You hear a lot about patent litigation in district courts. And, over the past several years, the new inter partes review procedure has seen a lot of attention (including last week’s renewed effort to try to kill off the single most effective tool we have for invalidating bad patents.)
You don’t hear that much about the International Trade Commission (ITC). But that might need to change. After TC Heartland made the Eastern District of Texas less attractive for patent trolls, they’re looking for a new place to go, and the ITC might be just the thing they’re looking for.
What Does International Trade Have To Do With Patents?!
Back in 1922, Congress passed a Tariff Act. The intention was to prevent importation of products into the United States if the products would unfairly impact U.S. industry or monopolize U.S. commerce. The 1922 Tariff Act didn’t say anything about patents—it was a trade bill, intended to protect U.S. industries from unfair foreign competition.
In 1930, though, a new section was added—section 337. 19 U.S.C. § 1337 is the modern codification. In essence, it prohibits the importation and sale in the U.S. of articles that infringe a U.S. patent, as it would be unfair competition if you could manufacture something patented abroad and then import and sell it without fear of your manufacturing operations being accused of patent infringement.
After an ITC trial, the Commission can decide to enter an “exclusion order” that prohibits importation of the article in question. But you can’t just file in the ITC. In order to file there, you have to show what’s called “domestic industry.” In other words, you need to show that someone in the U.S. is using the patented technology to make something or do something.
Why Would Patent Trolls Prefer The ITC?
There’s a few things about the ITC that make it an appealing place to bring a patent lawsuit if you’re a patent troll.
First, the only remedy the ITC can give is an injunction. They can’t give money damages. But in district court, trolls have a lot of difficulty getting injunctions. (Right now, anyway—if the Coons bill passes, they’d have a much easier time.) And an injunction is usually more valuable than damages, because once you’ve designed your product and started to produce it, you’re willing to pay more than the “reasonable royalty” district courts award not to have to shut your business down (the “holdup” markup).
Second, the ITC is fast. Litigation in district court takes 2.5-3.5 years on average. ITC cases are required to finish within 17 months.
And it’s not just about how long the entire process takes. Everything in an ITC case is compressed. Instead of typical 30-day timelines for responding to communications from the other side, you have to respond in 10 days. Instead of 1.5-2 years to complete expert reports (which summarize all of the evidence and arguments your experts will make regarding the patents), you have 4-6 months. Everything moves faster, and it puts a huge burden on defendants, because plaintiffs can come in with their case ready to go.
Procedures Biased Towards Trial
Third, the ITC is procedurally biased in ways that increase the number of cases that go to trial. In district court, procedures are designed to decide issues as early in the case as possible. This allows the parties to settle or dispositively resolve the case earlier. For example, the meaning of the claims is determined in a Markman hearing long before trial. The ITC generally doesn’t have Markman hearings.
As a result of these procedural biases, approximately 60% of ITC cases filed wind up going through to trial. The vast majority, on the order of 90%, of district court litigations settle or are disposed of before trial through summary judgment.
But Trolls Don’t Make Anything
If you read about the domestic industry requirement and thought “Wait a second, a patent troll doesn’t actually make anything, that’s why they’re a troll – how can they bring an ITC lawsuit?” then you’re asking a very good question.
It’s been the case for a while that licensing a patent for production is considered domestic industry. This was intended to protect legitimate businesses that come up with new technology and license it out to others to manufacture. The idea was that if you designed something and others are producing it under license, you should still be protected from unfair foreign competition that infringes your patent. This “ex ante licensing” is designed around producing an invention, and then licensing that invention to others for production.
But in 2010, the ITC determined that pure litigation activities can satisfy the domestic industry requirement. You don’t need to prove anyone’s actually making anything that uses your patent—all you need to prove is that you’re suing people to try to make money off your patent. This “ex post licensing” is designed entirely around extracting money from U.S. industries after they’ve developed their products. That doesn’t have anything to do with protecting American industries from unfair foreign trade, the core purpose of the ITC.
An Inconstant ITC?
In other words, historically the ITC would protect only ex ante licensing. But after 2010, the ITC would also allow ex post licensing cases. And that’s why, up until 2010, you had very few troll cases in the ITC, and why the number shot up after 2010.
In 2014, the ITC changed its domestic industry standards again. The changes reduced the number of non-practicing entities filing cases there.
So patent trolls focused on an alternative approach to showing domestic industry. Instead of simply using attempts to license to show domestic industry, patent trolls reach a settlement with a small company. They then use that license to the company to show that someone in the U.S. uses their patent in order to satisfy the domestic industry requirement. Since the small company sometimes doesn’t wish to cooperate (after all, the troll probably sued them first), the troll will subpoena the small company, giving rise to the name “domestic industry by subpoena” for this type of activity.
And the tactic works—trolls who make their money purely off of assertion still file at the ITC.
How Do We Fix It?
The ITC needs statutory guidance in line with its original purpose, protecting actual U.S. industries from unfair competition abroad.
Fortunately, that exists. The “Trade Protection, Not Troll Protection” bill (TPNTP), re-introduced by Rep. Cárdenas and co-sponsored by Rep. Farenthold, Rep. Issa, and Rep. Swalwell, later joined by Rep. Lamar Smith and Rep. Polis, fixes this problem. The bill has three main effects:
- Modifying the domestic industry requirement to clarify that the licensing has to lead to a product, not be asserted after the product already exists.
- Requiring any licensee whose activities are relied on to show domestic industry to join the ITC case, voluntarily.
- Moving determination of domestic industry and public interest early in the case in order to reduce the burden on defendants from ITC cases that will ultimately be dismissed.
TPNTP returns the ITC to its original purpose—protecting U.S. industry. And it does so by making sure that, in order for a patent to be asserted in the ITC, it has to have led to the development and manufacture of products in the U.S. Asserting it after the fact isn’t enough.
In addition, because it can take 8-9 months to dismiss a case where domestic industry is missing (with the ITC costs I discussed above accumulating the entire time), it’s important to create a procedure early in ITC cases that can decide on case-dispositive issues like domestic industry.
Right now, ITC participants can request that their cases be entered into an Early Disposition Pilot Program. If they’re entered, the ITC will make a determination within 100 days. However, this isn’t guaranteed—as of the end of 2016, only five cases had been granted entry into the pilot. The ITC created the pilot in 2013.
TPNTP requires the ITC to make this kind of early determination if the issue would dispose of the case. This means frivolous or abusive cases in the ITC will be dismissed earlier in the process at less cost to litigants.
What’s Next For TPNTP?
Rep. Cárdenas introduced the Trade Protection, Not Troll Protection bill for the third time back in April (see here for previous discussion on Patent Progress). It’s been referred to the House Committee on Ways and Means, where it will likely be referred to the Subcommittee on Trade. After that, I would hope to see a hearing held and then passage. No Senate companion bill has been introduced. It might take some time, but TPNTP represents an opportunity for this Administration to show it’s serious about protecting American industry.
We’ll see if the third time’s the charm for protecting trade, not trolls.