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Update: New Remedy for Trade Secrets Misappropriation Overseas - ITC Can Ban Imports Based On Acts Carried Out Entirely Abroad

20 October 2011

On October 11, 2011, a three-judge panel for the U.S. Court of Appeals for the Federal Circuit affirmed a decision of the U.S. International Trade Commission (the ITC) that barred importation of cast steel railway wheels based on extraterritorial trade secret misappropriations by a China-based company. In the case, TianRui Group Co., Ltd. v. ITC, No. 20101395 (Fed Cir. Oct. 11, 2011), the Federal Circuit interpreted Section 337(a)(1)(A) of the Tariff Act of 1930 (Section 337), and held that it permitted the ITC to ban imports even in instances where the underlying acts of misappropriation are carried out entirely in foreign countries.

Amsted Industries Inc. (Amsted) is a U.S. manufacturer that owns two secret processes for manufacturing cast steel railway wheels. One of those processes—referred to as the “ABC Process”—is no longer practiced by Amsted in the United States, although Amsted continues to produce and sell wheels in the U.S. domestic market. Nonetheless, Amsted licensed the ABC Process to several companies in China. Two Chinese companies, TianRui Group Company Limited and TianRui Group Foundry Company Limited (collectively, TianRui) previously sought to license Amsted’s ABC Process. However, TianRui ultimately failed to reach an agreement on the terms of a license with Amsted and never entered into a license arrangement for the ABC Process. Later, TianRui hired nine employees with knowledge of the ABC Process from one of Amsted’s Chinese licensees, and those employees then revealed the details of the ABC Process to TianRui in China, thus misappropriating Amsted’s trade secrets.

In a 2-1 decision, the Federal Circuit concluded that the ITC had the authority to bar TianRui from importing wheels into the United States based on the misappropriation of trade secrets in China. It ruled:

  • Section 337 inquiries “should be decided under a uniform federal standard, rather than by reference to a particular state’s tort law” given that Section 337 deals with international commerce, an area of special federal concern. Although the court found that the ITC erred by applying state trade secret law (Illinois), this error did not affect the outcome of the case.
  • Section 337 prohibits importation where there has been an extraterritorial misappropriation of trade secrets. The presumption against extraterritoriality did not apply to Section 337 in this instance given that (i) Section 337 focuses on importation, which is an “inherently international transaction”; (ii) the ITC did not apply Section 337 to sanction purely extraterritorial conduct, but also focused on the resulting “domestic injury”; and (iii) legislative history demonstrates that Congress intended a broad and flexible meaning of “unfair methods of competition” with respect to importation.
  • Although courts have narrowly construed the extraterritorial application of U.S. patent laws, there is no parallel federal civil statute regulating trade secret protection, and, therefore, no statutory basis for limiting the ITC’s authority under Section 337 for trade secret misappropriation.
  • There is no requirement that the misappropriated trade secret be practiced in the United States in order for the ITC to grant relief. Here, TianRui argued that its actions could not have injured a “domestic industry” within the meaning of Section 337 given that Amsted licensed the ABC Process to other companies in China, but had no domestic operations of its own that practiced the ABC Process. The court rejected this argument, finding that even if Amsted did not employ the ABC Process domestically, there was a legally cognizable injury under Section 337 because the wheels imported by TianRui could directly compete with wheels produced by Amsted in the United States.

This case substantially expands the reach of the ITC to acts that occur entirely overseas and provides an effective remedy for trade secrets misappropriation outside of the U.S. Previously, a trade secret owner must sue for such misappropriation in the country where such misappropriation occurs. Now, the trade secret owner can resort to the ITC for an exclusion order to ban the import of products made by misappropriated trade secrets overseas into the U.S. It is expected that more trade secrets owners in the U.S. will resort to such remedy.