United States: Organik Kimya v. ITC: Federal Circuit Hears Arguments In Appeal Of Dispositive Sanctions For Bad Faith Spoliation Of Evidence

On October 7, 2016, the Federal Circuit heard oral arguments in an appeal from a decision in Certain Opaque Polymers, Inv. No. 337-TA-883, where the Commission imposed case dispositive sanctions on Respondents for bad faith spoliation of evidence and issued a 25 year limited exclusion order barring the importation of products made by or for Respondents using Complainant's asserted trade secrets. The appeal was heard by a panel consisting of Judges Lourie, Mayer, and O'Malley.  The case is Organik Kimya et al. v. International Trade Commission et al. (Case Nos. 2015-1774, 2015-1833).

Background

As reported in a prior post, in the Opaque Polymers investigation, the Commission affirmed Administrative Law Judge Pender's finding of default by Respondents with regard to allegations of trade secret misappropriation as a sanction for bad faith spoliation of evidence. Specifically, Judge Pender found that after he ordered Respondents Organik Kimya San. ve Tic. A.S., Organik Kimya Netherlands B.V., and Organik Kimya U.S., Inc. (collectively "Organik Kimya") to make certain computers and networks available for forensic inspection,  Respondents deleted or overwrote many of the computer files, wiped out recoverable data that was previously deleted, and backdated the clock on a laptop to make it appear the data was overwritten before the investigation began. The default sanction resulted in a finding of violation by Organik Kimya based upon misappropriation of 52 trade secrets identified by Complainants Rohm and Haas Company, Rohm and Haas Chemicals, LLC, and the Dow Chemical Company (collectively, "Dow").

The remedy imposed by the Commission consisted of a limited exclusion order barring, for 25 years, the importation of opaque polymers made by or for Organik Kimya using the misappropriated trade secrets, along with a coterminous cease-and-desist order directed to Organik Kimya U.S. The Commission also imposed an unusual requirement regarding potential future importations – a requirement that Organik Kimya first obtain an advisory opinion or modification ruling from the Commission that particular products are outside the scope of the exclusion order before it can certify to Customs that its opaque polymers are not made with Dow's misappropriated trade secrets.

The Oral Argument

The oral argument focused on two issues:  (1) whether the Administrative Law Judge and the Commission abused their discretion in ordering the case ending sanction of a default judgment; and (2) whether the Commission committed error when it refused to take Organik Kimya's evidence into account with respect to remedy.

With respect to the first issue, Organik Kimya argued that the entry of a default judgment was an abuse of discretion because the Judge failed to explain why the lesser sanctions outlined in 19 C.F.R. §210.33 were inadequate before entering the case ending sanction of a default judgment.  In Organik Kimya's view, the Judge was required to ask whether the party who was not at fault could have proven some elements of the case notwithstanding the spoliation.  Organik Kimya asserted that even assuming significant adverse inferences (one of the lesser sanctions in the Commission's rules) were appropriate on the misappropriation element of the trade secret claims, the spoliation did not affect evidence related to other elements of the claim, i.e., the existence or non-existence of Dow's trade secrets and the extent to which Dow kept theinformation at issue secret. Thus, Organik Kimya argued that Dow should have been required to provide evidence with respect to those elements.

Counsel for the Commission and counsel for Dow argued that Judge Pender and the Commission adequately considered lesser sanctions, noting that Judge Pender inquired about lesser sanctions during the two-day sanctions hearing and that the Commission spent two pages addressing the issue in its opinion. Counsel for Dow also argued that Judge Pender and the Commission found that the destroyed materials could have and likely would have contained information relating to all of the elements of its trade secret claim.  Moreover, Dow's counsel asserted that even if a default judgment had not been entered, and adverse inferences were entered instead, the outcome would have been the same because the destruction of evidence was so pervasive that adverse inferences would have been taken with respect to all four elements of the trade secret misappropriation claim.

With regard to the second issue, which consumed the bulk of the argument, Organik Kimya argued that a finding of default goes to the question of liability, which is separate from the issue of remedy, and the Commission had impermissibly allowed the default sanction to "bleed over" into its remedy determination.  Specifically, Organik Kimya contended that the Commission erroneously refused to consider information Organic Kimya had submitted relating to the appropriate length of the requested remedy. Organic Kimya further argued that by imposing a requirement that it obtain a ruling from the Commission that products it seeks to import in the future are outside the scope of the exclusion order before certifying to Customs that the products are not covered by the order, the Commission improperly shifted the burden of proof to Organik Kimya with respect to such future importations.  Judge O'Malley, however, questioned whether the issues of liability and remedy should be viewed separately in this particular instance given that Organik Kimya blocked its opponent from obtaining potentially relevant evidence when it destroyed files the Judge had ordered it to produce in discovery.

Judge O'Malley subsequently asked counsel for the Commission whether there should have been a separate hearing and evidentiary findings on the issue of remedy and indicated she had "some concerns" in that regard.  Counsel for the ITC responded that the Commission complied with its duty under 19 C.F.R. §210.16 to take complainant's allegations as true when a default judgment is entered and that Organik Kimya had tried to "press against the trade secrets" in arguing that the remedy should only last a few years because the asserted secrets were easy to replicate. ITC counsel further argued that the Commission's remedy determinations are governed by an "arbitrary and capricious" standard and Dow had not merely relied upon the default, but had made a case for a 25 year order.

Both counsel for the Commission and counsel for Dow argued that Organik Kimya sought to dispute the existence of the trade secrets during the remedy phase, which was impermissible in view of the liability determination. Counsel for the Commission emphasized that there had already been a determination that the trade secrets existed and were misappropriated, as well as unrebutted and accepted allegations that Dow successfully maintained control over these trade secrets for decades and that competitors had been unable to create these secrets. Counsel for Dow argued that a default judgment should be the same as if they won on the merits, and if Dow had won on the merits, Organik Kimya would not be permitted during the remedy phase to pretend that Dow did not hold these trade secrets and put forth evidence on that subject.

Judge O'Malley also asked whether there is a shifting of the burden onto the misappropriator in the remedy phase.  Counsel for the Commission responded that when there is an adjudged misappropriator in a situation like the present, where Organik Kimya's actions were so outrageous, it is reasonable to put the burden on the misappropriator to demonstrate to the Commission that its conduct is lawful.

The Court took the case under submission.

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.

© Morrison & Foerster LLP. All rights reserved

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Lynn I. Levine
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