In ClearCorrect Operating, LLC v. International Trade Commission, Slip Op. 2014-1527 (Fed. Cir., Nov. 10, 2015), a split panel of the Federal Circuit found that the International Trade Commission does not have the authority to stop the importation of electronic transmissions over the Internet into the United States.
Background
19 U.S.C. § 1337—often referred to as Section 337, its original section in the now-amended Tariff Act of 1930—defines and prohibits various unfair practices in import trade. Such prohibited unfair acts include the importation, sale for importation, or sale within the United States after importation of “articles that infringe” a valid and enforceable U.S. patent, trademark, or copyright. Section 337 gives the International Trade Commission (“Commission”) the authority to investigate alleged unfair acts and, where appropriate, issue exclusion orders directed to Customs and Border Protection to exclude infringing articles from entry into the U.S. The Commission also may issue cease and desist orders directing persons involved in unfair acts to stop their activities. The potential to bar imports of infringing articles as a remedy prompts many patentees to bring investigations before the Commission in addition to or in lieu of a district court action.
The case in ClearCorrect arose from a dispute between Align Technology, Inc. (“Align”) and ClearCorrect Operating, LLC (“ClearCorrect US”), along with its Pakistani affiliate, ClearCorrect Pakistan (Private), Ltd. (“ClearCorrect Pakistan”) (collectively, “ClearCorrect”). Align holds seven patents covering a system that uses a number of different orthodontic aligners to incrementally reposition a patient’s teeth. The system includes creating digital data sets, which represent the patient’s initial tooth arrangements and successive tooth arrangements that reach the desired repositioning, and fabricating the different aligners based on the digital data sets.
ClearCorrect makes aligners through cooperation between ClearCorrect US and ClearCorrect Pakistan. ClearCorrect US scans impressions of a patient’s teeth to create a digital data set representing the patient’s initial tooth arrangement. ClearCorrect US sends this digital data set over the Internet to ClearCorrect Pakistan, which processes the digital data set and creates other digital data sets corresponding to successive tooth arrangements. ClearCorrect Pakistan then sends the digital data sets it created back to ClearCorrect US, again over the Internet. ClearCorrect US then uses 3D printing to fabricate the aligners based on the digital data sets.
The Commission’s Investigation
Based on a complaint filed by Align, the Commission instituted an investigation of ClearCorrect’s activities. The accused “articles” upon which the Commission’s Section 337 jurisdiction was based were transmissions of the digital data sets from Pakistan to the United States.
During the investigation, Align’s asserted claims were split into four Groups based on claimed subject matter. At issue in the ClearCorrect appeal are Groups I and II, which contain certain claims of U.S. Patent Nos. 6,217,325, 6,705,863, 6,626,666, and 8,070,487, and are directed to methods of forming dental appliances (Group I) and methods of producing digital data sets (Group II). (Groups III and IV, which are directed to treatment plans and methods of producing dental appliances, are part of a companion case currently pending before the Federal Circuit, Align Technology, Inc. v. International Trade Commission, No. 2014-1533.)
On April 3, 2014, the Commission found the Group I patent claims to be directly infringed by ClearCorrect US and contributorily infringed by ClearCorrect Pakistan, and the Group II patent claims to be directly infringed by ClearCorrect Pakistan. The Commission particularly determined that ClearCorrect’s transmissions of digital data sets into the United States—electronic transmissions over the Internet, and not transfers on a physical medium such as compact disk or thumb drive—were importations in violation of Section 337, and issued cease and desist orders against ClearCorrect US and ClearCorrect Pakistan. Because Align had not sought an exclusion order, the Commission did not decide whether one was warranted and thus did not issue one.
Both Align and ClearCorrect filed appeals of the Commission’s decision to the Federal Circuit. The primary issue in ClearCorrect’s appeal was whether the digital data transmitted from Pakistan to the U.S. by ClearCorrect is an “article” within the meaning of Section 337. If that digital data is not, then ClearCorrect’s activities could not amount to an unfair act, and the Commission would lack jurisdiction to investigate such activities and issue any remedy.
The ITC’s Jurisdiction is Limited to “Material Things”
In today’s 2-1 panel decision, the Federal Circuit reversed the Commission. The opinion for the court, written by Judge Prost (Judge O’Malley concurring), held that “articles,” as that term is used in Section 337, means “material things,” and that electronic transmissions of data are not articles that can give rise to Commission jurisdiction. In reaching its holding, the court found that not only is there no ambiguity in the meaning of “articles” Section 337, but even if there were an ambiguity in the term, the Commission erred in determining that its meaning was broad enough to include electronic transmissions.
The court conducted its analysis under Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), which sets out the well-known two-step process for reviewing agency decisions: first reviewing the text of the enabling statute for ambiguity, and then reviewing the reasonableness of the agency’s determination with respect to that ambiguity, with deference to the agency.
Under the first step of Chevron, the court found that there was no ambiguity in the meaning of “articles.” Looking to the original statute—the Tariff Act of 1922, which preceded the Tariff Act of 1930—while there is no definition of “articles” within the statute itself, a review of contemporaneous dictionaries showed that the term is limited to “material things.” Moreover, the U.S. Tariff Commission, the predecessor agency to the U.S. International Trade Commission, published its own dictionary at the time that demonstrated “articles,” at its broadest meaning, to be commodities in general, whether manufactured or raw materials.
The court also found that Section 337 uses the word “articles” in a way that unambiguously expresses Congress’s intent for it to mean “material things.” The statute allows for the seizure and forfeiture of “articles,” but an electronic transmission can be neither seized nor forfeited. Also, the statute calls for the Secretary of the Treasury to “notify all ports of entry” upon the “attempted entry of articles” subject to an exclusion order. The court found that an electronic transmission is not subject to an attempted entry through a port, nor can it be intercepted at a port, as contemplated by the statute.
The court also looked to the remedies provided by Section 337 for further evidence of a lack of ambiguity. Originally, the statute only provided exclusion orders; cease and desist orders were added later, in 1974. But, the court found, an exclusion order is not an effective remedy against intangible things, such as electronic transmissions, because they do not pass through U.S. ports and thus cannot be excluded by CBP.
Despite not finding any ambiguity, the court proceeded to the second step of Chevron and held that the Commission was unreasonable in finding electronic transmissions to be articles. For one, the Commission did not review enough contemporaneous definitions, and those that it relied upon were imprecise. The court also took the Commission to task for failing to properly analyze the legislative history of the Tariff Act, including misquoting a Senate report and improperly relying on current legislative action and debate.
The Panel Split
In concurrence, Judge O’Malley agreed with the majority opinion but pointed out that she would have omitted the Chevron test altogether. Relying on King v. Burwell, 135 S. Ct. 2480 (2015), she called this an extraordinary case where the search for a statutory ambiguity was not even warranted, because it is clear Congress did not intend to delegate regulation of the Internet to the Commission.
Judge Newman in dissent took an opposite view. She agreed with the Commission’s review of the evidence and its statutory construction. However, in her view, Section 337 does not distinguish between importation of digital data electronically and importation of physical media containing digital data, and thus she found the majority opinion anomalous in this respect.
What Lies Ahead
Under the ClearCorrect panel decision, the Commission cannot investigate circumstances when, as here, foreign and domestic parties cooperate to produce a product in a way where only data is electronically transmitted into the United States, thereby to avoid importation of a material thing. It may be that the Commission will seek to have the case heard before the Federal Circuit en banc and, possibly also, the Supreme Court. Thus the panel decision may not be the last word.