The Effect of Proposed Legislative Reform at the ITC

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Last week, for the second time in two years, members of the House of Representatives proposed legislation limiting the ability of certain entities to file complaints for unfair trade practices at the U.S. International Trade Commission (“ITC”). First introduced in August 14, 2020 as H.R. 8037, the reintroduced Bill, named the “Advancing America’s Interests Act” (“AAIA”)(H.R. 5184) seeks to amend several key provisions of Section 337 (of the Tariff Act of 1930), the ITC’s enabling statute. Specifically, the Bill would: 1) make it more difficult for so-called non-practicing entities to rely on licensing activities to establish ‘domestic industry’; 2) prevent complainants from relying on activities of non-parties to establish domestic industry; 3) promote early adjudication of potentially dispositive issues; and 4) expand the circumstances under which the Commission could find a violation without issuing an exclusion order.

Generally speaking, the domestic industry requirement at the ITC requires a complainant seeking to enforce its patent rights to demonstrate related economic activity and investment in the United States significant enough to warrant protection. Under Commission precedent, the domestic industry requirement has been divided into (i) a “technical prong,” requiring articles covered by the asserted patent and (ii) an “economic prong,” requiring certain levels of activity with respect to the protected articles or patent itself. Notably for non-practicing entities, under current law, economic prong can be satisfied by licensing activities, and the technical prong satisfied by licensed products, even products that existed before the license came into being.

1. Licensing Must Lead to Creation of a Product

The AAIA would limit qualifying licensing activities to those leading “to the adoption and development of articles that incorporate” the asserted intellectual property. Thus, licensing existing products, or running a successful licensing and enforcement program in the United States, would no longer constitute a domestic industry, unless that activity led to the post-licensing development of new products. Because many NPEs rely on domestic industry products originally developed before their manufacturer became a licensee, this provision alone would make it difficult for many NPEs to utilize Section 337 at the ITC.

Only 10-20% of the investigations instituted at the ITC involve NPEs, and this provision of the AAIA would not affect all NPEs equally. The Commission has been collecting and publishing data tracking the number of Section 337 Investigations brought by NPEs for many years, and has created two classifications. According to the ITC, Category 1 NPEs design and sell technology rather than producing products, but have a primary focus on a business other than purchasing and asserting patents, whereas Category 2 NPEs have a primary focus on purchasing and asserting patents for profit. In recent years, the vast majority of the NPE cases at the ITC were brought by Category 1 NPEs, who should be less impacted by this proposed change. The ITC’s statistics for the past five years are reproduced below.1

2. Elimination of Unwilling Domestic Industry Partners

Under current law, a complainant can establish domestic industry without its own domestic operations by claiming benefit of the activities of a licensee. A complainant can even benefit from the economic activity of an unwilling licensee (for example, a prior litigation defendant), or an uncooperative licensee that wishes not to participate in the ITC Investigation, by issuing subpoenas.2

The AAIA makes it more difficult for NPE’s to file complaints by requiring willing participation by the domestic industry licensee. The bill would amend Subsection (b) paragraph (1), by inserting a requirement that “a person may be relied upon to qualify as an industry under subsection (a)(2) only if the person joins the complaint under oath.” Requiring the domestic industry partner to join the complaint makes life difficult for NPEs in at least two ways. Most obviously, because it will be difficult for some NPEs to find willing co-plaintiffs, particularly as many licensees are inherited with the purchase of a patent portfolio, and became licensees during business dealings with a prior patent owner. These companies, particularly larger companies who are more likely to satisfy the economic domestic industry requirements, are generally less likely to eagerly join a profit-seeking litigation campaign at the ITC.

Secondarily, requiring the domestic industry partner to join the complaint makes discovery easier to obtain and less costly for the respondent. When a Complainant relies on information in an affidavit about the activities of a third-party licensee, it often falls on the respondent to test the truth of these facts through third-party discovery. Making the licensee a party removes any roadblocks from the respondent’s ability to seek discovery, potentially leveling the playfield on access to relevant information about domestic industry.

3. Early Adjudication of Dispositive Challenges

Once a ‘pilot’ program, and now an official tool available to the Commission (19 C.F.R. § 210.10 (b)(3)), the 100-day early disposition program is intended to allow the Commission to deal with case-dispositive issues, including lack of domestic industry, without the cost and expense of a full evidentiary hearing. However, the early disposition program is rarely, if ever, invoked by the Commission. Since the beginning of 2019, respondents in 24 different investigations have requested early disposition—often because of alleged issues with domestic industry—and the Commission has denied each and every request.

The AAIA directs the Commission to identify potentially dispositive issues, and to direct them to the ALJ for early disposition:

The Commission shall identify, at the beginning of an investigation, whether the investigation presents a dispositive issue appropriate for an expedited fact finding and an abbreviated hearing limited to that issue, and shall direct the assigned administrative law judge to issue an initial determination on such issue not later than 100 days after the investigation is instituted.

Although the Commission could continue to decline the invitation to order early adjudication, the rationale frequently used by the Commission to deny such requests, namely that the “issues raised may be too complex to be decided within 100 days of institution,” appears incompatible with a statutory mandate to issue an early initial determination within 100 days. Instead, the effort of untangling a complex issue within 100 days would fall on the shoulders of the parties, and the ALJ. Whether this would actually enhance the quality of Section 337 investigation remains to be seen.

4. Violations Without Exclusions

Apart from a handful of notable exceptions, the Commission automatically issues an exclusion order for violations of Section 337 as a matter of course. Only rarely has the Commission found that public-interest considerations outweighed issuance of an exclusion order, and only after concluding that “an exclusion order would deprive the public of products necessary for some important health or welfare need: energy efficient automobiles, basic scientific research, or hospital equipment.” Spansion, Inc. v. US Int’l Trade Comm’n, 629 F.3d 1331, 1360 (Fed. Cir. 2010).3 Occasionally, the Commission has also carved exceptions into exclusion orders to permit some limited amount of infringing importation and use.4 But, by and large, the public interest factors rarely impact the outcome of most ITC investigations.

The AAIA, in contrast, creates a statutory framework where exclusion might not be an automatic remedy. The Bill amends subjection (d)(1), which currently directs the Commission to exclude infringing articles unless it would be against the public interest, by introducing a two part test that requires finding a violation and a finding that “exclusion of the articles concerned is in the interest of the public.” Under current law, the Commission orders exclusion even when the public interest factors arguably weigh in favor of the respondent. But under the Bill, the Commission would need to consider public interest evidence in all cases, and could only order exclusion with an affirmative finding that doing so favored the public interest. In other words, unlike current law, a complainant would not be entitled to an exclusion order when the public interest factors are neutral. The proposed language of the Bill also introduces an interesting phrase, “nature of the articles concerned,” which suggests that certain type of articles are more appropriately the subject of an exclusion order than others. If passed, this language would no doubt lead to years of interesting interpretation and debate.

 

1https://www.usitc.gov/intellectual_property/337_statistics_number_section_337_investigations.htm
2For example, the Commission allowed complainant SiGen to rely on subpoenaed evidence from its uncooperative licensee SunEdison. In re Certain Silicon-on-Insulator Wafers, Inv. No. 337-TA-1025, Initial Determination (Feb. 8, 2017).
3Certain Automatic Crankpin Grinders, No. 337-TA-60 (1979) (not in the public interest to exclude the importation of components used to make crankshafts for more efficient combustion motors); Certain Inclined-Field Acceleration Tubes & Components Thereof, No. 337-TA-67 (1980) (not in the public interest to hinder specialized atomic research using imported acceleration tubes); Certain Fluidized Supporting Apparatus & Components Thereof, No. 337-TA-182/188 (1984) (not in the public interest to exclude importation of specialized hospital beds for burn patients).
4Certain Microfluidic Devices, Inv. No. 337-TA-1068 (2020) (permitting importation of infringing microfluidic devices used by researchers with ongoing research projects and no alternative source of products)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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