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The ITC Can Play A Critical Role In Combating International Trade Secret Theft

December 8, 2011

The Federal Circuit has recently confirmed that the International Trade Commission has jurisdiction over trade secret misappropriation, even if the predicate acts of misappropriation occur entirely outside of the United States. The decision suggests that the ITC can play a very important role in addressing the alarming rise in international trade secret theft. Corporations considering ways to protect their intellectual property against overseas hackers, raiders and other would-be thieves must take note of this legal development.

In TianRui Group Co. v. International Trade Commission, ___ F.3d ___ (Fed. Cir. Oct. 11, 2011), the Federal Circuit held that Section 337 of the Tariff Act, over which the ITC has exclusive jurisdiction, can be used to prevent the importation of goods produced using misappropriated trade secrets, even if the acts of misappropriation occurred overseas. The Federal Circuit also held in the case that the victim of the alleged misappropriation abroad can satisfy the domestic industry requirement of Section 337 even if it does not practice the misappropriated trade secret.

The facts as recited in the opinion are an all too familiar story. Amsted Industries developed and maintained as a secret the so-called "ABC Process," which is used to manufacture cast steel railway wheels. Amsted used the ABC Process, but then stopped and instead licensed the process to several firms with foundries in China. TianRui, a Chinese competitor, hired away nine employees from one of those licensees. The employees, despite having been advised of a duty not to disclose, and most of them having signed confidentiality agreements, disclosed the ABC Process to TianRui. TianRui then partnered with an American company, Standard Car Truck, to manufacture and then import products using the ABC Process into the United States. Amsted filed a complaint with the ITC against TianRui and Standard Car Truck Co., and the ITC initiated an investigation.

Under Section 337 of the Tariff Act, 19 U.S.C. § 1337, the ITC is authorized to halt importation of goods into the United States if it finds their production is the result of unfair trade practices and the importation substantially injures a domestic industry. As a result, the ITC is a frequent destination for patent and trademark plaintiffs, sometimes in parallel with district court actions. Although it cannot award money damages in the initial investigation, ITC proceedings are faster than district court cases – often litigated to judgment in under two years – and the exclusion order is enforced by U.S. Customs and Border Protection. ITC decisions do not have preclusive effect, but are persuasive and, as a practical matter, often afforded deference. Thus, one strategy against importers that are subject to personal jurisdiction is to sue in the ITC and in district court, and to then move to stay the district court action until the ITC resolves the dispute.

The ITC is also an attractive forum against foreign defendants with no American presence because the ITC has in rem jurisdiction over goods imported into the United States. Therefore, the complainant may file in the ITC to keep goods out of the United States even if the importing entity is not subject to personal jurisdiction in the United States or is unknown.

The ITC applied Illinois law* in finding that TianRui misappropriated Amsted's trade secrets. The ITC then issued an exclusion order prohibiting the importation of TianRui's competing products into the United States. TianRui appealed to the Federal Circuit arguing that Congress did not intend for Section 337 to apply where the acts of misappropriation occurred entirely outside the United States. The Federal Circuit, in a split panel decision, disagreed and affirmed the ITC decision. The Federal Circuit reasoned that Section 337, like immigration laws designed to bar the admission of an alien who has engaged in particular conduct overseas, is designed not to punish the unfair trade practices, but to keep the infringing goods out of the United States.

In addition to confirming the extraterritorial application of Section 337 in trade secret litigation, the Federal Circuit also held that the ITC did not err in determining that the domestic industry would be "destroyed or substantially injured" even though Amsted did not use the ABC Process in the United States and had not for some time. Instead, Amsted used another of its processes, "the Griffin Process," to manufacture wheels domestically, and licensed the ABC Process to several foundries in China. The ITC determined that there was injury to a domestic industry because the infringing product directly competed with wheels that are domestically produced by the trade secret owner. The Federal Circuit upheld this construction of Section 337(a)(1)(A) and, therefore, upheld the ITC decision.

Trade secret cases have not been a significant part of the ITC's docket, but that may be about to change. The Federal Circuit's TianRui Group decision confirming the ITC's jurisdiction over goods made using misappropriated trade secrets, even when the trade secrets theft occurred entirely outside the United States, provides at least one possible answer to corporations seeking means to effectively address the extraterritorial misappropriation of their trade secrets. Extraterritorial misappropriation, in some circumstances, may be outside the reach of American common law and statutory trade secret laws. And many foreign countries, particularly those in East Asia, do not recognize intellectual property rights unless those rights are created by contract – which means an action for misappropriation of trade secrets may succeed against the former employee who stole the secrets, but will not succeed against the foreign company to which the employee delivered the stolen trade secrets. The TianRui Group decision, thus, confirms a new domestic legal avenue to combat international trade secret theft.

* The Federal Circuit rejected this choice of law, explaining that the Federal common law of trade secrets should apply in 337 determinations. But ultimately, the court explained, the choice of law made no difference to its decision because it was clear under either standard that the disclosure of the ABC Process was trade secret misappropriation.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Mark A. Klapow
Partner – Washington, D.C.
Phone: +1.202.624.2975
Kathryn L. Clune
Partner – Washington, D.C.
Phone: +1.202.624.2705