How can the federal agency created to protect U.S. manufacturers from foreign knock-offs now block sales by America’s largest tech company? Because it can.
The U.S. International Trade Commission (ITC), a once-sleepy tribunal that, until recently, devoted its time to stopping imports of counterfeit handbags and pirated DVDs, has gone rogue. The purpose of the ITC, originally chartered by Congress in 1916, is “to adjudicate trade disputes between U.S. industries and those who seek to import goods from abroad.” The need for such an agency is clear. Rip offs of famous brands and content hurt domestic business and there is often no practical way to identify, let alone sue, offshore counterfeiters in their home jurisdictions. Thus, blocking counterfeit goods at the border was a sensible approach in 1916 and remains so today.
But recently matters coming before the ITC have expanded, primarily in the area of patents. Patents, like trademarks and copyrights, can be infringed by foreign-made goods. A counterfeit version of a patented microchip or industrial laser is, in many ways, no different than a fake Rolex or a pirated copy of “Driving Miss Daisy”. As a result, the ITC has become a popular venue for airing patent grievances. In a 2011 paper, Professor Colleen Chien reports that the number of patent suits at the ITC has increased fivefold over the past 15 years, and the number has only increased since then.
But unlike trademark and copyright disputes, many of the patent disputes brought before the ITC are between domestic companies that simply have their products manufactured overseas. So long as a product is manufactured abroad, the ITC has the authority to block its import into the U.S. Thus the ITC, which was created to adjudicate international trade disputes, is hearing an increasing number of cases between U.S. companies. But that’s not all. In order to bring a suit at the ITC, a company need only show that it has a “domestic industry” to protect, a test that, these days, is not hard to satisfy. For example, patent trolls that do no more than license patents for a fee have been found to be engaged in a domestic industry (patent licensing). And foreign companies that sell products in the U.S. are also engaged in a domestic industry. Thus Samsung, Korea’s largest industrial concern and one of the largest vendors of smart phones and tablets in the U.S., can seek to block infringing imports through the ITC. Even if those “imports” are made by a U.S. company like Apple.
Thus, last week the commission barred imports of some older Apple iPhones and iPads, finding that they infringed patents held by Samsung. If this suit sounds familiar, it should. It is the second incarnation of the massive Apple v. Samsung trial that concluded in San Jose last August. Except in that case Apple won. Rightly or wrongly, the jury found that Apple did not infringe the same Samsung patents, and awarded Apple damages of around $1 billion (under appeal). At the same time, the parties were litigating the case at the ITC, where Samsung’s luck improved. Why? Did Apple’s products change from one trial to the next? Did Samsung’s patents increase in their scope or potency? Of course not. The simple fact is that patent infringement determinations are throws of the dice. If you lose the first time, your odds might improve the next time around. And because the legal standards employed by the courts and the ITC are different, a different result is not only possible, but likely.
This duplicative litigation strategy is not unique to Samsung and Apple. According to Professor Chien, up to two thirds of the patent disputes brought before the ITC are simultaneously litigated in the federal courts. In many cases the ITC cases are heard before their federal court counterparts. So why do parties spend millions of dollars litigating cases in two separate venues? Because they’re there. Give a lawyer a new venue in which to sue, and the result is not hard to predict.
But things get curiouser still. In addition to highlighting the unnecessary duplication afforded by ITC litigation, last week’s decision represents what is probably the most colossal case of poor timing in recent years. The patents asserted by Samsung against Apple are what are known as “standards essential”. That means, in this case, that they are necessary for Apple’s products to use the communications protocol employed by AT&T’s wireless network. Holders of standards-essential patents, Samsung included, are required by most standards organizations to license their patents on terms that are fair, reasonable and non-discriminatory (FRAND). Over the past couple of years, a growing chorus of voices has argued that patent holders should not be allowed to block the sale of products that comply with a standard, so long as the manufacturer is willing to pay the FRAND royalty. Among those advocating this viewpoint have been the Federal Trade Commission, the Department of Justice, the Patent and Trademark Office, several federal judges, members of Congress, a large contingent of economics and law professors (this author included) and, most recently, the President of the United States.
Yes, on the very day before the ITC released its ruling against Apple, the Executive Office of the President announced a sweeping set of administrative actions and legislative recommendations intended to curb patent litigation. Among the items recommended by the President was the following: “Change the ITC standard for obtaining an injunction to better align it with the traditional four-factor test .”. In other words, the President believes that the ITC should follow the Supreme Court’s tougher rules for blocking sales of infringing products, rather than its own looser rules. And what did the ITC do on the very next day? It issued an injunction against Apple based precisely on those looser rules. A deliberate poke in the Presidential eye? Hopefully the ITC’s misstep can be chalked up to exceptionally poor timing, and no more. In any event, the President has 60 days in which to consider, and potentially reverse, the ITC’s Apple ruling. It is not clear whether President Obama will become the first executive since Ronald Regan to slap down the agency, but the timing could not have been more opportune for such a move.
And even if the President does not intervene in the case, the door has been opened for Congress to correct some of the confusion and inefficiency caused by this hyperactive agency. Among the legislative measures that could help are the following: (1) removing ITC jurisdiction over U.S.-based parties, even if they manufacture products overseas, (2) removing ITC jurisdiction over cases in which a remedy is otherwise reasonably available in the U.S. courts, and (3) limiting the availability of exclusion orders involving standards-essential patents along the lines recently proposed by the FTC and others. With these modest measures, a needed measure of sanity could be restored to our out-of-control patent litigation system and the ITC could return to its intended purpose of protecting U.S. manufacturers from unfair foreign imports.
