At the Dallas Toy Fair in October 2011, the makers of Hexbug robotic toys spotted a swimming mechanized fish they say incorporates their company’s research on making waterproof battery-operated gadgets.
Innovation First International Inc. sued, claiming a former employee stole its trade secrets and went to work for the fish’s Chinese manufacturer. A federal judge told the company to take its complaint to China, where much of the evidence and most principal witnesses are located.
“For fairly obvious reasons, we’re not excited about going to China to sue a Chinese engineer,” Vince Mouer, general counsel for Greenville, Texas-based Innovation First, whose Hexbug Nano Hive Habitat Set was named specialty toy of the year by the Toy Industry Association in 2011 and 2012, said in an interview.
Innovation First instead decided if it couldn’t stop the products from being made, it would try to stop them from being sold. The company took its complaint to the U.S. International Trade Commission in Washington which, because it can block imports of products that violate U.S. intellectual-property rights, is becoming an attractive forum for companies alleging trade-secret theft overseas.
“The ability to prevail on cases like that in China is often limited,” said Jim Altman, an intellectual property lawyer at Foster, Murphy, Altman & Nickel in Washington, who often represents foreign companies in ITC cases. “The advantage of the ITC is you don’t have to fight in China if your concern is the U.S. market.”
Innovation First filed its case Jan. 4, naming CVS Caremark Inc. (CVS:US)’s CVS Pharmacy unit as a retailer selling Zuru Robo Fish. Zuru Inc., the Guangzhou-based manufacturer, denied stealing trade secrets and said the engineer’s idea for the fish predated his time at Innovation First. The ITC hasn’t decided whether to investigate.
Mouer said Zuru wasn’t named in the ITC complaint for strategic reasons he declined to explain. Carolyn Castel, a spokeswoman for CVS, didn’t return messages seeking comment.
The agency is looking into a complaint filed Dec. 20 by Itasca, Illinois-based Fellowes Inc., which makes paper shredders. Fellowes says a former partner in China stole its equipment and know-how to make and sell competing products, including about 70,000 Fellowes shredders that were in the factory when the joint venture collapsed.
Fellowes said it needs to keep the competing products out of the country “to ensure its own survival as a U.S. company and to protect the threatened integrity of the domestic shredder market.”
The ITC’s authority to regulate imports has made it a battleground in the global smartphone war as companies including Samsung Electronics Co. and Apple Inc. try to choke off sales of competing products they say violate U.S. patents.
The prospect of mobilizing the trade agency in trade-secret disputes dates to February 2010, when the ITC for the first time banned imports on that basis.
In that case, Amsted Industries Inc. won an order blocking imports of cast-steel railway wheels manufactured using secrets stolen from a Chinese licensee. The ITC’s action was upheld on appeal in October 2011.
Six complaints, including those by Innovation First and Fellowes, have followed on Amsted’s precedent. Five are pending. Taiwan’s Richtek Technology Corp. (6286)’s complaint concerning power management circuits led to settlements or agreements to stop imports, although one company was later found in violation of that agreement and fined $620,000.
“It goes back to the fundamental issues for the ITC,” said Greg Vogler of McAndrews Held & Malloy in Chicago, who represented Amsted. “Its purpose is to prevent unfair trade practices by foreign entities who are trying to get around U.S. laws.”
Innovation First initially persuaded a Texas state judge to temporarily halt sales of Zuru Robo Fish at the Dallas Toy Fair. The case was then transferred to federal court, where District Judge Jane Boyle in Dallas ruled China was the more convenient forum.
“Texas residents do not have a high interest in resolving a dispute based on trade secrets that were allegedly misappropriated in China,” the judge ruled April 10. Innovation First is appealing. Arguments are scheduled for Feb. 5 in New Orleans.
Innovation First, which also makes robotics for educational competitions and computer server racks, has about 175 employees worldwide, most in Texas. It has Chinese engineers who refine the American designs to deal with the manufacturing process, said Mouer, the company lawyer.
Hexbug is a line of robotic inchworms, scarabs and spiders that move realistically and sell for less than $20 each. The company plans to introduce Hexbug fish later this year.
Zuru sells its fish for about $15. Zuru President Nick Mowbray, who started the toy company with his brother in New Zealand eight years ago, said the engineer worked on the technology in his home for 13 years and left Innovation First after being rebuffed three times over two years in efforts to build a robotic fish.
“They realize they made the wrong move by not licensing this technology,” Mowbray said. “They can’t make it work, so put out press releases saying that we copied them.”
The ITC isn’t limited to allegations of theft in China, although the Asian nation is the focus of the cases filed thus far. In a May 2011 report, the commission estimated theft of trade secrets in China led to $1.1 billion in U.S. economic losses.
“There have been some successes, but often it may not be a big enough deal to fight in China,” Altman said. “It’s like anyplace, there are good actors and bad actors -- that’s not unique to China. What’s different is they are still developing the rule of law and commercial codes of conduct.”
The trade secrets cases involve companies not as big or as well-known as Apple and Samsung.
Family-owned SI Group Inc. of Schenectady, New York, filed a case about rubber resins used in tire manufacturing, and closely held Twin-Star International Inc. of Delray Beach, Florida, complained about electric fireplaces.
“To these companies, the products are their lifeline,” Vogler said. “They have to fight and have to fight tooth and nail. The ITC is the forum they need to minimize their costs and seek justice in a short time.”
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