Letter from AmeriKat: Are patent trolls a problem in the ITC?

The AmeriKat keeping her ears peeled for
the possibility of major reform for
patent disputes in the ITC

Last Thursday, the Courts, Intellectual Property and the Internet Subcommittee of the House of Representatives Judiciary Committee held a hearing to determine whether the way patent disputes are handled by International Trade Commission (ITC) is fair to litigants, beneficial to the US economy and complements or conflicts with the work of the US district courts.  Why the interest?  Trolls of course! In statement, Committee Chairman Bob Goodlatte (Republican - Vermont) explained:

"Recent alarming statistics indicate that patent assertion entities, commonly referred to as patent trolls, have used the ITC to exploit our patent laws. These ITC cases can result in injunctions that can keep imported goods out of the U.S. market. There are certain steps that the ITC can take to correct these problems and the Committee looks forward to a thorough examination of these potential patent litigation reform solutions." (see full statement here)

Subcommittee Chairman Darrell Issa (Republican - California) continued:

"In recent years, however, the International Trade Commission has been co-opted as a forum to assert weak or poorly-issued patents against American businesses. We look forward to hearing from the witnesses on how we can reform this process to avoid unnecessary and costly litigation."

The hearing was directed to the proposed Trade Protection Not Troll Protection Act (H.R. 4829) which was introduced in the 114th Congress at the end of March (it had previously been introduced in 2014).  The ITC has a "domestic industry" requirement.  This means that the ITC only has jurisdiction over products protected by a patent where the complainant can show that, with respect to those products, there is a significant investment in plant or equipment, employment of labor or capital or substantial investment in exploitation, including engineering, R&D or licensing.  Non-practicing entities (NPEs) make use of the licensing requirement.  The bill would amend the provision by requiring a higher threshold for the licensing prong by demanding that complainants show that there is a "substantial investment" in licensing activities that lead to "the adoption and development of articles that incorporate the patent..."  The bill would also require complainants who rely on the licensing prong to join one or more of its licensees in as a co-complaint to qualify under the domestic industry requirement.

Chairman Issa starts questioning in the latest patent troll
focused legislative effort

Chairman Issa opened the session making the point that where a district court may not order a permanent injunction in certain circumstances following eBay v MercExchange, the ITC could still make an exclusionary order (see recent report on Fordham IP panel on patent injunctions here).  Expressing frustration at two examples - Apple v Kodak and Broadcom v Qualcomm.  Chairman Issa said the issue boiled down to the question of whether it should be the case that companies like Broadcom and Qualcomm could use the power of the ITC when they did not need to do so (i.e. they could have obtained effective remedies in the district court).  The only purpose, he said, of using the ITC was to act as leverage to bring about a settlement which have otherwise taken longer to achieve in district court.  Chairman Issa continued by acknowledging that the ITC has a reason to exist and a role, but that it was "hoped through this hearing and likely legislation" that that these issues will be clarified.  Parties, especially trolls, should not be able to simultaneously leverage litigation in all three venues - district, PTO or ITC - if one venue is appropriate.  

The Committee last considered the topic in 2013 in the context of abusive patent litigation.  Testimony before the Committee was that patent trolls had started to flood the ITC following eBay as they were unable to obtain essentially automatic injunctions from the district courts (some estimates suggested that it reduced their chances of obtaining injunctive relief to one in three).  The ITC does not apply the eBay analysis and an exclusion order is almost automatic in the case of an infringement finding.  Trolls were therefore exploiting this "death-knell" to pressure defendants into settling frivolous cases. Since that hearing, the ITC has taken steps to address this issue.  Congressman Nadler (Democrat - New York) explained these steps as follows:

"For example, as ITC case law continues to evolve, NPEs, whose entire business model depends on litigation, may find it more difficult to establish that there is a domestic industry that would be threatened by the importation of a particular product, as is required under Section 337 of the Tariff Act.In addition, the ITC has begun a pilot project, which it proposes to codify and expand, allowing the Commission to identify potentially case-dispositive issues when an investigation begins, and direct the presiding judge to issue an Initial Determination of those issues within 100 days. If used to its full extent and made permanent, this may help weed out weak claims at an early stage and discourage many others from even being filed. Indeed, recent statistics indicate that filings by NPEs has dropped from its peak between 2008 and 2011."

Deanna Okun, Former Chairman of the ITC and now Partner at Adduci, Mastriani & Schaumberg stated that the ITC and Section 337 is functioning as Congress intended and that proposals to amend the statute were "misguided".  She pointed to the fact that, the Section 337 jurisdiction is essential in providing protection to US intellectual property rights owners.  It would send the wrong message for the US to weaken the ITC's jurisdiction at a time where China and Europe are strengthening their IP laws and US trade negotiators worked hard to protect American innovation (see the TTIP).  Okun continued stated that NPEs actually rarely file cases at the ITC and rarely do they succeed.  Indeed, there is really only a small number of investigations brought by NPEs as a result of administrative changes and case law.  To read Okun's full statement click here.

John Thorne of Kellog Huber Hansen - injunctions may
be the appropriate remedy, but not always.  The ITC's remedy 
is almost "always" an injunction (or exclusion order)

John Thorne (Partner, Kellog Huber Hansen) explained that two thirds of all ITC cases have parallel district court cases.  He said that the first reason why parties pursue litigation in the ITC is because of leverage.  He referenced a case of one New York-based company suing a New Jersey-based company.  Given they were a mere 20 miles apart, they could have sued in the Eastern District and probably the Southern District, but the plaintiff picked the ITC because its remedy would be uniquely "leveraging, if I can use the 'L' word".  The reason was because of the ITC's remedy - the exclusion order (essentially an injunction).  An injunction would have been unlikely granted by the district court as the application of the balance of harm test under eBay would have more likely resulted in an award of damages.  Second, the ITC is less likely to invalidate patents.  The same rules apply, commented Thorne, but the ITC throws out a bad patent about half as often.  Third, the ITC will enforce standard essential patents.  Finally, you are able to bring in numerous respondents in the ITC, unlike in the district courts.  To read Thorne's statement click here.

Mark Whitaker of
Morrison & Foerster says the stats
tell a different story...

Mark Whitaker (Partner, Morrison & Foerster - appearing in his personal capacity) stated that Congress intended that the ITC would provide IPR owners with broad protections against a wide range of unfair acts of importation.  Section 337, therefore, "is more than a mere surrogate to the district courts" in the field of patent law.  It is more properly viewed as being directed toward trade protection that is informed by US patent law.  Whitaker explained that the proposed legislation would not allow a plaintiff to rely on licensing activity unless it is able to show that "licensing leads to development and adoption of articles that incorporate the patent..."  This change could potentially limit the ability of NPEs to use section 337 but, in practice, investigations brought by NPEs are low anyway with 3 in 2014, 2 in 2015 and just one in first quarter of 2016.  Whitaker explained that prior to 2014, entities that manufacture patented articles in the US had a greater burden of proving their domestic industry activities than entities who rely on US patent licensing activities.  However, the Federal Circuit recently confirmed that establishing a domestic industry based on licensing now requires proof of an article that practices the patent in suit.  Further, in Certain Integrates Circuit Chips, the ITC has confirmed that there needs to be nexus between asserted patent and the US investment in that patent when the domestic industry requirement is based on the licensing prong. Whitaker said that the proposed bill would require licensees to be brought in as co-complainants in order for the complainant to establish the domestic industry prong.  This would have a potentially negative impact on industries such as university R&D bodies and tech companies who have chosen to license a subset of its patent portfolio for business reasons.  This would be contrary to the Congressional intent when opening the ITC up to certain NPEs following the 1988 amendments.  Those changes were geared towards enabling "a university and small businesses who do not have the capital to actually make good in the United States to still have access to the ITC forum for the protection of their rights" (see InterDigital v ITC (Fed Cir 2013)).  To read Whitaker's full statement click here.

Fiona Scott Morton of Yale explains
that the ITC's remedies are
about leverage,
not equity

Fiona Scott Morton (Professor of Economics of Yale School Management) said the basic problem is that the ITC duplicates the function of the federal courts with a different process which gives patent holders "in excess of the value of their IP".  That power, continued Scott Morton, is used to extract money from implementers.  It was noted that this is mostly a US on US problem  (InterDigital, Kodak, Apple, Dell).  Because US companies manufacture so many components outside of the US, we are necessarily importing them.  However, Scott Morton does not consider these disputes "trade disputes".  In reality, the problem is the IP leverage that the ITC provides creates a distortion in US contractual negotiations over IP royalties.  The incentive created by the duplicative but favorable court creates forum shopping and business for the ITC.  Although there were some statistics offered during the hearing which indicated the number was going down, Scott Morton considered the number was actually higher if you looked at the proportion of companies who were actually interested in monetary damages (PAEs as opposed to NPEs), not really an order for exclusion.  She reminded the Committee that the business model of licensing means that the patent owner actually does not want an injunction - they need the other party to sell so that they can obtain a royalty.  "They don't want a an injunction, they want leverage" explained Scott Morton, "After eBay, litigants get less leverage in federal court than they do in the ITC. " The threat of an injunction or an exclusion order from the ITC is incredibly powerful.  Why?  Scott Morton provided an example:  "Suppose my royalty ask is 50 cents on a $600 device.  The risk of exclusion is a $600 royalty - you cannot sell your device.  The correct royalty may be 2 cents, but you may have to settle for 50 cents as you do not want the risk of losing the whole $600."  This is why monetizers prefer the ITC.  This is especially a problem for standard essential patents (SEPs).  Again, the owner of an SEP has agreed to charge a FRAND royalty so they are in the business of collecting money.  "They are licensing their IP and an injunction is not what they want at the end of the day.  So these patents [SEPs] are ripe for abuse at the ITC because there is no way for an implementer to avoid using them. And so, again, the injunction gives them a very powerful threat."  Scott Morton recommended that the ITC jurisdiction over licensing disputes should be eliminated - they can safely be resolved by federal court.   The process or procedural reforms proposed are a "poor substitute" as any determined complainant can proof up standing to surmount the proposed reformulated licensing requirement.  You have to remove the incentive to go to ITC in the first place.  If you do, concluded Scott Morton, you do not need to worry about process reforms.  To read Scott Morton's written statement click here.

What will be the future of
patent disputes at the US ITC?

Tom Stoll  (Stoll IP Consulting) said that to the extent that the ITC had a patent troll problem, it appears by the number of filings that the Commission has addressed it.   They have done this in two ways.  First, by tightening up on the "domestic industry" requirement by requiring more evidence than the fact the patent owner was able to licence the patent, especially where the licensing activities did not specifically relate to articles protected by the patent or where licensing is aimed at financial gains not at encouraging adoption of the patented technology (see Motiva v ITC and LSI v ITC).
Second, by instituting a 100-day pilot program to quickly dispense with unmeritorious cases, the ITC can resolve, by an investigation, a dispositive issue, such as the lack of domestic industry.  If there is such a dispositive issue, then the assigned Administrative Judge can conduct an expedited fact-finding and abbreviated hearing and briefing schedule limited to that issue.  The decision on that issue is given within 100 days from the institution of the investigation. These efforts have resulted in a reduction in the number of cases instituted - from 69 in 2011 to 39 in 2014.   toll concluded:  "Only 36 new investigations were instituted last year. According to the ITC’s own statistics, non-practicing entities were the complainants in only two of the 36 ITC investigations instituted last year." To read all of Stoll's written statement click here.

Dominic Bianchi (General Counsel or US ITC) comments were primarily set out in his statement (see here).  In questioning, he admitted that although much had been said about the 100-day pilot number,  so far only one case has been adjudicated under that program.

The hearing then opened up to a series of questions from the Committee members including whether, in the absence of eBay criteria in the ITC, the ITC considered the public interest.  No explicit examples were given from current or former ITC witnesses, but it was noted that the ITC does take the public interest element into account including its effect on consumers and the US economy.  To a question of whether it was right that the ITC did not have to perform a balance of equities, Okun stated that there were safeguards in the statute, including equitable defences and the provision which enables the President to disprove an order.  Although there was much disagreement about what the statistics actually demonstrated (and whether they were counting NPEs v PAEs), the key question seemed to boil down to whether, as matter of policy, it was right that the US should have a separate remedial forum not subject to equitable balances when the district courts could and were addressing the same dispute?  A solution proposed, following questions from Congresswoman Lofgren (Democrat- California), was to divide up disputes between domestic entities (to be dealt with by the district courts) and disputes involving a foreign entity (to be dealt with by the ITC, which was the original intent of the ITC).

Before Chairman Issa adjourned the session, Congressman Nadler concluded:

"It seems to be very questionable why we have a situation where one body can issue decrees that flaunt the normal equitable considerations that an Article III court would impose.  Why would you have this dual jurisdiction where you cannot at least stay [the ITC case].  You should develop one body of case law and enable the normal equitable principles to apply."

To the AmeriKat, the appetite of the Committee seemed overwhelmingly strong and went beyond the more restrained amendments proposed by H.R.489.  For this reason, despite it being an election year which would otherwise have muted this debate, we may be hearing more on the future role of patent disputes at the ITC.  In the meantime, what do readers think?  Is the dual-jurisdiction functionality between the ITC and district courts a problem?

And, if you have are really interested, you can watch the entire two hour hearing during your Monday morning commute (click here).