On June 9, 2016, the International Trade Commission (“the Commission”) issued the public version of its opinion finding of a violation of Section 337 by Respondent Viraj Profiles Limited (“Viraj Profiles”) in Certain Stainless Steel Products, Certain Processes for Manufacturing or Relating to Same, and Certain Products Containing Same (Inv. No. 337-TA-933).

By way of background, this investigation is based on a complaint filed by Valbruna Slater Stainless, Inc., Valbruna Stainless Inc., and Acciaierie Valbruna S.p.A. (collectively, “Valbruna”) alleging violation of Section 337 in the importation into the U.S. and sale of certain stainless steel products manufactured using Valbruna’s allegedly stolen trade secrets. See our September 8, 2014 and October 9, 2014 posts for more details on the complaint and Notice of Investigation, respectively.

According to the opinion, Valbruna alleged that Viraj Profiles and other named respondents took its trade secrets by inducing a former Valbruna employee, Giancarlo Zausa, to steal customer lists and confidential operating practices for making stainless steel. Valbruna’s operating practices involve the melting stage of manufacturing stainless steel products that result in semi-finished billets or ingots, and encompasses the precise quantity and mix of inputs and optimal processing times and temperatures. Valbruna’s customer lists include two customer databases containing customer names, contact information, payment terms, and other commercially valuable information. Valbruna asserted that just before he resigned in August 2006, Mr. Zausa downloaded customer lists and more than 300 of Valbruna’s confidential operating practices and saved them on his work laptop in a folder entitled “s.s. secrets.” In 2009, an Italian court convicted Mr. Zausa of theft of Valbruna’s know-how and customer lists. In 2014, the Italian court convicted the General Manager of Viraj Profiles of the same crime. The Italian authorities are currently investigating and prosecuting the Chairman and Managing Director of Viraj Profiles and the Managing Director of Respondent Flanschenwerk Bebitz GmbH.

On July 2,2015, ALJ Essex issued Order No. 10 requiring the forensic inspection of the electronic devices and email accounts of six current and former employees of the Viraj and Bebitz respondents, including Shilpi Mathur, the head of Research and Development and Quality Assurances at Viraj Profiles. Order No. 10 required the respondents to identify “[a]ll computers and storage media in Respondents’ possession, custody, or control that have been used since August 2006” by the six named custodians, including any “personal storage media including USB drives,” and to make available the identified electronic devices for inspection and copying to an expert. The respondents prepared a list of the computers and other electronic assets that they identified as covered by the order. Valbruna’s expert then performed a forensic inspection of the computers and electronic assets that were identified and produced. The inspection of Ms. Mathur’s computer revealed the following:

  • On October 19, 2014, a few weeks after the complaint was served, three days after Valbruna served its initial discovery requests, and three days after Viraj Profiles was notified by counsel of its duty to preserve all documents and things in its possession, a new operating system was installed on Ms. Mathur’s computer that permanently overwrote and destroyed previously existing data.
  • Metadata associated with a shortcut link file on Ms. Mathur’s computer indicated that a folder titled “s.s. secrets” had existed on her computer as early as December 2007 and was shared on Viraj Profiles’ network. This folder had the same name as the folder on Mr. Zausa’s work laptop containing Valbruna’s confidential operating practices.
  • After the operating system installation, between October 28,2014 and July 27, 2015, at least thirty-six different USB storage devices were attached to Ms. Mathur’s computer. Three of the USB devices contained files with filenames and sizes identical to the Valbruna operating practices downloaded by Mr. Zausa. A fourth USB device contained six files with filenames corresponding to Valbruna’s operating practices.

Viraj Profiles did not identify or produce any of the thirty-six devices attached to Ms. Mathur’s computer. After the forensic inspection, Viraj Profiles represented that the USB devices no longer exist.

On December 8, 2015, ALJ Theodore R. Essex issued Order No. 17 (“Sanction ID”) granting-in-part Valbruna’s motion for default and other relief against Viraj Profiles for spoliation of evidence. Among the factual findings in the Sanction ID were the following:

  • Viraj Profiles had control of Ms. Mathur’s computer and the USB devices that were attached to it at all relevant times. Viraj Profiles had a duty to preserve and to not alter the computer and the USB devices after Viraj Profiles was served with the complaint in this investigation, and was informed of that duty by its previous counsel on October 16, 2014, just days after the investigation was instituted.
  • Viraj Profiles destroyed or withheld evidence with a culpable state of mind, as indicated by the following factors: the significance of Ms. Mathur and her computer; the timing of the operating system installation; the similarities between the files accessed from Ms. Mathur’s computer, the files on the USB devices attached to Ms. Mathur’s computer, and the information stolen by Mr. Zausa on behalf of Viraj Profiles; Viraj Profiles’ failure to produce the USB devices attached to Ms. Mathur’s computer; and Viraj Profiles’ “glaring lack of explanation of the installation of the new operating system on Ms. Mathur’s computer especially in light of the litigation hold.” (Emphasis in original).
  • Viraj Profiles “did little to discredit” the work or affidavit of Valbruna’s expert. The bulk of Viraj Profiles’ cross-examination focused on speculation and topics of little probative value, instead of the expert’s methodology and conclusions.
  • The information deleted from Ms. Mathur’s computer and the information contained on the missing USB devices are highly relevant to the investigation and prejudicial to Valbruna, the Commission Investigative Staff (“OUII”), and the ALJ. The loss of at least four files that were identical to those stolen by Mr. Zausa “directly undermines Valbruna’s ability to show that Viraj [Profiles] stole its steel making processes and, further, that Viraj [Profiles] used the information in making its own steel.” Viraj Profiles did not come forward with any explanation as to what the destroyed information might have been.

Based on the evidence, ALJ Essex found Viraj Profiles’ conduct to be “so egregious and prejudicial” as to warrant a finding of default as a sanction. In considering lesser sanctions, ALJ Essex stated in the Sanction ID:

As for lesser sanctions, which include proceeding to an evidentiary hearing, the ALJ declines to allow Viraj [Profiles] to continue to use Valbruna’s trade secrets by forcing the parties to an evidentiary hearing. The outstanding issues, i.e., injury, domestic industry, whether the steel making processes are trade secrets, simply pale in comparison to the misconduct by Viraj [Profiles]. The ALJ finds that prolonging this investigation simply gives Viraj [Profiles] additional time to continue to misappropriate and use Valbruna’s trade secrets. The evidence against Viraj [Profiles] is so overwhelming and its conduct is so egregious that the ALJ finds that the best and only sanction is a finding of default. Indeed, given the extent of [Viraj Profiles’] misconduct, the ALJ finds that all aspects of the investigation have been tainted since it will never be clear whether the record before the ALJ and the Commission is complete and accurate. In other words, [Viraj Profiles’] credibility in this investigation is tainted—consequently, any findings or evidence that rely on representations from Viraj [Profiles] will be highly suspect and of doubtful veracity. Moreover, as [OUII] correctly noted, Commission precedent allows for a finding of default regardless as to whether other issues, such as injury, had not yet been decided.

In addition to finding that Viraj Profiles acted in bad faith in spoliating evidence and that default was warranted, ALJ Essex ordered Viraj Profiles to disgorge any Valbruna operating practices in its possession. The Sanction ID, however, denied Valbruna’s request to assert certain operating practices that the ALJ had previously excluded. The Sanction ID also made no findings as to any other respondent.

The Commission determined to review the Sanction ID, and clarified in its notice of review that default against Viraj Profiles did not preclude the remaining respondents from participating in an evidentiary hearing and contesting the allegations at issue in the investigation. The Commission also requested briefing from the parties on the question of disgorgement, and from the parties and other interested persons on the issues of remedy, the public interest, and bonding. In addition, the Commission has since determined not to review Order No. 19 granting Valbruna’s motion for partial termination of the investigation based on withdrawal of the complaint against all respondents except Viraj Profiles.

In its opinion, the Commission adopted all of the Sanction ID’s factual findings, and affirmed—subject to certain modifications—the default finding against Viraj Profiles for spoliation of evidence. In addition to the reasons set forth in the Sanction ID, the Commission found that Viraj Profiles engaged in a course of conduct in which it lied about its document production, obstructed the judicial proceedings, and intentionally destroyed evidence during the investigation: “Viraj Profiles’ failure to identify and produce for forensic inspection thirty-six USB devices in violation of Order No. 10—although certainly sufficient for sanctions—was just the tip of the iceberg because the forensic inspection revealed much more misconduct.” The additional misconduct included, inter alia, numerous false representations, such as Viraj Profiles’ repeated denial (under oath) that it had taken or had in its possession Valbruna’s operating practices, as well as Viraj Profiles’ opposition to the forensic inspection with false statements to the ALJ that it had conducted all the necessary searches and produced all relevant documents, when, in fact, it had not.

The Commission found that default was appropriate “for at least three reasons.” First, lesser sanctions such as monetary penalties or adverse rulings would not adequately protect Valbruna’s interest or remedy the prejudice Valbruna suffered from Viraj Profiles’ conduct. Second, a sanction of default is necessary to deter similar spoliation of evidence and discovery order violations and to protect the integrity of judicial proceedings. Third, Viraj Profiles’ argument that the spoliated evidence relates to only one element (theft) of the trade secret claim was already addressed and rejected by the Commission in Certain Opaque Polymers (Inv. No. 337-TA-883).

The Commission vacated the portion of the Sanction ID ordering Viraj Profiles to disgorge any Valbruna operating practices in its possession because the ALJ had ordered disgorgement as a sanction for Viraj Profiles’ spoliation of evidence and discovery violation rather than a remedy for a Section 337 violation, and the Commission’s finding of default disposes of violation issues with respect to Viraj Profiles despite its failure to comply with Order No. 10, rendering disgorgement unnecessary.

With respect to remedy, the Commission issued a limited exclusion order barring the entry of stainless steel products manufactured using any of the trade secrets Valbruna identified in the complaint by or on behalf of Viraj Profiles or its affiliated companies, parents, subsidiaries, or other related business entities, or their successors or assigns. The Commission found that the circumstances justifying Viraj Profiles’ default and the limited record developed as a consequence warrant a requirement that Viraj Profiles obtain a ruling from the Commission before importing any stainless steel that may be subject to the exclusion order. The Commission also agreed with Valbruna that the limited exclusion order should be effective for 16.7 years, reflecting the approximate time Valbruna spent developing the operating practices identified in the complaint. In addition, the Commission issued a cease-and-desist order, consistent with its precedent in investigations where a domestic respondent is found in default and the presence of commercially significant inventories as alleged in the complaint are presumed.

Regarding the statutory public interest factors, the Commission found that the issuance of remedial orders would not have an adverse effect on the public health and welfare, competitive conditions in the U.S. economy, the production of like or directly competitive articles in the U.S., or U.S. consumers, based in part on comments from numerous third parties, including U.S. Representatives Tim Murphy and Peter J. Visclosky, Chairman and Vice Chairman of the Congressional Steel Caucus, and U.S. Senator Joe Donnelly of Indiana.

As to bonding, the Commission found that 13.4% of the entered value of the excluded products imported or sold during the Presidential review period is appropriate based on the evidentiary record.