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Article: October 2016: International Trade Update

October 01, 2016
Business Litigation Reports

Litigating the First Case of International Economic Cyber Espionage Under Section 337 of the Tariff Act. In what has been described by analysts as the case that “could be the most significant development in U.S. steel trade in a quarter of a century,” on May 26, 2016 the U.S. International Trade Commission (ITC) instituted investigation in Certain Carbon and Alloy Steel Products, Inv. No. 337-TA-1002. The Respondents in the investigation include nine out of ten of the largest Chinese steel makers that also occupy positions from second to eighteenth on the list of the world’s largest steel companies. The complaint—filed by Quinn Emanuel on behalf U. S. Steel on April 26, 2016—alleged three categories of violations by Respondents under section 337 of the Tariff Act of 1930:

(i) A conspiracy to fix prices and control output and expert volumes.
(ii) Theft of trade secrets.
(iii) False designation of origin or manufacturer.

By spurring investigation of these claims at the ITC, Quinn Emanuel is seeking to put an end to illegal practices that are causing extensive damage to U. S. Steel and that also threaten to destroy or substantially injure an industry in the United States: anti-competitive conduct, cyber-theft and illegal transshipment. While each of the three illegal practices are frequently faced by legitimate enterprises, the cyber-theft of trade secrets—or electronic industrial espionage—is increasingly severe and widespread.

Whereas it is not uncommon for the ITC to institute investigations based on claims of trade secret theft, this is the first time the ITC has instituted an investigation where the alleged unfair act is trade secret theft through computer hacking. Perhaps as a result, the investigation into the violation of misappropriation and use of trade secrets has garnered the most attention from court-watchers. The case also appears to be the first ITC investigation where a sovereign state is alleged to have perpetrated the trade secret theft. U. S. Steel alleges that elements of the Chinese government targeted a well-known U. S. Steel researcher to steal U. S. Steel’s confidential and highly valuable research and trade secrets relating to the next generation of advanced high-strength steels—strong, light and thin-gauge steels used to manufacture fuel-efficient cars. The market for this new lightweight yet strong steel is projected to reach over $21.17 billion by 2021, at a CAGR of 8.2% from 2016 to 2021. And even those estimates are conservative. U. S. Steel further alleges that elements of the Chinese government passed this proprietary, highly-valuable information on to Chinese steelmakers, who then improved their manufacturing processes through the use of U. S. Steel’s trade secrets. To date, Respondents’ attempts to prevent, terminate and limit the investigation have failed. As discovery is ongoing, this case affords U. S. Steel the unprecedented opportunity to seek through nationwide subpoena power the testimony and production of relevant documents directly from the Chinese steel manufacturer respondents. As with any opportunity, there are an equal amount of challenges, including the logistics and coordination involved in the anticipated review of volumes of documents in Mandarin from several dozen respondents and the imposition and verification of additional safeguards in the identification of the U. S. Steel trade secrets exfiltrated in the cyber breach.

As computers become ever more ubiquitous and online activity increases, the threat and incidences of being hacked, sabotaged and spied on by malign actors also rises. One of the avenues presented to companies that have become victims of cyber-theft and misappropriation of trade secrets is a Section 337 investigation at the ITC. Although damages are not available as a remedy in a Section 337 investigation, the ITC is empowered to exclude products based on trade secret theft from importation into the United States. As one reporter proclaimed, this is “an ITC fight like you’ve never seen before.” And likely not the last.