On December 22, 2022, the U.S. International Trade Commission (ITC) issued an exclusion order banning the import of the popular Apple Watch after determining that Apple was infringing on AliveCor’s patents. Yet that same month, the Patent Trial and Appeal Board (PTAB) at the U.S. Patent and Trademark Office ruled that the patents in question were invalid. While the PTAB decision is on appeal, the case raises concerns about why a small federal agency created to address tariffs and unfair trade practices is becoming a prominent and popular venue for airing patent disputes.
The International Trade Commission, Patents, and Section 337 Investigations
The ITC was established in 1916 as an independent, quasi-judicial federal agency to manage the nation’s tariff system and shield domestic industries from unfair competitors beyond the reach of U.S. laws. However, the ITC’s mandate has expanded over time, notably under section 337 of the Tariff Act of 1930, which grants the ITC broad investigation powers. While section 337 investigations cover a range of unfair practices, they predominantly focus on allegations of patent infringement. The ITC, in effect, has established itself as an alternative means of adjudicating patents outside the federal courts, a marked departure from the agency’s original mission that has proved vulnerable to exploitation.
Several factors contribute to the ITC’s attractiveness as a forum for patent dispute resolution. First, the speed of ITC proceedings, typically concluding within 16 to 18 months, creates an opportunity to exert pressure on alleged infringers more quickly than in federal courts. Second, unlike federal courts, the ITC does not award monetary damages; its primary remedy is the exclusion order, sometimes accompanied by a cease and desist order, that can ban the importation of an infringing product into the United States.
Life After eBay: The ITC and Exclusion Orders
Before the 2006 landmark U.S. Supreme Court ruling in eBay Inc. v. MercExchange, L.L.C., federal courts routinely issued permanent injunctions upon a finding of patent infringement. This practice effectively allowed patent holders to exclude competitors from the market, providing significant leverage in licensing negotiations. However, the eBay decision fundamentally changed this dynamic. The Supreme Court held that the traditional four-factor test for injunctive relief should apply to patent cases. This was a rejection of the U.S. Court of Appeals for the Federal Circuit’s general rule “that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.” The eBay ruling made obtaining injunctions in federal courts significantly more difficult. Courtroom remedies focused more on monetary damages, allowing better proportionality between the infringement and its economic impact.
This shift reshaped patent enforcement and defense strategies and inadvertently elevated the ITC’s importance in patent litigation. Unlike federal courts, the ITC is not bound by the four-factor test established in eBay when considering an exclusion order, which is functionally an injunction. This makes it an attractive forum for patent holders seeking strong remedies, particularly those who might struggle to obtain an injunction in federal court. The threat of an ITC exclusion order gives patent holders significant negotiating power, potentially leading to higher licensing fees or larger settlements.
Consequently, companies facing the threat of a section 337 investigation may need to raise prices to offset potential litigation costs or build reserves for possible settlements. Moreover, if an exclusion order removes a competitive product from the market, remaining suppliers may have greater flexibility to increase prices due to the reduced threat of competition. Thus, consumers may face reduced choices and higher prices in the wake of an exclusion order.
The Rise of Nonpracticing Entities and Third-Party Litigation Funding
The changing landscape of patent litigation did not go unnoticed by nonpracticing entities (NPEs), who are bringing an increasing number of cases before the ITC. Often disparaged as “patent trolls,” NPEs acquire patents not to produce an invention or deploy a new technology but, rather, to assert the patents against alleged infringers to generate revenue through licensing fees and litigation settlements, with subsequent adverse impacts on social welfare.
NPEs have found the ITC to be a particularly advantageous venue. The expedited timeline and threat of an import ban can induce respondents to settle under unfavorable conditions, especially in today’s globalized economy, where many products are manufactured overseas. According to data from the ITC, NPEs were the complainant in 11 of the 37 investigations instituted at the ITC in 2023, roughly 30%. The level of NPE activity at the ITC has raised concerns about the impact on innovation and economic efficiency because NPEs extract value from productive companies without practicing patents themselves. Moreover, the threat of an ITC investigation can divert resources from research and development to legal defense, particularly for smaller firms with limited resources.
More recently, the NPE problem has been exacerbated by third-party litigation funding. This relatively new practice allows outside parties such as hedge funds and sovereign wealth funds to provide financial assistance to plaintiffs in exchange for a share of the litigation’s proceeds. One estimate suggests that third parties now fund almost one-third of all patent litigation, including cases before the ITC. This influx of capital has enabled NPEs to pursue more cases and larger targets.
Moreover, the leverage provided by the threat of exclusion orders can lead to what economists call “holdup,” where NPEs extract settlements that exceed the actual value of their patents. This dynamic can distort market incentives and harm consumers through increased prices or reduced product availability. In a report for the R Street Institute, William Jenks provides an example of how Daedalus Prime, LLC, an NPE, sought exclusion orders on vehicles produced by Mazda and Mercedes-Benz over patents asserted on a component in the vehicle’s infotainment system. In what Jenks describes as the “little-to-big” problem, an ITC exclusion order’s economic impact equates to the value of the entire vehicle—well beyond what a court would establish as the royalty value for the chip in question in the infotainment system. As a result, companies may be compelled to enter into licensing agreements or settlements that do not reflect the actual economic value of the patents in question simply to avoid the risk of being shut out of the U.S. market.
The ITC’s Expansive Definition of Domestic Industry
While the ITC was initially established to protect U.S. industries from unfair foreign competition, a concerning trend has emerged in recent years: the increasing use of ITC investigations for disputes between domestic companies, or cases brought by foreign complainants against American companies. A 2024 study found that 196 complaints of unfair trade had been filed with the ITC since 2020; of these, 54 were brought by foreign companies.
The statutory language defining a domestic industry belies much of the activity at the ITC. It begins reasonably by stating that a “significant investment in plant and equipment” or the “significant employment of labor or capital” are indications of a domestic industry. However, the statute then includes “licensing” as evidence of domestic industry. This provides the justification necessary for NPEs—which do not produce or innovate—to assert domestic industry status and, therefore, bring cases before the ITC. Even worse, NPEs can compel an unwilling third party forced to acquire a license to provide evidence of domestic industry via subpoena.
These cases impose significant costs on American businesses and disrupt international supply chains that undermine U.S. competitiveness in the global market. Ultimately, the misuse of exclusion orders harms consumers by restricting choice through product bans, while increased litigation expenses and licensing fees contribute to higher prices. The ITC’s definition of domestic industry is too expansive, allowing entities who, by definition, do not produce anything to allege unfair competition. At the same time, much of the ITC’s docket is duplicative with the federal courts, suggesting a proper venue already exists for cases brought before the agency. A 2021 study of ITC case data by Charles Duan found that since 2017, only 41 out of 635 ITC investigations (6.5%) involved solely domestic complainants and foreign respondents.
This misuse of section 337’s domestic industry requirements has several economic implications. Companies involved in ITC investigations often face higher legal expenses than traditional court proceedings due to the accelerated timeline and specialized nature of ITC cases. These costs are additive when considering that cases before the ITC often have parallel litigation in the federal courts. Additionally, there is an impact on innovation that can discourage small firms from innovating for fear of patent litigation. The global nature of many supply chains adds another layer of complexity because an exclusion order can ripple through a company’s entire production and distribution network, potentially leading to production delays, increased costs, and loss of market share.
What About the Public Interest?
Section 337 specifically requires the ITC to evaluate potential public interest impacts before issuing an exclusion order. The statute includes four key public interest factors to evaluate during an investigation. First, investigators must assess the impact of an exclusion order on public health and welfare, such as changes in the availability of essential products like medical devices and pharmaceuticals. Second, the effect on competitive conditions within the U.S. economy must be examined, including concerns about market structure and monopoly power. Third, the implications for U.S. production of similar or directly competitive articles must be reviewed, specifically determining whether domestic alternatives can adequately meet market demand. Fourth, the investigation must evaluate the consequences of an exclusion for U.S. consumers in terms of product availability and pricing.
Yet, historically, analysis of these public interest factors has been perfunctory at best, often lacking depth and rigor. Overall, the public interest requirements have had little impact on exclusion orders granted by the ITC. In fact, over the last 40 years, there have been only four cases where the public interest was used to deny an exclusion order.
Only in rare cases have public interest concerns overridden an exclusion order, as in 1984 when the ITC, after finding a violation under section 337, declined to issue an exclusion order based on public interest concerns. In this case, involving the importation of crankpin grinders, the ITC determined that an exclusion order would impede the nation’s ability to meet fuel efficiency standards mandated by Congress.
In 2011, the ITC issued a final rule to enhance public interest considerations, allowing the commission the option to delegate the public interest evaluation to the administrative law judge in a section 337 investigation. While an earlier determination of public interest impacts aimed to improve the process, the changes have not had a significant impact on the number of investigations where the public interest has limited the role of an exclusion order. Again, a prime example is the ITC’s recent exclusion order on the Apple Watch. If the federal court determines that the patents are valid, imports of the popular Apple Watch could be banned, potentially affecting millions of consumers, many of whom may rely on the device to detect cardiac arrhythmia, or irregular heartbeats.
A more robust public interest analysis with greater weight in the ITC’s decision-making process would provide an essential check on questionable exclusion orders and allow a more careful evaluation of the potential economic and consumer harms and public health risks associated with an exclusion order. This would help create more consistency between ITC proceedings and federal court patent litigation, ensuring that the criteria for issuing exclusion orders are more aligned across both forums.
Congress Weighs In
For some time, Congress has shown an interest in the growing problem of abusive patent litigation. In 2011, the America Invents Act was enacted, which, among other things, took aim at the problem of business method patents and excessive litigation. In the wake of the eBay decision and the ITC’s rise to prominence as an alternative venue, Representatives Suzan DelBene (D-WA) and David Schweikert (R-AZ) first introduced the Advancing America’s Interests Act in the 116th Congress in an attempt to return the ITC to its original mission and curb abusive patent litigation in section 337 investigations. The legislation was reintroduced in the 118th Congress by Schweikert and cosponsor Representative Don Beyer (D-VA).
As Schweikert stated:
For far too long, the International Trade Commission has been misused by patent trolls seeking to exploit financial gain at the expense of American consumers and businesses. The Advancing America’s Interests Act modernizes the ITC by reforming its unfair import processes and ensuring public interest is always prioritized above bad actors looking to stifle competition. I’m proud to introduce this bipartisan legislation that increases transparency at the ITC, encourages a strong patent system, and ensures America can continue being a leader in advancing innovation.
The Advancing America’s Interests Act (H.R. 3535) attempts to address concerns about section 337 investigations through new statutory language that would curb excessive litigation by NPEs at the ITC while allowing legitimate patent cases to proceed. More specifically, the legislation tightens the definition of domestic industry, expands the scope of the public interest review, and makes other procedural changes to expedite section 337 investigations. Key provisions of the act include:
- Strengthening the domestic industry requirement: The legislation would require complainants to demonstrate that they have made significant investments in the United States to develop and exploit a patent. Licensing alone would not establish domestic industry. Rather, licensing must lead to “the adoption and development of articles that incorporate the patent, copyright, trademark, mask work, or design.”
- Enhanced public interest analysis: The act would require the ITC to determine, as an initial matter, whether an exclusion order would negatively affect the public interest. This change would increase the importance of public interest considerations in ITC proceedings.
- Eliminating the “domestic industry by subpoena”: The bill includes provisions that would make it more difficult for complainants to compel domestic licensees to join legal actions to demonstrate domestic industry.
- Establishing a new timeliness requirement: The act would require ITC investigations to identify and address any potentially dispositive facts in the first 100 days of the inquiry so a prompt determination can be made on whether to proceed further.
These changes would help refocus the ITC on its core mission of protecting true American innovators and reduce its use for adjudicating patent disputes more appropriately handled in federal courts. Such reforms would help reduce abusive patent litigation while protecting legitimate intellectual property rights and domestic industries.
But despite concerns raised in Congress and in the policy community, reforming the ITC’s growing role in patent adjudication is difficult. As in many political debates, vested interests have solidified around the status quo, from bureaucratic entrenchment at the ITC, to a strong patent bar that sees opportunities in section 337 investigations, to NPEs that fare better at the ITC than they do in courts. The benefits that accrue to these strong, concentrated interests provide a classic example of Mancur Olson’s collective action problem, as the costs are dispersed across consumers and the business community. As a result, an agency created to protect American businesses from unfair competition is often used in ways that harm domestic industry for the benefit of those who contribute little to American economic output.
The Case for Reforming ITC Patent Practice
Patents were designed to promote progress in science and the useful arts, with established case law providing clear mechanisms for resolving disputes. However, in the wake of the Supreme Court’s eBay decision limiting injunctive relief, the ITC has emerged as a more lucrative venue for patent disputes through its exclusion orders that can yield settlements exceeding the underlying patent’s value.
The ITC’s growing role as an alternative patent forum represents a marked departure from its original mission, creating parallel litigation that generates substantial duplicative costs. And the economic consequences of such forum shopping are significant and adverse for American industry and can disrupt supply chains, restrict consumer choice, and raise prices. While the Advancing America’s Interests Act offers promising reforms through enhanced public interest consideration and stricter domestic industry requirements, the political economy of change remains challenging. Concentrated benefits to status quo beneficiaries—from NPEs to the patent bar—have created strong resistance to reform. Yet, without legislative or institutional reforms, the ITC will continue to serve as an attractive venue that often does more harm than good to American industry.
Ultimately, it is essential to align the agency’s practices with those of the courts to ensure a consistent, harmonized approach to patent disputes. Otherwise, as seen today, section 337 will continue to impose significant costs on the U.S. economy, with substantial economic harms to consumers, American businesses, and overall economic growth.
