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When Trade Secrets Are Stolen Overseas, Can the Thief Compete in the U.S.?

Thomas C. Carey

Thomas C. Carey | Partner, Business Chair View more articles

Thomas is a member of our Business Practice Group

The International Trade Commission (ITC) may ban the import of items made abroad using improperly obtained trade secrets even if the trade secrets are no longer in use in the United States. So says the Federal Circuit, which applied U.S. trade secret law to foreign activity, despite the Supreme Court’s refusal to apply U.S. law to protect U.S. patents from potentially infringing activity abroad.

The facts of TianRui Group v. ITC illustrate why U.S. manufacturers balk at disclosing their trade secrets to a Chinese subcontractor. In this case, Amsted Industries engaged Datong ABC Castings, a Chinese company, to make cast-steel railway car wheels using Amsted’s secret process. To facilitate the process, Amsted trained several Datong employees at its U.S. facility.

Amsted was later approached by TianRui Group, another Chinese manufacturer, which sought to license the Amsted process. Amsted negotiated with TianRui, but the license talks bogged down.

TianRui then hired nine employees of Datong, including some whom Amsted had trained in the U.S. All nine had been informed by Datong of their obligation not to disclose Amsted’s trade secrets, and eight of the nine had signed confidentiality agreements to protect those secrets.

Notwithstanding these safeguards, TianRui soon started making train wheels using Amsted’s secret process and exporting them to the U.S. in direct competition with Amsted. In fact, Amsted and TianRui were the only suppliers of cast-steel train wheels in the U.S.

Amsted asked the ITC to turn these wheels away at the border. The federal law that empowers the ITC to take such action to protect patented and trademarked items is not clearly applicable to trade secrets. The law does, however, in general terms, permit sanctions against foreign manufactures who engage in “unfair methods of competition … the effect of which is … to destroy or substantially injure an industry in the United States…”

The language protecting patents and trademarks does not include this “destroy or substantially injure” phrase; instead, it requires only that the aggrieved party demonstrate that the industry related to the articles in question “exists or is in the process of being established” in the United States. 19 USC 1337(a)(2). This difference in language proved to be critical in surprising ways.

Before analyzing the statute, the Federal Circuit took issue with the ITC’s application of Illinois trade secret law to this case. Breaking new ground, the court held that the ITC should apply federal common law in trade secret cases. This ruling had little effect on the outcome, but it signals a feisty Federal Circuit bucking the Supreme Court’s trend of deferring to the states in areas that are traditionally the domain of state law.

Next, the court considered whether it is appropriate to apply U.S. trade secret law to activity taking place in China. The majority of the three-judge panel focused on the fact that the activity in question involved more than the theft of trade secrets in China; it also involved the importation of train wheels into the United States.

Likening the ITC’s power to that of the Immigration and Naturalization Service, which can consider illegal conduct abroad in determining whether to grant a visa to a foreigner, the Federal Circuit said that the ITC could consider whether an item was made in violation of U.S. trade secret law in determining whether the item involves an “unfair method of competition.”

The remaining question raised by the statute – whether the importation would “destroy or substantially injure an industry in the United States” – was not easily established because, in fact, Amsted’s domestic manufacture of cast-steel train wheels uses an entirely different process from the one that had been disclosed to the Chinese.

Thus, there was a question as to what was the relevant industry. Holding quite sensibly that the industry was cast-steel train wheels, the Federal Circuit found that Amsted had satisfied this element of the statute.

Oddly, if the statutory language applicable to patent and trademark protection had been applied, the result might have been different. Although that element of the statute would appear to be easier to satisfy, it does require that the industry related to the articles in question “exists or is in the process of being established.”

Furthermore, a definition of “industry” found in the statute seems to link the “industry” to the intellectual property being protected. Since no U.S. company was manufacturing cast-steel wheels using the secret process in question, Amsted might not have been able to satisfy this test.

Seizing on this implication, TianRui argued that, because Amsted was not itself using the trade secret in question, it should not prevail. The court rejected this argument, pointing out that the definition of “industry” applies only to the portion of the statute related to patents and trademarks.

The Federal Circuit deemed this limited reference to that definition sufficient to permit a broader reading of “industry” in the phrase “destroy or substantially injure an industry.” This analysis resulted in protection of trade secrets even if they are not in use in the U.S., as long as they are used to make products that are competitive with products made here.

The decision was not unanimous. One judge disputed the majority’s reading of the statute and offered cold comfort to companies who entrust their trade secrets to overseas manufacturers. In his view, the solution is simple: get a patent.

This advice is of no use, however, to companies with trade secrets that have been in commercial production for more than a year. Moreover, many companies prefer the potentially perpetual lifespan of a trade secret over the 20-year term of a patent. Thus, the majority ruling is both practical and warranted.

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