How Businesses Can Prepare for ITC Exclusion Orders: Section 337 Investigations on the Rise
Patent investigations at the International Trade Commission (ITC) have been on an upward trend in the last few years. In 2018, the most recent year with complete data, 74 new complaints were filed and there were 130 active investigations, compared to the 117 active investigations in 2017. The trend appears to be continuing in 2019. In today’s global economy, with so many types of products and components being imported into the United States, a rise in patent investigations means that a large number of U.S. companies and their customers are at risk of having their supply chain disrupted. This can result in a potential loss of income, breached contracts, disgruntled customers and general uncertainty regarding the future.
Section 337 Investigations
In the ITC, an intellectual property owner, or complainant, files a complaint asking for an investigation into the importation of products that allegedly infringe their intellectual property. If the investigation is instituted, the manufacturers and/or importers, called respondents, of the accused products then litigate with the complainant, culminating in a hearing before an administrative law judge. If the complainant is successful, the ITC will issue an exclusion order, whereby U.S. Customs and Boarder Protection (CBP) will prevent the infringing products from being imported into the United States. While these investigations, commonly called Section 337 investigations, can involve any type of intellectual property, the vast majority involve patents. In 2019, 110 of the 127 active investigations solely involved patents, while 119 of the 130 active investigations in 2018 solely involved patents.
Avoiding an ITC Exclusion Order
With ITC Section 337 investigations on the rise, and exclusion orders stagnating, businesses need to plan for this potential contingency. While this planning ideally should happen before the 337 complaint has been filed, there are steps that businesses can take even after being hit with a complaint.
One of the most important steps is to find alternative suppliers, including suppliers who are manufacturing the component at issue in the United States. Sourcing critical components from multiple sources may reduce the chance that a business is unable to obtain all the necessary parts for its products. Identifying replacement suppliers who can step in for the primary supplier can assist with this. Furthermore, if the suppliers are manufacturing the product in the United States, a business may be able to avoid the exclusion order entirely.
A business should also look at potential redesigns for different components and functions. What parts of their product can be changed and how can this best be accomplished? By evaluating these possibilities, even during the early stages of product development, a business may be able to get a head start on avoiding an ITC 337 exclusion order. ITC 337 investigations are fast-paced, averaging 14 months from beginning to end.
This may not leave much time to research and develop alternatives to the infringing component. By identifying some of these alternatives in advance, whether through implementing alternative functionality that does not infringing or using vendors that are licensed, a business can more quickly implement these changes to their products.
Businesses may also want to consider having suppliers indemnify and defend a business against intellectual property infringement allegations for 337 investigations at the ITC. This is particularly important for businesses that purchase the majority of their parts from others. The ITC and CBP will only enforce exclusion orders against parties that were named in the investigation. Kyocera Wireless Corp. v. ITC, 545 F.3d 1340 (Fed. Cir. 2008).
This means that a business that incorporates an infringing component into its product prior to importation—often referred to as a customer respondent—may be brought into an ITC investigation. For example, computer manufacturers often purchase chips and incorporate them into the final laptop computer before importation into the United States. However, if a 337 complaint is directed at the chip and its functionality, the computer manufacturer will often be included in the ITC investigation so that any resulting exclusion order includes those laptops.
In these situations, it is critical for the end manufacturer to get indemnification from the component supplier. This indemnification should include defending against both the 337 investigation and any parallel district court actions. Businesses should also try to obtain some control of any eventual settlement. This may include allowing a phase-out period to permit the business to identify and engage other component suppliers, thereby minimizing disruptions to customers. That control may help avoid the business being left in a lurch with no time to find alternative components or suppliers.
Fight the Patents
Fighting the asserted patent(s) is also critical to these efforts. Many ITC 337 Investigations involve several patents of different scope and technical coverage. Currently in 2019, 79% of new 337 investigations involved three or more patents, while 44% involved five or more.
Multiple patents may be directed to different aspects of a product. By fighting the patents, both at the ITC and in other forums, a respondent can not only reduce its exposure, but also reduce the changes necessary to their components and/or products when they seek to design around the patents or look for different suppliers. Due to its speedy proceedings, filing petitions for inter partes review (IPR) at the U.S. Patent and Trademark Office may be particularly effective. Altering the design of a product can be done much more easily and quickly when it is accused of infringing one patent as opposed to when it is accused of infringing 10 patents.
Have a Plan
ITC 337 investigations are a fast-paced litigation that can severely disrupt a business. The results can be devastating to its targets. Businesses should frequently evaluate their products and contingency plans to prepare for the likelihood of an investigation.