Year in Review 2018: Domestic Licensing Disputes

In the previous Year in Review post, we looked at the prevalence of duplicative litigation at the ITC and district court to see that the trade agency's patent jurisdiction is way too broad to be justified by the problem of unreachable foreign infringers. In this post, we're going to examine the widening gap between Congress' trade-related intent for Section 337 and the ITC's current actions under the law.

Since 1988, Section 337's domestic industry test has required complainants to show that "an industry in the United States relating to the articles protected by the patent . . . exists or is in the process of being established." As discussed in a previous post, this test does not require domestic manufacturing of a competing article, and Congress expressly wanted to make Section 337 relief more accessible for a broader range of patent owners.  Here's how the Senate Committee Report for the Omnibus Foreign Trade and Competitiveness Act of 1988 describes the test's purpose:

[The domestic industry] requirement was maintained in order to preclude holders of U.S. intellectual property rights who have no contact with the United States other than owning such intellectual property rights from utilizing section 337.  The ITC is to adjudicate trade disputes between U.S. industries and those who seek to import goods from abroad.  Retention of the requirement that the statute be utilized on behalf of an industry in the United States retains that essential nexus. [emphasis added]

In practice, however, the test does not fully prevent the ITC from adjudicating disputes that have nothing to do with trade or from acting directly against the interests of U.S. industries. That's because the agency allows patent owners to meet the domestic industry requirement through licensing activities, through the investments of an unwilling licensee hauled in to the agency by subpoena, and through the production of non-competing articles. 

As a result, the ITC regularly adjudicates purely domestic disputes between patent licensing companies and U.S. industries that import goods from abroad. In those cases, an import ban serves no recognizable trade policy goal while simultaneously offering an excessive remedy for infringement that hinders the patent system's ability to promote innovation.

That's because ITC litigation gives patent owners the ability to bypass the Supreme Court's 2005 decision in eBay v. MercExchange that ended automatic injunctions in patent cases. Since eBay, courts have awarded monetary damages and ongoing royalties in patent licensing disputes, because those remedies are enough to compensate the harm caused by patent infringement. But the only remedy available at the ITC is injunctive relief (in the form of an import ban), which makes the agency an attractive venue for patent trolls and anyone else hoping to force a settlement and extract excessive royalty payments for a low-value patent embodied in a high-value, high-tech product.

If Section 337 actually could only be "utilized on behalf of an industry," that requirement (together with the public interest test) would provide an imperfect proxy for the four factor eBay test used by federal courts to determine whether to grant equitable relief.  

However, a look at the ITC's Section 337 docket in 2018 shows how that domestic industry requirement regularly fails to fulfill its legislative purpose.

Are Domestic Industries Domestic?

One consequence of the ITC's permissive domestic industry requirement is that complainants are not on average any more domestic than respondents. Respondents must be importers, but complainants can be importers also.  Complainants (or their licensees) must make "significant investments" in U.S. economic activity, but respondents can also be companies that make significant investments in the U.S. economy.

If we look at where complainants' company headquarters are located, we find a similar mix of foreign and domestic companies in both sides of ITC investigations.  In 2018, U.S.-based companies made up 68 percent of complainants in new investigations, while 61 percent of named respondents had a U.S. address.

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And it's not at all unusual for a company to have experience at the ITC as both a complainant and a respondent. Of the 47 complaints filed in 2018, there were 17 (36 percent) that involved at least one party with experience on the opposite side in a previous investigation. Among these are a number of perennial ITC litigants in the computer technology industry like Apple, Samsung, Panasonic, Broadcom and Canon.

Sometimes both sides of a single dispute file competing Section 337 complaints against each other at the same time. The ITC then has two investigations into the same products with the same parties, both claiming to be a domestic industry.  In 2018, there were active investigations against both sides in disputes over sleep apnea masks, beer dispensers, undersea cables, data storage tapes and industrial automation equipment. In the data storage tapes dispute, the ITC is currently reviewing a pair of initial determinations finding both parties to be domestic industries and both to be violating Section 337.

Are Domestic Industries Industries?

There are two ways in which a patent owner can satisfy the domestic industry test even if it doesn't operate an industry. The first is that Section 337 lets complainants count investments in "licensing" as qualifying domestic activity. The other is that complainants can rely on the investments of a licensee who was forced to participate in the investigation by subpoena from the ITC.

Thankfully, there were very few new complaints filed in 2018—only 3—in which a complainant tried to use licensing activity to establish a domestic industry. The reluctance to rely on licensing to satisfy the domestic industry test may be due to the agency's relatively new practice of issuing early determinations in cases with weak domestic industry arguments and because the ITC has made it more difficult to use litigation costs as evidence of a licensing-based domestic industry.

But while there were only a few licensing-based domestic industry arguments, the ITC received 11 complaints in 2018 (roughly one quarter of all new investigations) that relied on the investments of a third-party licensee. In these "domestic industry by subpoena" cases, the ITC investigation imposes a direct burden on a domestic industry in the form of legal costs—costs incurred only because the third-party licensee has made sufficient domestic investments to satisfy the domestic industry requirement—in pursuit of a remedy the licensee has not requested.

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It is also quite possible the licensee's interests align more closely with the respondent than the complainant. For example, in Digital Video Receivers (Inv. 1103), the ITC is investigating whether to block imports of Comcast cable boxes that allegedly infringe patents covering the right to make search suggestions and select programs from a list.  The complainant, Rovi, is a patent aggregator in the cable TV market whose licensees include pretty much every cable, satellite, and streaming video company in America. Comcast chose not to renew its license and instead challenge the scope and validity of Rovi's patents in court.  In the ITC investigation, Rovi is relying on the domestic investments of AT&T, DISH Network, Charter and Google. But those companies (and their customers) will all be better off if Comcast succeeds.

A similar situation exists in Mesh Networking (Inv. 1131) in which licensing company SIPCO is relying on the investments of Honeywell in its complaint against Emerson Electric, who has chosen to challenge SIPCO's patent claims in court and through inter partes review at the Patent and Trademark Office.  

In both investigations, all the parties are American companies and all the products are imported.  The only difference between the accused products and the domestic industry products is whether the company decided to pay the troll or to fight its claims. And even if the complainants in these investigations are correct about the scope and validity of their patents, there is simply no need to block imports over a domestic licensing dispute. Whatever rights the patent owners have can be fully adjudicated and enforced by a court.

And it's not just trolls that can abuse Section 337 by establishing domestic industry by subpoena. An initial determination issued in August 2018 in Magnetic Tape Cartridges (Inv. 1058) found that the complainant (Sony) satisfied the domestic industry requirement based on the domestic investments of its licensee (IBM). But according to the respondent (Fujifilm), some of the licensee's products used in the domestic industry calculation were actually manufactured under contract by the respondent. So it's possible in that investigation that the respondent is contributing more to the existence of the protected domestic industry than the complainant.

By allowing a licensing company to haul in an actual domestic industry as a pawn in its dispute with other domestic industries, the ITC is not in any way fulfilling its purpose to "adjudicate trade disputes between U.S. industries and [importers].” It is instead adjudicating licensing disputes between patent owners and U.S. industries.

Luckily, there are simple ways to reform Section 337's domestic industry test to reduce abuse, to make ITC litigation less disruptive, and to limit the agency's jurisdiction to genuine "trade disputes." The first is to require any licensee relied on for domestic industry purpose to join the investigation as a complainant. This would ensure that the investigation was being conducted "on behalf" of that industry instead of against it. Congress should also eliminate "licensing" as a qualifying domestic activity. And it’s worth remembering that none these problems would exist if the ITC's jurisdiction were limited to cases where the respondent cannot be reached in court.