- Did You Know ... Importing Articles Manufactured Using Trade Secrets Misappropriated Abroad Can Be A Violation Of Section 337?
- June 25, 2012 | Authors: Alexander B. Englehart; Eric W. Schweibenz
- Law Firm: Oblon, Spivak, McClelland, Maier & Neustadt, L.L.P. - Alexandria Office
Any regular reader of this blog will recognize that the vast majority of Section 337 actions involve the importation, sale for importation, and/or sale within the U.S. after importation of articles that allegedly infringe U.S. patents. See 19 U.S.C. § 1337(a)(1)(B). However, patents are not the only form of intellectual property that can form the basis for a Section 337 action. The statute also prohibits, inter alia, “[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.” 19 U.S.C. § 1337(a)(1)(A). The ITC has long interpreted this provision of Section 337 to apply to trade secret misappropriation. See TianRui Group Co. v. ITC, 661 F.3d 1322, 1326 (Fed. Cir. 2011). But until the TianRui decision, it was not entirely clear whether Section 337 could prohibit the importation of articles manufactured using misappropriated trade secrets where the acts of misappropriation occurred entirely outside the U.S.
By way of background, TianRui was an appeal from the ITC’s finding of a violation of Section 337 in Certain Cast Steel Railway Wheels, Certain Processes For Manufacturing Or Relating To Same And Certain Products Containing Same (Inv. No. 337-TA-655). See our October 19, 2009 and December 4, 2009 posts for more details. Complainant Amsted Industries Inc. (“Amsted”) was an American-based company that developed two secret processes to make cast steel railway wheels. Amsted used one of the processes and licensed the other to companies overseas, including companies in China. The basis of the ITC’s investigation was Amsted’s complaint, filed August 14, 2008, alleging a violation of Section 337 in the importation into the U.S., sale for importation, and sale within the U.S. after importation of certain cast steel railway wheels and products containing the same by reason of misappropriation of Amsted’s trade secrets (the “ABC trade secrets”). The complaint named TianRui Group Company Limited; TianRui Group Foundry Company Limited; Standard Car Truck Company, Inc. and Barber TianRui Railway Supply, LLC (collectively “TianRui”) as Respondents.
The ITC instituted an investigation and held a ten day evidentiary hearing, finding that TianRui had misappropriated Amsted’s ABC trade secrets under Illinois trade secret law. Specifically, after TianRui was unsuccessful in obtaining a license, it hired away nine employees of another Chinese Amsted licensee to manufacture wheels using the confidential ABC process. On October 16, 2009, ALJ Charneski issued the Initial Determination (“ID”) finding a violation of Section 337 by TianRui with respect to the ABC trade secrets. The Commission issued a notice determining not to review the ID, and soon after issued a notice of Issuance Of A Limited Exclusion Order and Cease and Desist Order; Termination of the Investigation. See our December 18, 2009 and February 19, 2010 posts for more details. TianRui appealed the decision to the Federal Circuit.
One of the main arguments that TianRui raised on appeal was that the ITC had exceeded its authority by applying Illinois trade secret law to find a violation of Section 337 based on acts of misappropriation that occurred entirely in China. Specifically, TianRui argued that Section 337 is only appropriately applied extraterritorially with respect to patents, as there is no express language authorizing the ITC to do the same with trade secrets. The ITC’s primary counter-argument emphasized that it had not applied trade secret law extraterritorially because a key aspect of a Section 337 violation is the domestic element of importation.
In the opinion, the Federal Circuit affirmed the ITC’s application of domestic trade secret law (albeit not Illinois law specifically) to conduct occurring in a foreign country. The Court determined that the Congressional presumption against extraterritorial application of legislation does not apply for three reasons. First, Section 337 is specifically directed to importation of articles into the United States, an inherently international transaction, and thus “it is reasonable to assume that Congress was aware, and intended, that the statute would apply to conduct ... that may have occurred abroad.” Second, the Court pointed out that the ITC “does not purport to regulate purely foreign conduct.” Rather, the “unfair” activity is only prohibited to the extent that it results in importing goods into the United States and causing domestic injury. Third, the Court determined that the legislative history of Section 337 supports interpreting the statute as permitting the ITC to evaluate conduct that occurs extraterritorially since “Congress intended a ... broad and flexible meaning.” The Court also held that the domestic industry injured as a result of the importation need not actually practice the misappropriated trade secrets. See our November 7, 2011 post for more details on the TianRui opinion.
In the wake of TianRui, there appear to have been two new Section 337 complaints involving the importation of articles manufactured using misappropriated trade secrets where the acts of misappropriation occurred outside the U.S. The first was filed by Twin-Star International, Inc. of Delray Beach, Florida and TS Investment Holding Corp. of Miami, Florida (collectively, “Twin-Star”) on December 13, 2011. Twin-Star’s complaint alleged that Shenzhen Reliap Industrial Co., Ltd. of China (“Reliap”), Yue Qiu Sheng, a.k.a. Jason Yue of China (“Yue”), and Whalen Furniture Manufacturing Inc. of San Diego, California (“Whalen”) (collectively, the “Electric Fireplaces Respondents”) unlawfully engage in unfair methods of competition and unfair acts in connection with the importation into the U.S., sale for importation, and/or sale within the U.S. after importation of certain electric fireplaces, components thereof, manuals for same, and products containing same and in relation to certain processes for manufacturing or relating to same. According to the complaint, the unfair methods of competition and unfair acts at issue include, inter alia, the Electric Fireplaces Respondents’ misappropriation of Twin-Star’s trade secrets. According to the complaint, Yue was formerly employed by Twin-Star in China and, since the termination of his employment, Yue has misappropriated Twin-Star’s trade secrets in China in connection with the formation of his own new company Reliap. See our December 15, 2011 post for more details. The ITC instituted an investigation based on Twin-Star’s complaint—Certain Electric Fireplaces, Components Thereof, Manuals for Same, and Products Containing Same, Certain Processes for Manufacturing or Relating to Same, and Certain Products Containing Same (Inv. No. 337-TA-826)—on January 13, 2012. See our January 17, 2012 post for more details. The 826 investigation has been consolidated with Inv. No. 337-TA-791.
The second post-TianRui Section 337 complaint in this area was filed by SI Group, Inc. of Schenectady, New York (“SI Group”) on May 21, 2012. In its complaint, SI Group alleges that a number of entities are involved in the unlawful importation into the U.S., sale for importation, and/or sale within the U.S. after importation of certain rubber resins made using misappropriated SI Group trade secrets. According to the complaint, a Mr. Xu Jie, a.k.a. Jack Xu (“Xu”), was employed by SI Group (Shanghai) beginning on April 14, 2004, and SI Group started manufacturing SP-1068 tackifier in Shanghai shortly thereafter. The complaint states on information and belief that, by virtue of his employment and position, Xu was the only employee at the SI Group (Shanghai) plant who had access to the entire trade secret processes for making SP-1068 and other resins. On April 30, 2007, Xu resigned from SI Group (Shanghai). While Xu apparently denied that he was leaving to join a competitor, SI Group alleges in the complaint that Xu in fact joined Sino Legend (Zhangjiagang) Chemical Co., Ltd., Sino Legend Holding Group, Inc., Sino Legend Holding Group Ltd., HongKong Sino Legend Group Ltd., Ning Zhang, and Quanhai Yang (collectively, “Sino Legend”). According to the complaint, shortly after Xu joined Sino Legend, Sino Legend started to market its SL-1801 resin, which has specifications substantially the same as those for SI Group’s SP-1068 tackifier. The complaint therefore alleges that Sino Legend misappropriated SI Group’s trade secrets through hiring Xu (or otherwise) to develop SL-1801 and other rubber resins corresponding to SI Group rubber resins. See our May 22, 2012 post for more details. The ITC instituted an investigation based on SI Group’s complaint—Certain Rubber Resins and Processes for Manufacturing Same (Inv. No. 337-TA-849)—on June 20, 2012. See our June 22, 2012 post for more details.
In view of the above, it appears that Section 337 actions based on the alleged misappropriation of trade secrets abroad may be becoming more common in the wake of the Federal Circuit’s decision in TianRui. As in TianRui, both Twin-Star’s and SI Group’s recent complaints involve situations where a U.S. company’s trade secrets were allegedly misappropriated in China and used in connection with the importation of articles into the U.S. to the detriment of a domestic industry. Since it is now clear that violations of Section 337 can potentially arise from acts of trade secret misappropriation that occur entirely outside the U.S., companies may be encouraged to bring new Section 337 actions where they believe that their domestic industry is being harmed through the importation of articles manufactured abroad using misappropriated trade secrets. While it is unlikely that the number of new Section 337 actions based on trade secret misappropriation will eclipse the number based on patent infringement, this newly-invigorated basis for seeking relief from the ITC should not be overlooked.