Trade Secret Problems Abroad Lead to ITC Injunction at Home

On October 11th, the Federal Circuit decided that a trade secret issue in China justifies blocking U.S. importation of railroad wheels. That’s right—it enforced U.S. trade secret law abroad.

This is the first time the court has blessed the International Trade Commission (ITC) position that it has the authority to look at conduct outside the U.S. when investigating unfair competition injuries at home. But is this interpretation of unfair competition law consistent with the principle that American laws should be read to apply only within the territories of the U.S., unless a contrary intent clearly appears in the law? In this case, Judge Moore wrote a thoughtful dissent that concludes the court just made bad law because of bad facts.

This decision is important because it could dramatically increase the scope of the ITC’s unfair competition investigations in future cases. Read on to learn why.

TianRui Group Co. v. International Trade Commission, No. 2010-1395 (Fed. Cir. Oct. 11, 2011) (Judges Bryson, Schall, and Moore)

Skipping Town with the Blueprints

A Chinese company, Datong, received a license to use “the ABC process” for manufacturing railway wheels in China for Amsted, a U.S. company. Amsted kept this process secret and stopped using it in the U.S. years ago. Datong’s employees agreed to keep this information secret in their employment agreements. Later, TianRui (a Chinese company) hired several employees from Datong. These employees disclosed the trade secrets to TianRui, who used them in China to make railway wheels. So all the acts that arguably constitute misappropriation (theft of a trade secret) occurred in China.

Amsted asked the ITC to initiate an investigation under Section 337 of the Tariff Act of 1930, after it learned that TianRui was importing railway wheels that were made using the trade-secret-protected process it had licensed to Datong only. Section 337 prohibits unfair methods of competition and actions involving the importation of products to the U.S. that threaten or actually result in destruction or substantial injury to a U.S. industry.

TianRui requested that the ITC dismiss the investigation, arguing that the employees’ disclosure and use of trade secret information in China is not actionable in the U.S. Amsted, in response, stated that it was not asking for extraterritorial application of the law here, because under Illinois law, TianRui’s unauthorized activities in the U.S. violates the unfair competition statute.

Ultimately, the court rejected Amsted’s arguments that the marketing, sales, and certification efforts in the U.S. are uses of the trade secrets that qualify as domestic acts of misappropriation without some evidence of a breach of a duty of confidentiality in the U.S. But it still upheld the Administrative Law Judge’s determination that TianRui’s wheels should be excluded (i.e., it can’t import them to the U.S. because of its unfair competition acts in China and injury to Amsted’s business here).

Why You Should Care About This Opinion

In this case, the Federal Circuit decided that general federal principles of trade secret law should be applied (not a state law standard) because a federal statute is the basis for Amsted’s claim. Since the question of whether Congress’s policy of protecting domestic industries from unfair competition is a federal concern with a federal remedy, the court concluded that a single federal standard for trade secret misappropriation should apply, not Illinois law.

But that is not why this case is important. It’s important because the Federal Circuit was confronted with a second new question in this case: does the ITC have authority to look at conduct that occurs outside the U.S. when it is investigating an allegation that U.S. trade secrets have been misappropriated?

Two of the judges on this panel concluded that the ITC has the power to rely on activities that occur outside the U.S. in order to protect U.S. industries from unfair competitive activity that occurs within the borders. They were not troubled by the fact that Amsted did not practice the ABC process anymore. As long as the misappropriation of the process caused substantial injury to Amsted’s domestic rail wheel industry, it doesn’t matter where it occurs.

The majority also talked about what Congress “would have wanted” Section 337 to be applied to in support of its decision to look at activities in China. (See footnote 4 on page 16 of the majority opinion.)

No Trade Secret Protected Process in the U.S.? No Problem!

You’ll be interested to know that unlike patents, copyrights, and registered trademarks (statutory IP), a party using the law to remedy trade secret misappropriation must show the ITC that the unfair practices threaten to “destroy or substantially injure” the domestic industry (not merely that the domestic industry just exists).

The funny thing is that there is no express requirement that the protected U.S. industry relate to the IP involved in the investigation. That is, a party that has a domestic industry doesn’t have to actually use the trade secret process here to get an injunction. That seems like a strange twist, no?

This case is important because the court has sanctioned ITC action that punishes acts that occurred solely in China and would violate U.S. laws if those acts occurred on U.S. soil. But the problem is that TianRui and its employees did not misappropriate trade secrets in the U.S.—the court applied a U.S. law to Chinese conduct in China. What if China did that to us?

I find the TianRui decision particularly interesting in light of the recent diplomatic discussions about China’s manipulation of its currency and other business practices aimed at protecting domestic (and particularly state-owned) industry and businesses. Section 337 is a clear example of a law aimed at protecting U.S. domestic industries too.

What do you think: is ITC enforcement of U.S. trade secret law in China a problem?

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