ITC Bans Imports Using Misappropriated Trade Secrets

Thursday, November 17, 2011 - 17:12
David M. Maiorana

David M. Maiorana

Patrick T. Michael

The Editor interviews David M. Maiorana and Patrick T. Michael, Partners, Jones Day.

Editor: Please tell us about the Jones Day International Trade Commission (ITC) practice generally and the firm’s capabilities in matters involving the ITC and China.

Maiorana: Having over 30 professionals with ITC experience, Jones Day is among the most active firms handling ITC matters both for complainants and respondents. We handle ITC investigations involving all areas of IP law, including patents, trademarks, trade secrets and copyrights.   My particular practice is IP litigation, focusing primarily on patent infringement. I practice both before the ITC and in U.S. district courts, and I am co-chair of the Firm’s ITC practice.

Michael: My practice is primarily focused on representing technology companies in patent infringement and trade secret litigation in the U.S. courts. I also represent, together with my colleagues in our China offices, U.S. companies in connection with trade secret cases in China.

In 1993 China enacted the Anti-Unfair Competition Law, which addresses trade secret matters. Further clarification to this law was provided in 2007 by the Supreme People’s Court of China. The Anti-Unfair Competition Law is a national law. Its provisions governing trade secrets are similar in many respects to the Uniform Trade Secrets Act that most states here in the U.S. have adopted, sometimes with modification. Each province in China applies the Anti-Unfair Competition Law, sometimes with subtle differences.

Maiorana: Jones Day has multiple offices in China, all with IP capability.  Our IP attorneys in China not only assist clients from all over the world with their IP issues in China, including patent, trademark, counterfeiting and piracy, they also provide valuable assistance to our ITC practice.

Editor: On October 11, 2011, there was a significant decision by the Federal Circuit in TianRui Group Co. Ltd. Et al. v. U.S. Int’l Trade Comm’n. What were the facts in that case?

Michael: The ITC was faced with the issue of whether Section 337 permits the exclusion of articles from importation into the U.S. when the underlying act of misappropriation occurs outside the United States. In this case, it was railway wheels made by processes protected under U.S. trade secret law.

The facts in the case were largely undisputed. Amsted, the owner of the trade secret, is a U.S. company with its principal place of business in Illinois. It owned trade secrets regarding processes for the manufacture of cast steel railway wheels. One of those processes was the “ABC process,” which Amsted had stopped using in the United States but licensed to a Chinese company called Datong.

Amsted’s negotiations with TianRui, another Chinese company, fell through. TianRui subsequently hired some of Datong’s employees in China who had been trained in Amsted’s secret ABC process. Although those employees had signed confidentiality agreements, when they left Datong to join TianRui, they disclosed the details of Amsted’s ABC process to TianRui.

TianRui began manufacturing wheels using the ABC process. It imported those wheels into the United States in competition with the Amsted wheels manufactured using a different process. As a result of that conduct, Amsted filed its complaint against TianRui with the ITC, alleging a violation of Section 337 based on the misappropriation of trade secrets.

Editor: Had Amsted ceased to manufacture wheels using the ABC process when the TianRui wheels were imported into the U.S.?

Michael: Yes, Amsted had ceased using the ABC process in the U.S. As a result, one of the issues the Federal Circuit ultimately had to address was whether or not the domestic injury requirement was satisfied in light of the fact that Amsted was no longer using the trade secret ABC process here in the United States.

The Federal Circuit, in applying the domestic injury requirement, distinguished between statutory intellectual property claims, which are found in Section 337(a)(1)(B-E), and those claiming non-statutory unfair practices (which include trade secret misappropriation) under Section 337(a)(1)(A). The court found that Amsted did not have to actually practice its intellectual property rights for the purposes of a non-statutory unfair practices claim. It was a sufficient showing of competitive injury if Amsted continued to manufacture cast steel railway wheels in the United States even though they did not use the ABC process.

Editor: What was the ITC’s ruling on choice of law?

Maiorana: The administrative law judge (ALJ) found a violation of Section 337 by applying the Illinois Trade Secrets Act, the Restatement (First) of Torts § 757 and general principles of trade secrets law. He also found that it was not essential for Amsted to prove that it was using the ABC process in the U.S. in order to satisfy the domestic injury requirement. All it needed to show was that there was a domestic industry that would be substantially injured by the imported wheels.

The ITC declined to review the ALJ’s determination and issued a limited exclusion order that barred the TianRui wheels from entry into the United States.

Editor: Did TianRui appeal?

Michael: Yes. TianRui raised two arguments on appeal to the Federal Circuit -- extraterritoriality and the domestic injury aspect. The Federal Circuit opinion addressed another key issue, choice of law, which the Federal Circuit deemed necessary to decide before it addressed the question of extraterritoriality.

As to extraterritoriality, TianRui asserted that the ITC had exceeded its statutory authority under Section 337 when the ALJ applied Illinois trade secrets law to conduct that occurred in China because Section 337 does not contain express language authorizing the ITC to apply U.S. state trade secret law extraterritorially outside the U.S.

Amsted and the ITC disagreed. According to Amsted, Illinois law defines misappropriation broadly to include use, and that use happens when the products are imported into or sold in the United States. So the first key issue was whether Section 337 authorizes the ITC to apply domestic trade secret law to conduct that occurs in a foreign country.

The second key issue was the choice of law. The court noted that it hadn’t previously addressed this issue in the context of Section 337. The question was whether there was a single federal standard or whether the law of a particular state, in this case Illinois, determines what constitutes misappropriation of trade secrets sufficient to establish unfair competition under Section 337.

The final issue on appeal was the issue of domestic injury and whether or not the IP had to be practiced domestically in order for there to be domestic injury under 337.

Editor: How did the Federal Circuit rule on the choice of law issue?

Maiorana: The Federal Circuit rejected the ALJ’s application of Illinois trade secrets law and held for the first time that a single federal standard, rather than the law of a particular state, should determine what constitutes misappropriation of a trade secret to establish an unfair method of competition under Section 337.

The court noted that Section 337 reflects congressional policy relating to the prevention of unfair competition rather than implementing any particular state’s policy. It also stated that Section 337 deals with international commerce, which is strictly the province of federal law. There really isn’t a federal common law of trade secret misappropriation. The Federal Circuit didn’t address that point, although they did note that most state trade secret laws are derived from the Restatement (First) of Torts § 757 or the Uniform Trade Secrets Act (UTSA).

Editor: How did it rule on the extraterritoriality issue?

Michael: That is the issue on which there was a two-to-one decision with the dissent expressing strong disagreement. Notwithstanding a general presumption against applying congressional legislation to acts that occur outside of the territorial jurisdiction of the United States, the majority affirmed the ITC’s position that Section 337 authorizes the ITC to apply U.S. trade secret law to conduct that occurs in a foreign country. The majority’s rationale in support of this holding was threefold.

The court first reasoned that the focus of Section 337 is on importation, which is inherently an international transaction.

Its second rationale was that the cause of action here itself is not purely extraterritorial because the misappropriation resulted in the importation of goods into the United States, which caused domestic injury.

As a third rationale, the court looked at the legislative history of Section 337 as well as the ITC’s interpretation of Section 337 and found that both support the application of 337 to trade secret misappropriation occurring abroad.

Editor: What happens next?

Maiorana: There will likely be petitions for rehearing en banc by the Federal Circuit. The vast majority of such petitions are denied. However, where there is a vigorous dissent, as there was in this case, there is a potential of en banc review. Once there is a final decision by the Federal Circuit, there is a 90-day period of time to petition for certiorari at the Supreme Court.

Editor: Why is TianRui an important decision, and what are the implications for companies, both domestic and foreign?

Michael: Rarely do you get a case that embodies three separate and significant holdings. On balance, these holdings favor domestic companies or at least place them on equal footing with foreign companies. In today’s global economy, all companies know that intellectual property can disappear in the wink of an eye. Because Section 337 provides a very powerful remedy in the form of exclusion orders, this decision should certainly help with the protection of trade secrets when sharing technology outside the United States.

Editor: What implications does it have with respect to other forms of unfair competition?

Maiorana: The statutory provision at play here is not limited to trade secret misappropriation by any means. This decision arguably would open up the door to causes of action relating to other types of unfair competition and in the words of the Federal Circuit would serve as “a predicate to the charge” of unfair acts in importation into the United States.

Editor: In conclusion, are there any developments you would like to mention?

Michael:  There have been recent proposals made by Senator Coons (D-Del.) for the enactment of legislation that would create a private cause of action under federal law for violation of trade secrets. This is yet another indication that recognition of the importance of trade secrets is continuing to rise here in the United States. It is heartening to see that their value is capturing the attention of industry, practitioners, the courts and Congress.

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