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Article: March 2018: ITC Litigation Update

Business Litigation Reports

ITC Determination on Trade Secret Misappropriation Preclusive in District Court. In a case of first impression, the United States District Court for the Eastern District of Wisconsin confirmed what many practitioners already believed to be true—that findings by the United States International Trade Commission (“ITC”) on trade secret misappropriation claims may have preclusive effect in district court litigation. The court’s holding in Manitowoc Cranes, LLC v. Sany America Inc., may result in expedited relief, cost-savings, and discovery benefits for trade secret holders using Section 337 to adjudicate misappropriation claims. See Manitowoc Cranes, LLC v. Sany America Inc. and Sany Heavy Industry Co., Ltd., No. 1:13-cv-00677-WCG, 2017 WL 6327551 (E.D. Wisc. Dec. 11, 2017). But there are limitations. Differences in state and federal law may defeat collateral estoppel, and even if the ITC’s determinations on liability are preclusive, trade secret holders must still establish that they are entitled to remedies available in district court.

Case Overview. On June 12, 2013, Manitowoc Cranes, LLC (“Manitowoc”) filed a Section 337 complaint against Sany America, Inc. and Sany Heavy Industry Co., Ltd. (collectively, “Sany”) alleging patent infringement and trade secret misappropriation relating to certain crawler cranes and components thereof. See Certain Crawler Cranes and Components Thereof, Inv. No. 337-TA-887, Compl. (June 12, 2013) (“Crawler Cranes”). The same day, Manitowoc filed a parallel district court action in the Eastern District of Wisconsin, which was subsequently stayed. The ITC action progressed through discovery and culminated with an evidentiary hearing in late March 2014. Crawler Cranes, Comm’n Op. at 3 (May 6, 2015). On July 11, 2014, the presiding Administrative Law Judge (“ALJ”) issued an initial determination finding a violation of Section 337 based on both (a) Sany’s infringement of two patents, and (b) Sany’s misappropriation of four trade secrets. On review, the ITC reversed several of the ALJ’s patent infringement findings, but affirmed the findings of trade secret misappropriation. Id. at 1. After the ITC’s decision was affirmed by the Federal Circuit Court of Appeals, the district court lifted the stay and reopened the case.

On July 14, 2017, Manitowoc filed a motion for partial summary judgment as to Sany’s liability for trade secret misappropriation. Manitowoc argued that, because ITC determinations in non-patent cases are entitled to preclusive effect in subsequent district court actions, the only remaining issue was the appropriate relief to be granted. Sany opposed the motion, citing the Federal Circuit’s decision in Texas Instruments v. Cypress holding that “Congress did not intend decisions of the ITC on patent cases to have preclusive effect.” Texas Instruments v. Cypress Semiconductor Corp., 90 F.3d 1558, 1569 (Fed. Cir. 1996). Sany argued that the same rationale should apply with equal force in the context of claims for trade secret misappropriation. Sany further argued that the ITC decision was not preclusive because the ITC did not apply Wisconsin law in finding Sany liable for trade secret misappropriation.

In a 12-page order, the district court granted-in-part Manitowoc’s motion for summary judgment, finding that “Sany is precluded from relitigating issues regarding Manitowoc’s misappropriation of trade secret claims and is therefore liable for trade secret misappropriation under Wisconsin law.” Manitowoc, 2017 WL 6327551, at *6.

The District Court’s Holding. The Manitowoc decision addresses two main inquiries: (1) the threshold question of whether ITC decisions on trade secret misappropriation have preclusive effect in subsequent district court litigation; and (2) the more granular question of whether the elements of collateral estoppel had been met in this particular case. The court answered both in the affirmative. The court first looked to Supreme Court precedent for the general proposition that the common-law doctrines of collateral estoppel and res judicata apply to administrative agency decisions, except when there is an express or implied statutory purpose to the contrary. See Manitowoc, 2017 WL 6327551, at *3. (quoting e.g., Astoria Fed. Sav. & Loan Ass’n v. Solimino, 501 U.S. 104, 107 (1991); B & B Hardware, Inc. v. Hargis Indus., Inc., 135 S. Ct. 1293, 1303 (2015)). The court then evaluated how federal courts address ITC findings in other contexts (e.g., trademark infringement, antitrust, patent infringement), and concluded that “ITC determinations regarding the unfair trade practices of trade secret misappropriation are entitled to preclusive effect.” Id. at 4. In so doing, the court expressly rejected Sany’s argument that the holding in Texas Instruments created a “general rule” against preclusion with respect to all ITC determinations. Id. at 5. The court held that, unlike the patent determination at issue in Texas Instruments, there was no Congressional intent against preclusion in the context of trade secret determinations.

Having determined that ITC trade secret findings could be preclusive in certain circumstances, the court then considered whether Manitowoc had established the elements of collateral estoppel in the instant case. Under Seventh Circuit law, the elements of collateral estoppel are: “(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.” Id. at 6 (quoting Adams v. City of Indianapolis, 742 F.3d 720, 736 (7th Cir. 2014)). Sany’s primary challenge was to the first element, arguing that the “issue” was not the same because the ITC’s determination rested on federal law (i.e., the Uniform Trade Secret Act (“UTSA”) and Restatement (Third) of Unfair Competition), rather than Wisconsin law. The court addressed this argument by comparing features of the UTSA with Wisconsin’s version of the Uniform Trade Secret Act (“WUTSA”), including their respective definitions of “trade secret” and “misappropriation.” Id. at 10. While noting that issues are not ordinarily identical if the second action applies a different legal standard, the court found that Sany failed to identify any substantive difference between the UTSA and WUTSA, or that “Wisconsin courts would apply a ‘significantly different…analysis’ to the issue presented here.” Id. Accordingly, the court concluded the issue before it was the same as the one raised and litigated before the ITC, and, as such, all of the elements of collateral estoppel had been satisfied. Id. at 10-11.

Impact for Future Trade Secret Actions Before the ITC. For years, commentators and practitioners have extolled the virtues of using Section 337 to adjudicate a wide range of unfair acts in the importation of foreign goods. The recognition of Section 337’s swift and powerful remedy has led to an increase in the number of complaints filed in the last 10 years. This growth in popularity among intellectual property owners has not, however, translated into a significant increase in the number of trade secret misappropriation actions before the ITC. While more than 400 new complaints and ancillary proceedings have been instituted since 2010, only 13 investigations have involved allegations of trade secret misappropriation. See https://www.usitc.gov/intellectual_property/337_statistics.htm. The Manitowoc decision provides further incentives for complainants to use Section 337 to adjudicate trade secret misappropriation claims in the future.

First, the Manitowoc decision should lead to significant time and cost-savings for trade secret holders who are seeking both injunctive relief and monetary damages in district court. Trade secret misappropriation cases by their nature are highly fact-intensive, expensive, and often take years to complete in federal and state court. Due to the accelerated nature of Section 337 actions before the ITC, however, a complainant can obtain necessary discovery in six to eight months and expect a final judgment in approximately 16 months. If successful, the ITC will issue a final determination of liability and issue exclusion and/or cease and desist orders preventing the importation and sale of unfairly traded goods. The advantage for trade secret holders is they will be able to argue the liability determination is preclusive in district court. They will then be able to seek damages or injunctive relief without facing the ongoing threat of sales of imported goods in the United States.

A second advantage of using the ITC for trade secret misappropriation claims is the ability to obtain broad-ranging discovery from foreign defendants. Because the ITC exercises in rem jurisdiction over the accused imported products, named respondents are forced to appear and
participate in discovery or risk entry of default judgment. Thus, by using Section 337, trade secret holders can fully and quickly develop the liability side of their cases and avoid many of the procedural and jurisdictional hurdles for obtaining foreign discovery in federal and state court.

Limitations on the Manitowoc Decision. The Manitowoc holding is not without limitations, however. First, collateral estoppel may not apply if the district court claims arise under different trade secret law than the ITC claims. Future cases could turn out differently than Manitowoc depending on the trade secret standards at issue in the ITC versus the particular district court. Like the Manitowoc court, a court asked to apply collateral estoppel will have to analyze differences between the applicable standards to determine if they require a “significantly different analysis.” For this reason, trade secret holders who hope to benefit from the preclusive effect of ITC determinations should be aware of potential differences between the applicable legal standards.

A notable example is New York trade secret law. New York is one of two states that has not adopted a version of the UTSA. Instead, courts in New York apply common law that has developed, in part, from the Restatement (First) of Torts. One significant difference between New York common law and the UTSA is that a “single or ephemeral” event will not qualify as a trade secret; rather, a trade secret “is a process or device for continuous use in the operation of the business.” See Softel, Inc. v. Dragon Med. & Scientific Commc’ns, Inc., 118 F.3d 955, 968 (2d Cir. 1997) (quoting the Restatement (First) of Torts, § 757 (1939)). The UTSA, in contrast, does not include a “continuous use” requirement in its definition of “trade secret”—an express departure from the Restatement. It is quite possible that a district court applying New York common law would decline to give preclusive effect to an ITC determination based on the UTSA because it fails to consider the “continuous use” requirement. The district court may find that a “significantly different analysis” is required to determine whether subject matter the ITC found entitled to trade secret protection under the UTSA meets the additional “continuous use” requirement.

This possibility is not limited to situations where the district court applies New York common law. Although 48 of 50 states have adopted some form of the UTSA, variations exist from state to state. See generally Sid Leach, Anything but Uniform: A State-By-State Comparison of the Key Differences of the Uniform Trade Secrets Act (Nov. 6, 2015). Trade secret holders should carefully review these differences when formulating their district court claims if they intend to seek collateral estoppel based on a companion ITC investigation.

A potential safety valve for trade secret holders is the recently enacted Defend Trade Secrets Action (“DTSA”). The DTSA provides a federal cause of action for trade secret misappropriation, as well as a potential vehicle for the ITC to analyze trade secret misappropriation claims in Section 337 proceedings. The statute promotes the Federal Circuit’s directive that “a single federal standard, rather than the law of a particular state, should determine what constitutes a misappropriation of trade secrets sufficient to establish an ‘unfair method of competition’ under section 337.” TianRui Group Co. Ltd. v. Int’l Trade Comm’n, 661 F.3d 1322, 1327-28 (Fed. Cir. 2011). Trade secret plaintiffs who file parallel actions in district court and the ITC would be wise to pursue DTSA claims in both actions. If the ITC finds a violation of Section 337 based on trade secret misappropriation under the DTSA, then the district court is likely to find that the parallel DTSA claims present the “same issue” for purposes of collateral estoppel.

A second, more straightforward limitation of the Manitowoc decision is that collateral estoppel based on an ITC finding of trade secret misappropriation would not extend to monetary damages in the district court action. Remedies available in the ITC are limited to (a) exclusion orders that bar imports, and (b) cease and desist orders that prevent the sale of previously imported goods in the United States. Because the ITC lacks authority to award money damages, trade secret holders should be prepared to litigate damages in the district court action, even if they benefit from a finding of liability based on collateral estoppel from an ITC determination.

The same is likely true for injunctive relief in the district court. Although ITC remedies are injunctive in nature, they result from different, more flexible standards than those applicable to injunctive relief in district court. In Manitowoc, for example, the ITC set the duration of the exclusion order at 10 years after evaluating the time it took the complainant to develop the asserted trade secrets and the time it would have taken the respondent to develop the same technology without the benefit of the complainant’s trade secrets. See Crawler Cranes, Comm’n Op. at 70-72. Section 337 did not require the ITC to consider factors that are relevant to a district court’s grant of injunctive relief, such as irreparable harm or the lack of adequate remedies at law. Trade secret holders will have to litigate injunctive relief in district court, even if liability flows from collateral estoppel.