Importers from China beware: if the company you are importing from violated U.S. trade secret laws, the U.S. could turn your goods away at the border, regardless of whether the product itself violates any laws.  That is what the Federal Circuit held Tuesday, setting up an interpretation of U.S. trade law that is likely to reach the Supreme Court due to its serious foreign-policy implications.  The question is one of first instance at the Federal Circuit.

On Oct. 11, 2011, the United States Court of Appeals for the Federal Circuit (Federal Circuit) upheld an International Trade Commission (ITC) ruling excluding the importation of Chinese goods based on a violation of U.S. state trade secret law that happened entirely within Chinese borders.  In the case, styled TianRui Group Co. v. ITC, the court characterized the issue as “whether section 337 authorized the Commission to apply domestic trade secret law to conduct that occurs in part in a foreign country,” id. at 7, although the dissent urged that the true issue was if it applied to conduct which “entirely occurs in a foreign country.” Id. at 2 (Moore, J, dissenting) (emphasis in original).

A Chinese company, Datong, had a license from a U.S. company, Amsted, to use a process for manufacturing railway wheels in China that Amsted protected as a trade secret.  A competitor, TianRui, hired nine employees from Datong, and began manufacturing using trade secrets disclosed by those employees.  TianRui then attempted to import those wheels into the United States, and Amsted brought suit in the ITC to exclude those goods from the United States.

The holding effectively expands the reach of ITC authority and allows downstream consequences for state trade secret misappropriation that occurs extraterritorially.  The court preserved the limitations on excluding items based on patent infringement in dicta unrelated to the holding, distinguishing the instant case over Microsoft Corp. v. AT&T, 550 U.S. 437 (2007), Amgen, Inc. v. U.S. International Trade Commission, 902 F.2d 1532 (Fed. Cir. 1990) and In re Amtorg Trading Corp., 75 F.2d 826 (CCPA 1935), which deal exclusively with the territorial limitations of patent enforcement.

Interestingly, the Federal Circuit claimed it was exercising deference to the administrative law judge (ALJ) at the ITC in upholding his ruling (finding the ALJ is “entitled to deference”), but went on to provide a detailed rebuttal of the arguments in the case, rebutting the “presumption against extraterritoriality by arguing 1) § 337 is expressly directed at international affairs, 2) the acts are relevant only as they result in harm in this country, and 3) the legislative history supports the ITC’s interpretation.

In the opinion, the majority glossed over the appellant’s argument that there was a conflict between the principles of misappropriation and Chinese trade secret law.  Id. at 21 (majority opinion).  The decision in a way federalizes a large aspect of state trade secret law—relying explicitly on the Federal “common law”—at least with regards to international violations of it.

The dissent focused on the jurisdictional nature and stated plainly: “We have no right to police Chinese business practices.”  Id. at 3 (Moore, J., dissenting).  The dissent found “The potential breadth of this holding is staggering,” and that the Federal Circuit and the ITC do not have “the right to determine what business practices, conducted entirely abroad, are unfair.”  Id. at 3, 4.  In a footnote, the dissent blasted the majority’s claim that “there is no conflict between trade secret laws in the United States and China,” and that “If there has been some violation of Chinese law, any remedy must come from Chinese courts.”  Id. at 12–13 n.8.

Keep in mind, too, that there is a Congressional push to federalize and reform state trade secret law akin to adopting the Uniform Trade Secrets Act at the Federal level.  This is likely in response to figures that show that trade secret misappropriation is on the rise in the age of the internet under nearly every metric measured.  In fact, the Obama administration has created a U.S. Intellectual Property Enforcement Coordinator (IPEC), issued a Joint Strategic Plan on Intellectual Property Enforcement, and made recommendations to Congress in a white paper, found here, that urges expansion of federal trade secret protections.

Share