Many US companies now have a new and powerful weapon in protecting their intellectual property against foreign wrongdoers. A three-judge panel at the Federal Circuit handed down a far-reaching decision on Tuesday, October 11, affirming that Section 337 of the Tariff Act of 1930, 35 U.S.C. § 1337 (“Section 337”) gives the International Trade Commission (ITC) authority to block importation of products based on trade secret misappropriation that occurred outside the United States. In this decision, the Federal Circuit expands the reach of Section 337 outside the territorial boundary of the United States in the context of trade secret misappropriation.

The facts in this case are largely undisputed. Amsted, a US company, owns trade secrets in two processes of manufacturing cast steel railway wheels (the ABC process and the Griffin process). Amsted has stopped using the ABC process in the United States but licensed the ABC process to DaTong (a Chinese company). After a failed negotiation with Amsted to license the ABC process, TianRui (another Chinese company) hired several DaTong employees in China who had been trained with the proprietary ABC process and had signed confidentiality agreements. Those former DaTong employees then disclosed the details of the ABC process to TianRui. TianRui began manufacturing its wheels using the ABC process and started to market and import them into the United States. Amsted filed a complaint against TianRui with ITC alleging a violation of Section 337 based on TianRui’s misappropriation of trade secrets. TianRui moved to terminate the ITC proceeding on the grounds that: (1) Section 337 cannot be applied extraterritorially and therefore does not reach the alleged trade secret misappropriation that occurred outside the United States; and (2) Amsted does not satisfy the domestic industry requirement because Amsted no longer uses the ABC process in the United States. ITC denied TianRui’s motions and ultimately issued a limited exclusion order against TianRui. TianRui then appealed to the Federal Circuit.

Section 337 prohibits “[u]nfair methods of competition and unfair acts in the importation of articles … into the United States, … the threat or effect of which is … to destroy or substantially injure an industry in the United States.” 1 In this 2–1 decision, the majority and the dissent disagree on the primary issue—the extraterritorial reach of Section 337.

The majority affirms ITC’s position that Section 337 authorizes ITC to apply US trade secret law to conducts that occur in part in a foreign country. It is a longstanding principle that US laws are meant to apply only within the territorial jurisdiction of the United States, absent a contrary legislative intent.2 The majority holds, however, that the presumption against extraterritoriality does not govern in this case3 because: (1) the focus of Section 337 is on “an inherently international transaction — importation;” (2) the trade secret misappropriation in this case is not “purely extraterritorial” because it results in the importation of goods into the United States causing domestic injury; and (3) the legislative history of Section 337 supports its application to conducts abroad. The majority’s rationale on the policy ground is clear: “In cases in which misappropriated trade secrets are used in the manufacture of the imported goods, the misappropriation will frequently occur overseas, where the imported goods are made. To bar the Commission from considering such acts because they occur outside the United States would thus be inconsistent with the congressional purpose of protecting domestic commerce from unfair methods of competition in importation such as trade secret misappropriation.” 4 The majority adds that ITC does not intend to enforce the US trade secret law in China, but only sets the conditions under which products may be imported into the United States.5

The dissenting opinion is equally cogent and deserves a close look. The dissent holds that the presumption against extraterritoriality should control in this case because there is no clear contrary legislative intent. The dissent claims that Section 337 reaches only “unfair acts in the importation of articles” into the United States and thus does not create a remedy for “the importation of goods resulting from unfair methods of competition.” 6 The dissent tends to separate the act of misappropriation from the act of importation. It reasons that there is “nothing inherently unfair” about importing the wheels into the United States, and the unfair act in this case is the alleged trade secret misappropriation, which occurred entirely in China.7 The dissent is apparently concerned about the potentially staggering breadth of the majority opinion: If ITC can block importation because of trade secret misappropriation occurred in China, it can also block importation if the working conditions in the foreign country do not meet the US labor law or the foreign worker compensations do not meet the US minimum wage law.8 The dissent then ultimately concludes that “§ 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.” 9

The dissent does not end its “not immediately popular” 10 opinion before offering some practical advice — obtain a process patent.11 The dissent states that Amsted could have obtained a US process patent and thus enjoyed the protection of the US patent law, which prohibits importation of a product made by a process patented in the United States.12  The dissent continues that Amsted instead chose to keep its processes secret while simultaneously exploiting its trade secrets by licensing them to a foreign company to use outside the United States. The dissent also expresses concern13 that the majority opinion would give additional incentives to US inventors to keep their innovation secret and thus deny the society of the benefits of disclosure underlined by the US patent system.

On a secondary issue, the Federal Circuit agrees with ITC that the domestic industry requirement has been satisfied in this case even if Amsted no longer uses the ABC process in the United States. The Federal Circuit reasons that Section 337 only requires that a domestic industry exists and the unfair practices threaten to destroy or substantially injure the domestic industry. Section 337 does not require that the domestic industry (which does not use the ABC process) relate to the intellectual property (the secret ABC process) involved in the investigation. The Federal Circuit in this case also answers two other important questions: (1) Marketing and certification14 efforts do not constitute use (and misappropriation) of trade secrets; and (2) 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 337.15

It is unclear at this moment whether TianRui would seek en banc review of this decision and, if denied, whether it would appeal to the US Supreme Court. So the scope of the expansion of Section 337 may not be final yet. Nevertheless, this most recent decision last week should serve to remind US companies of ITC as a powerful IP enforcement/protection venue. As suggested by the dissenting judge in this opinion, US companies should also carefully evaluate the pros and cons of trade secret protection and patent protection, especially when exporting technologies outside the United States.