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Legal Update

Federal Circuit Upholds Trade Secret Exclusion Order In Section 337 Investigation

1 November 2011
Mayer Brown Legal Update

On October 11, 2011, the Federal Circuit Court of Appeals, in TianRui Group Company Limited v. U.S. International Trade Commission, issued an important decision addressing the scope of the International Trade Commission’s (“ITC” or “Commission”) jurisdiction in trade secret cases.

Specifically, the Federal Circuit held that the Commission “has authority to investigate and grant relief based in part on extraterritorial conduct insofar as it is necessary to protect domestic industries from injuries arising out of unfair competition in the domestic marketplace.” The Federal Circuit also upheld the Commission’s decision that the complainant could obtain relief under Section 337 based on injury to a domestic industry, even though no domestic manufacturer was currently practicing the protected process.

The ITC’s investigation was instituted based on a complaint filed by Amsted Industries (Amsted), a domestic manufacturer of cast steel railway wheels. Amsted alleged that it owned two secret processes for manufacturing these wheels: the “ABC process” and the “Griffin process.” Amsted had previously practiced the ABC process in the United States, but was no longer using that process. However, Amsted licensed the ABC process to several companies with foundries in China.

The respondents in the ITC investigation (TianRui) manufacture cast steel railway wheels in China. They tried to license Amsted’s technology but were unable to agree to terms. After the negotiations failed, TianRui hired nine employees away from one of Amsted’s licensees in China. Amsted alleged that these employees disclosed information and documents to TianRui that revealed details of the ABC process, and that, therefore, TianRui misappropriated Amsted’s trade secrets.

Amsted filed a complaint with the ITC alleging that the misappropriation of its trade secrets constituted an “unfair method of competition and unfair act in the importation of articles … into the United States … the threat or effect of which is … to destroy or substantially injure an industry into the United States.” While most cases brought under Section 337 are based on alleged patent infringement, the reach of Section 337 is much broader and can include a variety of unfair acts, including trade secret misappropriation.

After a 10-day evidentiary hearing, the ITC’s Administrative Law Judge found that TianRui had misappropriated 128 trade secrets relating to the ABC process and used those trade secrets in manufacturing cast steel railway wheels that were imported into the United States. The Commission affirmed the ALJ’s decision, and TianRui appealed to the Federal Circuit.

On appeal, the Federal Circuit considered “whether section 337 applies to imported goods produced through the exploitation of trade secrets in which the act of misappropriation occurs abroad.” The Federal Circuit acknowledged that there is a general presumption that legislation should not be applied to have extraterritorial effects. Here, however, the Court held that the “presumption against extraterritoriality” does not govern for three reasons. First, Section 337 is expressly directed at unfair methods of competition and unfair acts “in the importation of articles” into the United States. Thus, the Federal Circuit held that Congress did not have only “domestic concerns in mind” when it enacted the statute. Instead, “the focus of section 337 is on an inherently international transaction—importation.”

Second, the Federal Circuit held that the Commission’s Exclusion Order was not limited to regulating extraterritorial foreign conduct. Instead, the Order prohibited foreign unfair activity only to the extent that it results in the importation of goods into this country causing domestic injury.

Third, the Federal Circuit held that the legislative history of Section 337 supports the Commission’s interpretation of the statute. By prohibiting “unfair methods of competition” instead of the traditional phrase “unfair competition,” Congress intended for Section 337 to have a broad reach.

The Federal Circuit rejected TianRui’s arguments that applying US trade secret law to conduct occurring in China would cause improper interference with Chinese law. Instead, the court held: (i) that by requiring importation of goods into the United States, the reach of the statute was not purely extraterritorial; (ii) that TianRui had failed to identify a conflict between principles of misappropriation that the Commission applied and Chinese trade secret law; and (iii) that in any event, the employees at issue had signed agreements not to disclose Amsted’s trade secrets. To hold that the disclosure of information in breach of that duty was beyond the scope of Section 337 simply because the breach itself took place outside the United States would “invite evasion of section 337 and significantly undermine the effectiveness of the congressionally designed remedy.”

The Federal Circuit also held that Amsted could obtain relief even though it was not itself using the trade secrets to make products in the United States. The court noted that in a trade secret case under Section 337 (unlike a case involving patents), relief is available based on unfair competition that threatens “to destroy or substantially injure an industry in the United States.” Because Amsted was being injured, it met the statutory test.

In dissent, Judge Moore disagreed with the majority’s holding that Section 337 could be used to exclude products from entering the United States where the trade secret misappropriation took place abroad. She found no “clear indication of congressional intent” to extend the reach of Section 337 to “wholly extraterritorial unfair acts,” and, as there was nothing unfair about the importation of the wheels, as opposed to their manufacture abroad, she would have found no violation of the statute.

The Federal Circuit’s decision in TianRui Group is significant because it establishes the proposition that Section 337 is available in cases where the unfair acts occur abroad as long as the resulting products are imported into the United States. One leading commentator has described the ITC’s exclusion orders as a “powerful, and “formidable” remedy available to trade secret owners. Where the importation requirement can be satisfied, companies in the United States concerned about their trade secrets being misappropriated abroad should consider Section 337 as a possible remedy.

For more information about the TianRui Group decision, or any other matter raised in this Legal Update, please contact .

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