United States: ITC Finding Of Trade Secret Misappropriation Precludes Party From Relitigating Issue In Court, WI Federal Court Rules

In a recent ruling in a case of first impression, Manitowoc Cranes LLC v. Sany America Inc., Case Nos. 13-cv-677 & 15-cv-647 (E.D. Wisc. Dec. 11, 2017), the US District Court for the Eastern District of Wisconsin held that a finding by the US International Trade Commission (ITC) that a party was liable for trade secret misappropriation precluded the party from relitigating the issue in the district court under the doctrine of collateral estoppel and granted summary judgment against the party.

Background

In 2013, Manitowoc Cranes sued Sany America for allegedly misappropriating Manitowoc's trade secrets under Wisconsin law. On the same day the district court case was filed, Manitowoc filed a complaint with the ITC accusing Sany of violating Section 337 of the Tariff Act of 1930 by committing unfair trade practices through the misappropriation of the same trade secrets. The district court stayed the case pending resolution of the ITC investigation. Manitowoc later added a claim to the district court case for tortious interference with a contract, which the district court consolidated with the initial trade secret case and stayed it as well.

After an evidentiary hearing, the ITC administrative law judge found that Sany had violated the Tariff Act by misappropriating four of Manitowoc's trade secrets, but that two others were not protectable. Certain Crawler Cranes and Components Thereof, Inv. No. 337-887, Final I.D. at 1 (July 31, 2014). The parties petitioned the Commission to review the ALJ's findings. The Commission affirmed the ALJ's finding of misappropriation and also found misappropriation for the other two trade secrets. Certain Crawler Cranes and Components Thereof, Inv. No. 337-887, Comm'n Op. at 76 (May 6, 2015). The ITC issued a 10-year limited exclusion order and cease-and-desist order. Sany appealed, and the Federal Circuit affirmed the ITC's decision without opinion. Sany Heavy Indus. v. ITC, Case No. 15-1782 (Oct. 11, 2016). After the ITC's decision was final and the district court lifted the stay, Manitowoc moved for partial summary judgment asking the district court to adopt the ITC's findings of trade secret misappropriation and also dismiss Sany's counterclaims.

Analysis

The core issue before the district court was whether the ITC's finding of protectable trade secrets and misappropriation of those trade secrets was preclusive. The district court recognized that "ITC adjudications of unfair trade practice and trademark infringement causes of action are entitled to res judicata effect." Slip. Op. at 4 (quoting Union Mfg. Co., Inc. v. Han Baek Trading Co., Ltd., 763 F.2d 42, 46 (2d Cir. 1985)). The court similarly noted that "ITC proceedings had res judicata effect on antitrust claims." Id. (citing Aunyx Corp. v. Canon U.S.A., Inc., 978 F.2d 3, 7 (1st Cir. 1992)).

In contrast, Sany argued that the Federal Circuit placed a general rule against ITC decisions being given a preclusive effect in Texas Instruments Inc. v. Cypress Semiconductor Corp., 90 F.3d 1558 (Fed. Cir. 1996). The district court rejected Sany's argument finding that Texas Instruments only holds that an ITC decision cannot have a preclusive effect "when Congress, either expressly or impliedly, indicated that it intended otherwise." Slip Op. at 5. The Federal Circuit in Texas Instruments analyzed congressional legislative history to determine that Congress only intended a preclusive effect for patent-based cases. Because the Sany case was not a patent based case, the district court found that ITC determinations regarding trade secret misappropriation could be entitled to preclusive effect.

The district court then analyzed whether collateral estoppel would apply to the present case. Collateral estoppel, also known as issue preclusion, prevents relitigation of issues finally resolved in an earlier suit. The court held that collateral estoppel applies when four elements are met:

(1) the issue sought to be precluded is the same as an issue in the prior litigation; (2) the issue must have been actually litigated in the prior litigation; (3) the determination of the issue must have been essential to the final judgment; and (4) the party against whom estoppel is invoked must have been fully represented in the prior action. Slip Op. at 6 (quoting Adams v. City of Indianapolis, 742 F.3d 720, 736 (7th Cir. 2014)); see also Restatement (Second) of Judgments § 27.

Sany argued that collateral estoppel does not apply because the ITC applies federal law to trade secret misappropriation allegations, but the district court action was brought under Wisconsin state law. As the Federal Circuit has held, the ITC must apply "a single federal standard, rather than the law of a particular state" to trade secret misappropriation allegations. TianRui Grp. Co. Ltd. v. ITC, 611 F.3d 1322, 1327-28 (Fed. Cir. 2011). Manitowoc however, brought the district court case under Wisconsin state law. Sany argued that different standards applied to the different cases. As evidence of this distinction, Sany pointed to the ITC's reliance on the Restatement of Agency to find Sany vicariously liable for its employees' actions because the employees were acting within the scope of their employment in misappropriating Manitowoc's trade secret information. Sany argued that the Wisconsin trade secret misappropriation statute does not provide for trade secret misappropriation under a theory of vicarious liability, which prevents collateral estoppel from applying.

The district court rejected Sany's argument finding that the "single federal standard" is based on the Uniform Trade Secrets Act (UTSA) and the Restatement of Unfair Compensation and that Wisconsin trade secret misappropriation law is enacted in Wisconsin's adoption of the UTSA (WUTSA). As a result, the same underlying standards apply to both Wisconsin trade secret law and federal trade secret law. Further, the court held that, even though Wisconsin courts have not recognized trade secret misappropriation by vicarious liability under the UTSA, other states have, including California, Delaware, Virginia, and Washington, under their respective adoptions of the UTSA. The district court thus concluded that "a Wisconsin court would not apply a different standard under the WUTSA than the one employed by the ITC." Slip Op. at 10. The court went on to hold that Sany had "failed to adequately identify any substantive difference between the UTSA and the WUTSA or show that Wisconsin courts would apply a 'significantly different . . . analysis' to the issue presented here." Id. (quoting Smith v. Bayer Corp., 564 U.S. 299, 312 n.9 (2011)).

As a result, the court concluded that each factor was met in precluding Sany from relitigating the allegations of trade secret misappropriation in district court and granted partial summary judgment for Manitowoc. This precluded most of Sany's counterclaims as well, which the court held were "little more than a negation of the claims Manitowoc . . . asserted against it." Slip Op. at 11. The district court, however, also denied summary judgment on Sany's counterclaims seeking a ruling that Sany did not induce former Manitowoc employees from breaching their employment agreements or that Manitowoc did not suffer any damages from the purported breaches of employment agreements. The district court held that, even though the factual settings may be the same, the ITC did not address the legal issue of Manitowoc's tortious interference with contract claim when it held Sany vicariously liable for the employees' actions. As a result, Sany could not have raised these counterclaims in the ITC as they would have been subjected to mandatory removal under 19 U.S.C. §1337(c).

Conclusion

Given Congress's recent adoption of the Defend Trade Secrets Act of 2016, ITC findings are almost certain to be given a preclusive effect in federal district courts when applying federal law. Whether individual state courts would hold that an ITC finding of trade secret misappropriation to be preclusive must be made on a case-by-case analysis applying the collateral estoppel factors; however, we caution any conclusion that relitigation would not be precluded. Nearly every state has enacted the UTSA in some form; the sole exceptions being Massachusetts, New York, and North Carolina. Uniform Law Commission, Acts: Trade Secrets Act, available at http://www.uniformlaws.org/Act.aspx?title=Trade%20Secrets%20Act.

Going forward, if a party wants to avoid an ITC decision being given a preclusive effect, it should focus on substantive distinctions between federal law applied at the ITC and the state's trade secret misappropriation law. Conversely, if a party wants an ITC decision to be given a preclusive effect, then it should be sure to characterize the issue based on the commonalities between the applicable laws. By properly framing the underlying facts and applicable law, one can evaluate the preclusive effect of an ITC finding of trade secret misappropriation.

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