Federal Circuit Provides U.S. Companies with New Tool to Fight Theft of Trade Secrets
The United States Federal Circuit Court of Appeals (“CAFC”) in TianRui Group Company Ltd. v. Int’l Trade Commission provided a significant domestic remedy for U.S. companies whose manufacturing processes are misappropriated overseas.
Under Section 337 of the Tariff Act of 1930, the International Trade Commission (“ITC”) is authorized to exclude imports when it finds “[u]nfair methods of competition and unfair acts in the importation of [those] articles.” In TianRui Group, a U.S. company (Amstead) complained that TianRui Group had obtained its trade secret process for the manufacture of cast steel railway wheels from former employees of an Amstead Chinese licensee, who went to work for TianRui. The employees were privy to Amstead’s trade secrets and were subject to an agreement not to disclose any confidential information. Amstead alleged in the ITC that TiranRui Group used the trade secrets in a manufacturing process for cast steel railway wheels and imported the wheels into the U.S. The ITC administrative law judge first rejected TianRui Group’s attempt to terminate the proceedings on the ground that Congress did not intend for section 337 to be applied extraterritorially. Then after a ten day hearing, the judge found that TianRui Group had misappropriated over 100 trade secrets belonging to Amstead.
On appeal, the CAFC held that a product manufactured outside the United States with the assistance of a stolen trade secret owned by a U.S. based company can be barred from importation into the United States under section 337, even if the theft of the trade secret occurred entirely outside of the U.S. In reaching this conclusion, the court reviewed the principles that apply to federal statutes that create causes of action based in part on conduct that occurs overseas.
The court first found the presumption against extraterritoriality does not apply here because section 337 is “expressly directed at unfair methods of competition and unfair acts ‘in the importation of articles’ into the United States.” According to the court, this shows that Congress did not intend for this act to be limited to domestic concerns. Second, the court held that the focus of section 337 is on the “act of importation and the resulting domestic injury” and, thus, the ITC’s order “does not purport to regulate purely foreign conduct.”
The dissent argued that because none of the acts that constituted misappropriation occurred in the U.S., domestic trade secret law cannot extend to acts occurring entirely within China. The majority stated that dissent’s understanding while “accurately describ[ing] most of the events constituting misappropriation . . . the determination of misappropriation was merely a predicate to the charge that TianRui committed unfair acts in importing its wheels into the United States. In other words, the Commission’s interpretation of section 337 does not, as the dissent contends, give it authority to ‘police Chinese business practices.’ It only sets the conditions under which products may be imported into the United States.” The court thought it unlikely that Congress would have intended to create such a large loophole as the dissent suggests.
The court also rejected TianRui Group’s assertion that the ITC’s ruling would cause improper interference with domestic Chinese law. The court pointed out that the ITC’s ruling only relates to the importation of articles into the U.S. and the ITC’s “activities have not hindered TianRui’s ability to sell its wheels in China or any other country.” The court then concluded, “the question in this case is whether the disclosure of protected information in breach of that duty is beyond the reach of section 337 simply because the breach itself took place outside the United States. To answer that question in the affirmative would invite evasion of section 337 and significantly undermine the effectiveness of the congressionally designed remedy.”
The Federal Circuit’s decision provides U.S. companies with the ability to seek expedited relief from the ITC without having to bring suit in a foreign jurisdiction that may be far less friendly to a U.S. company. This coupled with the court’s further determination in TiranRui Group that section 337’s domestic industry requirement is met where the “wheels could directly compete with wheels domestically produced by the trade secret owners”provides U.S. companies with a potential new and powerful legal weapon. Under the court’s holding, the section 337 domestic industry injury requirement does not require that the U.S. company prove that it is actually manufacturing the product using the trade secret process, it is enough to show that the imported product “could directly compete” with a product domestically produced by the trade secret owner. This low standard should not be an obstacle to bringing an action in the ITC in most cases.
The TianRui Group decision is significant in also holding that “a single federal standard, rather than the law of a particular state should determine what constitutes a misappropriation of trade secrets sufficient to establish an ‘unfair method of competition’ under section 337.” While the practical impact of this understanding will probably not amount to much in practical terms, because most states have adopted the Uniform Trade Secrets Act and state trade secret law generally is fairly uniform, it does highlight a trend toward the acceptance of a national civil trade secret statute. It also suggests that the time may be ripe for Congress to enact a civil trade secret law. Currently, the Economic Espionage Act (“EEA”) provides for criminal sanctions for the theft of trade secrets, but there is no civil counterpart. Recently, Senator Kohl has proposed an amendment to the EEA that would provide for civil remedies for the theft of trade secrets.
Congress should use the occasion of the TianRui Group decision to enact a law that extends trade secret protection to the broadest extent permitted by the Constitution, which is to all commerce that may be lawfully regulated by Congress. The goal of a federal trade secret law should be to do more than simply seek to replace existing state laws, but should reach those extraterritorial situations that are not covered by state trade secret laws. In particular, it should codify the holding in TianRui Group and provide for a civil cause of action where a defendant imports a good into the U.S. which has been manufactured overseas by a confidential and proprietary process belonging to an U.S. company, even where the offense took place entirely outside the U.S. is a violation. Additionally, it should cover the sale of goods in a foreign country which are manufactured overseas by a trade secret process belonging to a U.S. company where the sale of such goods causes financial harm to the U.S. trade secret owner so long as the interest of and links to American foreign commerce are sufficiently strong in relation to those of other nations. Courts have applied this standard to find jurisdiction for trademark infringement under the Lanham Act. There is no reason that the same standard should not be applied to theft of trade secrets.
The importance of trade secrets to the U.S. economy has long been recognized. It encourages the development and exploitation of advances in technology that for one reason or another may not be protected under patent law, but still should be accorded protection. The ITC in TianRui Group has given U.S. companies an important weapon to fight theft of trade secrets committed by foreign companies. While it certainly is a step in the right direction, it does not go far enough. Congress should pick up where the TianRui Group decision leaves off and enact a comprehensive civil trade secret act with broad extraterritorial jurisdiction. Technological innovation by U.S. companies has been a major driving force behind the U.S. economy for many years and Congress should act now to further protect this national asset, especially at a time when the unemployment rate is almost 10%.