Are ITC Exclusion Orders a Pre-Globalisation Anachronism?

Earlier this week I spoke to reporter Yun-Hee Kim via Skype, for the WSJ Live Asia Today program, about the decision of the Obama Administration to veto the US International Trade Commission (ITC) exclusion order issued against a number of older Apple devices.  The products in question had earlier been found to infringe a Samsung patent which is essential to implementation of the 3G international wireless communications standards.

I have embedded the video report at the end of this article, or you can view it on the WSJ Live web site.

In issuing an exclusion order, the ITC had done nothing particularly unusual.  As I will explain further below, it does not really have any other powers it can exercise against infringers.  Furthermore, it is part of the standard process that all proposed orders made by the ITC are subject to review, and possible veto, by the President of the United States within a period of 60 days.

To my mind, there are three aspects of this case that have contributed to the exceptional level of interest it has generated.  Together, they suggest that it might be time to reconsider the role of the ITC in ‘protecting’ the US market from imports of patent-infringing products, which increasingly looks like a relic from a simpler time in which companies, and industries, were either ‘domestic’ or ‘foreign’, rather than global.

Why is This Veto So Interesting?

As noted above, I think there are three main reasons for the interest in this case.

Firstly, any ban, injunction or exclusion order based on standard-essential patents (SEPs) is bound to be controversial, with the US Federal Trade Commission (FTC), the Department of Justice, and the US Patent and Trademarks Office all being opposed to such bans on antitrust grounds.

Secondly, while a Presidential veto is always an option, in practice it is extremely rare.  The last time an ITC decision was vetoed was by Ronald Reagan in 1987.

And thirdly, this case is highly politicised, involving as it does the potential exclusion of the products of a US company in response to a complaint by a foreign entity.  In my view, this turns the entire concept of ITC exclusion orders on its head.  Perhaps unsurprisingly, particularly given that the veto was blamed for a US$1 billion loss in Samsung’s market value, the South Korean media have accused the US Administration of protectionism and hypocrisy. 

Yet if you stop to think about it, this is an absurd accusation – vetoing a ban that would stop a US company from importing products which it had manufactured cheaply overseas, presumably at the expense of US jobs and a US manufacturing industry, is by any other account the exact opposite of protectionism.  The only reason such an claim can be made in this case with even the semblance of a straight face is because the party requesting the ITC investigation and exclusion order is a foreign company.  But this is actually irrelevant, and there is no reason to suppose that any different principles would have applied if the patent-holder had been, say, Motorola (now owned by Google, and itself no slouch when it comes to asserting SEPs).

The US Administration could avert an international incident by also vetoing any exclusion order that may be issued this week by the ITC against Samsung.  However, since the Apple patents involved in that case are not SEPs, the rationale supporting the Apple veto would not apply.

What Does the ITC Do?

Once upon a time, American products were mostly made in America, and imported products were mostly made by foreigners.  Furthermore, many of the products being brought in to the country which infringed US companies’ intellectual property rights were cheaper copies of the original products.

In this context, the idea of providing a mechanism to enable US patent holders to stop infringing products at the borders makes good sense.  If the products can be kept out of the country in the first place, the patent owner does not need to pursue all of the US-based distributors and retailers through the Federal Courts for injunctions and damages.

Many countries, including Australia, provide customs-based mechanisms for stopping counterfeit products (i.e. those that infringe trade mark rights or copyright) at the borders.  However, the US is somewhat unusual in providing a mechanism which also covers goods that infringe patent rights.  The difficulty with patents in this regard is that customs or border protection personnel cannot easily identify a product that infringes a valid patent by sight, in the way that they might be able to in the case of a counterfeit product which infringes trade mark rights or copyright.

The ITC’s process is administrative, and although its procedures follow rules which are similar to the Federal Rules of Civil Procedure, its decisions do not have the force of a Federal Court ruling.  The ITC’s powers are limited to issuing exclusion orders and associated ‘cease and desist’ orders.  It cannot award damages or other legal or equitable remedies.  Its decisions are subject to Presidential veto on policy grounds.  Its decisions are also subject to appeal to the US Court of Appeals for the Federal Circuit (CAFC).

Is It Time to End ITC Patent Exclusion Orders?

In the kinder, gentler, less globalised age to which I alluded above, a patent holder would most likely choose a single venue in order to assert its rights.  If the accused infringer were a US-based entity, then a Federal District Court might be the preferred venue.  On the other hand, if the infringer were a foreign company importing cheap knock-off products into the country, then the ITC might be a better option.

However, the world has moved on.  American companies may well design their products in California (or one of the other 49 states).  But they are quite likely to have them manufactured overseas and import them back into the domestic market, if that is the most cost-effective approach.  Thus arises the somewhat bizarre circumstance of a South Korean company seeking to ban the import of Chinese-made products by the American company which designed them, so as to prevent their sale in America to American consumers.

You see – when I put it like that, a veto of the exclusion order on policy grounds seems entirely reasonable, even without raising the SEP issue.  This is simply not the kind of thing the ITC procedure was designed to deal with when it was created in the first half of the 20th century.  It is hardly ‘protectionism’ to allow the country’s own corporate citizens to continue to compete against foreign imports.  The veto has not in any way limited Samsung’s rights to continue to pursue Apple for infringement via the Federal Courts, which have the power to grant injunctions, damages and other remedies in appropriate cases, and which are not subject to executive interference.

The other thing that has changed significantly is the role played by intellectual property in an increasingly knowledge-based economy.  The holders of IP rights are no longer necessarily the same as the manufacturers or suppliers of corresponding products and services.  Licensing of patents, even among nominal competitors (such as in the case of SEPs), is far more prevalent than it was even 20 or 30 years ago (i.e. in Reagan’s time).  The companies that Apple uses to manufacture its products do so under licence.

Furthermore, strategies for securing, exploiting and enforcing patent rights have evolved considerably.  A modern patent dispute may play out in a number of venues in parallel.  As in the Apple and Samsung case, the same patents may be asserted, and attacked, at the ITC, in the Federal Courts, and via re-examination or review processes before the USPTO.  Each of these procedures was originally developed to serve a different purpose than the others, and in general they therefore proceed independently.  The lowest common venue for appeal is the CAFC.  Any inconsistencies in the outcomes obtained below the CAFC can be resolved only at that level.

Conclusion

Overall, therefore, the system of parallel venues seems horribly inefficient and wasteful of resources.  The ITC exclusion mechanism, in particular, is being put to uses for which it was never designed.  Many of the criticisms being levelled at it from within and outside the US can be attributed to this fact.  Trying to tell the ITC, for example, that it should not issue exclusion orders in the case of SEPs is tantamount to telling it that it should not consider those applications in the first place, since there would seem to be little point if its decision cannot result in any meaningful outcome.  However, my understanding is that the ITC is required to consider any properly filed complaint.

The solution to the problem is not to criticise the ITC, it is to change the law.  The ITC’s power to issue exclusion orders based on patent infringement should probably not be abolished altogether, since there are no doubt still many cases of a more ‘traditional’ nature for which it provides a more efficient mechanism for assertion of patent rights than the Federal Courts.  However, there are strong arguments for a modernisation of the rules to ensure that the ITC process is not used for primarily strategic purposes in cases where it is not the most appropriate option.

The WSJ Live ‘Asia Today’ Story

Tags: Apple-v-Samsung, Injunctions, Smartphone wars, US, USITC