Some ITC Complaints Can Get a Do-Over in Court and No One Really Knows Why

Imagine a grocery store sues you for stealing an apple, but you didn't steal it. You go to court, show all the evidence, and your name is cleared. Then, the next day, that same grocery store sues you again for stealing the same apple but files the lawsuit in a different court, and you have to start all over again.

That is how things work with patent litigation at the U.S. International Trade Commission. Respondents in ITC investigations have to defend themselves through a full trial with evidence and hearings and appeals to prevent an import ban, but the agency's decisions on patent validity and infringement are not binding on federal courts. That means a patent owner can lose its case at the ITC and then start all over again with a clean slate in court against the same parties.

But there's a peculiar twist. The law that empowers the ITC to investigate claims of patent infringement—Section 337 of the Tariff Act of 1930—also allows the agency to block imports for other forms of "unfair competition." And for those non-patent cases, ITC decisions are indeed binding. That is, federal courts grant "preclusive effect" to the ITC's non-patent determinations. In trademark and trade secret cases, for example, federal district courts do not allow parties to relitigate issues that were already adjudicated in a Section 337 investigation. The court will simply adopt the relevant portions of the ITC's findings as its own.

Preclusion Confusion

This policy of treating different types of ITC cases differently was abruptly upended when the Federal Circuit Court of Appeals recently decided that even non-patent disputes adjudicated at the ITC should be entitled to a full do-over in district court.  

In an opinion issued on May 9, the Federal Circuit plainly stated that the ITC's decisions on trademark infringement in Section 337 investigations are not binding on federal courts in subsequent trademark litigation. The panel's reasoning was quite simple: it couldn't think of any reason why courts should treat patent and non-patent decisions differently, so it deemed them all non-preclusive.

The issue of preclusive effect arose in that case, Swagway v. ITC, in a roundabout way after Swagway challenged the Commission's refusal to accept a proposed consent order and instead issued a final determination of violation in Personal Transporters, Components Thereof, and Packaging and Manuals Therefor (Inv. 1007).  Even though the practical outcome from the ITC litigation (no more imports of Swagway-brand hoverboards) would be the same under a consent order as under the exclusion order issued by the Commission after finding a violation, Swagway wanted to avoid a ruling on the merits that might influence the outcome of co-pending litigation in district court.

But the Federal Circuit expediently disposed of that aspect of Swagway's challenge by rendering the entire issue moot:

We have previously determined that “Congress did not intend decisions of the ITC on patent issues to have preclusive effect.” . . . We see no reason to differentiate between the effect of the Commission’s patent-based decisions and the Commission’s decisions regarding trademarks. Because we hold that the Commission’s trademark decisions, like its patent decisions, do not have preclusive effect, we need not reach Swagway’s procedural arguments regarding its consent order motion.

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But after a request for rehearing from both the ITC and the complainant, the court backtracked by issuing a revised opinion on Aug. 14 that vacated the earlier opinion's discussion of preclusion and instead denied Swagway's argument on other grounds. So, it seems the policy of treating some ITC decisions as preclusive but not others will continue for now, despite the apparent lack of any reason to do so.

Ambiguous Legislative History

This awkward turn of events at the Federal Circuit has highlighted how much confusion and uncertainty there is, even among experts and decision makers, regarding the ITC's role in the U.S. legal system.

A primary reason for this confusion is that the current policy of treating patent and non-patent cases differently for preclusion purposes does not actually have any basis in the text of Section 337. It is instead the consequence of a bit of ambiguous language in the legislative history of the Trade Act of 1974.

Between 1922 and 1974, Section 337 operated very differently than it does today. Investigations were conducted by the Tariff Commission, which merely made non-binding recommendations to the president. Moreover, the Court of Customs and Patent Appeals held in Frischer v. Bakelite in 1930 that the Tariff Commission was forbidden from considering the validity of any patents.

The Trade Act of 1974 made a number of substantive changes to Section 337 and established the U.S. International Trade Commission as a more modern adjudicative agency for U.S. trade remedy laws. Those changes allowed respondents to raise "all legal and equitable defenses," in an investigation, including invalidity of an asserted patent. The Senate Committee Report for the bill noted, however, that the ITC's ability to entertain such defenses did not grant it the power to invalidate a patent.

The Commission is not, of course, empowered under existing law to set aside a patent as being invalid or to render it unenforceable, and the extent of the Commission's authority under this bill is to take into consideration such defenses and to make findings thereon for the purposes of determining whether section 337 is being violated.

The relief provided for violations of section 337 is "in addition to" that granted in "any other provisions of law".  The criteria of section 337 differ in a number of respects from other statutory provisions for relief against unfair trade practices.  For example, in patent-based cases, the Commission considers, for its own purposes under section 337, the status of imports with respect to the claims of U.S. patents.  The Commission's findings neither purport to be, nor can they be, regarded as binding interpretation of the U.S. patent laws in particular factual contexts.  Therefore, it seems clear that any disposition of a Commission action by a Federal Court should not have a res judicata or collateral estoppel [i.e., preclusive] effect in cases before such courts.

Although the concern is about patent validity and the example offered is patent-related, the report's analysis seems to apply broadly to all ITC cases under Section 337. Indeed, the report makes the case that "any disposition of a Commission action by a federal court" should not have preclusive effect, because the elements of a Section 337 violation are different "from other statutory provisions for relief against unfair trade practices." This reasoning applies equally to trademark and trade secret cases as it does to patent cases.

Nevertheless, federal courts have consistently interpreted the concern about preclusion in the legislative history as entirely patent-specific. The Second Circuit in Union Manufacturing Co. v. Han Baek Trading Co., held that "[t]he jurisdictional bar to res judicata treatment of ITC patent validity determinations simply does not apply to other decisions by the ITC." The court even quoted the above passage from the legislative history and flatly stated, "We read the last sentence of this quotation as limited to patent validity cases. Read out of context, however, it might appear to have broader effect."  

Interestingly, the Federal Circuit, which has appellate jurisdiction over all patent cases in federal court, has adopted a broader reading.  That court consistently cites the legislative history as evidence that "Congress did not intend decisions of the ITC on patent issues to have preclusive effect." That is, not just patent validity, as the Second Circuit would apply it, but to all patent issues, including claim construction and infringement.

And none of the analysis in the circuit courts’ ITC preclusion cases meshes very well with the Supreme Court's 2012 holding in B&B Hardware v. Hargis Industries that agency decisions should be presumed to have preclusive effect "except when a statutory purpose to the contrary is evident." That case also involved an agency determination used in a co-pending trademark infringement lawsuit, specifically whether the Trademark Trial and Appeal Board's findings on the likelihood of confusion between two marks in a registration challenge should have preclusive effect in an infringement lawsuit in district court. The Court looked at the text and the structure of the Lanham Act and found that neither indicated that preclusion should be forbidden.  

It would seem that the Federal Circuit is letting one speculative and ambiguous statement from legislative history do a lot of heavy lifting in their opinions on preclusive effect of ITC decisions. It’s quite possible the Supreme Court, should it ever review the issue, would find that all determinations under Section 337—even on patent validity—should be preclusive. 

In any event, the passage certainly does not offer a clear explanation of why ITC decisions on trademark and trade secret issues should be treated differently than they are for patent issues. The panel in Swagway couldn't see any relevant difference and the drafters of the Senate Committee Report probably didn’t either.

Let Congress Decide

What we do know for sure is that the courts desperately need a clear and well-reasoned rule on ITC preclusion. The majority of Section 337 cases involve domestic legal disputes that are also being litigated in parallel district court lawsuits. And the agency continues to adjudicate an ever-larger portion of U.S. patent and trade secret disputes. That's a lot of duplicative litigation.

The simplest and fairest way to eliminate duplicative litigation would be to limit the ITC's jurisdiction to disputes that cannot be adjudicated effectively in court. That would cut out at least 80% of the agency's docket and make the question of preclusive effect a lot less important. 

In the meantime, however, there doesn't seem to be any value in subjecting ITC respondents, even in patent cases, to double jeopardy by denying preclusive effect to ITC decisions that were fully and fairly litigated.

The most decisive way to clear up the preclusion confusion would be to add a specific statutory provision to Section 337 stating which ITC determinations, if any, should be binding on later courts. In doing so, Congress would have to consider some important questions: Should intellectual property rights holders be allowed to relitigate cases they already failed to win at the ITC?  If not, are there some disputes that should be reserved for adjudication in court rather than by an administrative agency? The answers to those questions, in whatever direction, would help establish a more definitive role for ITC litigation in the broader U.S. legal system.