Fifth Circuit Affirms Dismissal of International Trade Secret Dispute

21 March 2013 Dashboard Insights Blog

Even as the Obama administration is announcing an effort to crack down on international trade secret theft, the Fifth Circuit has released a ruling reminding companies just how difficult it can be to go to court on their own behalf to protect trade secrets from misappropriation taking place overseas.

In Innovation First International, Inc. v. Zuru, Inc., No. 12-10511, the Fifth Circuit, in an unpublished opinion, affirmed the decision of the District Court for the Northern District of Texas to dismiss a trade secret misappropriation suit on forum non conveniens grounds. Innovation First, the manufacturer of the Hexbug toy line, filed suit against Zuru, a competing manufacturer of robotic toys, claiming that Zuru had misappropriated its trade secrets. In a nutshell, Innovation First claimed that one of its employees, who worked exclusively in China, had quit and begun working for Zuru, again in China. According to Innovation First, the employee took some of Innovation First’s proprietary technology with him, which Zuru began using.

Innovation First filed suit in federal court in Texas. The district court ruled that it had jurisdiction over Zuru in Texas — but dismissed anyway, finding that China had the strongest connections with the case and that the case should be heard in China. Part of its justification for this ruling was that Innovation First had facilities in China, including the facilities where the employee in question had worked, and so it would not be inconvenient for Innovation First to maintain suit in China. While courts usually defer to a plaintiff’s choice of forum, the district court decided that Innovation First was entitled to “somewhat lessened” deference because it had facilities in China. The Fifth Circuit affirmed this analysis.

So what does this mean for other multinational companies? Simply put, even if a multinational company can obtain jurisdiction over a trade secret misappropriation defendant in its chosen forum in the U.S. — not always an easy task — courts still have wide discretion to dismiss such suits on the basis of convenience, and can use the plaintiff’s presence overseas to decide that the case should be heard elsewhere. Manufacturers and other businesses that outsource work to countries such as China cannot rely on U.S. courts (and by extension, U.S. law) to enforce their intellectual property rights if an act of misappropriation occurs overseas.

The Fifth Circuit’s decision can be viewed at: http://www.ca5.uscourts.gov/opinions/unpub/12/12-10511.0.wpd.pdf

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