The theft of trade secrets by foreign companies, especially those in China, from American companies is a hot topic among lawmakers and in the press. A recent opinion from the Fifth Circuit Court of Appeals dealt a blow to the ability of American companies to bring lawsuits in the United States for trade secret theft  in some circumstances, at least in the Fifth Circuit. The American companies that appear to be potentially susceptible to this ruling are those that have facilities in China or another country.

Innovation First International, Inc. (“Innovation”), an American toy manufacturer, filed suit in Dallas, Texas against Zuru, Inc. (“Zuru”), a British Virgin Islands toy manufacturer headquartered in China. It was alleged that a high level designer that worked at Innovation’s China facility resigned his position, stole trade secrets, began working for Zuru in China, and used the trade secrets to produce the same robotic toy fish for Zuru that was being manufactured by Innovation. Innovation discovered that Zuru was marketing the same robotic fish when both Innovation and Zuru participated in the Fall Toy Preview in Dallas, Texas in 2011.

The trial court dismissed the case after Zuru filed a motion claiming China was a more convenient forum. The Fifth Circuit Court of Appeals affirmed.

Motions to dismiss based on convenience are rarely granted because courts generally give deference to the Plaintiff’s choice of forum. The trial court found that “China has a far greater interest in regulating the conduct of companies doing business in China.”

The Fifth Circuit observed:

“The district court recognized that Lu allegedly designed the toy fish at Innovations First’s facility in China; Lu negotiated an agreement with Zuru in China; and the robotic fish produced according to that agreement was developed in China. The district court also reasonably concluded that most of the records and witnesses are located in China and their production or testimony can be compelled by Chinese courts.”

The Court noted that neither party argued that the law of one forum or the other should apply or that there was an interest in avoiding a conflict with foreign law. Innovation also did not challenge that China is an available and adequate alternative forum. These issues are generally considered by courts when ruling on a motion to dismiss based on convenience. That leaves open the possibility that the ruling could have been different had these arguments been persuasively raised.

The bottom line is that, while some companies may enjoy lower costs to produce products abroad in addition to other benefits, companies run the risk of having to litigate claims such as theft of trade secrets in those same foreign forums.