Joff Wild

After various members of the US Senate and House of Representatives, the White House and the FTC, now it’s the turn of the International Trade Commission to put NPEs in its sights. Yesterday, the ITC announced the launch of a pilot programme designed to “test whether earlier rulings on certain dispositive issues in some section 337 investigations could limit unnecessary litigation, saving time and costs for all parties involved”. Although NPEs are not specifically mentioned in the announcement, the intention is made pretty clear:

Under the pilot program, the Commission will identify, at institution, investigations that are likely to present a potentially dispositive issue and direct the assigned Administrative Law Judge (ALJ) to rule on that issue early in the investigation through expedited factfinding and an abbreviated hearing limited to the identified issue.

One such issue could be the existence of a domestic industry. A key determination in the course of a section 337 investigation is whether an industry in the United States exists or is in the process of being established. If the USITC finds that there is no domestic industry, no remedies can be provided under the law.

Domestic industry is defined by the ITC in this way:

The proof required to establish a domestic industry involves an "economic" prong and a "technical" prong. The economic prong can be satisfied by demonstrating that there exists in the United States with respect to the products protected by the intellectual property right being asserted: significant investment in plant and equipment; significant employment of labor or capital; or substantial investment in its exploitation, including engineering, research and development, or licensing. To satisfy the technical prong, a complainant must be practicing the asserted intellectual property right. For example, in a patent-based Section 337 investigation, a complainant must prove that it or its licensee is practicing at least one claim of the asserted patent.

Since the Supreme Court’s eBay v MercExchange decision handed down in 2006, it has been almost impossible for entities which do not manufacture goods to do this via the courts; the ITC, however, does not discriminate in this way, so if it finds that patent rights are infringed by goods being imported into the US such importation can be halted, whatever the status of the patent owner. According to one article I have read "PAEs initiated five [ITC] investigations against 18 respondents in 2010, 16 investigations against 140 respondents in 2011, and 12 investigations against 88 respondents from January through Oct. 10 of 2012". While in testimony given to the House Judiciary Committee in March, Mark Chandler of Cisco claimed that: "In 2011, over 50% of all ITC investigation respondents were respndents in an investigation brought by PAEs."    

Being able to prevent the sale and distribution of a product in the world’s most important marketplace is, of course, a very powerful weapon and it is one that NPEs would hate to lose. But as far as I can see this pilot programme does not focus on whether NPEs should have the right to use the ITC or not; instead, it mandates meeting existing requirements at an earlier stage in the process:

The complainant controls the timing of the complaint’s filing and should be prepared to prove its case, including such elements as domestic industry, importation, and standing, without extensive discovery on these issues. While some complainants rely on licensees’ activities to satisfy the domestic industry requirement, such complainants should have acquired the necessary information from licensees prior to filing the complaint and have a well-developed plan for obtaining any necessary discovery immediately upon institution.

In effect, this would mean having a case fully prepared before you make a complaint – something that will take time and increase front-end costs. This will make it harder for NPEs to use the opening of an investigation as a bargaining chip in licensing negotiations; while it will also give potential infringers more time to come up with workarounds and/or other strategies that would minimise the effects of an injunction were one to be finally granted.

But, of course, it is important to remember that this will not only affect NPEs - it applies to all cases brought before the ITC, by whatever type of organisation; once again demonstrating just how hard it is to introduce targeted measures. Whether it is a good idea to change ITC practice in a way that is potentially so advantageous to companies that are the targets of complaints is hopefully something that those running the programme will think about carefully. Although NPE ITC cases are increasing, it's not as if they are affecting huge numbers of businesses. Replace a big, bad troll with a small company of limted resources using the ITC to try to block a big-ticket competitor from riding roughshod all over its IP rights and the idea behind this scheme may not look such a great one.