The Federal Circuit Paves the Way for the International Trade Commission to Stop Imports Derived from Trade Secret Theft in Foreign Countries

by Orrick, Herrington & Sutcliffe LLP
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The United States Court of Appeals for the Federal Circuit recently issued a decision that paves the way for domestic trade secret owners to seek relief from the United States International Trade Commission (ITC) for the misappropriation of trade secrets when the acts of misappropriation occur entirely on foreign soil. Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, prohibits "[u]nfair methods of competition and unfair acts in the importation of articles . . . into the United States, . . . the threat or effect of which is . . . to destroy or substantially injure an industry in the United States." This statute has long been interpreted to apply to the misappropriation of trade secrets. In Tianrui Group Co. Ltd., et al. v. Int'l Trade Comm'n, et al., the Federal Circuit confirmed that in the course of a trade secret misappropriation investigation, the ITC has jurisdiction over conduct occurring entirely in China provided it is necessary to protect a domestic industry from injuries arising from the misappropriation. Observing that Section 337 is focused on "an inherently international transaction—importation," and therefore, is not a "'statute in which Congress had only domestic concerns in mind,'" the Court affirmed the issuance of a limited exclusion order based on findings that Tianrui acquired its manufacturing process "through the misappropriation of . . . [t]rade [s]ecrets," and "caused injury to the complainant's domestic industry." This decision has far-reaching implications for domestic trade secret owners who suspect their confidential information has been stolen abroad.

Case Background

Tianrui Group Co. Ltd. and Tianrui Group Foundry Co. Ltd. (together "Tianrui") manufacture cast steel railway wheels in China that are imported for sale into the United States. The complainant, Amsted Industries Inc., is a U.S.-based manufacturer of cast steel railway wheels that maintained two manufacturing processes as trade secrets. It employs one of the manufacturing processes in its U.S. operations; while it licenses the other process, which it no longer practices in the United States, to several firms in China. 

Amsted alleged that Tianrui stole its secret manufacturing processes after it hired nine employees from one of Amsted's Chinese licensees and those employees disclosed to Tianrui the details of the manufacturing process, in violation of both their former employer's employee code of conduct as well as contractual obligations to preserve the confidentiality of the process. On appeal, Tianrui did not "dispute the Commission's factual finding that proprietary information belonging to Amsted was disclosed to Tianrui in breach of obligations of confidentiality . . . or the finding that the information was used in manufacturing the imported railway wheels."

Tianrui did challenge whether the ITC had jurisdiction to preclude the importation of goods produced through the misappropriation of trade secrets that occur entirely abroad and whether, in trade secret cases, the domestic industry that faces the threat of destruction or substantial injury is required to practice the misappropriated trade secrets. 

Governing Law

The Federal Circuit began its analysis by examining a matter of first impression: what body of law governs trade secret investigations initiated by the ITC. While the administrative law judge applied Illinois trade secret law, the Federal Circuit held that "a single federal standard, rather than the law of a particular state, should determine what constitutes a misappropriation of trade secrets sufficient to establish an 'unfair method of competition' under section 337." The Court found "the case for applying a federal rule of decision particularly strong," since section 337 "deals with international commerce, a field of special federal concern." Ultimately, the Federal Circuit found that the evidence was sufficient to establish trade secret misappropriation "under either Illinois law or the generally understood law of trade secrets, as reflected in the Restatement [of Torts], the Uniform Trade Secrets Act, and previous Commission decisions under section 337."

Extraterritorial Misappropriation of Trade Secrets      
  
Turning to the first issue on appeal, the Federal Circuit examined "whether section 337 applies to imported goods produced through the exploitation of trade secrets in which the act of misappropriation occurs abroad." In answering that question, the Court observed the "'long-standing principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.'" The Court, however, found that the presumption did not govern this investigation for three separate reasons.

First, because section 337 is "expressly directed at unfair methods of competition and unfair acts 'in the importation of articles' into the United States," it "'surely [is] not a statute in which Congress had only domestic concerns in mind.'" The Court likened section 337 to immigration statutes that bar the admission of aliens "who ha[ve] engaged in particular conduct or who [make] false statements in connection with [their] entry into [the US]." Those laws, like section 337, "focus...not on punishing the conduct or the false statements, but on preventing the admission of the alien, so it is reasonable to assume that Congress was aware, and intended, that the statute would apply to conduct (or statements) that may have occurred abroad."

Second, the Federal Circuit observed that the ITC's exclusion order did not "purport to regulate purely foreign conduct," but foreign conduct that "results in the importation of goods into this country causing domestic injury." As such, the Court commented that "the determination of misappropriation was merely a predicate to the charge that Tianrui committed unfair acts in importing wheels into the United States." These comments provoked a strong rebuff from the dissent, written by Judge Moore, who disputed there were any unfair acts in connection with the importation, as opposed to the manufacture, of the wheels. Indeed, Judge Moore observed that "[t]here is nothing inherently unfair about the wheels or the process by which they are imported in this case." The majority, however, viewed the dissent's analysis as creating "a conspicuous loophole for misappropriators," who "ensure that the actual act of conveying the trade secret occurred outside the United States," and then imported products produced through the use of those trade secrets into the United States to the detriment of the trade secret owner.   

Finally, the Court found that the legislative history of section 337 supported a finding that Congress intended the ITC to consider conduct occurring abroad. In particular, the Court concluded that Congress intended a "broad and flexible meaning" for the prohibition on "unfair methods of competition" in importation. In addition, the Court pointed to comments the U.S. Tariff Commission made to Congress following the enactment of section 316 of the Tariff Act of 1922, the predecessor to section 337, providing that the new provision "make[s] it possible for the President to prevent unfair practices, even when engaged in by individuals residing outside the jurisdiction of the United States." Since Congress never disagreed with the Commission's characterization of the provision, despite criticism of the power as too broad, the Federal Circuit concluded that Congress intended the ITC, in exercising authority over unfair competition, to consider conduct occurring beyond the country's borders "in determining whether imports that were the products of, or otherwise related to, that conduct were unfairly competing in the domestic market."

Destruction or Substantial Injury to the Domestic Industry

The second issue on appeal addressed whether the domestic industry is required to practice the misappropriated trade secret. Tianrui argued that the ITC lacked power to exclude its railway wheels from the domestic U.S. market because Amsted no longer employed the misappropriated manufacturing process in the United States. The Federal Circuit disagreed, observing that there is no requirement for the domestic industry to practice the trade secret involved in the investigation because the domestic industry showing for trade secrets (nonstatutory IP) is different from the domestic industry showing for certain forms of statutory intellectual property (such as patents or registered trademarks). 

With respect to statutory intellectual property, the Court explained that the domestic industry finding requires evidence of "significant domestic investment or employment related to the protected articles" (emphasis added). In contrast, the provision governing unfair practices involving non-statutory intellectual property "is not satisfied by evidence showing only that a domestic industry exists; it requires that the unfair practices threaten to 'destroy or substantially injure' a domestic injury." At the same time, for nonstatutory IP such as trade secrets, there is no "express requirement" that the "domestic industry relate to the intellectual property involved in the investigation." The Court thus concluded that the industry requirements are different depending on the nature of the intellectual property at issue, and for trade secret investigations, there is no requirement that the trade secret be practiced in the domestic industry.

Practical Considerations

As Judge Moore noted in her dissent, "the potential breadth of this holding is staggering." Indeed, this decision will open the door to domestic trade secret owners who suspect their confidential information has been stolen abroad to seek to exclude competitive products resulting from such theft from importation into the United States. The decision provides a U.S. forum for victims of extraterritorial trade secret theft, and an effective enforcement mechanism at U.S. Customs. 

The Court's decision also clarifies two important legal issues for trade secret investigations before the ITC. First, federal trade secret law—as reflected in the Restatement of Torts, the Uniform Trade Secrets Act and ITC decisional law—shall govern ITC trade secret investigations. Second, in order to establish a domestic industry threatened with destruction or substantial injury as a result of acts of unfair competition related to non-statutory IP, a trade secret owner need not prove that it practices the trade secret in the domestic market.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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