Assume that your company operates in an area of cutting-edge and highly profitable technology. The company has done all the right things to grow its business and protect the fruits of its investment in research and development. Using trade secrets, patents, or a combination of both, the company has prudently protected its hard-earned inventions and processes. In fact, the company has done so well that many competitors at home and abroad want in on the action. Through loss of employees, trade secrets have been carried to new competitors. Or some companies have treated your patents as recipes for their success (without the bother and expense of research and development). There are so many competing companies importing products that you cannot even identify all the sources. What can you do?
July 20, 2016 Articles
Using Section 337 to Reduce Unfair Competition Once and for All
No more whack-a-mole.
By Steven E. Adkins
One option is to enforce your intellectual property (IP) in federal district court. Under the Federal Rules, you must sue each infringing company individually. This means multiple sets of complaints, discovery actions, motions practice, and trials in possibly many different courts. It will also mean lots of legal fees. The likely remedy in district court is a money award in the form of a judgment that has to be enforced. Can you enforce the judgment and recover for the theft of your IP rights? Can you even identify the companies that should be named as defendants? These uncertainties may cause you to question whether the federal courts are a viable approach.
Another option is the U.S. International Trade Commission (ITC) in Washington, D.C. Under a trade statute known as section 337, 19 U.S.C. § 1337, your company can sue all companies involved in the importation of infringing goods—known and presently unknown—and effectively shut them out of your market in the United States. To obtain relief from the ITC, an IP owner must show that there is a “domestic industry” with respect to the IP right at issue—typically investments in plant and equipment, labor, research and development, or licensing in the United States. This article explores the ways in which the ITC may be the most effective place to get the relief you need to ensure your hard-earned technology is not taken by other companies that compete unfairly against your company.
An IP owner seeking to enforce its rights (a complainant in ITC parlance) may find a section 337 action attractive for several reasons, including the commission’s in rem jurisdictional power. Because itsjurisdiction derives from the imported articles, and not the presence of the parties or the performance of unfair acts within the United States, the commission is empowered to address infringement by multiple parties (domestic and foreign) and products in a single forum, without distracting and expensive disputes over jurisdiction or service. In addition, once an investigation begins, a party cannot transfer the case from the ITC to a district court that the party believes may be better or more convenient for it. Moreover, the ITC’s in rem jurisdiction permits it to provide unique remedies, including orders prohibiting the entry of infringing articles (or other articles that harm a domestic industry) into the United States. These orders are enforced by U.S. Customs officials at all ports of entry. The commission may also issue cease-and-desist orders against products already imported and held in inventory in the United States. The availability of these powerful remedies is a major factor encouraging complainants to seek relief at the ITC instead of, or in addition to, district courts.
Monetary damages are not available at the ITC. To seek such damages, IP owners often file a parallel suit in federal district court. If requested by the defendant/respondent, and where the allegations are the same, district court actions are stayed while the ITC conducts its investigation and until all appeals are resolved. In re Princo Corp., 478 F.3d 1345, 1357 (Fed. Cir. 2007).
Below are some questions and answers that may be helpful in considering whether the ITC and section 337 may be of use to your company.
How Does Section 337 Work?
When the ITC starts an investigation (almost all complaints result in the ITC instituting an investigation), a notice is published in the Federal Register, and the investigation is assigned to an administrative law judge (ALJ). The commission is required to make its determination as to a violation of section 337 at the “earliest practicable time.” If temporary relief (analogous to a preliminary injunction) is sought, the proceedings must be concluded within 90 days, unless the case is more complicated and the commission grants a 60-day extension. For permanent relief, a target date of 15–16 months is usually set for the commission’s final determination. The target date is not merely aspirational; absent unusual circumstances, the investigation will be completed by the target date.
The ALJ oversees the investigation and discovery under the provisions of the Administrative Procedure Act and the commission’s rules. In addition, each ALJ has his or her own ground rules. The ALJ considers evidence presented at a bench trial as well as extensive pre- and post-hearing briefs submitted by the parties. The ALJ then prepares an initial determination of whether there has been a violation of section 337 and a recommended determination recommending an appropriate remedy should the commission find a violation. The initial determination includes the ALJ’s findings of fact and conclusions of law. It is generally issued four months before the target date for the commission opinion and final orders in the investigation. The parties have 10 days after the ALJ issues the initial determination to petition the ITC to review any aspect of the initial determination with which they disagree, or else they waive their rights to appeal.
The commission may decline to review the ALJ’s determinations in whole or in part, in which case the unreviewed portions of the initial determination become the official determination of the commission. If the commission does review the ALJ’s determination, it usually directs the parties to submit additional briefing on particular issues under review before issuing its final determination on or before the target date. Commission determinations finding a violation of section 337 are subject to a 60-day review period by the president (acting through the U.S. Trade Representative), during which time any imports require a bond posted by the respondent. The president may disapprove the determination and proposed remedy for policy reasons, in which case the commission determination will have no force or effect. (A president has disapproved a remedial order issued by the ITC only once in the past two decades.) After the close of the review period, the commission’s determination becomes final. Final determinations may be appealed to the Federal Circuit.
This chart shows a typical timeline for ITC investigations.
The ALJs at the ITC all have extensive trial experience, are familiar with IP litigation, and have handled numerous section 337 investigations. Discovery deadlines are much shorter at the ITC than in district court—responses to discovery requests and motions are typically due in 10 calendar days or less. Discovery disputes are resolved rapidly, and the ALJs are particularly experienced with foreign discovery difficulties that may arise. To this end, protective orders for confidential business information are routinely issued and steadfastly enforced in section 337 proceedings, enabling counsel and experts for the parties to have access to confidential information of the parties.
What Remedies Can the ITC Provide?
The most commonly issued ITC remedy is an order directing U.S. Customs to bar articles from being imported into the United States. Indeed, section 337 requires the commission to issue an exclusion order upon finding a section 337 violation unless the effects of one of the public interest factors set forth in the statute outweigh such a remedy. See Spansion, Inc. v. Int’l Trade Comm’n, 629 F.3d 1331, 1358 (Fed. Cir. 2010). Exclusion orders apply only to goods imported after the commission’s determination and do not cover goods imported before that time. As discussed below, infringing products that were imported before the ITC’s final determination are subject to seizure under a cease-and-desist order that can also be entered by the ITC.
In patent cases, an exclusion order usually lasts until the patent expires. In non-patent cases, the exclusion order may remain in force indefinitely. In some cases involving common-law trademark infringement and trade dress misappropriation, the commission has not set expiration dates for the exclusion orders but has required the complainants to demonstrate their ongoing use of the trade dress or trademark at issue. See, e.g., Certain Novelty Glasses, Inv. No. 337-TA-55 (July 11, 1979) (commission determination and order). In cases involving the misappropriation of trade secrets, the commission considers the totality of the circumstances in determining how long an exclusion order should last, frequently focusing on the unfair time advantage gained by the party that stole the trade secret. Exclusion orders in trade secret cases commonly last 10 years, but the commission has issued orders for up to 25 years in cases with particularly egregious facts. E.g., Certain Opaque Polymers, Inv. No. 337-TA-883 (Apr. 30, 2015) (commission opinion).
Exclusion orders can be directed to all imported products that infringe or otherwise violate section 337 (a general exclusion order, or GEO) or only to those products of the specific respondents found in violation of section 337 (a limited exclusion order, or LEO). Downstream products of companies not named in an ITC complaint that contain or incorporate the infringing product are not subject to LEOs. See Kyocera Wireless Corp. v. Int’l Trade Comm’n, 545 F.3d 1340, 1345 (Fed. Cir. 2008) (“[T]he ITC has no statutory authority to issue [an LEO] against downstream products of non-respondents.”).
During the presidential review period, any imports made must be under bond. The amount of bond is set by the commission and is designed to offset the respondent’s competitive advantage from continued unfair acts and to prevent the respondent from undercutting the complainant’s prices. The burden is on the complainant to justify the appropriate bond rate, and the commission has imposed bonds ranging from no bond at all, e.g., Certain Multiple Mode Outdoor Grills and Parts Thereof, Inv. No. 337-TA-895, slip op. at 60–62 (Feb. 20, 2015) (commission opinion), to 100 percent of the entered value and even higher. See, e.g.,Certain Liquid Crystal Display Modules, Products Containing Same, and Methods Using the Same, Inv. No. 337-TA-634, slip op. at 6–7 (Nov. 24, 2009) (commission opinion). Unless the president disapproves the remedial orders, these bonds are forfeited to the complainant (after motions practice before the ITC).
Next, we look at two of the lesser known remedies that the ITC may enter. These address situations where the products have already been imported (and are thus beyond the reach of Customs) and situations where only some of the importers are known to the IP rights holder or where infringing imports start after an ITC exclusion order issues.
Cease-and-desist orders. The commission may issue a cease-and-desist order, either alone or in conjunction with an exclusion order. Cease-and-desist orders are directed to a specific respondent and apply only to actions or conduct inside the United States such as marketing infringing goods, selling, or otherwise commercializing infringing products in inventory and other anticompetitive conduct. In some cases, cease-and-desist orders may apply to goods imported before a commission determination of a violation. For example, these orders pertain to infringing goods held in inventory in the United States. The commission has generally declined to issue cease-and-desist orders against importers that do not have commercially significant inventory in the United States or against companies that arrange for shipments but do not directly import products. There is, however, no requirement in the statute itself that requires a finding of commercially significant inventory before such an order can be issued.
In some circumstances, a cease-and-desist order may be a more effective remedy than an exclusion order. The penalties for violating a cease-and-desist order are quite severe, and companies may fear such an order even more than an exclusion order. Moreover, the possibility of a cease-and-desist order may deter a respondent from stockpiling quantities of the accused products in the United States before an exclusion order is issued. In addition, while an exclusion order may be limited to imported components that infringe or otherwise violate section 337, a cease-and-desist order may reach products incorporating those components, even if the products are assembled in the United States.
Cease-and-desist orders are enforced by the commission itself. The fine is the greater of either $100,000 per day for each day on which a violation occurs or twice the domestic value of the imported items. The commission has exercised this power to impose substantial fines, including an $11 million fine in Ink Cartridges and Components Thereof and a $6 million fine in Two-Way Global Satellite Communication Devices, Systems and Components Thereof. Both decisions were affirmed by the Federal Circuit. Ninestar Tech. Co., Ltd. v. Int’l Trade Comm’n, 667 F.3d 1373, 1380 (Fed. Cir. 2012); DeLorme Publ’g Co., Inc. v. Int’l Trade Comm’n, 805 F.3d 1328, 1336 (Fed. Cir. 2015).
For those instances where products have been imported before an exclusion order has issued or products somehow get through Customs after an exclusion order has issued, the cease-and-desist order, with its substantial penalties, can be a highly effective remedy.
General exclusion orders. For those situations where only some of the importers are known or companies begin importing infringing products after an exclusion order has issued, a general exclusion order (GEO) can be very effective. A GEO directs Customs to seize all products that infringe certain patents or otherwise violate section 337. There is no restriction on the companies affected by such an order. In fact, there have been instances where a company’s products have been stopped by Customs pursuant to a GEO when the company did not even know that there had ever been an ITC investigation.
GEOs are entered less often than LEOs because such a broad order may stifle legitimate trade, and, in many cases, an LEO may adequately protect the domestic industry. The commission has determined, however, that GEOs are appropriate where there is a “pattern of unauthorized use” of the IP right, where it would be particularly easy to avoid an LEO, or where it is difficult to identify the source of the infringing products. Forty percent of the exclusion orders issued by the commission since 2010 have been GEOs.
For instances where only some of the importers of infringing products are known, a GEO can be highly effective against importers that are identified later. (At that point, the IP rights holder can work directly with U.S. Customs officials to ensure the GEO is enforced against such companies.) For example, in its recent opinion discussing why a GEO against Segway-type personal transporters was necessary and appropriate, the commission quoted a Wired magazine article that stated:
Because the Chinese manufacturing industry is so centralized, anything new spreads like crazy through the supply chain. One manufacturer creates a product; another reverse-engineers it and makes it too. And that company can make it cheaper and faster, because it had no R&D costs. In most cases, this endless game of product-telephone makes the product worse.
Certain Personal Transporters, Components Thereof, and Manuals Therefor, Inv. No. 337-TA-935, slip op. at 11 n.2 (Apr. 20, 2016) (commission opinion).
As noted, the GEO will apply to those products whose makers may never even have known of a proceeding until their goods are stopped by Customs. At that point, those makers are quickly given actual notice by puzzled, impatient customers awaiting delivery of the products.
What Are the Differences Between a Federal District Court and the ITC?
Section 337 investigations are quite different from patent litigation in federal district courts. For example, an ITC complainant must establish that an industry in the United States relating to the articles protected by the patent or other IP right exists or is in the process of being established. This “domestic industry” requirement arises from the ITC’s role as an international trade remedy forum and has no counterpart in district court litigation. The chart below summarizes some additional differences:
A Comparison of ITC and District Court Proceedings
Conclusion
Section 337 provides the ITC with substantial powers to remedy unfair acts involving products that are imported into the United States. Exclusion orders can stop such products from ever entering the country, and cease-and-desist orders address such products that are already in the country. When a company believes its IP rights are being violated or that its competitors are otherwise engaging in unfair acts, the ITC may provide effective relief that is not available in district court or elsewhere.
Keywords: litigation, corporate counsel, International Trade Commission, patent infringement, trade secret
Steven E. Adkins is a partner at Steptoe & Johnson LLP in Washington, D.C.