House Judiciary Subcommittee Offers a Solution in Search of a Problem – Part 2

Last month, the House of Representatives’ Judiciary Committee’s Subcommittee on the Courts, Intellectual Property, and the Internet Subcommittee held a hearing to examine patent litigation activities at the U.S. International Trade Commission (ITC). In last month’s feature article, we summarized the testimony of the first three witnesses who appeared before the subcommittee. This month, we summarize the testimony of the second three witnesses.

The stated purpose of the hearing was to review how patent disputes are handled by the Commission with the goal of determining if the ITC produces results that are fair to litigants, beneficial to the U.S. economy, and complementary to the work of U.S. district courts. However, it soon became obvious that the true purpose of the hearing was to find a way to weaken the ITC’s patent enforcement capabilities in an effort to weaken U.S. Patent rights.

House Committee Chairman Bob Goodlatte set the tone for the hearing when he stated that “the IP subcommittee will review how patent disputes are handled by the International Trade Commission in an effort to ensure fairness for American businesses. 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.”

Goodlatte’s tone was supplemented by Subcommittee Chairman Darrell Issa who added that “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.”

Six witnesses testified before the subcommittee:

  • Deanna Tanner Okun, former Chairman of the International Trade Commission and currently a partner at the Adduci, Mastriani, & Schaumberg law firm
  • John Thorne, a partner at the Kellogg Huber Hansen Todd Evans & Figel law firm
  • Mark Whitaker, a partner at the Morrison & Foerster law firm
  • Fiona Morton, the Theodore Nierenberg Professor of Economics at the Yale University School of Management
  • Thomas Stoll, the principal at Stoll IP Consulting
  • Dominic Bianchi, General Counsel at the U.S. International Trade Commission

The Subcommittee specifically addressed in this hearing Section 337 of the law that established the International Trade Commission back in 1916, the authority the ITC has to issue injunctions that block the import into the U.S. of products that infringe U.S. Patents.

Deanna Okun, a former chair of the ITC, provided the title for this article when she testified that the proposed changes to ITC law are “a solution in search of a problem.” Ms. Olun defended the work of the International Trade Commission and said that “There is a direct link between the protection of U.S. IPR and American competitiveness. Section 337, by serving as a mechanism for protecting U.S. IPR, promotes economic growth and domestic job creation. Innovation is a primary driver of U.S. economic growth. IP-intensive industries account for more than $5 trillion in value added, or approximately 35 percent of U.S. gross domestic product.”

The fourth witness was Fiona Morton, the Theodore Nierenberg Professor of Economics at the Yale School of Management, and she specifically addressed standard essential patents (SEPs) and F/RAND (Fair and Reasonable Royalties) commitments as regards the International Trade Commission.

She began her testimony by stating that “the mere threat of an eventual exclusion order gives the patent holder the leverage to extract inefficiently high, above-F/RAND, royalty rates during settlement negotiations. A patent holder that has already obtained an exclusion order has even more power to increase its profits through a higher royalty.”

She added that “There is no sound economic reason why an exclusion order is needed to adequately compensate an SEP owner who is involved in a dispute with a willing licensee over validity, infringement, and reasonable royalties. If the SEP owner’s infringement claim succeeds, it will receive a reasonable royalty calibrated to reward the inventive activity with an appropriate return. Moreover, the royalty will reflect the court’s determination that the asserted patent is valid and infringed. This may result in a ‘certainty premium’ that could raise the court-determined F/RAND royalty above the level that would be freely negotiated for patents of uncertain enforceability, giving the potential licensee the incentive to settle prior to litigation for an ex ante F/RAND rate. The royalty may also include interest to compensate the patent holder for any delay in receiving its payments.”

The fifth witness before the subcommittee was Thomas Stoll, principal of Stoll IP Consulting LLP and an advisor to the White House on IP policy for the last several years. He began by stating that “The misappropriation of intellectual property is a real threat to innovation and to investment in research and development in the United States. Similarly, the abuse of enforcement proceedings can do real harm to businesses. While ITC filings by all patent owners, including non-practicing entities, certainly spiked in 2011, over the last few years the ITC has made great strides in reducing the risk that ITC proceedings can be misused. The ITC’s own statistics show that the number of investigations instituted has dropped to historically consistent numbers and that the number of filings by non-practicing entities is lower than they were before the jump in overall filings.”

He continued, “To the extent the ITC had a patent-troll problem, it appears the Commission has addressed it. U.S. Patent laws are extremely beneficial to society. They provide the incentive for inventors and companies to invest in the development of ground-breaking new technologies knowing their investment can be protected. Start-ups and other small companies armed with IP are often a better bet for investors than those without, often allowing them to secure the funding they need to grow.

"Abraham Lincoln described the beneficial effect that patent laws have on innovation as ‘add[ing] the fuel of interest to the fire of genius.’ They also aid society by encouraging the disclosure of that ‘genius’ by even the smallest of companies, without fear that their new ideas will be stolen. The ITC is charged with preventing unfair trade practices including the theft or unauthorized use of intellectual property. It can prevent products made using misappropriated patented technologies from entering the United States. It also has the extraordinary authority to issue general exclusion orders barring all imports that infringe a patent, and not just those of the importer or manufacturer.

"While we still have great domestic manufactures like Boeing, Corning and many other household names, many of our products are imported from overseas. The ITC now is the only tribunal with the authority to issue broad injunctive relief in every case in which it finds infringement. In fact, injunctive relief is the only form of relief available in the ITC; a complainant cannot recover damages there. Until relatively recently, it was almost a given that if a patent owner prevailed in a district court case the court would award an injunction.”

Stoll explained what a patentee must do to receive injunctive relief from the International Trade Commission. “In accordance with 19 U.S.C. §1337(a)(3), a party claiming that it has been harmed by the importation of infringing products must show that someone is making or selling the patented product in the United States, and that their investment in a U.S. industry that requires protection. Specifically, the patent owner must first show that it or its licensee is practicing at least one claim of the asserted patent. An entity need not make the patented invention, but may base its claim of an industry in need of protection on the products of its licensee. Second, the patent owner must show that the relief sought is needed to protect a significant investment in plant and equipment, or employment of labor or capital, or that there is substantial investment in the patent’s exploitation, including engineering, research and development, or licensing.”

The sixth and final witness was Dominic Bianchi, the General Counsel for the United States International Trade Commission. He explained that “Intellectual property holders often file complaints under section 337 because they desire a relatively quick resolution to their disputes. The USITC is statutorily charged with completing its investigations expeditiously, and the USITC’s procedures are specially designed to meet this mandate. The average time to evidentiary hearing in a section 337 investigation is about 9.5 months, and most investigations are completed within 16-18 months.

“As I outline below, the Commission’s Section 337 proceedings provide a technically sound and fair process to resolve allegations of IP infringement and other unfair acts and methods of competition by imported articles that harm U.S. industries. Similar to the federal courts, a section 337 investigation includes all aspects of patent disputes, including topics relating to (1) validity; (2) infringement; and (3) remedy. Unlike the federal courts, the Commission does not institute an investigation before the sufficiency of the complaint is assessed. Once instituted, the USITC develops a complete administrative record based on discovery and provides a full and fair opportunity for the parties to present testimony and cross-examination at a hearing and to provide legal briefing. The Commission staffs its investigatory process with IP experts and lawyers and qualified administrative law judges (ALJs) solely dedicated to adjudicating IP cases.

“Moreover, the statute requires the Commission to focus upon whether complainants have adequately established a domestic industry before a violation may be found. Further, the public interest is required to be considered in every investigation where a violation is found and an appropriate remedy is being considered. Finally, the Commission has procedures to address potentially case-dispositive issues, including domestic industry within a matter of months."

He summarized by testifying that “The USITC applies section 337 and the substantive law involved to the facts of each investigation presented to it. The Commission has made a concerted effort to develop procedures that will increase efficiencies, and reduce cost and still ensure a fulsome record. The Commission routinely seeks input into its process and diligently considers feedback from its stakeholders on ways to improve its processes and procedures.”

After hearing from the six witnesses, the Subcommittee on the Courts, Intellectual Property, and the Internet Subcommittee adjourned and has taken no actions on this issue.