The US government promotes policies that protect IP rights. Patents and copyrights, for example, are so core to US policy that they are expressly discussed in article I of the US Constitution. And the US judiciary has long adjudicated disputes over infringement claims, awarding injunctions and money damages when appropriate.
However, companies that import products (or components of products) into the United States are facing new IP challenges. As discussed in greater detail below, an administrative agency of the executive branch – the US International Trade Commission (ITC) – has become a hotbed for patent disputes, in large part because non-practicing patent assertion entities are gaining access to the agency and its potent "exclusion order" remedies. Therefore, companies engaged in developing, selling or importing technology into the United States must become familiar with the ITC and the impact of becoming involved in one of its investigations.
ITC and its domestic industry requirement
For the past century, the ITC has had responsibility for preventing the import of products that infringe US IP rights. For the overwhelming majority of that time, the ITC has used its investigatory powers under 19 US Code section 1337 to ensure that companies selling products or services in the United States did not face unfair competition from foreign infringers. In this regard, section 337 requires a party seeking relief in the ITC to demonstrate the existence of a "domestic industry" in the United States that practices or exploits the relevant patents – and that there have been substantial investments made in that domestic industry. This domestic industry requirement is logical and important; if no one in the United States is utilising and investing in a patented technology, the public would be disserved if a foreign company is prevented from importing products that do make use of the technology.
Accordingly, there has long been a perception that the ITC is unavailable to entities (sometimes called "patent assertion entities", "non-practicing entities" (NPEs) or "trolls") that do not import or sell products within the United States. Conventional wisdom was that NPEs could seek money damages for patent infringement in federal court, but because they were not selling products or services, NPEs could not establish the domestic industry requirement and, therefore, did not have access to the ITC's powerful exclusion order remedies. Recent developments call that conventional wisdom into question.
In recent years, the ITC has at times been more permissive regarding the domestic industry requirement. Companies engaged in the "licensing" of patents have had some success in arguing that their licensing efforts qualify to establish a domestic industry. There is a fine distinction between companies that are legitimately seeking to spread their technology through licensing and companies that use licensing overtures as an initial step in patent litigation and enforcement campaigns. It can be exceedingly difficult for the ITC to differentiate between the two types of companies, which has created an opening for patent-asserting NPEs to gain access to the ITC by depicting themselves as licensing entities rather than litigating entities. This is particularly true of the newest generation of NPEs, which are often funded by third-party financiers with deep pockets and have sophisticated structures designed to obscure their real status as NPEs.
In fact, the litigation funding community is packaging companies that, for example, have tried unsuccessfully to launch a product but own patents and can show:
- some revenue, unrelated to patent enforcement;
- some customers, even if there is only one; and
- some ability to make or replicate a product to satisfy the demand requirements of the domestic industry considerations present before the ITC.
Despite the fact that such companies have largely failed in the marketplace, it is possible for them to claim to be a real company with a competitor that is infringing their patents and, in turn, request the preclusion of such products from being imported into the United States. This is a troubling development, as it could leave the public without meaningful access to the technology in the United States. This conundrum has led to a surge in cases brought to the ITC by NPEs.
Why is the ITC a preferred forum for NPEs?
There are several reasons why NPEs, and their funders, seek to litigate in the ITC rather than litigating in federal court.
First, a complainant that can successfully demonstrate that a valid patent is being infringed and that a domestic industry exists will, except in rare cases, be awarded powerful remedies by the ITC – that is, exclusion orders that prevent the import of infringing products and cease-and-desist orders that prevent the sale of existing domestic inventory. Although district courts can award injunctive relief, in order to obtain an injunction, a successful plaintiff must demonstrate:
- irreparable harm;
- the inadequacy of legal remedies such as money damages;
- that the equities weigh in favour of an injunction; and
- that the public interest is not harmed by an injunction.(1)
NPEs traditionally have been unable to meet the district court standard, in large part because any harm can be resolved through damages and there is no equitable or public interest reason to enjoin the sale of an infringing product when the patent holder is not competing in the industry. The ITC, however, does not require a successful plaintiff to meet the same test for an injunction. To the contrary, the ITC generally issues exclusion orders when a complainant otherwise prevails on the merits of the case, except in the rare cases where the public interest weighs strongly against enjoining the import and sale of the infringing product.
Second, the ITC makes it relatively easy for complainants to litigate against multiple unaffiliated respondents in a single litigation. Indeed, it is not uncommon for a single ITC investigation to cover all major participants and all substantial products in a given industry. This can create great efficiencies for a complainant.
Third, the ITC employs a fast and intense litigation schedule. Federal court litigations can notoriously go on for years. In the ITC, however, it is required that the administrative law judge schedule the hearing (ie, the trial) so that their initial written determination can be provided no later than 16 months after the filing of the complaint. As a practical matter, the hearing/trial typically occurs around nine to ten months after the filing of the complaint, and then the administrative law judge takes three to four months to write their decision. This fast schedule has several advantages for a complainant. Not only does the complainant get its "day in court" quickly, but it also can obtain access to the respondents' technical information, documents and personnel records many months before it might achieve such discovery in a federal court.
Fourth, complainants historically have had a lot of success at the ITC. The ITC reports that from 2015 to 2021, violations were found in 65% of all investigations. Compare that to district court, where over 90% of cases settle before the complainant can present its case to the judge and jury.
Fifth, district courts do not give preclusive effect to the ITC's decisions. This means that even if a complainant loses at the ITC, it will not be precluded by law from pursuing the same claims again in a federal court. This is an incentive for certain complainants to use the ITC's robust and fast schedule as a means for fact gathering, so it can assess a respondent's defences and improve its case when it seeks a "second bite at the apple" in district court.
Sixth, because the ITC requires so much work at the outset of litigation, it can allow third-party funders to mitigate their early risks. When a funder invests in federal court litigation, the most important facts that influence its funding decision (including whether to settle) may not come to light for many months, if not years. In the ITC, the condensed schedule means that much of the complainant's investigation needs to occur before the case is even filed, and the complainant will have the opportunity to fill any gaps within a few months. This allows funders to better monitor and manage their investment.
Seventh, and finally, based on all the foregoing points, the ITC creates a situation where complainants can have strong, early leverage in any settlement negotiations.
Challenges for companies facing ITC investigations
The immediate challenge presented to many companies that find themselves responding to ITC Investigations is the cost and burden. There are few reasonable settlement opportunities at an early stage, which means that companies cannot avoid the full cost of litigation through trial. Such costs must also be borne within the condensed period created by the ITC's case schedule. Notably, these costs include not only attorneys' fees, but costs associated with the expert witnesses that typically form the backbone of each side's litigation presentation.
As a result, companies at risk for ITC investigations – which includes any company that imports products or components of products into the United States – should consult knowledgeable and experienced counsel. Often, the key to a successful defence at the ITC is working with counsel who are deeply familiar with the respondent's company, technology, personnel and documents. Litigation preparedness is critical; there simply is not enough time for unfamiliar counsel to start preparing for an ITC litigation when a complaint is filed. The better approach is for potential targets to work with counsel to assess the risks ahead of time, and to develop a contingency plan of action that can be implemented quickly and effectively once a complaint is filed.
(1) See eBay v MercExchange, LLC, 547 US 388 (2006).