October 17, 2011
Practice Group:
Intellectual Property
Litigation
Federal Circuit Approves ITC’s Ban on
Importation of Goods Manufactured Using
Trade Secrets Misappropriated Abroad
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
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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
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