ITC Policy Project Series: The Little-to-Big Problem, Part I
One aspect of International Trade Commission (ITC) practice that never ceases to astound the casual reader is the number of complainants, particularly non-practicing entities (NPEs), that use the ITC to seek remedies they could not get in court. Some such recent filings fit a pattern that we will refer to as the little-to-big problem.
In the typical little-to-big case, complainants first acquire a patent on some component of a larger device or machine. They then ask the ITC to exclude the entire machine. In most cases, the complainants have no interest in the market for the entire machine; they wouldn’t benefit from the exclusion of the machine. Instead, they use the ITC to create leverage to negotiate for more money than they could get under damages law in district court.
Little-to-Big in District Court
An NPE holding a patent on some component of a larger device or machine could go to a district court, and if its patent was held not invalid and infringed, it could collect money damages. But the courts would very likely not give the patent holder an injunction barring the making, using or selling of the larger whole. They long ago solved the little-to-big problem.
A district court will typically limit an NPE’s damages to a reasonable royalty. When the patentee’s innovation covers only a component of a device or machine, the district court will limit that reasonable royalty through apportionment. Apportionment is the legal theory that applies when an infringing product has both patented and unpatented elements.
Apportionment has a long history in the United States. The Supreme Court first applied apportionment in 1884 in Garretson v. Clark. Garretson’s patent claimed an improved method for securing a mop-head clamp. The prior art contained mops, mop-heads and mop-head clamps secured by other means. But the patentee sought damages based on the entire profit from the sale of mop-heads. The court rejected that theory. Instead, the court required patentees to separate and apportion damages between the patented and unpatented features of infringing products.
Thus, in NPE cases, courts must determine a reasonable royalty based on the incremental value attributable to the invention. For example, suppose a car uses a patented processor-chip method or feature in one of its systems. In that case, it’s safe to say that a court could require the car maker to pay a reasonable royalty on the value added without making car sales untenable. Things are different at the ITC.
Chips-to-Autos at the ITC
In a recent filing, Daedalus Prime LLC asserts six processor patents against Mazda and Mercedes automobiles, among other things. The accused functionality appears to be within the cars’ infotainment systems.
Daedalus itself seems to produce nothing. Daedalus bases its domestic industry claim on its licensee, Intel, the original assignee of the patents. Intel, of course, produces no automobiles. The asserted patents claim things like “a multi-domain processor that determines its power budget, allocates portions of the power budget to two different domains of the processor, and may control the frequencies of those two domains based on the allocated portions of the power budget,” and not automobiles.
According to its complaint, Daedalus is seeking an order excluding the allegedly infringing articles. For Mazda, that’s “all of its vehicles.” For Mercedes, that’s “many of its vehicles — including the Mercedes A class.”
Of course, excluding the cars from the market would not benefit Daedalus. Its only apparent goal is to obtain leverage to negotiate a license above the value of patent damages it could receive in court. An exclusion order would push the car companies to settle for something more than the value of the invention or force them into an expensive, expedited re-engineering cycle for their infotainment systems. Either way, the rational thing for any automaker to do if excluded from the market would be to pay the NPE more than it could get in a district court litigation—saving itself the critical harm of market exclusion.
The Underlying Issue
The ITC cannot apportion an exclusion order. Because of that institutional weakness, NPEs that own a patent on a feature or component will continue to come to the ITC and try to exclude entire devices or machines from import unless the ITC acts.
As for the automobiles, Daedalus assures the ITC that Mazda and Mercedes face competition from other automakers. But it admits that some competitors may be using systems that it may also seek to exclude. The direct exclusion would affect about 5 percent of auto sales, and the indirect effect would impair 15 percent of the auto market.
In 2021, 15 million cars were sold in the United States. Even if only 5 percent of autos were excluded from the U.S. market, all automobile prices would increase for consumers. If an exclusion order destabilized 15 percent of the car market, the effect on consumers would be “incalculably disruptive,” according to joint comments filed by auto industry trade groups.
Thus, the ITC could have disposed of this investigation—certainly with respect to Mazda and Mercedes—in the public interest. That would leave Daedalus to proceed with its parallel district court case against respondents, which it filed just after submitting its ITC complaint. If successful in court, Daedalus would be fully compensated for any infringement without threatening U.S. consumers.
Instead, the ITC instituted the investigation against Mercedes, among others, such as infotainment manufacturers, but declined to institute it against Mazda. This decision was not on public-interest grounds. Instead, the ITC refused to institute against Mazda because Daedalus had not sufficiently described the specific instances of importation or sale by Mazda of cars with the accused systems.
Solving the Problem
The ITC is not helpless to address these underlying issues. First, it is entitled to look at the statutory domestic industry requirement and decide whether merely owning a licensed patent is sufficient to establish an industry.
Second, and perhaps more pertinent to the little-to-big problem, Section 337(d)(1) requires the ITC to look at certain public-interest factors and decide whether an exclusion order would be in the public interest. The public-interest factors the ITC must consider include the effect of an exclusion order on public health and welfare, competitive conditions in the U.S. economy and the production of like or directly competitive articles in the United States.
Historically, the ITC rarely invokes the public-interest factors against potential exclusion orders; it does so in less than one-half percent of instituted investigations.
As R Street has argued, the ITC should reconsider its overall approach to the public-interest factors. Reconsideration is particularly needed in little-to-big investigations. In such cases, the relative harm to competition and U.S. consumers should weigh more heavily than in cases where an excluded article or device embodies the innovation the patent holder achieved. Similarly, third-party production of articles that compete with the banned article is less important when the excluded device or machine includes many innovations, only one of which is described in the patent. The ITC has the opportunity to reconsider its approach to these factors in this case and in another that we will highlight in Part II of this blog series.
Subscribe to ITC Policy updates
Image credit: Ashley Blackwell