Previously published in the Executive Counsel, April/May 2012
Theft of corporate trade secrets abroad is on the rise. Security ex- perts and government officials are increasingly concerned about breaches of corporate networks. In January, the director of national intelligence warned the Senate Intelligence Committee of overseas actors that are targeting the intellectual property of U.S. companies in an effort to "save themselves the time and expense of doing R&D."
U.S. companies, aware of the risks involved in conducting business abroad, are taking extraordinary measures. As the New York Times reported in Febru- ary, at AirPatrol, a Maryland-based company that specializes in wireless security systems, employees take only loaner devices to China and Russia, never enable Bluetooth and always switch off the microphone and camera.
What happens when such measures are not enough? Can corporations seek redress in U.S. courts for the theft of trade secrets, even when those trade secrets are stolen abroad?
Addressing these very questions, a federal appeals court recently deter- mined that the International Trade Commission, a quasi-judicial federal agency, does have authority to bar the importation of products made abroad using misappropriated trade secrets that were developed in the United States. The appeals court relied on a statute that prohibits "unfair methods of competition and unfair acts in the importation of articles . . . into the United States."
The case decided by the appeals court involved Amsted Industries, a domestic manufacturer of cast steel railway wheels. Amsted owned a secret process for manufacturing such wheels but no longer used that process in the United States. It licensed it instead to several firms with foundries in China.
The TianRui Group, a Chinese manufacturer of railway wheels, also sought to license Amsted's technology, but the parties could not agree on terms. Then, after the failed negotiations, Tian- Rui hired employees away from one of Amsted's Chinese licensees, Datong.
In proceedings before the ITC, Am- sted proved that the Datong employees hired by TianRui had been trained in the secret Amsted process, knew that the process was proprietary and confidential, but nonetheless disclosed it to TianRui. Amsted also proved that TianRui, after misappropriating the Amsted trade secret, imported into the United States the wheels it had manu- factured using the trade secret.
At the appeals court, TianRui argued that the jurisdiction of the ITC cannot reach trade secret misappro- priation that occurs outside the United States. Although the court agreed that Congressional legislation typically ap- plies only within the territorial jurisdic- tion of the United States, it rejected the argument advanced by TianRui. The statute at issue focused on the inherent- ly international transaction of importa- tion, the appeals court explained, and so the presumption against extraterri- toriality did not govern the case.
While the appeals court agreed that ITC jurisdiction could reach trade secret theft abroad, it placed an impor- tant limitation on that jurisdic- tion. The court ruled that the ITC's authority to address misap- propriation of trade secrets abroad is limited to those situations where the act of misappropriation abroad results in the importation of goods into the United States. As the appeals court explained, "the Com- mission has no authority to regulate conduct that is purely extraterritorial. The Commission does not purport to enforce principles of trade secret law in other countries generally, but only as that conduct affects the U.S. market."
The TianRui decision is important for U.S. corporations that do sub- stantial business in countries where the theft of corporate trade secrets is widespread. Domestic corporations that learn of trade secret theft abroad can now obtain an order from the ITC excluding from importation goods that are made using stolen trade secrets. An exclusion order may not deter trade secret theft by entities abroad that have no intention of selling their goods in the United States, but it will be a powerful weapon against those that are selling, marketing, or intend to sell and market, products made with stolen trade secrets in the United States.
An ITC exclusion order is not the only U.S. legal tool to combat the theft of trade secrets abroad. The Economic Espionage Act, passed by Congress in 1996, makes theft of trade secrets a federal crime. In particular, the EEA prohibits espionage on behalf of foreign governments for purposes of obtaining trade secrets from U.S. businesses. More gener- ally, the EEA also outlaws the theft of trade secrets when it is undertaken for the economic benefit of someone other than the rightful owners.
Under the EEA, informa- tion is a trade secret if (1) the owner took reasonable measures to keep it secret and (2) the information has independent economic value because of its secrecy.
The wide scope of the EEA is consistent with the purpose behind it. Legislative history indicates that in the wake of the Cold War, Congress rec- ognized that espionage had evolved to focus on secrets that lead to a commercial and economic advantage. Congress also acknowledged that corporate trade secrets are an important national eco- nomic resource. In this context the EEA was passed, to directly and systemati- cally address economic espionage.
The EEA not only criminalizes trade secret theft in the United States, it also explicitly prohibits the theft of trade secrets abroad if the offender is a U.S. citizen or corporation, or if any act in furtherance of the offense was commit- ted in the United States. While prosecu- tions under the provision of the EEA criminalizing trade secret theft abroad have not been common, that may change soon with the rise in interna- tional corporate espionage.
Thus, businesses seeking legal redress in the United States for the theft of trade secrets abroad face an important choice: Should they try to initiate criminal proceedings under the Economic Espionage Act, or should they petition the International Trade Commission for an exclusion order?
In certain circumstances the answer is clear. If the trade secret theft abroad has not and will not lead to the impor- tation into the United States of prod- ucts made using the purloined secrets, the ITC is not an option. Conversely, if the theft was carried out abroad by a foreign national acting on behalf of a foreign entity, and no act in further- ance of the theft occurred in the United States, the conduct would not fall within the ambit of the EEA.
If criminal and civil options to combat trade secret theft abroad are both available – for example, where a U.S. citizen stole trade secrets abroad on behalf of a foreign company, and the foreign com- pany then imported goods made with the stolen secrets into the United States – companies must weigh the risks and benefits associated with pursuing an ex- clusion order at the ITC versus a criminal indictment under the EEA.
One important benefit of an ITC action is the swift pace of ITC litigation. The entire discovery period is typically about six months, and a trial usually occurs in less than a year. The entire in- vestigative process is only 15-16 months from institution of the investigation.
Another important benefit to an ITC action, especially in comparison to seeking criminal charges, is that the bar to instituting an investigation by the ITC is quite low. Indeed, investiga- tion by the ITC is mandatory upon the filing of a complaint under oath, alleging a violation.
The benefits of initiating a criminal proceeding under the EEA instead of pursuing an investigation before the ITC are first, as Congress noted when passing the Act, a criminal prosecution does not tax the resources of smaller businesses that can't afford the legal fees and costs of an ITC investigation.
Additionally, the deterrent effect of a successful criminal prosecution may outweigh the punitive aspects of an exclusion order. Under the EEA, indi- viduals may be fined up to $500,000 and face up to 15 years in prison, and organizations may be fined up to $10,000,000.
Complementing the penalty provision, the EEA authorizes both manda- tory and discretionary forfeiture that targets proceeds of the crime and any personal property used in the commis- sion of the crime.
U.S. companies considering what steps to take to combat trade secret misappropriation abroad should be aware of both options. If the primary goal is to swiftly shut down the impor- tation of infringing products, the ITC is the logical venue. Because there is no need for personal jurisdiction and service need not be made pursuant to the Hague Convention, a lawsuit can be commenced without delay. Time to trial is very short, and injunctive relief, in the form of an exclusion order, is awarded as a matter of right.
If on the other hand a company does not have the resources to pursue an ITC action, or it wishes to send a powerful deterrent message to the entity that has misappropriated the trade secret, initiat- ing a criminal prosecution may be a viable and more attractive option.
Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.
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