The ITC is currently reviewing a Final Initial Determination in Memory Modules (Inv. 1089) in which the administrative law judge found a violation of Section 337 and recommended an exclusion order based on infringement of a standard-essential patent.

As the name suggests, standard-essential patents are patents that describe technology that is necessary to comply with interoperability standards established by industry organizations and that the patent holder has agreed to license to everyone on fair, reasonable, and non-discriminatory (FRAND) terms. There has been a long-running and contentious debate over how courts should handle infringement suits involving these patents, especially with regard to the proper remedy for infringement.

The ITC issued an exclusion order for infringement of a standard-essential patent once before, in Electronic Devices (Inv. 794). The 794 investigation was based on a complaint by Samsung against Apple seeking to block late model 3G iPhones. The ITC considered the FRAND issue primarily as an affirmative defense to infringement and found that Apple failed to prove Samsung violated a FRAND obligation. The Commission issued an exclusion order and released a lengthy opinion with dissenting and concurring views.

Then the Obama administration formally vetoed the agency’s decision under Section 337’s presidential disapproval procedure.

Due to Section 337’s peculiar origins as an all-purpose trade remedy, all orders issued by the ITC under Section 337 are subject to review by the president. Originally, Section 337 merely empowered the agency to make non-binding recommendations, but major amendments in the Trade Act of 1974 made ITC decisions automatically enforceable unless the president intervenes. According to 19 U.S.C. 1337(j)(2), ITC determinations “shall have no force or effect” if the president “disapproves” that determination “for policy reasons.” The Federal Circuit has held that such presidential disapprovals are not appealable. Despite this broad authority, however, presidential intervention into Section 337 investigations is very rare.

When the Obama administration disapproved the exclusion order in the 794 investigation, the office of the U.S. Trade Representative explained that the decision was driven by concerns

about the potential harms that can result from owners of standards-essential patents (“SEPs”) who have made a voluntary commitment to offer to license SEPs on terms that are fair, reasonable, and non-discriminatory (“FRAND”), gaining undue leverage and engaging in “patent hold-up”, i.e., asserting the patent to exclude an implementer of the standard from a market to obtain a higher price for use of the patent than would have been possible before the standard was set, when alternative technologies could have been chosen. At the same time, technology implementers also can cause potential harm by, for example, engaging in “reverse hold-up” (“hold-out”), e.g., by constructive refusal to negotiate a FRAND license with the SEP owner or refusal to pay what has been determined to be a FRAND royalty.

According to USTR’s disapproval letter, the decision to veto the ITC’s order was based on Section 337’s public interest factors, specifically “the effect on competitive conditions in the U.S. economy and the effect on U.S. consumers.” The letter also provided instructions to the ITC on how to address the issue in future investigations:

in any future cases involving SEPs that are subject to voluntary FRAND commitments, the Commission should be certain to . . . develop a comprehensive factual record related to these issues . . . including information on the standards-essential nature of the patent at issue if contested by the patent holder and the presence or absence of patent hold-up or reverse hold-up.

In Memory Modules, the complainant, Netlist, argued throughout the case that that its patents were standard-essential. Netlist claimed that the computer memory card designs described in its asserted patents were necessary to comply with interoperability standards established through the Joint Electron Device Engineering Council (JEDEC), and that SK Hynix’s accused products complied with those standards and therefore infringed the patents. As a member of JEDEC, Netlist has agreed to license patent rights for any standard-essential technology to all potential licensees on reasonable and non-discriminatory terms.

In the Final Initial Determination, the ALJ discussed the standard-essential issue at length in his public interest analysis. Deciding whether the one patent found to be infringed was standard-essential was fairly straightforward, because the complainant affirmatively argued it was essential during the litigation. However, the ALJ ultimately found that SK Hynix failed to prove that Netlist violated its obligation to offer a license on reasonable and non-discriminatory terms. That is, there was no patent hold-up here.

The Commission will review the Final ID and conduct its own public interest analysis before issuing any exclusion order in this case. It’s quite possible the Commission will agree with the ALJ and decide that as long as FRAND obligations are met there is no reason to deny an import ban for infringement of a standard-essential patent. If they do, the result will be an exclusion order in the Memory Modules case based on facts that are not substantially different from those in the vetoed 794 investigation.

An important twist in this case is that all of the asserted patent claims have already been deemed invalid by the Patent and Trademark Office after being challenged through inter partes review procedures at the Patent Trial and Appeal Board. Because the PTAB’s decision could still be overturned on appeal to the Federal Circuit, however, the ITC chose to continue the investigation. The Commission could save itself a lot trouble by deciding (as the PTAB has already) that the infringed patent claims are invalid and that no violation of Section 337 has occurred, thereby avoiding the FRAND issue entirely.

As always, it’s worth pointing out that nothing about this case actually requires administrative adjudication or the issuance of a special trade remedy. This is a licensing dispute between two companies who can certainly sue each other in federal court, where an Article III judge would be completely capable of adjudicating the claims and crafting an appropriate and effective remedy.

As the USTR noted when it disapproved the ITC’s last standard-essential patent decision, eliminating relief under Section 337 “does not mean that the patent owner in this case is not entitled to a remedy. On the contrary, the patent owner may continue to pursue its rights through the courts.”

Image Credit: Clint Budd

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