Innovate Articles

The International Trade Commission, Though Designed to Protect Domestic Industry, Frequently Threatens It

Joe Galvin

The International Trade Commission (ITC) has power under Section 337 of the Tariff Act to investigate whether goods are being imported unfairly and are affecting a domestic industry.[1] One type of unfair import is a good that infringes U.S. intellectual property rights, including patents.[2] Section 337 can therefore be a useful tool for protecting American industry against infringing imports. But, increasingly, the ITC has become a means for certain non-practicing entities (or “NPEs”), often referred to as “patent trolls,” to exploit the ITC for financial gain—and to do so in a way that perversely threatens the very domestic industry the ITC was designed to protect.

Patent Trolls

Patent trolls have long been notorious for bringing infringement litigation against productive companies with the goal of generating large settlements and royalty payments.[3] Many commentators have identified serious harms to innovative companies and the U.S. economy at large associated with NPE litigation, including reduced spending on research and development,[4] lower levels of employment at high-tech companies,[5] and spillover harm to entire industries that produce technology targeted by troll litigation, even for firms not specifically named as defendants.[6] Scholarship also has highlighted trolls’ abusive litigation tactics—noting, for instance, that trolls typically assert lower-quality patents than other entities in infringement litigation and disproportionately target defendants with higher cash reserves.[7]

Trolls at the ITC

Most scrutiny of patent trolls has focused on their district court litigation. But increasingly, the ITC has become the most menacing weapon in their arsenals. According to the ITC’s own data (which is known to undercount troll cases[8]), there has been a recent and pronounced increase in the number of cases filed by patent trolls, with troll cases under Section 337 more than doubling from 2020 to 2021 to comprise over 13% of the ITC’s 2021 docket.[9]

The ITC attracts trolls for several reasons. For one thing, the ITC adjudicates infringement cases more quickly than federal district courts, which puts increased pressure on responding parties.[10] But perhaps most attractive is the sweeping scope of remedies available under Section 337. If the ITC finds infringement of a valid patent, it has the power to issue an exclusion order blocking all of the respondents’ infringing products (and under certain circumstances even products not manufactured by the named respondents) from the U.S. market.[11] Unlike courts, which are restricted by the Supreme Court’s 2006 decision in eBay Inc. v. MercExchange, LLC, the ITC does not need to find that the complaining party will be irreparably harmed before ordering exclusion.[12] Rather, injunctive relief at the ITC is essentially automatic.[13]

The ITC’s Purpose Is to Protect Domestic Industry from Foreign Infringers

While trolls in recent years have flocked to the ITC, the Commission was actually established to fill a very different need. Congress created the ITC to protect U.S. industries from foreign competitors in situations where U.S. courts either would lack jurisdiction or would have difficulty issuing effective relief.[14] One of the ITC’s distinguishing features is that it exercises jurisdiction over infringing goods, and thus does not need to exercise jurisdiction over the infringing parties—a feature designed to address the potential lack of personal jurisdiction over foreign exporters.[15] When a court would lack jurisdiction, the ITC’s jurisdiction over the goods themselves and its remedy of exclusion serve a genuine purpose of stopping unfair trade that otherwise could go unchecked.

By contrast, when the alleged infringement is by a company based in the United States, there is no need for an exclusion order. Any infringement can be redressed through domestic litigation filed in federal district court with jurisdiction over the alleged infringer. If the court finds infringement, it can award damages and—if the requirements of eBay are met—can issue an injunction to prevent ongoing or impending infringement actively harming the patent owner.

Nevertheless, a Majority of ITC Respondents Are U.S.-Based

A review of the recent ITC docket reveals that the ITC is not being used for its intended purpose. To the contrary, this analysis found that a majority of companies sued at the ITC in recent years have been based in the United States. And trolls, in particular, are significantly more likely to target U.S.-based respondents.

The analysis used the docket search tool DocketNavigator to review all Section 337 cases filed in Fiscal Years 2018, 2019, 2020, and 2021 (i.e., between October 1, 2018 and September 30, 2021). This analysis considered an ITC complainant to be a “patent troll” if its complaint identified no actual use of the patent—for example, to manufacture goods—and instead relied solely on its licensing of the patent to another entity. But, consistent with other analyses of NPE litigation, the author excluded from the definition of a patent troll entities like universities, individual inventors, and startup companies, which do not manufacture goods but are in the business of securing patents for their own innovations (rather than acquiring the patents of others).[16] To evaluate whether a particular ITC respondent was based in the United States, the analysis used the address listed in the ITC complaint.

In cases filed by patent trolls during the analyzed period, 63.7% of the targeted respondent companies were headquartered in the United States. This percentage was greater than the already sizeable 53.9% of U.S.-based respondents in cases not filed by trolls. This striking difference between troll and non-troll cases had statistical significance at the 99% confidence level (with a t-score of 2.64), as calculated using data reported in the table below.

The problem becomes even more apparent when the analysis considers families of respondents—i.e., groups of related companies sued at the ITC. Often, a foreign respondent company will have significant U.S. affiliates engaged in U.S. research, manufacture, marketing, or distribution, meaning there is no need to use the ITC process to gain jurisdiction. To take a recent example, in July 2021, a troll called Sonrai Memory Limited filed a case at the ITC against 10 respondents that manufacture a range of high-tech consumer goods.[17] The respondents include both Lenovo Group Ltd. (headquartered in Beijing) and its subsidiary Lenovo United States Inc. (headquartered in North Carolina).[18] Under the “respondent family” analysis, those entitles were treated as a single Lenovo family subject to federal district court jurisdiction.

In troll cases, 95.1% of respondent families had at least one U.S. affiliate. This proportion far exceeded the already high proportion of 64.9% in non-troll cases—with the difference having statistical significance at the 99.9% confidence level (with a t-score of 5.57). This significant difference supports the notion that trolls, who use the ITC only to force more lucrative settlements than compensatory damages in federal district courts, believe that targeting U.S. companies is the most efficient way to achieve their ends.

This analysis also revealed that only a tiny fraction of Section 337 cases target purely foreign conduct. During the reviewed time period, 96% of cases filed by trolls had at least one U.S.-based respondent family. Even for non-troll cases, there was at least one U.S. respondent in over 93% of the cases.

The data speak clearly no matter how they are categorized. Section 337 is predominantly used—especially by trolls—to target U.S. companies. Despite the fact that the Commission was created to protect domestic industry, U.S. businesses are constantly and needlessly in its crosshairs.