MBHB Snippets: Review of Developments in Intellectual Property Law - Fall 2012 - Volume 10, Issue 4: The TianRui Group Company Ltd. v. U.S. International Trade Commission: A Powerful New Weapon for Combating Trade Secret Misappropriation Abroad

[authors: Emily Miao and Chelsea Durgan]

Trade secrets are often a key part of many companies’ operations and intellectual property portfolios.1 For U.S. companies doing business abroad that rely on off-shore manufacturing of their products, trade secret misappropriation by foreign entities, particularly China, is a serious concern.2 If trade secret misappropriation occurs in the United States, the aggrieved trade secret owner may obtain relief through a state law trade secret misappropriation claim,3 a claim under the Computer Fraud and Abuse Act,4 or could seek prosecution under the Economic Espionage Act of 1996 (EEA).5 What if trade secret misappropriation occurs abroad and the misappropriated trade secret is used to manufacture products that are then imported into the United States to compete with the trade secret owner’s products? Under the TianRui decision, a U.S. company doing business abroad may have recourse in the International Trade Commission (“ITC”) under section 337 of the Tariff Act of 1930 (“section 337”) to exclude the importation of products that embody a misappropriated trade secret, even when the trade secret theft occurred entirely outside of the United States and the U.S. company is not using its trade secret in its products.6

In its landmark decision, a divided panel of the Federal Circuit Court of Appeals (“Federal Circuit” or “Court”) addressed the scope of the ITC’s authority under section 337 to investigate trade secret misappropriation and prevent importation of products that are based on the misappropriated trade secrets. The Court held that: (i) the ITC has authority to prevent importation of products produced with misappropriated trade secrets, even if the acts of misappropriation occur outside of the United States, (ii) that Federal common law, not state law, applies when dealing with section 337 investigations involving trade secret misappropriation and unfair competition, and (iii) that the domestic industry requirement in section 337 investigations involving non-statutory intellectual property (IP) rights does not require proof that the domestic industry practices the IP rights at issue. This important decision expands the role of the ITC in addressing the problem of international trade secret theft and provides a powerful new weapon for any U.S. company challenging imports into the United States that are based on misappropriation of its trade secrets.

Facts

Amsted Industries (“Amsted”), an Illinois-based manufacturer of cast steel railway wheels, owned trade secrets relating to wheel production processes, including the “ABC process.” The ABC process was licensed to several Chinese companies, including Datong ABC Castings Company Ltd. (Datong). Amsted previously practiced the ABC process at its Alabama foundry, but abandoned that process in favor of a different proprietary process.”7

TianRui Group Company Ltd. and TianRui Group Foundry Company Ltd. (collectively “TianRui”) had sought to license Amsted’s ABC process, but the parties ultimately failed to agree on the terms of the license. TianRui then hired nine Datong employees who were trained in the ABC process.8

Datong had previously notified those employees through a written employee code of conduct that information concerning the ABC process was proprietary and confidential. In addition, those employees had executed confidentiality agreements before leaving Datong. Despite having been advised of these obligations, those former Datong employees disclosed the ABC process to TianRui. TianRui began producing wheels in China using the ABC process.9

With its partner Standard Car Truck Company, Inc. (“SCT”), TianRui formed the joint venture Barber TianRui Railway Supply, LLC. (“Barber”). Both SCT and Barber marketed the TianRui wheels to U.S. customers and imported the TianRui wheels into the United States. Other than Amsted, SCT and Barber were the only companies selling or attempting to sell cast steel railway wheels in the United States.10

Amsted filed a complaint with the ITC to block the importation of TianRui’s wheels into the United States, alleging a violation of section 337 based on TianRui’s misappropriation of trade secrets.11 After concluding its investigation and hearing, the Administrative Law Judge (ALJ) found a violation of section 337 under the Illinois trade secret law, general principles of trade secret law, and the Restatement (first) of Torts based on evidence that TianRui’s process was essentially identical to the ABC process and that TianRui misappropriated the ABC process.12

The ALJ also held that it was not essential for Amsted to prove that it used the ABC process in the United States in order to satisfy the domestic industry requirement of section 337. Rather, all Amsted needed to prove was that its domestic industry would be substantially injured by the imported wheels.13

The ITC affirmed the ALJ’s initial determination without review and issued a limited exclusion order barring TianRui from importing the railway wheels into the United States for 10 years.14

TianRui appealed the ITC’s determination of a violation of section 337, raising two key issues before the Federal Circuit. First, TianRui argued that the ITC exceeded its authority under section 337 by applying Illinois trade secret law to find a violation of section 337 based on acts of misappropriation that occurred entirely in China. Specifically, TianRui alleged that section 337 applied extraterritorially only with respect to patents and other statutory intellectual property and that there is no express language in section 337 authorizing the ITC to apply U.S. state trade secret law to conduct that occurs in a foreign country.15 Second, TianRui argued that the ITC erred in finding that the domestic industry requirement was satisfied because Amsted produces cast steel wheels by a different process. That is, TianRui asserted that the ITC misinterpreted section 337 to hold that a trade secret complainant seeking to enforce its IP rights need not practice the asserted IP domestically to establish the existence of a domestic industry.16

A divided panel of the Federal Circuit affirmed the ITC decision.17 The Court recently denied a petition for rehearing en banc.18

Federal Common Law, Not State Law, Governs Section 337 Investigations for Trade Secret Misappropriation

Before addressing the first issue relating to extraterritorial trade secret misappropriation, the Federal Circuit articulated important choice of law principles for section 337 investigations involving trade secrets. While the Federal Circuit affirmed the ITC’s authority under section 337 to exclude importation of products that embody a trade secret misappropriated abroad, the Court rejected the ITC’s application of Illinois trade secret law in its determination that the trade secret misappropriation that occurred was sufficient to establish an unfair method of competition under section 337.19 The Court held that a single federal standard, rather than the law of a particular state, should be applied. The Court emphasized that protecting domestic industries from unfair competition is a distinctly federal concern with federal remedy, thus the reason for applying federal law is particularly strong.20

For most states, the Court noted that the application of federal common law rather than state law is a difference without distinction.21 That is, federal trade secret law is based on the Uniform Trade Secrets Act (“UTSA”), the trade secret law of most states.22 The Court did not overturn the ITC decision due to reliance on Illinois trade secret law on the basis that the outcome of the case was not affected by the application of Illinois trade secret law since that law was based on the UTSA.23

Section 337 Applies to Exclude Imported Products that Embody Trade Secrets Misappropriated Abroad

The Court affirmed that the ITC has authority under section 337 to exclude the importation of products into the United States where those products were made using a trade secret misappropriated abroad. While the Court acknowledged the Congressional presumption against extraterritorial application of U.S. domestic law in the absence of clear intent otherwise, the Court asserted that the presumption does not apply in this case for three reasons.24 First, section 337 applies to “[u]nfair methods of competition and unfair acts in the importation of articles” into the United States.25 Since importation is an inherently international act, “it is reasonable to assume that Congress was aware, and intended, that the statute would apply to conduct . . . that may have occurred abroad.”26 Secondly, the Court pointed out that the ITC “does not purport to regulate purely foreign conduct.”27 Rather, the “unfair” activity is only prohibited to the extent that it results in importing goods into the United States and causing domestic injury. Thirdly, the Court determined that the legislative history of section 337 supports a statutory interpretation permitting the ITC to evaluate conduct that occurs extraterritorially since “Congress intended a . . . broad and flexible meaning.”28

Finally, the Court pointed out that applying U.S. trade secret law would not improperly interfere with Chinese law since the ITC would not be regulating purely extraterritorial conduct and would not affect TianRui’s ability to sell its cast steel wheels in China or elsewhere outside of the United States.29 In addition to importation into the United States, the Court noted that Datong’s employee agreements and the nondisclosure agreement between Datong and Amsted established grounds for the ITC to enforce the agreement between a Chinese company and a U.S. company.30 The Court found that such provisions were important in establishing the elements of trade secret misappropriation, regardless of whether the misappropriation occurred in the United States or abroad.31

Section 337 Does Not Require that the Misappropriated Trade Secret Be Practiced in the United States in Order to Find Injury or Threat to the Domestic U.S. Industry

With respect to the second key issue, the Court affirmed that a trade secret complainant need not show that it practices the misappropriated trade secret in the United States in order to satisfy the requirement of injury or threat to a domestic U.S. industry under section 337.32 The Court, in applying the domestic injury requirement, distinguished between statutory intellectual property claims (section 337(a)(1)(B-E)) and those claiming non-statutory unfair practices (section 337(a)(1)(A)).33 The Court noted that “Section 337 contains different requirements for statutory intellectual property (such as patents, copyrights, and registered trademarks) than for other, non-statutory unfair practices in importation (such as trade secret misappropriation).”34 For statutory intellectual property, it is necessary that an industry relating to the protected intellectual property exists or is being established.35 In contrast, the Court held that non-statutory intellectual property such as trade secrets requires that the unfair practice threaten to destroy or substantially injure domestic industry, without expressly requiring that the domestic industry be based on the intellectual property in question.36 Since the Court concluded that TianRui’s wheels could directly compete with Amsted’s wheels, it held that the domestic industry injury requirement was met.37

The Dissent

The panel mainly diverged on the issue of extraterritoriality with respect to the relevant location of conduct for a section 337 analysis.38 In a vigorously worded dissent, Judge Moore argued that the Court impermissibly expanded the reach of section 337 and asserted that:

The majority in this case expands the reach of both 19 U.S.C. § 1337 (§ 337) and trade secret law to punish TianRui Group Company Limited (TianRui) for its completely extraterritorial activities. As a court, however, we must act within the confines set out by the text of the law. Here, there is no basis for the extraterritorial application of our laws to punish TianRui’s bad acts in China.

The issue is whether § 337 authorizes the Commission to apply domestic trade secret laws to conduct which entirely occurs in a foreign country.

While TianRui is certainly not a sympathetic litigant—it poached employees to obtain confidential information—none of the unfair acts occurred in the United States and, as such, there is no violation of United States law which amounts to an unfair trade practice under the statute.39

The dissent argues that there is no clear indication of congressional intent in either the statute or the legislative history to extend the reach of section 337 to wholly extraterritorial unfair acts. The dissent determined that “unless there is the affirmative intention of Congress clearly expressed to give a statute extraterritorial effect, we must presume it is primarily concerned with domestic conditions.”40 Judge Moore determined that section 337 can only cover unfair actions in importation and thus can only cover trade secret misappropriation that occurs in the United States, in contrast to the majority’s assertion that Congress “clearly intended to create a remedy for the importation of goods resulting from unfair methods of competition.”41 As such, the dissent concludes that section 337 “does not reach the misappropriation and use of trade secrets in China, even if the product of the misappropriated process is ultimately imported into the United States.”42

Conclusion

The TianRui decision is significant because it expands the ITC’s authority to further protect U.S. domestic industries by holding that section 337 applies in cases where trade secret theft and unfair competition in connection with products imported into the United States occur entirely outside of the United States. TianRui also announced the existence of new law—federal common law—governing trade secret claims brought under section 337, leaving the elements of that law to development in subsequent cases. Furthermore, TianRui reminds foreign importers that importation of their products into the U.S. market requires compliance with section 337, and that their overseas conduct may result in a finding of trade secret misappropriation in the ITC.

Finally, the Court’s opinion in TianRui is not the only authority addressing the increasing threat of trade secret misappropriation to the United States. Congress has acknowledged the increasing danger to the economy and national security caused by trade secret theft of U.S. technology and has decided that further protection is needed.43 Legislation has recently been introduced in Congress to further enable companies to combat trade secret theft, including the ability to seek redress in federal courts, rather than having to file suit in individual state courts, and to enhance criminal penalties for corporate espionage.44 It is possible that some or all of the TianRui decision may be codified as law in the event that Congress takes further action.

Endnotes

1 See Emily Miao, Trade Secret Basics: What Every Business Owner Needs to Know, SnippetS, Vol. 8, Issue 1, Winter 2010, at 1, http://www.mbhb.com/ files/FirmService/e2dd2878-641d-44cd­8041-d4920608aa6e/Presentation/ ceSnippetIssue/Snippets%20Vol%208%20 Issue%201%20Online.pdf (providing an overview of basic trade secret law).

2 18 U.S.C. § 1831 (1996); Steven E. Feldman & Sherry L. Rollo, Extraterritorial Protection of Trade Secret Rights in China: Do Section 337 Actions at the ITC Really Prevent Trade Secret Theft Abroad?, 11 J. MarShall rev. intell. prop. l. 523 (2012). See office of nat’l counterintelligence executive,foreign SpieS Stealing u.S. econoMic SecretS in cyberSpace: report to congreSS on foreign econoMic collection and induStrial eSpionage i (Oct. 2011) (stating that “Chinese actors are the world’s most active and persistent perpetrators of economic espionage” and that six of the seven cases that were adjudicated under the EEA—both Title 18 U.S.C. §§ 1831 and 1832—in the Fiscal Year 2010, involved a link to China).

3 See Miao, supra note 1, at 5.

4 18 U.S.C. § 1030 (2008).

5 18 U.S.C. § 1831; Feldman & Rollo, 11 J. MarShall rev. intell. prop. l. at 525.

6 TianRui Group Co. v. ITC, 661 F.3d 1322, 1324 (Fed. Cir. 2011).

7Id.

8 Id.

9 Id.

10 Id. at 1324-1325.

11 Id. at 1325.

12 Id.

13 Id. at 1326.

14 Id.

15 Id. at 1325-1326.

16 Id. at 1326.

17 In the Matter of Certain Cast Steel Railway Wheels, USITC Inv. No. 337-TA-655, 2009 WL 2350640 (ITC Feb. 27, 2009).

18 TianRui Group Co. v. ITC, 2012 U.S. App. LEXIS 4790 (Fed. Cir. Feb. 1, 2012).

19 TianRui Group Co., 661 F.3d at 1327.

20 Id.

21 Id. at 1327-1328.

22 A handful of states have not adopted the UTSA. nat’l conference of coMM’rS on unif. State lawS, a few factS about the uniforM trade SecretS act, http://www.uniformlaws. org/Act.aspx?title=Trade%20Secrets%20 Act (last visited Oct. 25, 2012).

23 TianRui Group Co., 661 F.3d at 1328.

24 Id. at 1329.

25 19 U.S.C. § 1337(a)(1)(A) (2004).

26 TianRui Group Co., 661 F.3d at 1329.

27 Id.

28 Id. at 1330-1331.

29 Id. at 1332. The majority claimed there was no conflict between the trade secret laws in the United States and China, and concluded that the absence of conflict supported granting “relief based on extraterritorial acts of trade secret misappropriation relating to the importation of goods affecting a domestic industry.” Id. at 1333. In her dissenting opinion, Judge Moore pointed out the majority’s failure to recognize the conflict of laws issue presented by TianRui. The majority eagerly affirmed the Commission’s decision by extending the reach of section 337 to apply extraterritorially. In doing so, the majority failed to acknowledge that U.S. law provides no express cause of action, and given that a violation of Chinese law occurred, the remedy should come from the Chinese courts. Id. at 1343.

30 Id. at 1333.

31 Id.

32 Id. at 1337.

33 Id. at 1335.

34 Id.

35 19 U.S.C. § 1337(a)(2).

36 19 U.S.C. § 1337(a)(1)(A).

37 TianRui Group Co., 661 F.3d at 1337.

38 In addition, Judge Moore pointed out in her dissenting opinion that absent a clear intent by Congress, statutes do not have extraterritorial application. Given that section 337 does not expressly include the authority to apply its provisions to acts occurring abroad, Judge Moore reasoned that section 337 does not apply to the misappropriation of Amsted’s trade secrets that occurred in China. Judge Moore distinguished trade secret law from other areas of intellectual property law—namely, process patents—where Congress has clearly indicated the statute’s extraterritorial scope. “Congress could have legislated generally to grant extraterritorial application to any “unfair acts” in section 337, but did not. Congress only changed the statute to create a remedy for extraterritorial use of process patents. This delicate legislative touch indicates that Congress intended to give special treatment solely to process patents, and not to other categories of ‘[u]nfair methods of competition and unfair acts in the importation of articles.’” Id. at 1339-1341.

39 Id. at 1337-1338.

40 Id. at 1338-1339.

41 Id. at 1339-1340.

42 Id. at 1342.

43 In recognition of the growing importance of trade secrets and trade secret enforcement in the U.S. market, Congress, in enacting the EEA, expanded intellectual property protection to trade secrets, expressly recognizing that “proprietary economic information” is “an integral part of America’s economic well-being” and of “growing importance.” See H.R. rep. no. 104-788, at 4 (1996).

44 In July 14, 2012, Senators Kohl and Coons introduced legislation entitled “Protecting American Trade Secrets and Innovation Act of 2012” (PATSIA) to expand the legal options for victims of economic espionage and trade secret theft, and to create a private cause of action under federal law for trade secret violations. Prior to PATSIA, Senator Kohl sponsored legislation entitled the “Economic Espionage Penalty Enhancement Act of 2011,” which increased criminal penalties for persons committing economic espionage. The Act passed the Senate Judiciary Committee with amendment, and is presently under consideration by the full Senate and House of Representatives. See Protecting American Trade Secrets and Innovation Act of 2012, S. 3389, 112th Cong. (2012). Text as of Jul 17, 2012, available at http://www.gpo.gov/fdsys/pkg/BILLS­112s3389is/pdf/BILLS-112s3389is.pdf

Emily Miao, Ph.D., an MBHB partner, has broad experience in all aspects of intellectual property practice, including patent, trademark and copyright procurement and portfolio management; client counseling on validity, infringement, freedom-to-operate (FTO), due diligence reviews, and patent strategy matters; and licensing/secrecy agreements.

miao@mbhb.com

Chelsea Durgan was an MBHB 2012 summer associate.