By Eric Schweibenz
On October 11, 2011, the Federal Circuit issued a precedential opinion in Tianrui Group Co. Ltd. v. ITC (2010-1395).  This 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.

Amsted Industries Inc.(“Amsted”) is an American-based company that developed two secret processes to make cast steel railway wheels.  Amsted uses 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 United States, the sale for importation, and the sale within the United States after importation of certain cast steel railways and certain products containing the same by reason of misappropriation of its 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, they 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 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. 

As summarized in our March 8, 2011 post, Tianrui raised two primary issues on appeal at the Federal Circuit.  First, Tianrui asserted that the ITC 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.  Second, Tianrui argued that the ITC erred in finding that the domestic industry requirement was met because Amsted produces cast steel wheels by a different process.  In essence, Tianrui asserted that the ITC erroneously reinterpreted the statute to hold that a trade secret complainant seeking to enforce its intellectual property (“IP”) rights need not practice the asserted IP domestically to establish the existence of a domestic industry.

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.  Amsted supported this argument by maintaining that some of the misappropriation actually took place in the United States.  In addition, Amsted argued that it met the domestic industry requirement based on the statutory language.  Specifically, Amsted argued that Subparagraph (A) of §337(a)(1), as opposed to subparagraphs (B)-(D), is based on common law and not statutory IP rights.  Therefore, although §337(a)(2) expressly creates a requirement that the domestic industry practice or exploit the asserted IP, this requirement applies only to statutory-based IP investigations covered by subparagraphs (B)-(D) of Section 337(a)(1).

In the opinion, the Federal Circuit affirmed the ITC’s application of domestic trade law to conduct occurring in a foreign country, although the Court rejected ALJ Charneski’s application of Illinois trade secret law.  The Court held that a single federal standard, rather than the law of a particular state, should determine whether or not misappropriation occurred sufficient to meet the requirements of an unfair method of competition under Section 337.  The Court emphasized that protecting domestic industries from unfair competition is a distinctly federal concern with a federal remedy, and thus the reason for applying a federal standard is particularly strong.  However, the Court noted that trade secret law differs little from state to state and the federal criminal statute governing theft of trade secrets is also based on the Uniform Trade Secrets Act, and since there is no dispute in this case pertaining to the substantive law of trade secrets, the outcome of the case was not affected by applying Illinois law.

The Court determined that the Congressional presumption against extraterritorial application of legislation does not apply to this case 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 points 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.  Lastly, 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.”

Tianrui’s arguments that applying domestic trade law would cause improper interference with Chinese law were dismissed for the reasons detailed above, with emphasis on the fact that the ITC would not be regulating purely extraterritorial conduct and would not affect Tianrui’s ability to sell its cast steel wheels in China or elsewhere.  The Court also noted that Tianrui was unable to identify a conflict between the principles of trade secret misappropriation applied by the ITC and as governed by Chinese trade secret law. 

The second issue on appeal, whether or not Amsted had established injury of a domestic industry, was also affirmed by the Federal Circuit.  The Court noted that “Section 337 contains different requirements for statutory intellectual property (such as patents, copyrights, and registered trademarks) than for other, nonstatutory unfair practices in importation (such as trade secret misappropriation).”  For statutory IP, it is necessary that an industry relating to the protected IP exists or is being established.  In contrast, the Court held that non-statutory IP requires that the unfair practice threaten to destroy or substantially injure a domestic industry, without expressly requiring that the domestic industry be based on the IP in question.  Since the Court concluded that Tianrui’s wheels could directly compete with Amsted’s wheels, it held that the domestic industry injury requirement was met.

Judge Moore dissented, arguing that the Court impermissibly expanded the reach of Section 337 and asserting that “there is no basis for the extraterritorial application of our laws to punish Tianrui’s bad acts in China,” emphasizing that the trade secret misappropriation occurred entirely in China.  The dissent argues that there is no clear indication of congressional intent in either the statute itself or the legislative history to extend the reach of Section 337 to wholly extraterritorial unfair acts, stating “unless there is the affirmative intention of Congress clearly expressed to give a statute extraterritorial effect, we must presume it is primarily concerned with domestic conditions.”  Judge Moore determined that Section 337 can only cover unfair acts in importation and thus can only cover trade secret misappropriation that occurs in the United States, in contrast to the majority’s assertion that “Congress clearly intended to create a remedy for the importation of goods resulting from unfair methods of competition” (emphasis in original).  As such, the dissent concludes that Section 337 “does not reach the misappropriation and use of trade secrets in China, even if the product of the misappropriated process is ultimately imported into the United States.”