Will your products be allowed into the US?

2008/04/01,Steven E. Adkins — Jones Day, Washington, D.C. etc.,[Trade Secrets]

Imagine that all of your competitors are sued for patent infringement at the US ITC.  Their customers start buying from you.  You begin hiring hundreds more employees, renting more land, building more dormitories and factories, and increase production significantly.  A few months later, you learn that even though your company is not on the list of companies sued at the ITC, your company's products will be seized by US Customs and kept out of the United States if your competitors lose the case.  How can you avoid or respond to such a situation and other challenges that can arise from a Section 337 investigation?

I. The United States International Trade Commission and Section 337

Section 337, as administered and enforced by the United States International Trade Commission ("ITC"), is a broad-reaching and powerful law. It prohibits the importation into, the sale for importation, or the sale within the United States after importation of products that infringe a valid United States intellectual property right.  For example, the owner of a U.S. patent can file a complaint with the ITC, and the ITC, generally within 30 days, will start an investigation to determine if the accused products infringe the patent and therefore violate Section 337. If a violation is found, the ITC can issue an exclusion order that requires United States Customs and Border Patrol to stop the infringing products from being imported into the United States.  In addition, if there are infringing products inside the United States, the ITC can issue a cease and desist order to prevent those imported products from being sold. 

There are several things foreign companies seeking to import products into the United States should consider about Section 337:

• Section 337 is considered a "first line of defense" because exclusion orders stop infringing imports at the United States border. 

• The ITC's jurisdiction is based on the importation of accused products, not the presence or activities of a company in the United States. Thus, the ITC has power to exclude infringing products even if it does not have power over the company that manufactured or imported those products.

• The ITC works quickly, usually completing investigations in twelve-to-fifteen months. 

• The ITC's most powerful remedy, the General Exclusion Order, can exclude an entire class of products beyond those specific products found to infringe patents.  This means that the ITC can exclude products of companies who did not participate in the investigation.  Thus, even if your company is not listed on the Section 337 complaint, your products could be subject to such an order and could be excluded from the United States.

• Even if your product is not imported into the United States by you or others, but is included in a larger product that is imported into the United States, that larger product, including your component, can be seized by US Customs and kept out of the United States.

II. What Section 337 Means to Chinese Companies

The ITC is an increasingly popular forum for protecting United States intellectual property.  For example, from 1996 to 2000, the ITC initiated 63 investigations.  Between 2001 and 2005, the ITC initiated 113 investigations, or almost twice as many.  Investigations are also getting larger.  The average number of respondents between 1996 and 2000 was 3.89, but the average number of respondents during 2001 through 2005 was 5.65.  More China-based companies are being named as respondents at the ITC; about one-half of the Section 337 investigations now include China-based companies.  More of these companies are fully participating in these investigations, despite the legal costs of doing so. 

There are several explanations for why so many Chinese companies are named as respondents in Section 337 investigations.  The simplest explanation is the volume of products that China-based companies are sending into the United States.  Business is booming, and China has experienced dramatic economic changes in the last decade, with a significant rise in its manufacturing and exports.  The United States is one of China's largest export markets. Given the rapid growth in China's economy – especially in the high-technology manufacturing sector – it is likely that more and more Chinese companies will be named as respondents at the ITC.  It also appears that more and more Chinese companies are taking Section 337 seriously and participating fully in the litigation at the ITC. 

Going forward, there are several specific actions that Chinese companies may consider to avoid Section 337 investigations:

• Get clearance opinions from competent and independent counsel, before beginning importation into the United States. These opinions advise you whether there is a risk that your products infringe another's intellectual property. You can then decide what the best course is for the products you want to export and sell in the United States.

• Locate and retain competent ITC trial counsel. Intellectual property law is complicated and requires expertise and skill.  Because of its unique and fast-paced nature, Section 337 adds another layer of complexity.  The difference between a good (but expensive) lawyer and a bad (but cheap) lawyer can be your company's ability to participate in the United States market.  In fact, there is a saying in the United States that there is nothing as expensive as a cheap lawyer.

• Diligently maintain corporate records. This includes complete business transaction records, as well as design, engineering, research and development records. These documents may help prove that there is no violation of Section 337.  On the other hand, the absence of these documents may prevent you from presenting a good defense. 

• A United States intellectual property portfolio can also be useful. That is, it can provide Chinese companies a way to stop others from infringing their rights.  It can also be used as bargaining leverage in potential settlement negotiations. 
III. Dealing with Section 337 Investigations

If you are accused of infringing a patent in a Section 337 investigation, the first thing you should do is retain competent trial counsel. Because Section 337 investigations move so quickly, your lawyers need as much time to prepare as possible.  Once the ITC starts the investigation, the ITC will send the Chinese company the Complaint and other papers by Air Mail; there is no Hague Convention service at the ITC. Among the first things the Chinese company should consider when it is sued at the ITC are the following:

• Retain ITC counsel and demand a written budget for the work to be done.

• Consider settlement by taking a license or ceasing production of the product.

• Consider a different design that moves the product away from the patent.

• Retain an expert who is credible, willing to work, and who can teach the relevant technology to the ITC Judge.

American-style discovery can be intrusive and uncomfortable, but is a critical part of Section 337 investigations. You must be prepared to participate fully in discovery by providing documents and answers to questions (called interrogatories).   

If you fail to participate in discovery, the ITC can compel you to participate or impose sanctions. Still, the ITC appreciates the sensitive nature of your confidential business information. Protective orders are automatically entered to ensure that each party's sensitive information cannot be viewed by a competitor or the public.
One of the most critical things that a party to a Section 337 investigation must do is retain a good expert early in the investigation. Often, a respondent can locate and retain a more qualified, useful expert despite the fact that the party bringing the suit had time before to do so. Quick action is necessary: a good expert can make the difference between winning and losing at the ITC.

If there are other respondents in the investigation, it may be appropriate to share legal counsel and expert witnesses. It may also be helpful to coordinate tasks with other respondents. Many issues in Section 337 investigations are common to all respondents.  By dividing up the work that needs to be done, you may be able to reduce the costs of participating in Section 337 investigations. 

As noted above, it is also critical that you consider a different design that places your product well outside the patent at issue. You should act quickly to get this new product imported and before the Administrative Law Judge. Of course, getting clearance of this new product will reduce or remove any disruption your US customers may experience due to the Section 337 investigation. With regard to your US customers, it is always a good idea to be proactive and contact the customers to inform them of the ITC investigation and, to the extent possible while maintaining confidentiality with your lawyer, explain the steps you are taking to respond to the investigation.

IV. Summary

Section 337 is a gatekeeper to the United States market. Within months, the Chinese company can find that its largest market is off limits based on a ruling from the ITC.  Even if your company is not on the list of companies sued, you should ensure that the type of product you are selling into the United States (or selling to someone who puts the product in a larger product that is then imported into the United States) is not subject to a pending ITC investigation.  You can do this by monitoring the ITC website (www.usitc.gov). 

If you participate in a Section 337 investigation, you should consider the steps mentioned here. Doing so quickly will increase your chances of winning and keeping your access to the US market.



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