Section 337 Reform Bill Targets the Worst Abuses of ITC Patent Litigation
Section 337 of the Smoot–Hawley Tariff Act of 1930 gives the U.S. International Trade Commission the power to adjudicate patent disputes and block imports of infringing articles. This mechanism is useful and appropriate when U.S. patent owners face competition from unscrupulous foreign manufacturers operating beyond the jurisdiction of U.S. courts. But such cases are quite rare, even at the ITC, which mostly operates as a redundant venue for private patent disputes that can and should be adjudicated by a court of law. Overlapping jurisdiction between the ITC and federal district courts consistently leads to duplicative litigation, conflicting judgments, forum shopping and excessive remedies.
Some of these problems would be solved by passing the Advancing America’s Interest Act (AAIA), a new bipartisan ITC reform bill sponsored by Suzan DelBene (D–WA) and David Schweikert (R–AZ). According to the sponsors, the purpose of the bill is to “protect American businesses from unfair and unjustified claims” at the ITC, which is currently being “misused by patent licensing entities.”
Substantively, the bill includes a number of seemingly technical reforms to Section 337’s domestic industry requirement and public interest test that have the potential to significantly reduce the trade agency’s disruptive effect on the U.S. patent system by eliminating some of the most harmful and pointless ITC cases.
Ending Domestic Industry by Subpoena
Section 337 was designed to provide protection for U.S. industries harmed by unfair import competition. As such, the law includes a domestic industry test meant to ensure that Section 337 is “utilized on behalf of an industry in the United States” while providing “adequate protection against foreign companies.”
But in its zeal to become an all-purpose administrative patent court for imports, the ITC has steadily eroded the domestic industry requirement. For example, ITC exclusion orders have become available for foreign companies whose domestic investments are limited to sales activities and customer support or even for companies that don’t make anything at all. And when a case does involve a genuine domestic industry, that company is just as likely to be defending itself before the trade agency as it is to be asserting its own patents.
The most troubling way the ITC has enabled companies to circumvent the law’s domestic industry requirement has been to allow non-practicing entities to establish a domestic industry by subpoena. Patent licensing companies with no industry of their own can file a Section 337 complaint relying on the domestic investments of a licensee, even if that licensee doesn’t want to participate.
It is not uncommon for a licensing entity to use a settlement agreement from an earlier lawsuit against one company as a “license,” enabling them to haul that company before the trade agency to support their case against another company. Sometimes the licensee has no prior dealings with a patent owner if the licensing company bought the patent from an operating company that the licensee had a broad cross-licensing agreement with.
In none of these cases is the ITC working on behalf of a U.S. industry.
Not only is it nonsensical to grant “trade relief” to entities that do not trade, it’s also bad patent policy. In allowing licensing companies to commandeer domestic industries against their will and threaten other potential licensees with an import ban, the ITC is enabling them to circumvent U.S. patent law, which does not authorize injunctive relief when the patent owner’s sole interest in litigation is to monetize their patent rights. By giving these companies access to a remedy that gives them what they cannot legally obtain in court, the ITC is overriding the will of Congress and the Supreme Court, which have recognized how excessive patent remedies harm innovation and tax the U.S. economy.
The ITC reform bill would fix this problem by requiring any licensee relied on as a domestic industry to join the case voluntarily as a co-complainant while limiting reliance on a licensee’s investments to those instances where the license “leads to the adoption and development of articles that incorporate the claimed patent.”
This change would ensure that Section 337 remains available for aggrieved domestic industries that license rather than own their patent rights. But it would effectively eliminate cases where the domestic industry is merely a pawn in the patent owner’s abusive litigation scheme.
Reviving the Public Interest
When Congress gave the ITC the power to issue exclusion orders for violations of Section 337, it enumerated a set of public interest factors that the Commission must consider before imposing any remedy. Those factors include “the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive articles in the United States, and United States consumers.”
According to the legislative history, “the public interest must be paramount in the administration of this statute,” and the public interest factors must be “overriding considerations.” In practice, however, the ITC has completely forsaken its public interest responsibility.
In its entire history, the ITC has refused to issue an exclusion order on public interest grounds only three times (all between 1979 and 1984) and not once in the last 36 years. On the rare occasions when the agency does recognize a negative effect to one or more of the public interest factors, it dismisses that harm by claiming that the “strong public interest in the protection of intellectual property” outweighs and justifies all consequences that flow from the enforcement of patent rights.
The ITC’s disinterest in applying the public interest test eventually prompted the Obama administration to intervene in 2013 by vetoing an exclusion order that would have banned all iPhones connecting to 3G networks over a licensing dispute with Samsung. The U.S. Trade Representative found that the remedy would indeed harm competitive conditions and U.S. consumers and then admonished the agency to examine public interest issues more “thoroughly and carefully” in future investigations.
Despite this instruction, the ITC has provided almost no discussion at all of the public interest in its opinions, devoting the minimum amount of thought and page space required to meets its legal obligation to “consider the effect” of an exclusion order on the public interest.
The AAIA would tackle this problem in two ways. First, it rewords the public interest factors in the statute to clarify that the agency should consider the effects of a remedy on “the United States economy” as a whole and should consider whether the “complainant and its licensees” can produce adequate replacements for the excluded products.
The bill would also require the ITC to make an affirmative determination in each case that an exclusion order “is in the interests of the public.” This change would make it more difficult for the agency to ignore the public interest test and put the burden on complainants to explain why an exclusion order is warranted.
Remembering its Purpose
These and other reforms in the bill are largely focused on improving the patent system by reducing the ability of licensing companies to seek excessive remedies through ITC litigation. Curiously, they do so by strengthening the trade-related components of Section 337 like the domestic industry requirement and public interest factors that don’t exist in normal patent litigation.
This approach makes sense in light of the ITC’s gradual, self-directed transformation away from the law’s original trade focus. Hopefully, the bill’s introduction will spark renewed interest in and scrutiny of the ITC’s proper role in the patent system as a supplemental forum available in special cases justified by trade policy and not as the arbitrary alternative to federal courts it currently operates as.