ITC’s Data on NPE Litigation Undercounts Persistent Misuse of Trade Law
On April 19, the ITC published an update to its public data on Section 337 litigation involving non-practicing entities (NPEs). According to the updated numbers, there were 7 investigations instituted on behalf of NPEs in 2018. That’s 14% of all new investigations last year, which is slightly less than the 10-year average of 16.8%.
The agency began reporting data on the frequency of NPE litigation in 2012 after an obvious surge in Section 337 filings by such entities prompted concern in Congress. It was clear that legislative and judicial efforts to combat abusive litigation by “patent trolls” had overlooked the ITC and potentially left a loophole for NPEs to secure inappropriately excessive remedies from the trade agency.
Interestingly, the ITC report establishes two categories of NPEs based on the patent holder’s business model. “Category 1” is for “inventors . . . ; research institutions . . . ; start-ups . . . ; and manufacturers whose own products do not practice the asserted patents.” While Category 2 is reserved for entities “whose business model primarily focuses on purchasing and asserting patents.” In the last ten years, the NPEs in the ITC report have been split evenly among the two categories, with 40 Category 1 NPE investigations and 40 Category 2 NPE investigations.
This business model-based distinction may be useful in the broader policy debate about patent trolls, but it shouldn’t matter for ITC litigation. Whether an NPE is a patent aggregator using litigation to extract settlement royalties or a research firm designing vital new technology, complaints brought by NPEs are not trade disputes. They are, instead, licensing disputes that can and should be litigated in court. When the ITC adjudicates these cases, it is merely interfering in the proper functioning of the U.S. patent system without serving any trade-related policy goal.
But even looking at the total number of NPE investigations counted in the ITC data fails to capture the full extent of the problem. Of the 128 Section 337 complaints filed since the beginning of 2017, I have counted 31 in which a complainant included licensing activities or investments by a third party licensee in its domestic industry argument. That’s 24% of recent complaints in which the ITC is being asked not to protect a domestic industry from unfair competition but to intervene in a legal dispute between potential licensing partners.
Additionally, the ITC’s NPE numbers do not capture cases where the domestic industry is based on unrelated products. Operating companies can satisfy Section 337’s domestic industry test based on their own production of products that practice the asserted patents, even if the domestic industry product does not compete with the accused products.
Like NPE investigations, these cases are licensing disputes instead of trade disputes. Consider, for example, the recently settled Qualcomm–Apple cases in which chipmaker Qualcomm sought to block imports of iPhones. Qualcomm qualifies as a domestic industry because it makes chips that practice the patents, but those chips don’t compete with phones and Qualcomm’s ultimate goal is to secure a license from Apple. Similarly, there is an investigation ongoing right now in which the ITC has been asked by chipmaker Broadcom to exclude imports of Toyota automobiles.
It’s a good thing that the ITC is publishing data about Section 337 investigations brought by NPEs. And it’s important to remember that none of these disputes should be adjudicated by a federal agency under a trade remedy law. NPE litigation, like all licensing disputes, can and should be heard in court.