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How to succeed in ITC trade secret litigation: tips for successful enforcement and defense
2022 PRINDBRF 0250
• Practitioner Insights Commentaries
• June 10, 2022
(June 10, 2022) - Attorneys Jonathan J. Engler and Michael T. Renaud of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC provide advice for how to handle trade secrets disputes before the U.S. International Trade Commission.
Trade secret litigation at the U.S. International Trade Commission (ITC or Commission) has become increasingly common in recent years. The increase reflects the market's appreciation of the Commission's extraterritorial authority under Section 337 of the Tariff Act, global discovery, powerful remedial orders with injunction-like remedies, and very rapid calendar, with most investigations concluding in less than 18 months.
Successful trade secret litigants at the ITC are mindful of the many unique aspects of litigation in this forum. There are significant differences between ITC, state court, and U.S. district court trade secret litigation. The special characteristics of ITC trade secret litigation offer promise and peril for complainants and respondents. The following discussion provides an overview of ITC trade secret practice and pointers for complainants and respondents.
ITC jurisdiction and exterritorial authority
A critical difference between the ITC's jurisdiction under Section 337, and that of a U.S. district court applying the Defend Trade Secrets Act (DTSA), is that the "act" that gives rise to the Commission's jurisdiction and remedial authority is the act of importation.1
The ITC does not apply the DTSA's "but for" or "in furtherance of" test to determine whether the agency has extraterritorial jurisdiction.
Instead, the relevant "act" at the ITC is importation of a physical article that has a nexus to the unfair business practice. The imported article need not, itself, embody the trade secret, but can (among other things) be a component used to implement a misappropriated trade secret process in the United States.
The Commission's extraterritorial authority is well-established and stands out given the general reluctance of Congress and the courts to apply U.S. law overseas.
The U.S. Court of Appeals for the Federal Circuit (CAFC) has held that "there is "no statutory basis for limiting" the extraterritorial application of trade secret law in Section 337 proceedings because when "misappropriated trade secrets are used in the manufacture of the imported goods, the misappropriation will frequently occur overseas, where the imported goods are made."2
The court noted that "it is reasonable to assume that Congress was aware, and intended, that the statute would apply to conduct (or statements) that may have occurred abroad" and that while Section 337 does not empower the agency to "police [foreign] business practices" it does authorize the agency to "set[] the conditions under which products may be imported into the United States."3
Bench trials only
Trade secret investigations at the ITC are adjudicated by Administrative Law Judges (ALJs) with extensive experience with intellectual property litigation. There is no jury, only a bench trial. Section 337 litigations are nominally ITC "investigations."
In practice, however, an ITC Section 337 investigation is private party litigation, prosecuted by the "complainant" against the "respondent" (or respondents). The majority of Section 337 investigations at the ITC are patent-based. The IP-friendly nature of the forum can make the ITC a good place for complex technical trade secret claims.
The Commission may also assign an attorney from the Office of Unfair Import Investigations (OUII) as a third party, particularly when there are significant public interest concerns that may arise given the nature of the accused products. OUII acts a sort of ombudsman. The scope of its role (if any) is defined by the Commission and varies from case to case. OUII does not represent the ITC and positions taken by OUII are not those of the agency.
Finally, it is important for parties to understand the relationship between ALJs and the Commission. The Commission — not the ALJ — is the ultimate arbiter. ITC ALJ opinions are called "Initial Determinations" and, in effect, are elaborate advisory opinions with fulsome factual and legal findings.
The Commission may adopt the ALJ's Initial Determination in whole or in part, or not at all. Commission Final Determinations (following a 60-day period of presidential review following any finding of violation) are then appealable directly to the CAFC.
ITC resolutions come quickly
ITC investigations are fast. Very fast. Fact discovery typically lasts only four or five months. Trial will normally take place less than 12 months after the complaint is filed. It is therefore critical to know what you're looking for at the outset, including discovery.
Complainants at the ITC typically can obtain foreign discovery from the respondent, because a lack of cooperation by the respondent can lead to default judgment or adverse inferences.4 Most respondents will want to avoid the blanket exclusions which can result.
But, given the short discovery period it is critical to be very aggressive in demanding information from the respondents at the outset. There is no time to delay seeking the assistance of the administrative law judge (ALJ) if one doesn't obtain immediate cooperation.
The availability of third-party discovery at the ITC can vary. The ITC has national subpoena power so enforcement of third-party discovery against domestic entities is relatively straightforward. If a U.S. third party does not cooperate with an ITC subpoena, the Commission may enlist U.S. district courts to enforce discovery. This process works and is effective.
But it is vital to start the enforcement process as early as possible and not to allow a third party to engage in excessive delay, given the shortness of ITC discovery. The enforcement of foreign third-party discovery at the ITC is as complicated and difficult as it can be in district court, with resort to the Hague an option.
Know your trade secrets
It is essential that the complainant have a well thought-out trade secret case in all its dimensions before litigation begins. A complainant that files an ITC case without having identified its strongest trade secrets with precision — as well as all related proofs, such as ownership, value and reasonable measures to protect — can run out of time.
ITC ALJs typically require the complainant to provide an initial identification of the asserted trade secrets within three weeks of the issuance of the procedural schedule order. Normally, the ALJ also sets a "final" identification date, which occurs toward the end of fact discovery.
These trade secret disclosure dates operate in the context of the ITC's strict contention discovery rules. Many ITC ALJ procedural schedules also contain fixed dates for initial and final contentions. Facts and arguments that are not timely disclosed in contention discovery can be deemed waived. All of this is compressed into a very short fact discovery period of between four and six months.
Complainants should anticipate early and aggressive discovery requests from the respondents as to the complainant's factual bases for these proofs. It can be difficult to obtain leave from the ALJ to amend and add new trade secret claims after the initial trade secret identification date: a showing of good cause is generally required.
Demonstrate domestic industry
Another major difference between ITC and district court litigation is one of two proofs unique to the ITC for which the complainant must come prepared: the domestic industry requirement. The complainant is required to show that it has significant economic activities in the United States that are beyond those of a "mere importer."
There is no magic quantitative formula to demonstrate "significance." The easiest activities to use to demonstrate significance are often U.S. manufacturing activities. It is also very possible to demonstrate significant U.S. economic activities on the basis of technical support, research development and other non-manufacturing activities.
But it is critical for the complainant to demonstrate and quantify these activities with substantial evidence — that means direct documentary support to the extent possible and careful testimony by knowledgeable company officials. Most ITC domestic industry cases that fail do so due to unsupported and excessively general characterizations of the complainant's U.S. activities and investments.
Prove injury to the domestic injury
Another difference between ITC and district court litigation is the second of the unique ITC proofs: injury. In trade secret investigations, Section 337 requires the complainant to show that the threat or effect of the unfair imports is "to destroy or substantially injure an industry in the United States."5
When the complainant alleges a threatened injury, that injury must be foreseen and have "a causal connection between the action of the respondents and the threatened injury."6
The Commission in assessing injury will consider the volume of the accused imports and their degree of penetration, complainant's lost sales, lost revenue, underselling and price erosion, reductions in complainant's production, profitability and sales, and harm to complainant's good will or reputation.7
The Commission to date has not seriously delved into the diminution or destruction of the value of the trade secrets themselves, or calculated injury using a reasonable royalty damages analysis.
However, other damages considerations that district courts often weigh — such as lost research and development expenses, increased costs to the complainant, and unjust enrichment (reflected in the respondent's 'short cut' by not having to incur research and development expenses) — are clearly relevant to the ITC's injury analysis. To the extent these additional harms can be quantified and shown, it can be worth arguing these the ITC.
Finally, the complainant must show a causal nexus between the imported products, the unfair act, and the alleged injury. That is because the ITC is an international trade tribunal. Economics and injury issues are the agency's bread and butter, and not just in section 337 litigation: the Commission deals with similar issues every day in antidumping and countervailing duty investigations.
It is vital that the complainant tell a coherent story as to why its domestic industry is suffering from or threatened with substantial injury by reason of the unfairly traded imports, not just from the unfair act of trade secret misappropriation.
Global discovery
A critical advantage of ITC litigation is the leverage a complainant has to obtain global discovery from the respondents. This is particularly important when the acts of misappropriation took place entirely abroad and involved only foreign nationals. The lever the Commission uses to obtain foreign discovery is the threat of a default judgement: a failure by the respondents to cooperate in fact discovery can result in default judgement.
In most investigations, extensive foreign discovery — including depositions and document discovery, as well as extensive forensic discovery — is successfully obtained from the respondents. Even Chinese respondents have generally cooperated.
Spoliation has unfortunately been a major factor in many ITC trade secret investigations over the years, including in the recent Certain Balanced Armature Devices trade secret investigation.8 The Lithium Ion Batteries investigation was also marred by serious spoliation by respondent SK Innovation Co., which led to a default judgement.
ITC trade secret remedies are powerful, effective, and reach up and down the supply chain
ITC complainants can obtain powerful injunction-like relief that includes domestic relief as well as border measures. The ITC not only issues exclusion orders (barring the importation of the accused articles) but also domestic cease-and-desist orders that bar the domestic sale, transfer or distribution of articles. Violations of the ITC's domestic cease-and-desist orders can lead to major civil penalties: this is trade relief with teeth.
The ITC's remedial orders can extend not only to finished goods but also to imported components that are part of a respondent's U.S. supply chain. In Lithium Ion Batteries, brought by LG Chem against SKI for acts of EV battery trade secret misappropriation, the remedial orders targeted imported components to be used by SKI to make batteries in the United States:
"Given the number and breadth of the trade secrets covered by the order, the Commission expects that most components will be subject to the order" given that "many of the misappropriated trade secrets, including the BOMs [bills of materials], pertain to highly customized components made specifically for the battery manufacturer to be used to manufacture battery cells, including electrolytes, active materials, CNT [carbon nanotube] slurries, anode and cathode slurries and their constituent elements, conductive additives, foils, packaging, in addition to the cells themselves."9
The case ended up settling for $1.8 billion.10
Rules to succeed by
Successful ITC trade secret complainants follow these rules before filing the complaint in Section 337 investigations:
• Identify and prepare "packages" for each of the trade secrets you plan to assert before you file the Complaint. Each trade secret package should:
•Define the technical metes and bounds of the trade secret information — delimiting the border between the secret and what is generally known;
•Calculate the value of the trade secret (to the complainant and competitors);
•Demonstrate that reasonable measures were taken to protect the trade secret information (confidentiality agreements, etc.);
•Demonstrate that the trade secret belongs to the complainant (development documentation, etc.); and
•Show the time and expense incurred in developing the trade secret.
• Prepare a detailed fact discovery game plan before the case is filed. The ITC is too fast for major course corrections.
• Prepare the domestic industry and injury proofs. Under no circumstances leave the development of these proofs until the case is under way.
Successful respondents keep the following in mind:
• Hold the complainant to its proof, early. The complainant has the burden to show the existence, ownership, and value of each asserted trade secret. Early and aggressive discovery can significantly undermine the complainant's case.
• Press the "reasonable particularity" requirement. The complainant is ultimately required to identify the trade secret with reasonable particularity and to distinguish it from information that is generally known. Push the complainants hard at the outset to clarify the metes and bounds of the asserted trade secrets.
• Use contention discovery to your advantage. Respondents should use contention discovery aggressively and early to pin down the complainant to underdeveloped aspects of its case. ALJs expect complainants to be prepared with facts are within the complainants control at the outset, such as the existence and value of trade secrets, and the existence of a domestic industry.
• Keep your client honest. U.S.-style civil discovery is uncommon in Europe and Asia. It is critical that outside counsel impose and enforce an early and aggressive litigation hold on foreign clients and to ensure that relevant documents are not destroyed.
Notes
1 See 18 U.S.C.A. § 1836.
2 TianRui Grp Co. v. Int'l Trade Comm'n, 661 F.3d 1322, 1333-1335 (Fed. Cir. 2011).
3 Id.
4 See e.g. Certain Lithium Ion Batteries, Battery Cells, Battery Modules, Battery Packs, Components Thereof, and Processes Therefor, Inv. No. 337-TA-1159 ("Lithium Ion Batteries") (Order No. 34) (Initial Determination).
5 19 U.S.C.A. § 1337(a)(1)(A).
6 Certain Rubber Resins & Processes for Mfg. Same, Inv. No. 337-TA-849, at *32 (Feb. 26, 2014).
7 Id. at *31-32.
8 See Certain Balanced Armature Devices, Products Containing Same and Components Thereof, Inv. No. 337-TA-1186 (Notice of a Commission Determination Finding a Violation) (Oct. 2021). See also Lithium Batteries, Comm'n Op. at 13-19; Certain Stainless Steel Prods., Certain Processes for Mfg. or Relating to Same, and Certain Prods. Containing Same, Inv. No. 337-TA-933, USITC Pub. 4904 at 20 (June 9, 2016) ("Stainless Steel"); see also Certain Opaque Polymers, Inv. No. 337-TA-883, USITC Pub. 4922, Comm'n Op. (Apr. 30, 2015).
9 Lithium Ion Batteries, Comm'n Op. at 81-82 (March 4, 2021).
10 https://bloom.bg/38qWM5T
Jonathan J. Engler is a member of the intellectual property division in Mintz, Levin, Cohn, Ferris, Glovsky and Popeo's Washington, D.C., office. He focuses on representing complainants and respondents in patent, trade secret, trademark and copyright cases before the U.S. International Trade Commission and the U.S. Court of Appeals for the Federal Circuit. Drawing on his extensive experience as an ITC attorney in private practice and his tenure as an attorney with the ITC and in the U.S. Department of Commerce, he represents parties on both sides of ITC disputes. He can be reached at [email protected]. Michael T. Renaud is a Boston member and firmwide chair of the firm's IP division and leads the IP litigation and ITC investigation practices. He recognizes the critical importance of trade secrets to many clients' overall IP strategies and helps to preserve trade secrets rights through counseling, negotiated transactions and litigation. He handles complex trade secret matters involving crown jewel innovations, representing companies on both sides of trade secrets disputes, including those involving failed joint development agreements and other collaborative contractual arrangements. He can be reached at [email protected].
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