Federal Circuit Approves ITCs Ban on October 17, 2011 Importation - PDF document

Federal Circuit Approves ITC’s Ban on October 17, 2011 Importation of Goods Manufactured Using Practice Group: Intellectual Property Trade Secrets Misappropriated Abroad Litigation On October 11, 2011, the Federal Circuit issued an opinion that expands the ability of trade secret owners to protect their intellectual property assets against overseas misappropriation. In a 2-1 decision in TianRui Group Co. v. ITC , case number 2010-1395, the Federal Circuit affirmed the International Trade Commission’s (“ITC”) order excluding the importation of certain cast steel railway wheels. In doing so, the Federal Circuit concluded that the ITC is authorized to investigate and grant relief based on extraterritorial trade secret misappropriation to protect the United States domestic industry from unfair methods of competition. Additionally, as an issue of first impression, the Federal Circuit held that federal common law applies to trade secret claims brought under Section 337. Finally, the Federal Circuit held that the domestic industry requirement of Section 337(a)(1)(A) can be met even if the domestic industry is not “directly” related to the intellectual property involved in the investigation. Thus, products manufactured abroad using misappropriated trade secrets can be excluded even if the domestic manufacturer no longer uses those specific trade secrets in its business. Amsted Industries Inc. (“Amsted”) filed the underlying ITC complaint alleging a violation of Section 337 based on TianRui ’s misappropriation of trade secrets. Section 337(a)(1)(A) 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.” Amsted based its complaint on TianRui ’s misappropriation of Amsted’s secret process (the “ABC process”) for manufacturing cast steel railway wheels and TianRui ’s subsequent importation (through subsidiaries) of those wheels into the United States. Amsted no longer uses the ABC process itself in the United States, having replaced it with a different secret process. Amsted licensed the ABC process to several firms with manufacturing facilities in China. TianRui hired nine employees from an Amsted licensee in China. These employees, despite being bound by confidentiality agreements, were found by the ITC to have disclosed multiple trade secrets to TianRui . The ITC administrative law judge found that TianRui had misappropriated Amsted’s trade secrets through the violation of these former employees’ confidentiality agreements. In reaching its decision, the Federal Circuit resolved three significant issues of law. The main legal issue decided by the court was whether Section 337 applies in cases where the misappropriation of trade secrets occurs outside of the United States. The court acknowledged the general presumption against applying Congressional legislation to acts occurring outside the United States. The court nonetheless held that the presumption did not apply for three reasons. First, the court held that Section 337 is by its terms directed to an “inherently international transaction,” i.e., unfair methods of competition or unfair acts in the importation of articles into the United States. Second, the court held that the challenged activity in a Section 337 proceeding is thus not wholly extraterritorial. Instead, Section 337 only applies to the extent that unfair acts occurring in a foreign jurisdiction result in the importation of goods into the United States injuring a domestic industry. In this respect, the court noted that the ITC’s authority under Section 337 would not extend to extraterritorial sales if the products are never imported into the United States. Third, the court concluded that the ITC’s “longstanding” interpretation of Section 337 would encompass trade secret misappropriation

occurring abroad, was entitled to deference, and was consistent with the purpose and legislative background of the statute. Judge Moore dissented from the majority on this issue. Judge Moore argued that the presumption against extraterritorial application applied, and Section 337 was not violated because the unfair conduct occurred “entirely” outside the United States. The majority essentially conceded that the challenged misappropriation – but not the subsequent importation – occurred entirely outside the United States. In responding to Judge Moore’s dissent, the majority argued that an interpretation of Section 337 that did not cover misappropriation occurring entirely outside the United States would create an unintended “loophole” in the law and render the ITC powerless to protect trade secret owners from the importation of goods produced using their misappropriated trade secrets. TianRui thus stands for the proposition that Section 337(a)(1)(A) prohibits the importation of goods produced by unfair methods of competition in a foreign country if the complainant meets the domestic industry requirement. Second, in an issue of first impression, the court held that federal common law governs an ITC trade secret dispute under Section 377. In holding that federal common law applies, the court noted that Section 337 deals with international commerce, “a field of special federal concern,” and that Congress has given federal courts the power to develop substantive law with respect to the unfair competition provision of Section 337(a)(1)(A). The court clarified that state law would continue to govern state law trade secret claims decided under the Federal Circuit’s supplemental jurisdiction. To establish federal trade secret common law under Section 337, the court’s opinion suggests that the ITC should look to the Uniform Trade Secrets Act, the Restatement (Third) of Unfair Competition, the Economic Espionage Act, and previous ITC decisions under Section 337, among other sources. While the case before the court did not involve any conflicts of law between these sources, the court acknowledged that the “choice of law” could be important in other cases. The court also identified two other related issues that could be important in other ITC trade secret proceedings: the possibility of conflict between federal trade secret common law and foreign trade secret law, and the possibility of conflict between contractual duties (e.g.) of confidentiality and the public policy of a foreign jurisdiction. The third legal issue of interest is whether there was a domestic injury sufficient to allow ITC jurisdiction in light of the fact that Amsted no longer used the misappropriated secret process in the United States. Amsted continued to manufacture cast steel railway wheels in the United States, but used a different secret process to do so. The Federal Circuit held that Section 337 would apply regardless of whether the complainant used the trade secret process, if the tainted imported products “could directly compete” with products domestically produced by the complainant. In doing so, the Federal Circuit distinguished between Section 337(a)(1)(B)-(E) claims based on statutory intellectual property and Section 337(a)(1)(A) claims based on nonstatutory unfair practices (such as trade secret misappropriation). With respect to nonstatutory intellectual property right claims, the complainant must show not just that a domestic industry exists, but that unfair practices threaten to destroy or substantially injure that domestic industry. Mitigating the complaining party’s burden of proof, however, in nonstatutory claims there is no requirement that the domestic industry relate directly to the asserted intellectual property. Thus, the Federal Circuit accepted the ITC’s argument that the ITC’s interpretation of the term “industry” in the context of nonstatutory intellectual property rights was different from, and broader than, the definition of that term in the context of statutory intellectual property rights. In sum, the Federal Circuit in TianRui held that Section 337 applies to misappropriation of trade secrets occurring entirely outside the United States – a theory Amsted did not argue and the ITC argued only in the alternative. In deciding that Section 337 does reach such conduct, the Federal 2

Circuit significantly expanded the protections available to domestic trade secret owners against overseas misappropriation. The Federal Circuit expanded the ITC as a forum, with procedural advantages and disadvantages, in which trade secret owners can enforce such rights. Finally, the Federal Circuit announced the existence of a new law – federal common law – governing trade secret claims brought under Section 337, while leaving the elements of that law subject to development – and dispute – in cases yet to come. Authors: Jeffrey C. Johnson jeff.johnson@klgates.com 206.370.8338 Jonathan H. Harrison jonathan.harrison@klgates.com 206.370.7590 3