US manufacturers have home-turf protection through Section 337 of the 1930 Tariff Act.  Enacted during the depts. Of the Great Depression, §337 has survived, while punitive tariff rates and many other protectionist provisions have been repealed.  As the United States changed from a fenced-in economy to a leader in freer-trade thinking, it kept §337.

This section has been used primarily to uphold the integrity of US patents and trademarks.  It prevents a foreign producer from selling into the US in a way that infringes US registered patents or trademarks.  Valid US patents and trademarks create a US monopoly for their owners.  As a result, a foreign manufacturer cannot export to the US a machine that infringes a competitor’s US patent.  And a foreign seller cannot ship to the US a product that violates a US trademark holder’s rights.  If this happens, the US company can use §337 to block the offending imports at ports of entry (if it can).

The language of §337, however, is not restricted to registered patents and trademarks.  In a ruling by the U.S. Court of Appeals for the Federal Circuit, §337 gained a broader scope than many had thought it had.  In a 2-1 decision, the Court affirmed a decision of the US International Trade Commission (ITC) that it could prevent Chinese imports that infringed, “trade secrets” of a US company.  See TianRui Group Company Ltd. v. International Trade Commission, No. 2010-1395 (Fed. Cir. Ct. App. Oct. 11, 2011).

A trade secret is not a patent.  It is secret intellectual property that a company owns and tries to prevent competitors from discovering and using.  There is no way to obtain a registered monopoly over a trade secret (other than converting it to a patent).  In the TianRui case, the trade secret was a process for making wheels owned by Amsted Industries Inc.  Amsted licensed the process to certain firms in china.  TianRui and Amsted discussed but did not agree on a license.  TianRui nonetheless used the process on wheels and shipped them to a US buyer.

§337 prohibits “unfair methods of competition, and unfair acts in their importation of article . . . into the United States.”  19 U.S.C. §337(a)(1)(A).  Here the unfair acts occurred in China, not in the United States.  The imported wheels did not infringe a US patent or trademarks, and there was no evidence that the wheels were marketed in an unfair manner.

Nonetheless, the Federal Circuit upheld the ITC’s right to ban the wheels from coming into the USA.  Unless overturned by the Supreme Court, the decision gives an extra weapon to US manufacturers that can show that their trade secrets have been used abroad to create a product imported to the USA.

On the facts of this case, where the Chinese company appears to have stolen secrets that it was unable to purchase through a negotiated license fee, “unfair” competition is an easy conclusion.  But how far can the concept be extended?  What if the Chinese company had never talked about buying a license from Amsted but had reverse engineered the secret process after seeing how others used it?  What does it take for competition to be “unfair” when that competition takes place outside the USA and may not offend the laws of the country of production?  And if improper use of trade secrets is “unfair” under §337, what about making products with slave labor or with child labor or at less than minimum wage or without observing good environmental practices?  The list of potential “unfair methods of competition” can be very long.  One’s definition depends on one’s context and sensitivities.  The UN and World Court have no such defined list, and no one treaty exists to define it.  But there are International Labor Organization and many other conventions and treaties, both multilateral and bilateral that cover a wide variety of issues that could be interpreted to define “unfairness.”  How about other things considered improper or inappropriate in the USA, but not in China or other countries?

The TianRui decision represents a pro-protection viewpoint concerning imports into the US that extends beyond registered patents and trademarks.  For US manufacturers under stress from lower priced imports, it represents a tool to use to slow down or block competing products in the US market.  For Chinese and other foreign makers, it may appear to be an overreaching attempt to impose US attitudes on non-US production territories.  And a ruling by the US may invite other countries to apply similar thinking to block US exports to countries that may claim that US production is “unfair” to their markets.