United States: Sino Legend v. ITC: Federal Circuit Affirms ITC's Trade Secret Misappropriation Determination

On December 11, 2015, two days after hearing oral arguments in an appeal from an ITC determination finding trade secret misappropriation, the Federal Circuit summarily affirmed the ITC's decision. Sino Legend Chemical Co., v. International Trade Commission, No. 2014-1478 (Fed. Cir. December 11, 2015). The primary issues raised on appeal were: (1) whether the ITC can block the importation of products resulting from trade secret misappropriation occurring entirely outside the U.S.; and (2) whether the ITC should have deferred to the judgments of the Chinese courts that were reviewing the same trade secret allegations.

Background

The Commission instituted the investigation of Certain Rubber Resins and Processes for Manufacturing Same, Inv. No. 337-TA-849 ("Rubber Resins"), based on complainant SI Group's allegations that respondents Sino Legend misappropriated trade secrets for tackifiers — chemical compounds used to bind rubber mixtures in tires.

SI Group hired two employees at its Chinese facilities, both of whom had access to SI Group's trade secrets concerning tackifiers. The employees left SI Group and joined Sino Legend in China, bringing with them SI Group's formulas for producing tackifiers. Shortly thereafter, Sino Legend began producing its own tackifiers and importing them from China into the U.S.

SI Group brought multiple actions against Sino Legend for trade secret misappropriation in China. These included criminal and civil investigations. The civil investigation resulted in a ruling that Sino Legend had not misappropriated protectable trade secrets. The ruling was affirmed on appeal.

SI Group also filed an ITC Complaint under Paragraph (a)(1)(A) of Section 337, which renders unlawful the importation of goods stemming from "[u]nfair methods of competition and unfair acts in the importation of articles...into the United States." As the Federal Circuit held in TianRui Group Co. Ltd. v. ITC, 661 F.3d 1322, 1327 (Fed. Cir. 2011), trade secret misappropriation is a form of unfair competition encompassed by the statute. Moreover, TianRui specifically held that Section 337 encompasses trade secret misappropriation that occurs abroad. Id. at 1335 ("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").

In Rubber Resins, the Administrative Law Judge issued a final initial determination finding a violation of Section 337 for trade secret misappropriation and recommending a 10-year general exclusion order (GEO), or alternatively, a limited exclusion order (LEO) directed to a number of named individuals and companies that manufacture, distribute, and import the accused product. The Judge did not afford comity or give deference to the Chinese litigations, one of which was co-pending at the time.

The Commission adopted the Judge's findings and issued a 10-year LEO. The Commission declined to dismiss the case for comity to the Chinese court, stating in a footnote that "abstention and international comity do not relieve the Commission of its statutory responsibility to determine whether there is a violation of Section 337." Sino Legend appealed the Commission's decision to the Federal Circuit.

Oral Argument

The Federal Circuit panel consisted of Judges Reyna, Mayer, and Chen. The panel focused on two primary questions:

1. Extraterritoriality – can the ITC block imported articles arising from trade secret misappropriation that occurred entirely in China?
2. Comity – did the ITC err by not considering judgments from Chinese courts that litigated SI Group's trade secret allegations?

1. Extraterritoriality

TianRui held that the ITC has the power to block the importation of goods derived from trade secret misappropriation occurring outside the U.S. In its briefing and during oral argument, respondent Sino Legend urged the Federal Circuit to reconsider TianRui in view of the intervening Supreme Court decision in Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659, 1664 (2013). According to Sino Legend, Kiobel states that a statute can only apply extraterritorially when it includes a clear indication of extraterritoriality. Sino Legend argued that Section 337 does not clearly indicate that it should reach conduct occurring wholly outside of the U.S.

During Sino Legend's oral argument, Judge Chen observed that in Kiobel, the conduct being regulated or policed occurred entirely overseas, whereas in Section 337 proceedings at the ITC (as addressed in TianRui), the focus is on domestic matters – i.e., a domestic injury triggered by the domestic act of importation, with a domestic remedy. In response, Sino Legend pointed to the dissent in TianRui, which stated that in addition to importation, Section 337 investigations involve an unfair method or act in connection with the importation. Sino Legend argued that to count unfair acts occurring anywhere in the world as triggering violations under Section 337 would constitute an improper extraterritorial application of the statute that cannot be upheld in the absence of explicit statutory language confirming its extraterritorial application.

Judge Reyna asked why Kiobel did not explicitly overrule TianRui. Sino Legend responded that Section 337 was not before the Supreme Court in Kiobel. Judge Reyna then asked why the Federal Circuit should presume that Kiobel reaches TianRui. Sino Legend responded that the Federal Circuit should revisit TianRui because its rationale is undercut by Kiobel.

During its arguments, the ITC relied on the holding in TianRui, which stated that Section 337 does not regulate foreign conduct and does not apply extraterritorially; the statute instead applies to importation and economic injury in the U.S. Thus, Kiobel's holding regarding extraterritoriality is not relevant to TianRui and Section 337.

Complainant and intervenor SI Group separately argued that Sino Legend's briefs to the ITC did not address extraterritoriality, and that Sino Legend raised this issue for the first time on appeal.

2. Comity

Sino Legend argued that the ITC committed error by failing to consider whether to accord comity to the decisions of Chinese courts regarding the trade secret allegations. According to Sino Legend, the ITC concluded that comity has no role to play in an ITC proceeding. Sino Legend argued that the case should be remanded to allow the ITC to consider the various factors to determine whether to grant comity to the Chinese proceedings.

Judge Reyna noted that comity is discretionary and that the ITC is not obligated to accord comity. Sino Legend responded that there is no mandate that the ITC defer to foreign decisions, but the ITC must apply the applicable test to determine whether or not to accord comity. Judge Reyna observed that whether to defer to a foreign judgment requires a due process analysis regarding the foreign proceedings, and asked whether there had been a factual finding that the Chinese proceedings were unfair. Sino Legend responded that the ITC did not make any such factual findings.

On rebuttal, Judge Reyna asked Sino Legend why it did not submit additional arguments on fairness and due process of the Chinese proceedings, including the factors that courts examine when deciding whether to defer to a foreign judgment. Sino Legend stated that its submission of the Chinese judgments met its prima facie burden, and that although Sino Legend raised comity generally in its Petition to the Commission, the Commission did not request briefing on the comity issue.

Judge Reyna asked if there were arguments made at the ITC that the Chinese proceedings were unfair. The ITC responded that Sino Legend never submitted evidence supporting the according of comity to the Chinese judgments and did not preserve those arguments. When the Commission reviewed the case, there was no evidence regarding comity in the record and no evidence about the fairness or unfairness of the Chinese judicial system.

Judge Chen asked about the ITC's position on comity and whether it flatly rejects comity. The ITC responded that Sino Legend raised comity late in the proceedings and did not include substantial arguments or evidence. In future cases involving comity, there might be "a little bit of wiggle room" for a party who makes substantial arguments in a timely manner.

SI Group said they did not interpret the ITC's decision as precluding comity in all cases. In this case, Sino Legend did not raise the issue of comity in its briefs to the Commission.

Judge Reyna asked if there was any discussion or argument in the proceeding as to due process in China. SI Group said that its brief included a discussion on procedural issues in the Chinese case, and referenced an ITC report regarding the effects of intellectual property rights infringement in China and China's indigenous innovation policies. By contrast, Sino Legend relied on a law review article that SI Group characterized as a "marketing fluff piece."

Audio of the oral argument is available here.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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