What You Need to Know
- Key takeaway #1In ITC investigations, even if the alleged trade secret theft occurs exclusively outside of the US, the International Trade Commission has jurisdiction over goods imported into the US that incorporate those stolen trade secrets.
- Key takeaway #2Injury to domestic injury can be found based on a complainant’s lost sales and revenue, despite an overall increase in complainant’s revenue.
A recent Final Initial Determination (“FID”) from newly appointed Administrative Law Judge Hines confirmed the statutory authority of the International Trade Commission (“ITC” or “Commission”) to investigate the alleged importation of goods incorporating misappropriated trade secrets causing injury to a domestic industry, as held by the Federal Circuit in TianRui Grp. Co. Ltd. v. Int’l Trade Comm’n, 661 F.3d 1322 (Fed. Cir. 2011). The ALJ also held that Complainant had proven its domestic industry had been substantially injured despite the fact that its revenue had increased during the same period. For Crowell’s previous client alert on TianRui, see here.
In ITC investigation In the Matter of Certain Raised Garden Beds (337-TA-1334) (the “Investigation”), Complainant Vego Gardens alleged trade secret misappropriation and unfair competition based on raised metal garden bed products manufactured and sold by Respondent Green Giant in China to Respondent Utopban, who then imported the products into the US and sold them online. Of Vego Garden’s three trade secrets (1) 8-Inch Product Development, (2) Protective Film, and (3) Bending Machine, the ALJ found that the second was not a protectable trade secret because it was known outside of Vego Garden’s business, had little to no value, and was readily ascertainable. The first and third, however, were protectable trade secrets because they were not known outside of Vego Garden, were protected by reasonable measures, had commercial value to Complainant and Respondents and were not readily ascertainable.
Regarding misappropriation, the ALJ found that the trade secrets were inappropriately acquired by the CEO of Respondent Green Giant, while he was also working for a supplier of Complainant’s manufacturer, from an engineer who worked at Complainant’s manufacturer (“the Engineer”). Indeed, the CEO founded Green Giant while still working for the supplier after Complainant rejected a delivery of metal coil for raised metal garden beds, and he wanted to “recoup some of the losses incurred because of the rejection of materials.” Both the CEO of Green Giant and the Engineer were subject to confidentiality obligations not to share the trade secret information – through confidentiality agreements between the supplier and the manufacturer (for the CEO of Green Giant) and the manufacturer’s employee handbook (for the Engineer) – but did so any way. The ALJ also found that the trade secrets were used in the development and manufacture of Respondents’ accused products, further supported by the rapid pace at which Respondents were able to develop and commercialize their accused products.
The Respondents argued that the Commission lacked jurisdiction to investigate Complainant’s trade secret misappropriation claim in the first instance because the “alleged trade secrets that are the basis of this Investigation are based exclusively in China – the alleged trade secrets were developed in China, the agreements being asserted are private contracts and nondisclosure agreements between Chinese companies, and the alleged unfair acts all occurred in China.” The ALJ rejected this argument. Citing the Federal Circuit’s TianRui decision, the ALJ reiterated that Section 337 is directed at unfair acts in the importation of articles into the US, and therefore foreign “unfair” activity (i.e., trade secret misappropriation) is relevant to the extent it results in the importation of goods into the US causing domestic injury. Here, the Commission had jurisdiction because, even though the acts of misappropriation occurred in China, the Respondents’ accused products imported into the US included Complainant’s misappropriated trade secrets and had injured Complainant’s domestic industry.
Respondents raised the affirmative defense of independent development of their raised garden bed products, pointing to agreements with third parties to purchase equipment and materials. Noting a respondent’s “heavy burden” in proving independent development, the ALJ rejected this defense and found that the agreements demonstrated only that Respondents were taking steps to manufacture competing raised metal garden bed products. The ALJ also found that the evidence showed that Respondents had difficulty finding an equipment manufacturer to make the equipment they needed, and thus turned to the Engineer for his help to manufacture their own competing raised metal garden bed products. In light of this evidence, the ALJ found testimony that Complainant’s products were “reverse engineerable” was not credible.
Regarding injury to domestic injury, notably, the Staff attorney contended that because of Complainant’s increase in revenue, it had not shown substantial injury to domestic industry as a result of lost sales and revenue. The ALJ, however, disagreed, finding that Complainant’s increase in revenues was not dispositive. Contrary to the Staff attorney, the ALJ found that the evidence supported that Complainant lost revenue when Respondents entered the market in 2022 under three theories. First, despite increasing, Complainant’s revenue growth had been slowed by Respondents’ entry into the market. Second, Complainant established that a customer will continue to purchase raised metal garden beds and accessories from the same brand once they have purchased a raised metal garden bed. And, finally, there was customer confusion between Complainant’s and Respondents’ products.
The ALJ also found substantial injury to domestic industry based on two other factors. The first was price erosion, where the evidence showed that Respondents were able to enter the market quickly and offer their products at lower prices, forcing Complainant to lower its prices in order to compete. The second was brand harm, where there was injury to market position (because Complainant had to lower its prices to compete), damage to reputation and brand-power, and lost investment opportunities from private equity companies. The ALJ concluded that there was a causal nexus between the unfair act of trade secret misappropriation and the substantial injury to Complainant’s domestic industry.
As it stands, this FID confirms the powerful role the ITC continues to have in fighting international trade secret misappropriation— even when the misappropriation occurs wholly outside the US—since the ITC’s jurisdiction was confirmed by the Federal Circuit in TianRui. Respondents have filed a petition for review of the FID, including the findings on jurisdiction and injury to domestic injury. Complainant has opposed the petition, and the Staff attorney also contends that the petition should be denied. The Commission extended the deadline for its decision on the petition to January 9, 2024, and also extended the target date from January 8, 2024 to March 11, 2024.
For further information, please contact:
Kathryn L. Clune, Partner, Crowell & Moring