Wednesday, November 6, 2013

Dell, Ford, Google and HP file submissions to up the ante for patent trolls at the ITC

Google, HP, Ford and Dell have filed statements (which are not themselves publicly accessible, but which are referenced by a public filing by Nokia, Huawei and ZTE) in connection with an ITC investigation of a complaint by non-practicing entity InterDigital.

In parallel to a political debate and legislative process on U.S. patent reform, some companies are also trying to achieve fundamental change through amicus curiae briefs. As a general rule, you really need to change the law for major change. On key issues, limited progress -- moving the goalposts just a little bit in your preferred direction -- is all you can realistically hope to achieve if you raise a policy argument with a court.

One of the topics in the patent reform debate is the ITC's immense popularity with patent trolls. In the headline of a Wall Street Journal op-ed, a former ITC commissioner even referred to the U.S. trade agency as the "International Trolling Commission". Without a doubt, the ITC is under pressure and may see its jurisdiction over patent infringement cases restricted.

There are three ways in which lawmakers or the ITC itself could make it harder, or even impossible, for patent trolls to obtain ITC exclusion orders (import bans). Some argue that an eBay v. MercExchange type of equitable standard should be imported into the ITC's governing law. I don't consider this a promising approach because the ITC has only one remedy, which is a form of injunctive relief, but eBay is all about deciding whether legal remedies (monetary compensation) are sufficient or an injunction is warranted. Also, I believe that ITC exclusion orders are a special kind of remedy. The second approach would be centered around public interest considerations. I can see how this works for certain issues, such as FRAND-pledged standard-essential patents (SEPs), but doubt that it's an answer to the problem of rampant, increasingly industrialized patent trolling. The third approach is the ITC's domestic industry requirement (DIR): you don't have access to an exclusion order without proving that a domestic industry exists or is in the process of being created in the U.S. with respect to the asserted patent(s). And that's the one I'm going to focus on for the remainder of this post.

Just like Congress liberalized the DIR in 1988 by enabling complainants to satisfy it through the proof of licensing activities (as opposed to the manufacturing of products implementing the patents in question), it could again narrow it. It's like "Congress giveth, Congress taketh away". But at this point there doesn't seem to be momentum behind legislative change in that regard (for as much as I would prefer a stricter DIR over an attempt to make eBay work for the ITC). So some of the companies who are generally critical of the ITC, and particularly of the many ITC investigations instituted at the request of patent trolls, hope that ITC rulings and, especially, appellate opinions can result in a more exacting DIR. Unfortunately for them, this is a steep challenge because Section 337, the statute governing the ITC's unfair import investigations, defines the DIR very inclusively.

In January 2013, Dennis Crouch wrote on his PatentlyO blog that "NPEs [Non-Practicing Entities] Solidify Enforcement Jurisdiction at USITC". That post discussed the Federal Circuit's order denying a petition by Nokia for a rehearing of a decision relating to InterDigital's first ITC complaint against Nokia, holding that InterDigital satisfied the DIR. The following passage from the Federal Circuit's opinion supports PatentlyO's assessment:

"Under the clear intent of Congress and the most natural reading of the 1988 amendment, section 337 makes relief available to a party that has a substantial investment in exploitation of a patent through either engineering, research and development, or licensing. It is not necessary that the party manufacture the product that is protected by the patent, and it is not necessary that any other domestic party manufacture the protected article. As long as the patent covers the article that is the subject of the exclusion proceeding, and as long as the party seeking relief can show that it has a sufficiently substantial investment in the exploitation of the intellectual property to satisfy the domestic industry requirement of the statute, that party is entitled to seek relief under section 337."

Let's take a quick look at the relevant part of the statute:

(2) Subparagraphs [regarding import bans against infringing products] apply only if an industry in the United States, relating to the articles protected by the patent, copyright, trademark, mask work, or design concerned, exists or is in the process of being established.

(3) For purposes of paragraph (2), an industry in the United States shall be considered to exist if there is in the United States, with respect to the articles protected by the patent, copyright, trademark, mask work, or design concerned --

(A) significant investment in plant and equipment;

(B) significant employment of labor or capital; or

(C) substantial investment in its exploitation, including engineering, research and development, or licensing.

I'll further enhance legibility now by replacing "patent, copyright, trademark, mask work, or design" with "IPR" (for "intellectual property right"):

(2) Subparagraphs [regarding import bans against infringing products] apply only if an industry in the United States, relating to the articles protected by the [IPR] concerned, exists or is in the process of being established.

(3) For purposes of paragraph (2), an industry in the United States shall be considered to exist if there is in the United States, with respect to the articles protected by the [IPR] concerned --

(A) significant investment in plant and equipment;

(B) significant employment of labor or capital; or

(C) substantial investment in its exploitation, including engineering, research and development, or licensing.

Item (C) is the one that patent trolls invoke -- in particular, the last item ("licensing"). For example, litigation expenses can constitute a substantial investment in licensing. Without litigation it's probably hard to satisfy the DIR on a licensing basis.

The structure of the statute has a major flaw. It lumps together all the criteria for satisfying the DIR through a product business with those that apply to a licensing business. It would have been better to have a clear set of criteria for product-based DIR arguments, and another set for licensing-based DIR theories. But the statute is what it is, and various companies are now arguing that even a non-practicing entity like InterDigital, which relies on licensing, must show "articles protected by the [asserted IPR(s)]". In the case of an NPE, such articles would be products made by licensees.

For product-based business, the DIR has an economic prong (investment, employment) and a technical prong (a showing that the products the investment and/or employment relate to actually implement an asserted patent). The statutory basis for the technical prong is the term "articles protected by the [IPR] concerned". Does this even make sense for licensing firms? Or should there be no technical prong at all in their case? That's the question the ITC recently asked parties and third-party stakeholders in connection with its ongoing review (which does not, at least not yet, involve FRAND issues) of a preliminary ruling clearing Nokia, Huawei and ZTE of infringement of various InterDigital patents. This is the Commission's request for input in its September 4, 2013 review notice:

"Please discuss, in light of the statutory language, legislative history, the Commission's prior decisions, and relevant court decisions, including InterDigital Commc'ns, LLC v. Int'l Trade Comm'n, 690 F.3d 1318 (Fed. Cir. 2012), and 707 F.3d 1295 (Fed. Cir. 2013), whether establishing a domestic industry based on licensing under 19 U.S.C. § 1337 (a)(3)(C) requires proof of 'articles protected by the patent' (i.e., a technical prong). If so, please identify and describe the evidence in the record that establishes articles protected by the asserted patents."

This question about whether there is any technical prong of the DIR for licensing-based businesses was interesting enough all by itself. But those advocating a strict, NPE-unfriendly DIR saw another invitation to make submissions to the ITC in last month's Federal Circuit opinion on Microsoft's appeal of certain unfavorable parts of the ITC ruling on its complaint against Motorola. On page 11 of that opinion, there's the following passage that stresses the need to show articles protected by an asserted IPR (and that these must be the ones that a domestic industry is established for):

There is no question about the substantiality of Microsoft's investment in its operating system or about the importance of that operating system to mobile phones on which it runs. But that is not enough under the statute. Section 337, though not requiring that an article protected by the patent be produced in the United States, unmistakably requires that the domestic company's substantial investments relate to actual 'articles protected by the patent.' 19 U.S.C. §§ 1337(a)(2), (3). A company seeking section 337 protection must therefore provide evidence that its substantial domestic investment—e.g.,in research and development—relates to an actual article that practices the patent, regardless of whether or not that article is manufactured domestically or abroad. InterDigital Commc'ns v. Int'l Trade Comm'n, 707 F.3d 1295, 1299, 1304 (Fed. Cir. 2013).

So there's the above passage, building on and citing to the earlier decision in the InterDigital case, and it emphasizes the reuqirement to show articles protected by an asserted patent. The respondents in the InterDigital investigation that is at the review stage -- Nokia, Huawei, and ZTE -- have tried to capitalize on this in their reply briefs. But I don't agree with them (not because I don't like what they want to achieve, but because I don't think they provide a compelling logic) that the Microsoft decision clarifies/modifies the InterDigital opinion to the effect that a licensing firm needs to show actual products. In the InterDigital opinion, the Federal Circuit actually declines to go into much detail on decisions relating to product-based DIR cases. I'm sure the reference in Microsoft to InterDigital is only about the part that clarified once again a domestic industry article doesn't have to be manufactured domestically but can also be imported.

Still, some companies now hope to up the ante for patent trolls by requiring them to show DIR products (and, even though InterDigital appears to suggest the opposite, those would obviously have to be other products than the accused devices). Nokia (which is in the future going to be more of a patent licensing firm than a product business), Huawei and ZTE try to defeat InterDigital's ITC complaint, in the event any of the preliminary findings on (non-)liability is reversed, just on the basis of the DIR.

In a reply brief (the public redacted version of which just became available this week) they also point to positions taken by third-party stakeholders that are allegedly consistent with their own opening brief on domestic industry:

"Respondents [Nokia, Huawei and ZTE] were also served with filings from non-parties Hewlett Packard, Dell, Ford and Google that address the domestic industry issue identified in the September 4 Notice. These submissions largely are consistent with the positions taken by Respondents in their initial brief."

Those submissions have actually not appeared on the ITC document system yet.

Now that briefing on the Commission's DIR-related review question is complete, it's clear that there are basically three positions: InterDigital argues that there is no technical prong and it also wants to have an extremely low hurdle as far as the economic prong is concerned. Respondents and third-party stakeholders opposing patent trolls' access to ITC exclusion orders want there to be a technical prong, which would not make it impossible for NPEs to win ITC cases, but it would be too late for InterDigital in this case and it might discourage some other NPEs from bringing ITC complaints. The Office of Unfair Import Investigations (commonly referred to as the "ITC staff"), which is participating in this investigation with respect to only two of the patents-in-suit and overall FRAND issues, has stated a position that is closer to InterDigital's -- no technical prong -- but still comes down to a more exacting standard: the ITC staff would like to see proof that a substantial investment in licensing relates to the asserted patents. The ITC staff says that InterDigital failed to provide such proof. Presumably InterDigital just argued based on licensing activities relating to its overall portfolio. The ITC staff wants a more granular showing of substantial investments relating to particular patents out of a large portfolio. It's not clear to me how this would work in practice.

My guess is that if the Commission, the six-member decision-making body at the top of the ITC, reaches the domestic industry question at all instead of just throwing out InterDigital's complaint for failure to prove infringements of valid patents, it will rule more or less consistently with InterDigital's position. Maybe it will agree with the staff that the economic prong, which would be the only relevant prong for NPEs, must be satisfied on a patent-by-patent basis. But I doubt that it will agree with the likes of Google. Companies like Google will, however, continue to lobby Congress for a reform of overall patent law and also the statute governing the ITC.

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