United States: Patent Infringement as an Unfair Trade Practice: Section 337 Proceedings before the U.S. International Trade Commission

Over the last four and a half years the United States has lost over 3 million manufacturing jobs to locations outside the United States. For the first half of 2004 the U.S. trade deficit for manufactured goods increased 16% over 2003 to $252 billion. There is clear evidence that some of the increase in imports is due to unfair trade practices by companies importing goods into the United States.

Patent infringement can be addressed by a patent holder in U.S. federal district courts. However, companies who import or sell products into the United States should be aware that not only are they subject to litigation in United States federal and state courts, but they may also be subject to proceedings in the United States International Trade Commission (ITC) under Section 337 of the Tariff Act of 1930, 19 U.S.C. §1337, which can result in orders barring foreign goods from the U.S. marketplace. Section 337 proceedings are available in certain instances to remedy ‘unfair acts,’ which include acts of patent infringement.

Only disputes involving the importation of alleged infringing products can be addressed in a Section 337 proceeding. If the products are not imported, there is no Section 337 jurisdiction. The ITC exists to protect U.S. industry from unfair trade practices so, in order to bring a Section 337 action, the patent holder must either have or be establishing a ‘domestic industry’ devoted to practicing the patented technology.

Section 337 declares unfair methods of competition and unfair acts in the importation of articles into the United States to be unlawful. The administration of Section 337 is the responsibility of the ITC. The ITC is an independent, quasi-judicial federal agency. It determines whether the statute has been violated due to unfair acts, such as patent infringement, based on a complaint or on its own initiative. Section 337 investigations are themselves adversary proceedings and are akin to patent infringement litigations in federal district courts.

The ITC can only award injunctive-like relief in the form of exclusion and cease and desist orders. Monetary damages for historical infringements are not available from the ITC but instead must be obtained in separate and usually simultaneously filed district court litigation. In spite of the fact that monetary damages are not available, the ability to get an order excluding all imports from the U.S. market can be very attractive to those patent holders who qualify as domestic industries.

The ITC as a general rule is a much faster proceeding than district court litigation. ITC proceedings from start to finish take on the order of 12 months in a normal case and up to 18 months in more complicated cases. The speed of an ITC proceeding greatly favors the patent holder who can prepare its case in advance, putting the named respondents at a distinct disadvantage. While ITC cases generally cost about the same as a standard district court patent infringement case, because they proceed faster, the costs are incurred over the 12-to-18 month period as opposed to a 2-to-3 year period as would be the case in a district court litigation. In addition, although a respondent may assert affirmative defenses against allegations of patent infringement, the respondent is not permitted to assert a counterclaim of patent infringement against the complainant. Any such allegations must be requested for institution in a separate proceeding.

The ITC has nationwide jurisdiction and is an administrative proceeding that is tried before an Administrative Law Judge (ALJ) and not a jury. The ITC’s jurisdiction is over the goods, not the parties, so there is no need to obtain personal jurisdiction over foreign importers or manufacturers as there would be in a district court case. The decision by the ITC is subject to presidential review and should the president disagree with the Commission’s decision, the president can modify or reject any relief. While the president has rarely overruled the Commission, the possibility still exists. In order to prove a violation of Section 337, a patent holder (referred to as a complainant) must establish the unfair competition or an unfair act (e.g., patent infringement); the importation, sale for importation or sale after importation into the United States of the accused products; and the existence of a domestic industry relating to the product in question.

Section 337 requires that there be an industry in the United States relating to the products at issue. There are factors that relate to proving a domestic industry: an economic prong and a technical prong.

To meet the economic prong under Section 337, a potential complainant needs to demonstrate that, with respect to the products protected by the patent right being asserted, there exists in the United States any one of the following: a significant investment in plant and equipment; significant employment of labor and capital; or a substantial investment in its exploitation including engineering, research and development or licensing.

To satisfy the technical prong, the complainant must practice or exploit the asserted patent right either directly or through a licensee. Fulfillment of the technical prong of the domestic industry requirement is determined by the articles of commerce and the marketplace.

Unlike district court notice pleading, an ITC complaint must contain detailed information regarding the alleged infringing product or method, the basis for asserting infringement and what the patent owner contends constitutes a domestic injury.

Once a complaint is filed, the ITC has 30 days to determine whether an investigation should be instituted on the basis of the complaint. The investigation is assigned to an ALJ who will set a period for discovery. An ITC investigation involves three parties: the patent holder (the complainant); the accused infringer or infringers (the respondent or respondents); and the ITC’s Office of Unfair Import Investigations (OUII). The OUII actually participates in the investigation on behalf of the public and it is treated as any other party involved in the investigation. After the discovery period, the ALJ conducts a hearing, at the conclusion of which, the ALJ issues an initial determination subject to full review by the ITC.

The Commission, by statute, may impose three kinds of remedies: permanent (general and limited) exclusion orders, temporary exclusion orders, and cease-and-desist orders. The permanent general exclusion order directs U.S. Customs to exclude entry of products by any person violating Section 337, and the permanent limited exclusion order directs U.S. Customs to exclude entry of products made or imported by specific firms. A general exclusion order is issued when a limited exclusion order cannot provide sufficient relief.

Temporary exclusion orders are issued to maintain the status quo pending the Commission’s determination of whether to issue permanent relief. An ITC respondent under a temporary exclusion order can, however, continue to import by posting a bond.

The Commission, in lieu of an exclusion order, may issue a cease-and-desist order to any person violating Section 337. Cease-and-desist orders are in personam orders and, therefore, to be effective, in personam jurisdiction over the person violating Section 337 is required. The Commission will issue a cease-and-desist order when the complainant proves that commercially significant inventories of infringing products are present in the United States. When enforcing a cease-and-desist order, the Commission will intend to replace it with a limited or general exclusion order and will assess a civil penalty of $100,000 or twice the value of the goods, whichever is higher.

Appeals of all ITC decisions under Section 337 which survive presidential review are heard by the Court of Appeals for the Federal Circuit. Questions of law are reviewed afresh by the Federal Circuit.

Patent holders with sufficient U.S. activities devoted to the practice of patented technology should consider bringing an ITC action to stop alleged infringing activities rather than simply filing a district court case where imported products are involved. The ITC can be particularly attractive when there are multiple alleged infringers and obtaining personal jurisdiction may be problematic. Companies involved in importing into or selling imported products in the United States should be aware that Section 337 proceedings may be an option utilized by an adversarial patent holder and should be ready to take action quickly should an investigation be instituted by the ITC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.