The International Trade Commission’s (ITC) basic function is to protect American industry against unfair foreign competition by prohibiting the importation of unfairly produced trade goods. That includes preventing the importation of goods that infringe a valid U.S. patent through what are called “exclusion orders.”
But that function is limited by the second part of its mission—a requirement that the ITC consider the impact of such protection on the American economy, American consumers, and public health and welfare. If ITC action excluding a product from importation would significantly harm the economy, consumers, or health and welfare, the ITC isn’t supposed to issue an exclusion order.
The ITC’s present practice has resulted in an all-or-nothing approach to remedies; either a product is excluded, or it isn’t. But the ITC has the power to tailor its remedies more narrowly.
The ITC Is Authorized To Exclude
The ITC has generally been characterized as having a single remedy—issuing an exclusion order barring importation of a product.1 The agency doesn’t have statutory authority to order a company to pay damages, or to prevent the sales of goods that are produced inside of the United States.
The Commission’s perceived inability to provide a legitimate complainant with any relief other than exclusion might influence the ITC to grant an exclusion order, even if the agency should deny exclusion on the basis of the public interest.
But tailoring existing remedies might allow the ITC to provide an appropriate remedy, while also respecting the public interest in reducing the negative impact of exclusion on American consumers and competitive conditions in the American economy.
The ITC Can Set Parameters On How Exclusion Is Applied
The ITC has significant authority over exactly how an exclusion order will operate. As summarized by Profs. Chien and Lemley, the ITC can decide:
(1) what the order will cover;
(2) when the order will be implemented; and
(3) whether a bond can allow importation conditioned on payment of money.
The latter two provisions, in particular, enable the ITC to effectively tailor remedies to appropriately respect the public interest while enforcing patent rights to prevent unfair competition. In other words, by tailoring the remedy, the ITC can adhere to both aspects of its mission.
Damages at the ITC
That means the ITC actually does have a way to provide what is effectively a damages remedy—a single day exclusion order, combined with an appropriately determined bond. The complainant would receive the bond, in an amount calculated to remedy them for the infringement. The exclusion order could then be terminated.
The inverse situation is one in which the ITC chooses to exclude, but to delay the implementation of their exclusion order and allow a penalty-free importation during the period of delay.
The ITC has actually used this exact remedy in the past. In 337-TA-710, the ITC determined that exclusion was appropriate, but delayed implementation of the exclusion order for 4 months and required a zero dollar bond from the respondent, effectively allowing them to continue to import handsets for four months while they transitioned from infringing to non-infringing handsets, but providing exclusion after that time.
Putting It Together—Compensated Delay
By combining the damages-like bond provision with a delayed implementation of exclusion, the ITC can provide a remedy which allows compensated import during the period of delay, while preventing importation after the delay period expires. This remedy mimics a district court’s ability to use a stayed injunction with an ongoing royalty.
Compensated Delay and Design-Arounds
When a company is making an infringing product, one option—rather than paying to license—is to pay to redesign their product so that it doesn’t infringe. This process, called “design-around”, can be desirable if the patent owner is asking for more than the value the patented feature contributes to the product. At its most extreme, a design-around can consist of simply removing the feature. Other options may include implementing a less valuable feature, or creating a novel way to implement the feature that doesn’t infringe.3 However, these processes can be expensive. While it may be relatively inexpensive to remove a feature from a software product, the cost of a new set of masks for a semiconductor product can easily reach into seven or eight figures—that’s just one component of the implementation cost, not even including any cost to design the design-around.
Why Companies Don’t Design-Around Before A Case Ends
Given the potential expense, a company won’t engage in a design-around before they have to. Defendants are rarely aware of the patent before a case is filed,4 meaning that they won’t consider design-arounds until the lawsuit has already begun. At that point, they may choose to delay incurring the expense of a redesign—particularly if they have good reason to believe that they don’t infringe the patent or that the patent is invalid (e.g., an instituted inter partes review.)
How Would Compensated Delay Be Used?
In order to provide an appropriate remedy to the patent owner while also protecting competitive conditions in the American economy and avoiding consumer harm, compensated delay can provide a time period during which the manufacturer can transition from their infringing product to a new, non-infringing product. However, in order to ensure that the patent owner is compensated during this time period, the ITC can set a bond value determined to compensate the patent owner for the maximum expected importation during the period of delay. By doing so, the patent owner’s interest in their patent is protected, while avoiding the potential negative consequences of exclusion.
Allowing a Delay for Design-Around Is Good Policy
As noted above, a design-around can be expensive. It’s not generally economically desirable to incentivize manufacturers to implement design-arounds before the patent is found valid and infringed, as that represents a waste of resources that could be employed more productively elsewhere. At the same time, it’s desirable to provide patent owners with a remedy for infringement of valid patents.
But if exclusion is the sole remedy given, patent owners can attempt to extract more than the cost of a design-around from the manufacturer. The vast majority of patents, particularly of those litigated at the ITC, apply to small features in a complex, multi-component product. Those features have value, but don’t contribute the entire value of the product—they rarely even contribute the majority of the value of the product.
But faced with exclusion where they would be unable to receive any of the value of the product, the manufacturer will be willing to pay more than the value of the patent in order to license it and be able to sell their product. This increased cost is then likely to be passed on to consumers, contrary to the ITC’s mandate to avoid consumer harms. As an alternative, they might exit the market, harming competition with respect to the non-patented features—again, contrary to the ITC’s mandate to avoid harming competitive conditions.
If, instead, the manufacturer were to be provided with a period during which they could redesign their product, the patent owner’s leverage above and beyond the value of their patented feature would be eliminated. This doesn’t eliminate the value of the patent. On the contrary, it ensures that the patent owner receives the value of the patent, but that the manufacturer receives the value of their product minus the patent.
Patent Owners Still Receive A Remedy
Compensated delay ensures a correct remedy for the patent owner, without providing for an excessive remedy that might harm consumers or competition.
First, the manufacturer might still be inclined to pay the patent owner to license their patent. That amount would be expected to be no more than the cost of implementing a design around, but would also be at least as much as the value lost if the manufacturer simply removed the feature. A delay in exclusion to permit design around would thus serve to avoid supra-competitive licenses and the associated negative impacts on consumers and the economy, while still providing good reason to license the patent in order to continue to benefit from the patent after the period of delay ends.
Second, the patent owner would still receive the bond compensation. While the manufacturer would be able to continue to import infringing products during the Presidential Review period, they would be required to pay the patent owner for the privilege, ensuring that the patent owner is compensated for the use of its patent.
In other words, patent owners would receive a reward—just not the excessive reward they can obtain using the threat of exclusion.
Why Doesn’t The ITC Do This?
If there’s a solution that would allow the ITC to wield exclusion orders as a scalpel, targeting true harms from unfair foreign trade while protecting American industry and consumers, why does the ITC continue to wield exclusion orders like a sledgehammer, heedless of collateral damage?
The ITC has a statutory mandate to both deal with unfair competition in import trade and to consider impacts on consumers and competitive conditions while dealing with unfair competition. To date, they’ve focused far more heavily on the first portion of that equation.
If the ITC fails to focus on the second portion of their statutory mandate, then the ITC’s ability to negatively impact American companies and consumers should be removed. If a company can be sued in district court, there’s no reason for the ITC to have jurisdiction—especially if it uses that jurisdiction to reward patent owners in ways that harm consumers and competitive conditions, contrary to the ITC’s own statutory requirements.
- They can also issue a cease and desist order, but that has the same primary effect as an exclusion order. ↵
- After the Commission determines that exclusion is warranted, their determination is subject to review by the President. If the President doesn’t act for 60 days, the exclusion order is made final. ↵
- A design-around is generally not possible for standard-essential patents, as any redesign would render the product unable to interoperate with other standards-compliant products. This inability to design-around is one reason that standard-essential patents raise a “hold up” concern, where the patent owner can use the threat of injunction or exclusion to extract more than the technical value of the feature. ↵
- The vast majority of defendants in patent infringement actions are innocent infringers. It’s extremely rare, especially outside of the pharmaceutical industry, for a defendant to have intentionally copied a patent. ↵