Engineers from your China subsidiary just joined a competing company which has begun using your trade secrets. Can you sue in the US and avoid the uncertainty and expense of seeking relief in a Chinese court? The answer is that both federal Defend Trade Secrets Act (DTSA) of 2016 and California’s version of the Uniform Trade Secrets Act (CUTSA), under the right circumstances, may be extended extraterritorially to reach misappropriation outside of the US.
Perhaps surprisingly, it may be harder to do this under the federal law, which expressly provides that it applies to conduct outside the US, than under the California law, which is silent on the subject. Let’s break this down.
Extraterritorial theft of trade secrets by insider employees or business partners in China is a significant problem as evidenced by the investigation in International Trade Commission cases Amsted v. TianRui (disclosure and use of US company’s trade secrets in China) [the 2011 Federal Circuit decision on appeal] and In re Certain Rubber Resins (same) [the 2014 ITC determination]. The problem reflects the reality of the current business environment, which is global and digital; technology owned by US-based companies is often shared with employees or business partners located outside of the US and it is not unusual for them to move between competitors.
Of additional concern is that US courts have been willing to overlook the delay and corruption associated with enforcing trade secret rights in Chinese courts, finding instead that Chinese courts provide an adequate alternative forum in which a US company can assert its trade secret claims. This was the finding in CYBERsitter, LLC People’s Republic of China [2010 CD Cal decision], for example. See also Sinochem Int’l. Co., Ltd. v. Malaysia Int’l. Shipping Co., 549 U.S. 422, 435-36 (2007) (dismissing case on forum non conveniens grounds in favor of trial in China where plaintiff was a California corporation).
Bringing Suit under Federal Defend Trade Secrets Act
Insofar as suing in US court, the initial hurdle to overcome is a Rule 12(b)(6) motion to dismiss based on the presumption against extraterritorial application of US law, confirmed by the Supreme Court in Morrison [2010 SCt decision]. Excepted from the presumption are federal statutes in which Congress has expressed the intent that the law has extraterritorial application. Federal trade secret law expresses the intent that it apply to conduct overseas and therefore appears to satisfy the exception.
The DTSA creates a federal private right of action for trade secret misappropriation under an earlier law that criminalized trade secret theft, the Economic Espionage Act of 1996 (EEA). Section 1837 of the EEA provides that the EEA applies to conduct outside the United States if . . . an act in furtherance of the offense was committed in the United States.” This section was not amended as part of the DTSA amendments to the EEA, and therefore provides a good faith basis for extending the DTSA to reach misappropriation occurring in China.
There are no cases interpreting the scope of section 1837, but legislative history supports the aggressive extension of federal trade secret law to reach foreign conduct.
“The EEA was crafted to punish virtually every form of illegal industrial espionage, “from the foreign government that uses its classic espionage apparatus to spy on a company, to the two American companies that are attempting to uncover each other’s bid proposals, or to the disgruntled former employee who walks out of his former company with a computer diskette full of engineering schematics.”
United States v. Hsu, 155 F.3d 189, 201 (3d Cir. 1998) (emphasis added).
However, by conditioning the extraterritorial reach of the DTSA upon proof of “an act in furtherance of the offense was committed in the United States,” Congress may have effectively confined within US borders what was intended to reach beyond them. In the above-described theft of IP in China, the actionable conduct, namely, improper acquisition and retention of protected secrets, and the unauthorized disclosure or use of the secrets, all occurred in outside of the US.
There is harm occurring in US because a US company owns the trade secrets at issue. But this suggests an “effects” test for extraterritoriality in contrast to a separate and distinct “conduct” test in the statute’s text (referring to “acts in furtherance” as compared to harm, injury or damage resulting from the actionable misconduct). Federal courts in non-trade secret cases have distinguished between “effects” and “conduct” tests for extraterritorial application of federal law. See, e.g., Wiwa v. Royal Dutch Petroleum Co., 2009 WL 928297, at *4 (S.D.N.Y. Mar. 18, 2009) (“These precedents establish two kinds of tests, “conduct” and “effects,” which assess the extent to which the otherwise extraterritorial racketeering activity involved conduct in, or had sufficient effects in, the United States.”) (Emphasis added). See also Hawg Tools, LLC v. Newso Int’l, 2015 WL 1064519, at *6 (D. Colo. Feb. 23, 2015) (The court distinguished between elements of the civil theft tort at issue, which it deemed relevant to the extraterritorial analysis, and the harm resulting from commission of the tort, which it said was not, stating “where Plaintiff’s damage is suffered is not part of the extraterritoriality analysis.”).
A better case for showing that “acts in furtherance” have occurred in the US is if the accused has attempted to import into the US products using the plaintiff’s trade secrets. Presumably, the act of importing such products is itself actionable “use” and “misappropriation” under trade secret laws. But at least some cases appear to characterize such imports as reflecting a US-located effect or harm, on the one hand, as compared to US-located conduct, on the other:
“[P]laintiffs fail to adequately allege that defendants’ extraterritorial conduct had an effect on United States imports or exports. Not only is there no allegation that defendants ever sold any product in the United States using plaintiffs’ misappropriated trade secrets, plaintiffs also fail to allege that defendants’ extraterritorial conduct interfered in any way with exports from the United States.”
Roquette Am., Inc. v. Alymum N.V., 2004 WL 1488384, at *9 (S.D.N.Y. July 1, 2004).
Bringing Suit under Uniform Trade Secrets Act – as adopted by California
Unlike the DTSA, California’s version of the Uniform Trade Secrets Act (CUTSA) does not expressly provide for extraterritorial application.
It nonetheless may be easier to extend the CUTSA to reach IP theft in China than it is under federal trade secret law. How could this be?
Similar to federal law, California law recognizes a presumption against applying state laws extraterritorially to encompass conduct occurring in a foreign jurisdiction. North Alaska Salmon Co. v. Pillsbury Council, Inc., 174 Cal. 1, 4 (1914); Diamond Multimedia Systems v. Superior Court, 19 Cal.4th 1036, 1060 n. 20 (1999). California’s intent to make an “act operative, with respect to occurrences outside the state, will not be declared to exist unless such intention is clearly expressed or reasonably to be inferred from the language of the act or from its purpose, subject matter or history.” North Alaska, 174 Cal. at 4 (internal quotes omitted).
However, unlike federal extraterritoriality principles, California courts will extend the reach of state law to cover foreign misconduct resulting in injuries in California. See Norwest Mortgage, Inc. v. Superior Court, 72 Cal. App. 4th 214, 222-23 (1999) (considering the extraterritorial application of California’s Unfair Competition Law). There is at least one California lower court decision, TSMC v. SMIC, holding that CUTSA misappropriation claims may be asserted extraterritorially against the wrongful acquisition and use of IP in Taiwan, where this injures a California company. [Copy of the Superior Court’s 2014 Order.] This suggests California courts are willing to apply an “effects” test to determine CUTSA extraterritoriality.
Similarly, in Applied Materials v. Advanced Micro-Fabrication, a case brought by US-based Applied Materials alleging misappropriation of its trade secrets by a Chinese company AMEC China, the district court denied a Rule 12(b)(6) motion to dismiss on the grounds that CUTSA does reach improper acquisition or use of trade secrets in China. [Copy of ND Cal 2008 decision.] In reaching this decision, the district court emphasized the strong legislative intent underlying the CUTSA of “protect[ing] California residents against the misappropriation of their trade secrets.” This principle is especially true when the injury involves misappropriation of a trade secret because California has a significant interest in protecting the intellectual property of its citizens and businesses from infringement by foreign defendants.” (citations omitted). See also CYBERsitter, LLC v. People’s Republic of China (applying California law) (a compelling basis for refusing to grant a motion to dismiss based upon forum non conveniens was that “[b]ecause Solid Oak’s principal place of business is in the Central District of California and it alleges harms committed by foreign defendants, this Court has a particular interest in adjudicating the matter.”) [2010 CD Cal decision]
Summing It Up – Sue in Federal Court Asserting Both DTSA and CUTSA Claims, Keeping in Mind that Extraterritoriality Is an Initial Hurdle
IP theft occurring in foreign jurisdictions such as China poses a significant risk to US technology companies. Bringing suit in federal court provides several procedural advantages over state court and asserting a claim under the DTSA gives the federal court federal question jurisdiction. That it may be easier to extend California trade secret law than it is to extend the federal trade secret law, suggests that any such action include a claim under California trade secret law (the DTSA does not preempt state court trade secret claim).
Extraterritoriality is not dispositive of the questions whether a court has personal jurisdiction over the Chinese defendants or whether the court should nonetheless dismiss the matter based upon the doctrine of forum non conveniens. Hence the above description of extraterritoriality as an initial hurdle.