House Judiciary Subcommittee Offers a Solution in Search of a Problem – Part 1

With the recent lack of progress with several anti-patent rights bills brought before Congress in this session, the anti-intellectual property rights lobby has turned its efforts toward the alternate remedy available to patentees whose patents have been infringed, the International Trade Commission.

On April 14, The House of Representatives Judiciary Committee’s Subcommittee on the Courts, Intellectual Property and the Internet held a hearing to examine patent litigation activities at the U.S. International Trade Commission (ITC). The purpose of the hearing was ostensibly to review how patent disputes are handled by the Commission with the goal of determining if the ITC produces results that are fair to litigants, beneficial to the U.S. economy, and complementary to the work of U.S. District Courts. The underlying purpose for the hearing was clearly designed to explore how to weaken the enforcement authority of the ITC with the goal of weakening patent enforcement.

Six witnesses testified before the Subcommittee:

  • Deanna Tanner Okun, former Chairman of the International Trade Commission and currently a partner at the Adduci, Mastriani, & Schaumberg law firm
  • John Thorne, a partner at the Kellogg Huber Hansen Todd Evans & Figel law firm
  • Mark Whitaker, a partner at the Morrison & Foerster law firm
  • Fiona Morton, the Theodore Nierenberg Professor of Economics at the Yale University School of Management
  • Thomas Stoll, the principal at Stoll IP Consulting
  • Dominic Bianchi, General Counsel at the U.S. International Trade Commission

House Committee Chairman Bob Goodlatte, a Republican from Texas, set the tone for the hearing when he stated that “the IP Subcommittee will review how patent disputes are handled by the International Trade Commission in an effort to ensure fairness for American businesses. Recent alarming statistics indicate that patent assertion entities, commonly referred to as patent trolls, have used the ITC to exploit our patent laws. These ITC cases can result in injunctions that can keep imported goods out of the U.S. market. There are certain steps that the ITC can take to correct these problems and the Committee looks forward to a thorough examination of these potential patent litigation reform solutions.”

Rep. Goodlatte’s approach was matched by Subcommittee Chairman Darrell Issa, a Republican from California, who added that “In recent years, however, the International Trade Commission has been co-opted as a forum to assert weak or poorly issued patents against American businesses. We look forward to hearing from the witnesses on how we can reform this process to avoid unnecessary and costly litigation.”

The Subcommittee specifically addressed in this hearing Section 337 of the Trade Act of 1930 that gives the ITC the authority it has to issue injunctions that block the import into the U.S. of products that infringe U.S. Patents.

Deanna Okun, a former chair of the ITC, began her statement with a summary of the importance of innovation to the U.S. economy, and the role the ITC plays in protecting American innovation. She pointed out that innovation is a primary driver of U.S. economic growth, and that IP-intensive industries account for more than $5 trillion in value added and approximately 35% of U.S. gross domestic product. IP-intensive industries account for over 60% of U.S. exports and over 30% of U.S. employment!

Ms. Okun explained the importance of patent rights: “Constitutionally protected patent rights incentivize investments in innovation, a key engine of economic growth. Indeed, the U.S. economy is highly dependent on the innovation produced by universities, small businesses, and start-ups, which deploy significant investment in research and development and licensing programs. Notably, IP licensing is one of the few industries in which the United States enjoys a significant trade surplus, delivering billions to the U.S. economy every year.

“Licensing revenues facilitate a cycle of innovation, allowing IP owners to fund the research and development of future creations. According to the U.S. Chamber of Commerce, more than 50 percent of annual economic growth is attributable to technological innovation.

“Critics claim NPEs are easily satisfying the domestic industry requirement through dubious investments in efforts to license their patents. Consequently, they propose amending Section 337 to require complainants who rely on licensing to prove a domestic industry to show that the licensing activities led 'to the adoption and development of articles' that practice the asserted patent. This proposal is both unwise and unwarranted.

“The relief afforded by the ITC is often essential to ensuring meaningful protection of U.S. IPR. A U.S. company cannot easily obtain relief in district court against an infringing foreign manufacturer. Such a plaintiff must first establish personal jurisdiction over that manufacturer, which is typically accomplished through the company’s U.S. affiliate. Where a foreign manufacturer does not have a domestic affiliate, therefore – and many do not – it may be impossible to establish jurisdiction in federal court. Sometimes it is impossible even to identify foreign manufacturers. In such circumstances, the ITC’s in rem jurisdiction ensures that U.S. companies harmed by infringing imports can obtain effective relief.”

Ms. Okun added that “against this notable backdrop, Section 337 filings have decreased markedly in the past few years. The proposed ‘reforms’ are, therefore, a solution in search of a problem. Instead of seeking statutory changes that would weaken the ITC’s ability to combat foreign infringement, those who claim to want to reduce abusive patent litigation should applaud what is already happening at the Commission.”

John Thorne, as a patent litigator that represents infringers, and spent a portion of his career at Verizon, took – not surprisingly – a different approach from Ms. Okun. He began his testimony making two points. “First, despite Congress’s requirement that the ITC limit the availability of its parallel patent forum to protect a domestic industry involving ‘significant investment in plant and equipment,’ ‘labor or capital,’ or ‘engineering, research and development, or licensing.’ [17 U.S.C. § 1337(a)(3)], the ITC has become hospitable to hedge funds and legal entrepreneurs whose only ‘industry’ is the enforcement of patents and investments in patent enforcement. Second, one of the reasons for the ITC’s increasing popularity has been its willingness to creatively stretch its authorizing statute to allow it to hear new kinds of cases that go beyond the simple stopping of infringing articles at the borders.”

He continued. “Prior to 2006, no ITC investigation had been brought by any non-practicing entity. RPX Corp., a public company whose data are relied upon by many operating companies, reports that in 2012 more than half the companies sued at the ITC for patent infringement were sued by non-practicing entities (NPEs). In the most recent three years, NPEs accounted for about one quarter of the ITC’s patent docket measured by the number of companies sued in those years.”

Since NPEs sell no products of their own, they do not actually want the only remedy the ITC can grant. They are in business to extract royalty payments. An exclusion order is simply a means to create hold-up and extract greater royalties. Following the Supreme Court’s decision in eBay v. MercExchange [547 U.S. 388 (2006)], federal courts have denied injunctions to NPEs in 75% of cases, and when the injunction was contested it was denied in 90% of cases. The one forum that has continued to issue virtually automatic injunctive relief (in the form of an exclusion order) is the ITC.”

To his credit, Mr. Thorne added that “The ITC made a deliberate choice not to follow the Supreme Court’s decision in eBay and the Federal Circuit upheld that choice.”

He testified that the “ITC grants exclusion orders whenever it finds a violation of Section 337, including in instances where a district court would deny injunctive relief under eBay. NPEs take advantage of the diverging standards by filing at the ITC concurrently with district courts to increase the threat of injunctions to defendants or by filing at the ITC after district courts deny injunctions in order to get a second bite at the apple.”

Representing the anti-IP rights lobby, Mr. Thorne had several recommendations for the Subcommittee to consider:

  • The ITC should not open an investigation when a district court remedy is available.
  • To discourage forum shopping between the ITC and district courts, the ITC should follow the same rules established by Congress and the courts for district court cases.
  • NPEs should not be treated as a protectable domestic industry.
  • However, as the current statute provides, ex ante licensing that promotes new uses of patented technology (leading to the adoption and development of articles that incorporate the patent in question) may be a protectable domestic industry if it is substantial and if the other requirements are satisfied.
  • In proving a domestic industry based on licensing, a complainant should not be permitted to draw its licensees into the proceeding unless they agree.
  • The ITC should identify and resolve dispositive issues, such as domestic industry or standing, early in the case.
  • The ITC’s 100-day “pilot program” should be used in many more cases, and should always be available when there is a question regarding domestic industry as often occurs in NPE cases.
  • Because these cases may raise important questions of law, immediate appellate review should be allowed.
  • Exclusion orders should issue only if they are in the public interest. The ITC should terminate a case at any time during the investigation if the ITC determines an exclusion order would not be in the public interest.

Mark Whitaker, who is President-Elect of the American Intellectual Property Law Association, specifically addressed H.R. 4829, the “Trade Protection Not Troll Protection Act,” a bill currently before the Subcommittee. He began his testimony as Deanna Okun did, reminding the Subcommittee of the purpose of the ITC. “Congress intended that the Commission provide owners of intellectual property rights broad protections against a wide range of unfair acts of importation. Section 337 of the Trade Act of 1930 was intended to broadly cover unfair methods of competition and unfair acts in the import of articles.”

Mr. Whitaker provided some history. “In 1974, Congress significantly revamped Section 337 principally into its modern form. The amended provisions authorized the newly created International Trade Commission to impose remedies, whereas the prior version authorized the Tariff Commission to make recommendations to the President.”

He went on to explain how the ITC addresses the issue of NPEs who bring actions before it. The ITC gathers data on the NPEs that bring 337 investigations, and divides them into one of two groups (1.) Entities that obtain patents based on their research and development, and license those patents to manufacturers; and (2.) entities that purchase patents strictly to monetize them. In 2014, only three NPEs in the three complainants in the second category brought 337 actions before the ITC, just two in 2015, and just one in the first quarter of 2016.

Mr. Whitaker was critical of H.R. 4829’s requirement that a licensee join the patentee in filing a 337 action as a co-complainant. “This would require, for example, a research and development entity such as a university, to persuade one or more of its licensees to agree to be a co-complainant in order to make use of Section 337. Thus, this change could result in barring those beyond non-practicing entities that exist solely to monetize patent rights, such as universities and laboratories, from proceeding against infringing imports at the ITC. At bottom, such a change indelibly limits the property rights enjoyed by such entities as compared to others.”

He was also critical of a provision of H.R. 4829 that would allow the losing party to appeal to the Federal Circuit to request a stay of all further proceedings. “This measure would also apply to all Section 337 investigations, not only those brought by non-practicing entities. From the stand point of intellectual property rights holders, the ability to obtain expeditious relief against unfair imports is one of the most important features of Section 337. Adoption of this provision, however, would potentially delay relief in Section 337 for as much as a year or more in many investigations. This provision would also have the anomalous effect of encouraging those who lose before the Commission to drag out the appeals process as long as possible to engage in conduct the Commission had found to be in violation of the statute.”

Mr. Whitaker concluded that “While the purpose behind H.R. 4829, to ensure that the resources of the ITC are focused on protecting genuine domestic industries, is applauded, the work the Commission has already been able to accomplish in this effectively eliminates the need for a number of provisions in the bill. In addition, any future amendments to Section 337 should be exhaustively studied and considered so that they do not impose unintentional consequences to those beyond non-practicing entity cases.”

Next month, we summarize the testimony of the other three witnesses.