Issue
In working with the polymer project I found that their page on their Shadow DOM polyfill had a set of known limitations http://www.polymer-project.org/platform/shadow-dom.html#known-limitations.
The first limitation on the list was :
Research
I hadn't seen any encapsulation issues on some of the simple tests I had run. I have one jsbin, I've kept around to test things. http://jsbin.com/ANeCUv/10/edit .
To test I removed that css import statement from my style tag inside of the polymer template. I noted that the element became unstyled even though the same import was still called in the style tag in the above header. This showed me at least in this case the encapsulation prevented the jquery-ui.css from styling the Shadow DOM of my element.
I decided to research the issue more specifically, and found a few references, like this one in the comments of a styling guide http://www.polymer-project.org/articles/styling-elements.html
I tested again with an older version of IE and confirmed that css was bleeding in from styles referenced outside of the element.
I understand the design of polymer and its polyfills, is to make newer web technologies accessible, and allow unsupported features in older browsers to be supported with older techniques or failover gracefully. So I understand how this issue wold be viewed as a limitation of the Shadow DOM polyfill.
Other than this issue with support for older browsers, I have not been able to find other encapsulation issues. Though the "CSS encapsulation is limited" is a very generic label if the only specific known limitation is incompatibility with older browsers.
Summary
Outside of inconsistencies in the Shadow DOM polyfill support in older browsers are their other known issues with CSS Encapsulation?