ITC Policy Project Series: Record-Breaking Year at the ITC (for NPEs)
Record-breaking is often fun and sometimes silly. But occasionally, when a record is broken, it’s troubling. That’s the type of record the International Trade Commission (ITC) set in 2022—troubling.
In 2022, non-practicing entities (NPEs) appeared in record numbers at the ITC. According to the ITC’s own data, NPEs were the complainant in 19 of the 59 investigations instituted at the ITC last year. The previous record for NPE investigations was 13 in 2012; last year, there were 10.
The new record means that, in 2022, at least 32 percent of all ITC complainants did not practice their asserted patents. As we’ve discussed, an NPE typically cannot get an injunction in district court because it is incredibly difficult to show irreparable harm from infringement when an entity is not producing a product. Therefore, NPEs typically come to the ITC for leverage. The ITC provides a near-automatic exclusion of all infringing imports. The threat of exclusion means that an accused infringer has an incentive to pay money—more money than the law of patent damages would afford the patent holder—to avoid the order. An accused infringer that relies on imports prefers settlement over risking its entire business, even when the settlement exceeds what a district court could award in damages under the patent law.
The ITC divides NPEs into two categories: NPE-1 and NPE-2. NPE-1s do not manufacture any products that practice the asserted patents. They include start-ups, design shops and universities, entities that may innovate but lack the capacity or desire to manufacture products. As we’ve explained, most NPE-1s do not belong at the ITC because the purpose of an exclusion order is to protect U.S. industry, not drive up patent settlements beyond statutory patent damages. Last year, there were eight NPE-1 investigations at the ITC, another record.
NPE-2s likewise do not manufacture products. Unlike NPE-1s, they do not conduct research, build prototypes or innovate in any way. They invent nothing; they make nothing; they produce nothing. Per the ITC, their “business model primarily focuses on purchasing and asserting patents.”
NPE-2s are more commonly called patent assertion entities (PAEs); sometimes, they are called “patent trolls.” And PAEs set their own record in 2022; the ITC instituted 11 of its 59 investigations—18.6 percent of all cases—at the behest of PAEs. For the first time since the ITC began tracking NPE activity in mid-2006, the number of PAEs has reached double digits.
Maybe there’s a place in the patent ecosystem for PAEs, but it is not at the ITC. PAEs are in it only for the money. That’s fine, but general patent law sets the standard for how much money a patent holder can recoup in the form of damages. The standard for PAEs, which build nothing, produce nothing and provide nothing to the market, is a reasonable royalty.
Congress gave the ITC the power to protect domestic industry from infringing imports. The ITC can stop infringing imports quickly. It can stop imports by small fly-by-night infringers who might avoid a district court’s jurisdiction. But the ITC cannot award damages or royalties, and its exclusion power—meant to protect domestic industries against unfair trade—should not be invoked to leverage supra-compensation for PAEs that can readily seek damages in district court.