The U.S. International Trade Commission (“ITC”) voted on January 22, 2013 to institute a Section 337 investigation on certain paper shredders produced in China based on a complaint filed by Fellowes, Inc., an Illinois-based maker of paper shredders. The case relates to a longstanding dispute between the company and its former joint-venture partner in China. This case highlights both the potential risks of manufacturing in foreign jurisdictions and the use of Section 337 litigation to prevent foreign competitors from benefiting from misappropriated trade secrets.

In its ITC complaint, Fellowes alleges that its former joint-venture partner in Changzhou, Jiangsu Province, China misappropriated its proprietary designs, manufacturing process, and know-how and began manufacturing paper shredders under the trade name of the Chinese entity, New United Co. Group, Ltd. According to Fellowes, the principal of New United, Zhou Licheng, halted the manufacturing of Fellowes’ paper shredders after failing to obtain certain concessions from Fellowes in 2010 and blocked access to the facilities. After the company became insolvent, Zhou allegedly used legal processes in China to seize control of the company’s assets. Fellowes alleges that New United hired away Fellowes’ engineers in China who possessed Fellowes’ proprietary know-how and advertises the products as its own. The complaint further alleges that New United has commenced sales operations in the United States. Fellowes seeks ITC orders to bar the importation of these products and enjoin New United’s U.S. staff to cease advertisement and distribution, destroy any infringing products in their possession, and turn over all documents containing Fellowes’ proprietary information.

The Fellowes case underscores the risks associated with conducting manufacturing operations in China and the importance of finding reliable business partners in China and safeguarding proprietary information. In this instance, Zhou, the principal of New United, is a locally renowned entrepreneur and a member of the Chinese Communist Party. Besides selling paper shredders, the company has also formed joint ventures with Alstom, Bombardier, and Siemens to make railway equipment for China’s rapidly expanding high-speed railway network. Because of this contribution to China’s national railway policies, Zhou and his company have gained the attention of officials at the highest levels of China’s central government. Fellowes’ troubles are not unique; its ITC complaint is part of a recent wave of ITC litigation based on alleged trade-secrets theft abroad.

A local government website in China confirms that Fellowes’ joint venture ceased operations in 2011. The company’s assets were auctioned in bankruptcy the same year. Fellowes’ ITC case follows in the footsteps of litigation in both China, which ended with Zhou’s withdrawal of his suit against Fellowes, and in federal district court in Illinois, which is ongoing.

Fellowes filed its ITC complaint in December 2012 under Section 337 of the Tariff Act of 1930, which allows a petitioner to seek relief from the importation of products made using an unfair trade practice, including trade secret theft. If the ITC finds that such unfair trade practice has taken place, that the domestic industry has been injured as a result, and that an exclusion order would be in the public interest, the ITC could issue an exclusion order and cease-and-desist order barring the importation of such Chinese manufactured paper shredders. U.S. Customs & Border Protection would then enforce the order at ports of entry.