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March 14, 2016 Articles

Tariff Act Section 337: USITC as a Fast and Effective Forum

The commission deserves a hard look by practitoners seeking a national remedy for unfair acts and deceptive trade practices.

By Jonathan J. Engler

The past few decades have seen an expansion in the number of U.S. states with unfair acts and deceptive trade practice (UDAP) statutes, modeled on the Federal Trade Commission Act (FTC Act). UDAP statutes are intended to protect consumers and businesses from a broad array of predatory, unscrupulous, and deceptive business practices. As is well known, these statutes vary widely in their effectiveness and scope. State UDAP statutes differ from the FTC Act in that they provide for a private cause of action but suffer from a lack of national enforcement power. Also, enforcement can be a problem if the unfair acts occurred out of state, even if the consequences are suffered at home. Consequently, although many, if not most, unfair trade practices have a nexus to interstate and international commerce, individuals and companies harmed by unfair trade practices sometimes struggle to obtain meaningful relief.

A solution to certain UDAP enforcement problems may lie with the U.S. International Trade Commission (ITC), a federal agency best known for intellectual property litigation. The ITC has authority and experience adjudicating unfair acts and deceptive trade practices, and it offers fast and powerful nationwide injunctive relief in cases in which the unfair act has a nexus (directly or indirectly) to imported products. The Court of Appeals for the Federal Circuit in recent years has affirmed and expanded the scope of the ITC’s authority to adjudicate and provide remedies in unfair act and deceptive act cases—effectively creating a national cause of action where none previously existed. This has led to a significant increase in unfair act and Lanham Act litigation at the ITC.

Unfair and Deceptive Advertising Involving Imported Goods—A Very Significant Problem for U.S. Business
The rise in UDAP litigation in the United States in recent decades has been accompanied by a dramatic increase in the volume and penetration of internationally traded goods in the U.S. market. Many unfair business practices, particularly mislabeling and misrepresentation, have a strong nexus to international trade, as U.S. businesses buy and sell products that do not originate in the United States. By way of example, nowhere are these phenomena—both the increase in U.S. market penetration by imports and the rise in unfair business practices in connection with those imports—in greater evidence than in the U.S. food business. For example, 90 percent of all seafood consumed in the United States is imported, and it is estimated that at least a third of the imported seafood sold in the United States is mislabeled, with serious implications for U.S. public health. See Oceana, Seafood Fraud: Stopping Bait and Switch. The U.S. Department of Agriculture and the Food and Drug Administration (FDA) in principle have the jurisdiction and authority over such business practices, but both agencies suffer from a lack of resources equal to the scope of the problem.

Many U.S. businesses suffer greatly from unfair business practices in international trade, including fraudulent labeling, false advertising, and false representations of origin, yet they have struggled to obtain meaningful relief, given limited federal enforcement resources. This problem is acute with respect to food and drug imports from China. The importation of counterfeit drugs into the United States is rampant, particularly given the rise in online retailing, which allows sellers to bypass local channels of distribution and to reach U.S. consumers directly. The FDA estimates that 40 percent of drugs purchased in the United States are imported and 80 percent of the active pharmaceutical ingredients come from other countries. Sanjay Gupta, “The Difficult Fight Against Counterfeit Drugs,” 60 Minutes, Mar. 14, 2011. The volume of food and drug imports from China and India (countries in which counterfeit and fraudulent food and drug labeling is truly notorious) together has risen dramatically over the past 10 years to over $10 billion, behind only Canada and Mexico. The fraudulent and dangerous counterfeit and mislabeling problem, however, cuts across industries and poses dangers to U.S. consumers and business, including the toy and consumer electronics industries.

Section 337 litigation at the ITC offers a rapid and effective remedy to these and similar patterns of unfair and deceptive trade practices. The remedies at the ITC are twofold: (1) exclusion orders barring the importation into the United States of an unfairly traded good—and this does not mean that the good itself must infringe a U.S. intellectual property right—and (2) cease-and-desist orders, national in personam injunctions barring the sale and distribution in the United States of imported goods with a nexus to the alleged unfair act, as well as enjoining the unfair act itself. The violation of ITC cease-and-desist orders can and does result in enforcement fines that can reach the tens of millions of dollars. These fines act as powerful incentives for respondents (ITC parlance for “defendants”) to comply with those orders and can help to significantly curtail the U.S. distribution of unfairly traded goods. The ITC has not been shy about allowing complainants (ITC parlance for “plaintiffs”) to take on Internet retailers, leading to enforceable consent orders and settlement agreements with major online marketplaces.

Section 337 of the Tariff Act: Background and Scope
Section 337 traces its origins to the Revenue Act of 1916, in which Congress made it a misdemeanor for a foreign producer to import goods “with the intent of destroying or injuring an industry in the United States.” Revenue Act of 1916, ch. 463, § 801, 39 Stat. 756, 798–99. This was revised to become section 316 of the Tariff Act of 1922, which created a private right of action for U.S. companies against importers engaged in “unfair methods of competition and unfair acts in the importation of articles to the United States.” Tariff Act of 1922, ch. 356, 42 Stat. 858, 943. In 1922, Congress created the Tariff Commission, giving it the authority under section 337 to adjudicate private complaints in a trial-like proceeding and, with the acquiescence of the president, to exclude imported products found to have been produced or imported using “unfair methods of competition.”Tariff Act of 1922 § 316(a). It is significant that the statute intentionally did not define what constituted “unfair methods of competition.” This broad, undefined language lives on in the modern version of the statute, which broadly creates a private right of action to prevent the importation of articles produced or imported using “[u]nfair methods of competition and unfair acts.” 19 U.S.C. § 1337(a)(1)(A). The Senate Finance Committee report on the bill that ultimately became the Tariff Act of 1922, and later section 337, states that

[t]he provision relating to unfair methods of competition in the importation of goods [section 316] is broad enough to prevent every type and form of unfair practice and is therefore a more adequate protection to American industry than any antidumping statute the country has ever had.

S. Rep. No. 67-595, at 3 (1922); see also Certain Air Impact Wrenches, Inv. No. 337-TA-311, 1991 WL 788551, at *7 (May 6, 1991).

This broad authority has been noted by both the commission and its reviewing courts in the context of the expanse of the commission’s jurisdiction. As stated almost 60 years ago by the Court of Customs and Patent Appeals, the predecessor of the present-day Court of Appeals for the Federal Circuit, section 337

provides broadly for action by the Tariff Commission [now the International Trade Commission] in cases involving “unfair methods of competition and unfair acts in the importation of articles”, but does not define those terms nor set up a definite standard. . . . The importation of articles may involve questions which differ materially from any arising in purely domestic competition, and it is evident from the language used that Congress intended to allow wide discretion in determining what practices are to be regarded as unfair.

In re Von Clemm, 229 F.2d 441, 443–44 (C.C.P.A. 1955).

When its jurisdiction concerning alleged violations of the Digital Millenium Copyright Act was challenged, the commission stated:

The Commission has broad discretion to determine what constitutes unfair practices in import trade. Although the terms “unfair methods of competition’’ and “unfair acts,’’ as such, have not been extensively analyzed by the Commission, there is a large body of law analyzing these same terms under Section 5 of the Federal Trade Commission Act, 15 U.S.C. §45, a statute which is analogous to §337. . . . Accordingly, the Commission has great latitude in deciding what constitutes “unfair methods of competition” or “unfair acts in importation” and thereby, whether jurisdiction exists.

Certain Universal Transmitters for Garage Door Openers, Inv. No. 337-TA-497, USITC Pub. 3670, Initial Determination Concerning Temporary Relief at 9–10 (Nov. 21, 2003) (internal citations omitted); Notice of Commission Determination to Affirm Initial Determination Denying Temporary Relief and Order (Nov. 25, 2003).

The recent major revival of section 337 as a major and broad remedy for business torts in international trade—not just intellectual property infringement—began in 2009 when a major trade secret case came to the ITC involving the alleged misappropriation in China of trade secrets relating to the manufacture of railway wheels. In that case, the U.S. plaintiff claimed that employees at a Chinese joint venture misappropriated the plaintiff’s trade secrets and used them to produce railway wheels at a Chinese competitor. All the claimed unfair acts involved Chinese actors and took place in China. The ITC found that the “unfair acts” language in section 337 gave it broad authority to apply U.S. state trade secret misappropriation law to foreign employee conduct—with the sole nexus to the United States being the importation of railway wheels produced using the misappropriated trade secrets. The Court of Appeals for the Federal Circuit affirmed the ITC’s broad authority to define and police unfair acts with a nexus to import trade, even if the unfair acts occurred abroad.

Of particular significance for UDAP litigation, the Federal Circuit in TianRui Group v. International Trade Commission created a national cause of action for trade secret misappropriation based on the broad principles of the Restatement of Unfair Competition and Uniform Trade Secrets Act, notwithstanding the lack of a federal trade secret misappropriation statute. The court held that

the nonstatutory unfair competition provision of section 337 falls comfortably into both of the categories that have been described as calling for the application of federal common law-instances in which “a federal rule of decision is ‘necessary to protect uniquely federal interests,’ . . . and those in which Congress has given the courts the power to develop substantive law.”

661 F.3d 1322, 1327 (Fed. Cir. 2011).

The court went on to explain that “trade secret law varies little from state to state and is generally governed by widely recognized authorities such as the Restatement of Unfair Competition and the Uniform Trade Secrets Act” and, on that basis, created and applied a national “trade secret common law” for purposes of ITC litigation based on the statute’s unfair competition provisions. Id. at 1327–28. Unsurprisingly, TianRui was followed by a very significant increase in the number of trade secret cases brought to the ITC, most of them involving trade secrets allegedly misappropriated in China, as well as cases arising under the Lanham Act. Although, successful ITC complainants in ITC litigation must show that they have suffered “substantial injury” by reason of the unfair act, the commission has interpreted the injury requirement relatively leniently to include a wide variety of evidence that the unfair act has had the “tendency or effect” to cause competitive harm to the domestic industry.

It is therefore clear that unfair and deceptive business practices, within the meaning of the various UDAP statutes, fall within the ITC’s jurisdiction. The agency has demonstrated an ability and willingness to provide remedies to domestic industries adversely affected by unfairly traded imported goods, and the Court of Appeals for the Federal Circuit has affirmed that authority in suprisingly broad terms.

Rapid Bench Trials Before Experienced Administrative Law Judges
Those familiar with trial practice in U.S. district court will find section 337 proceedings at the ITC broadly familiar. Six commissioners preside over a system of administrative law judges (ALJs), who try all cases brought to the commission under the statute. In particular, the trial phase of an investigation involves a bench trial that, under the auspices of the Administrative Procedure Act, owes much to federal trial practice, including a broad (but not especially strict) reliance on the Federal Rules of Evidence. That said, many aspects of a section 337 investigation are unusual and, in some cases, unique under U.S. law, particularly the domestic industry requirement. Another significant difference is the existence of a third party to the litigation—the ITC’s Office of Unfair Import Investigations (OUII), which in principle represents the public interest. OUII is a full-fledged party and will submit briefs, participate in depositions, and examine witnesses in the course of a trial.

ITC section 337 investigations commence with the filing of a complaint on behalf of a U.S. industry. It is not necessary that the “industry” represent the interests of more than one company. Section 337 cases proceed in accordance with a strict and rapid procedural schedule; almost all proceedings conclude within 18 months of the filing of a complaint. The complaint lays out the basic legal and factual bases of the case. Approximately two months after trial, the ALJ issues an “initial determination,” which is normally quite detailed. The parties may then appeal the ALJ’s legal and factual findings to the full commission, which reviews all ALJ decisions according to a de novo standard of review. The commission may adopt the ALJ’s decision in part or in whole, issue its own opinion, or remand to the ALJ. While the ALJ’s opinion is technically advisory in nature, in practice it carries great weight with the commission, particularly with respect to factual findings.

The commission then issues remedial orders. Those commission orders take the form of general exclusion orders (which bar the further importation of the accused goods, regardless of origin) or limited exclusion orders (which are limited to the goods imported by the respondent). The commission also typically issues cease-and-desist orders, enjoining respondents from engaging in specific conduct, such as the continued sale and marketing of products found to be in violation of section 337, or the unfair act at issue in the investigation. Violations of commission orders can and do lead to very significant civil penalties. The commission, however, in contrast to a federal district court, does not have the authority to award damages.

In today’s economy, few domestic commercial transactions involving tangible goods have a direct nexus to an internationally traded good. The ITC and section 337 were, from inception, intended by Congress to provide a national remedy for unfair acts and methods of competition, broadly defined, with a nexus to international trade. Section 337, while modeled on the FTC Act, differs significantly in providing for a private right of action. The ITC and the Court of Appeals for the Federal Circuit have broadly interpreted the commission’s authority and have not hesitated to create national causes of actions and remedies for what had once been thought of as state causes of action, such as trade secret misappropriation. It is very clear, therefore, that the scope of the ITC’s jurisdiction and authority today extends to many causes of action that may have traditionally been considered state and common-law “unfair acts” and, provided there is a nexus to an imported product, deserves a hard look by practitoners seeking a national remedy for unfair acts and deceptive trade practices.

Keywords: litigation, business torts, unfair and deceptive trade practice, trade secret misappropriation, Lanham Act, International Trade Commission, Federal Circuit

Jonathan J. Engler – March 14, 2016