1 October 2010PatentsJames Coughlan & John Schnurer

Why NPEs prefer the ITC

Non-practising entities (NPEs) have traditionally enforced their patent rights in US district courts and not at the US International Trade Commission (ITC). The ITC cannot award monetary damages, and it imposes an additional jurisdictional hurdle not required by the district courts.

However, in recent years, the ITC has become a more popular forum for NPEs. In the last three years, at least 31 entities have been sued at the ITC by patent owners who do not manufacture a product covered by their asserted patents. ITC complaints filed by NPEs present unique legal challenges, and respondents must consider their options and potential strategies when defending themselves at the ITC.

The ITC is an independent, quasi-judicial federal agency that investigates alleged unfair acts of importation, including imports of products that allegedly infringe US patents. By rule, ITC actions must be completed expeditiously, and a final decision must be rendered in a timely manner, usually within 14 to 18 months.

At the ITC, the plaintiff is referred to as the ‘complainant’, defendants are ‘respondents’ and the action is an ‘investigation’. The ITC can issue an exclusion order directing the US Department of Customs and Border Protection to bar infringing articles from entering the United States. It can also issue cease and desist orders requiring the removal or destruction of infringing articles already held in inventory in the US.

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To establish jurisdiction at the ITC, a patent owner must prove that a domestic industry exists, or is being established, in connection with the asserted patent. A domestic industry is typically found where the patent owner has made substantial domestic investments in connection with the manufacture of a product covered by a claim of the asserted patent.

In 1988, Congress amended the statute to provide that a domestic industry can exist where the complainant has made substantial investments in the asserted patent’s exploitation, including its licensing. Despite this change, NPEs continued to pursue injunctive relief primarily in the district courts to gain leverage in licence or settlement negotiations.

In 2006, however, the Supreme Court’s decision in eBay Inc. v. MercExchange made it more difficult for NPEs to obtain injunctive relief from the district courts. The Supreme Court held that such relief was no longer ‘automatic’ upon a finding of infringement, and may not be available to parties that do not manufacture products and can therefore be made whole by monetary relief.

In addition, the increased popularity of forums traditionally favoured by NPEs, such as the courts of the Eastern Districts of Virginia and Texas, has resulted in more crowded and slower dockets. Moreover, defendants in those forums have had success transferring patent actions to other venues.

At the same time, the rapid pace of ITC proceedings remained substantially the same, and the standard for obtaining relief at the ITC remained unchanged by the eBay decision. A remedy from the ITC continued to be virtually automatic if a violation of the statute was found to have occurred.

The ITC has recently confirmed that in view of the change in the statute dating back to 1988, NPEs can establish a domestic industry and pursue their rights at the commission. Perhaps due to these factors, NPEs began to file more complaints at the ITC.

Key issues

If an NPE files a complaint at the ITC, the respondent should consider several issues as soon as possible. The first is whether to file a consent order stipulation and move to terminate the action. A consent order stipulation does not constitute an admission of liability, and may contain a statement that it is submitted for settlement purposes only and is not an admission that an unfair act has been committed.

The ITC will routinely grant a motion to terminate based on a consent order if the motion and stipulation contain all the necessary elements required by its rules. Termination based upon a consent order may be a viable option where the accused product is being phased out, discontinued or redesigned, or if its manufacture is being moved to the United States.

In such instances, it may be best to move to terminate the investigation using a consent order, given that the ITC cannot award monetary damages based on past infringement and the consent order stipulation is not binding in a subsequent district court action.

The respondent should also consider as early as possible how best to prepare for discovery, which can be rigorous and burdensome at the ITC. Under the ITC’s rules, responses to written discovery are due within 10 days, and there are few limits on the number of deposition notices, interrogatories, document requests and requests for admission that can be served.

As a result, a significant amount of time and expense is spent by both parties responding to discovery, which can become a distraction and diversion, particularly for a party that is not adequately prepared. The discovery burden can weigh even more heavily on the respondent when the complainant is an NPE.

"The respondent should also consider as early as possible how best to prepare for discovery, which can be rigorous and burdensome at the ITC."

This is because, in a typical action, the respondent and complainant must each produce technical documents such as schematics and source code, answer interrogatories and make deposition witnesses available in connection with their respective products. The respondent’s product would be relevant to the alleged infringement and the complainant’s product would be relevant to its domestic industry claims.

However, because an NPE’s domestic industry is based on licensing activities and not any specific product, the NPE does not have to produce any technical information, and its discovery burden is significantly reduced.

This can be a major advantage for an NPE during discovery. The respondent should also consider its underlying litigation strategy based on the goals it wishes to accomplish in connection with the litigation. For example, it may prefer to reach an early settlement before any other named respondents do so and before significant litigation costs are incurred.

Typically, costs incurred during the first two to three months of an ITC litigation are relatively low as compared to the total costs of the action. After the first two to three months, depositions, major motions practice and expert report preparation begin, and the costs of litigating the action increase significantly.

Alternatively, if the respondent prefers to make the NPE prove its case and obtain information valuable to leverage in settlement negotiations, it can do so under the ITC rules, which allow the respondent to begin an aggressive discovery campaign within the first few days of the action and file early dispositive motions challenging the validity of the claims or the domestic industry allegations.

Early challenges

Given that an NPE makes no product to fulfil the domestic industry requirement, it may be wise for the respondent to challenge the NPE’s licensing allegations early in the investigation, since a failure of proof for this jurisdictional issue would result in immediate termination of the investigation.

There are several ways to challenge an NPE’s domestic industry claims. For example, the licensing activities of the NPE may not be significant enough to satisfy the ITC’s domestic industry requirement if the NPE has few employees and minimal overhead costs, or if the patent at issue has not generated significant licensing revenue.

In addition, the NPE may not be able to prove that there is a nexus between each alleged domestic investment and the licensing of the asserted patents. Licensing activities relied on by the NPE occurring outside the United States would not be relevant, and the NPE cannot rely on legal fees spent in connection with enforcing the patents at issue if the litigation efforts did not result in a licence.

Conclusion

NPEs are filing more actions at the ITC, and it would be wise to prepare in advance to defend such actions. To defend against an ITC action filed by an NPE, a respondent should consider whether to terminate the action unilaterally based on a consent order stipulation.

If the action cannot be terminated in that manner, it would be wise to prepare for discovery as soon as possible and consider whether to pursue a litigation strategy that might bring about an early, favourable settlement.

If the decision is made to litigate the action, it may be wise to challenge the NPE’s domestic industry allegations. If successful, such a challenge will lead to the immediate termination of the investigation.

James B. Coughlan is of counsel at Perkins Coie LLP. He can be contacted at: jcoughlan@perkinscoie.com

John P. Schnurer is a partner co-chair of ITC Section 337 Actions at Perkins Coie LLP. He can be contacted at: jschnurer@perkinscoie.com

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