Focusing on Section 337 Investigations in the Context of the Financial Crisis

Issue 32 By Harry Yang and Sara Yan, Photo by Doris Li and Zhou Yi, China IP,[Unfair Competition]

Under Section 337 of the United States Tariff Act of 1930, the United States International Trade Commission (ITC) shall institute an investigation of certain import-related complaints and render determinations. Such investigations are called Section 337 investigations, most of which involve IP issues. From 2002 to 2007, Chinese enterprises ranked first in terms of the number of complaints being investigated.

During the first half of 2009, there was a decline in the number of Section 337 investigations against Chinese businesses. By July 1 of 2009, only two Section 337 cases were initiated and the most recent one was filed on March 31.

Under the theme of “Focusing on ‘Section 337 Investigations’ in the Context of Financial Crisis”, the 5th IP Salon of the People’s Daily Online held a forum to conduct an in-depth analysis and discussion over the changes and future trend of “Section 337 investigations” in the context of the financial crisis as well as some Section 337 cases such as Rubber Antidegradants (337-TA-652), Sucralose (337-TA-604) and Lysine (337-TA-571). Among the speakers invited were Dai Xi, Deputy Director General of the Barrier Investigation Division of the Bureau of Fair Trade under the Ministry of Commerce; Mark Cohen, former Senior Intellectual Property Attaché of U.S. Embassy in Beijing; Ran Ruixue, partner of East Associates Law Firm, and Li Yongbo, partner of Unitalen Law Office.

The participants also included representatives from the EU Delegation of the European Commission to China, LexisNexis, Yancheng JK Sucralose Inc., Panasonic Corporation of China, Sekisui Chemical Co., Ltd. Beijing Office.

I. Financial crisis affected U.S. Section 337 investigations involving Chinese companies?

Background: In the first half of 2009, there was a significant decline in the number of Section 337 investigations initiated by the U.S. against Chinese enterprises compared with the same period of last year. As to this phenomenon, the four guests gave their explanations.

Dai Xi: The Ministry of Commerce has noted the declining tendency of Section 337 cases over the first half of this year and has pondered over possible reasons for the decline. As is known to all, Chinese enterprises ranked first in terms of the number complaints being investigated between 2002 and 2007. However, beginning this year, there has been a decline in the number of Section 337 cases involving Chinese enterprises. One possible reason behind the reduction is the economic downturn. Because of the global financial crisis, the overall business conditions of enterprises were not good and the profit rate had declined. Given the huge cost of the investigations, potential foreign applicants had to be more prudent in making decisions or adopting other relatively economical competitive strategies.

Another very important reason is that in recent years, through the joint efforts of the government, business associations and enterprises, the responding rate and winning rate of Chinese enterprises in Section 337 cases has risen greatly. Prior to 2002, many Chinese enterprises chose not to respond to the complaints, thus giving up the U.S. market; whereas in the past five years the responding rate has reached over 86%. A growing number of enterprises are brave enough to use legal weapons to protect their IPRs and their rights and interests in exports. Furthermore, the winning rate also rose. Since last year, Chinese enterprises have won a series of Section 337 cases such as Lysine, Sucralose, Mercury-free Alkaline Battery, Copper Clad Laminate, and Glucosamine. The increasing responding rate and winning rate of Chinese companies is a strong deterrent to malicious litigation. Those who prepare to file a Section 337 investigation against Chinese companies have to think about whether they have the capacity to fight the lawsuit to the end and obtain a favorable result.

Mark Cohen: There are many elements that must be taken into account with respect to this issue. Examples include the relationship of Section 337 investigations with other trade measures, with the financial crisis as well as other factors, such as the tendency of litigation. Because of the financial crisis, the U.S. companies and the foreign companies in the U.S. did not expect to obtain a lot of compensation even if they filed a Section 337 claim. In addition to the initiation of Section 337 proceedings, the enterprises, when considering the market issues, may also choose court litigation. Thus, one potential reason behind the declining rate of investigation is that Section 337 litigation is not necessarily the most effective method.

What Director Dai said just now also makes sense. Beginning this year, there has been an improvement in the responding rate and winning rate of the Chinese enterprises in Section 337 cases. Over the past decade or so, the defaulting rate in the U.S. Section 337 cases was 7% between 1996 and 2000, and 14% between 2001 and 2005, among which Chinese enterprises occupied 34.5%. The winning rate of the Chinese enterprises responding to ITC investigations was higher than that of other foreign companies. For enterprises filing Section 337 investigations, the most economical result is that the respondent defaults, which decreases their cost and wins them time.

Ran Ruixue: In the context of the financial crisis, there has been a decline in the number of Section 337 cases, but this change was not obvious. With the deepening of internationalization of Chinese enterprises, more and more enterprises began to establish branches in the U.S. However, Section 337 cases involving these branches were not calculated. There were at least two cases in the first half of 2009 concerning Chinese enterprises’ branches in the U.S. If these cases were included in the statistics, there was only a relatively small drop in the number of Section 337 cases involving Chinese enterprises in the first half rather than a big fall.
Li Yongbo: The ultimate goal of Section 337 investigations instituted by the U.S. companies against Chinese enterprises is to restrict the entry of Chinese enterprises into the U.S. market. With the increase of responding rate and winning rate of Chinese enterprises, the U.S. companies will be cautious in choosing Section 337 proceedings. They may contemplate court litigation so as to obtain more monetary damages because there is no profit available in the business market due to the financial crisis. I felt that there was a dramatic increase in patent and trademark litigations against Chinese enterprises in the first half year; however, it was just another way for these U.S. companies to achieve their goals.

II. Introduction to some Section 337 cases
1. Rubber Antidegradants, Investigation No. 337-TA-652
History of the case:
Flexsys America L.P. (Flexsys), the complainant, filed a complaint with the U.S. ITC against Sinorgchem Co., Ltd. (Sinorgchem), requesting the ITC conduct a Section 337 investigation regarding rubber antidegradants and issue a permanent limited exclusion order and cease and desist order barring the importation of 4-ADPA made by using the patented processes held by Flexsys and 6PPD, antidegradants made from its 4-ADPA and the downstream products thereof. At the same time it brought a lawsuit with the U.S. District Court for the Northern District of Ohio claimimg of USD 20 million from Sinorgchem for economic losses.

On February 17, 2006, the ITC rendered its initial determination, holding that Sinorgchem violated part of Flexsys’ patents in the U.S. At the same time, U.S. District Court for the Northern District of Ohio restarted its trial. Subsequently, President Bush issued “a limited exclusion order”, barring the importation of Sinogchem’s products into the U.S. market.

In February 2007, Sinorgchem appealed the Commission’s final determination to the U.S. Court of Appeals for the Federal Circuit.  

On December 21, 2007, the Federal Circuit issued its judgment vacating and rejecting the Commission’s final determination and finding that Sinorgchem did not infringe Flexsys’ patent rights.

On April 14, 2008, the Federal Circuit denied Flexsys’ petition for rehearing by jury and rehearing en banc and affirmed the judgment of December 21, 2007.
Li Yongbo: After the Section 337 investigation of rubber antidegradants complaint was filed by the U.S. companies, Sinorgchem analyzed the case and felt that its products had been manufactured and put into use since the 1990s and Flexsys’ patents can be invalidated. It went through all the proceedings from the first instance trial, final trial to appeal in the Federal Circuit. Ultimately the court concluded that the enterprise was not found to be infringing. This was a very successful case.

2. Sucralose, Investigation No. 337-TA-604
History of the case:
On April 6, 2007, Tate & Lyle Technology Limited of London, United Kingdom, filed a complaint under the name of its U.S. subsidiary with the ITC against 23 Chinese sucralose manufacturers and exporters, especially Guangdong Food Industry Institute, who owns the patented technology, alleging these Chinese enterprises infringed its five patents in the U.S. They requested that the ITC institute Section 337 investigations against these enterprises and issue a general exclusion order and cease and desist order. These Chinese enterprises chose to answer the complaint.

On September 23, 2008, the U.S. ITC issued its initial determination ruling that the Chinese enterprises, i.e. Guangdong Food Industry Institute, L&P Food Ingredient Co., Ltd., Changzhou Niutang Chemical Plant Co., Ltd., Yancheng JK Sucralose Inc., did not infringe Tate & Lyle’s asserted patents and there was no violation of Section 337.

The decision was adjourned three times thereafter. On April 7, 2009, the U.S. ITC published the final determination finding that the Chinese enterprises prevailed in all aspects of this litigation.

An Lijun (CEO of Yancheng JK Sucralose Inc.): In the Sucralose case, JK Sucralose was not named as a respondent, but it was an opportunity for JK Sucralose. Section 337 investigation erected a barrier blocking the way for the competitors running in the front. However, JK Sucralose jumped to the front by utilizing this springboard. We made full use of this event and treated it from the perspective of investment and eventually won the case, growing from a small unknown company to No. 2 in the world. Therefore, a Section 337 investigation is not a terrible thing. IPR litigation is a market means. It is impossible not to encounter IPR litigations in international trade. Instead of being beaten passively, it is better to take the initiative and handle IPR litigations in international trade with the concept of investment.

III.Should Chinese companies choose to respond to “Section 337 investigations”?
What should Chinese enterprises do when faced with a Section 337 action? Should the enterprise respond or default? This question gave rise to controversies in the IP Salon on this issue. Mr. Ran Ruixue believes that “only those enterprises that have strength and ideals can afford to respond to Section 337 investigations,” whereas Mr. Cohen insists that “appearance in court is not the only way out when facing a Section 337 investigation.”

1. Enterprises having strength and ideals can afford to respond to Section 337 investigation

Ran Ruixue: In my experience, only two types of enterprises in China choose to respond to Section 337 investigations: large enterprises with strength and enterprises with ideals. What kind of enterprises can be deemed as having ideals? They are those whose interests in the U.S. market are probably not enough to balance their cost for the time being, but whose leadership has ideals and wish to become a leading enterprise in the industry. The chances that an ordinary enterprise will choose to answer the complaint are very slim because the expected cost of a Section 337 case is at least 2-3 million US dollars.
For many small and medium-sized enterprises, they may adopt other ways to deal with Section 337 investigations; for example, they may design around the complaint, or they may use other methods so that their products can enter the U.S. market smoothly. However, for those really large enterprises or enterprises with ideals, they should choose to participate in the investigation and prove their value in the industry by responding to litigation or even by winning litigation.

Mark Cohen: This is a matter of business principle rather than a matter of ideals. Winning or losing in litigation has nothing to do with whether a company is “good’ or “bad.” Many responding companies lost the case in the end. What they implemented eventually was their business plans rather than self-realization. Many examples can illustrate this point. For example, Huawei Technologies Co., Ltd. is an innovative enterprise. There were several Section 337 actions filed against it and it chose to default. This is a very good example. Can you say that such enterprises as Huawei do not have ideals simply because they chose not to respond to these actions?

Ran Ruixue: Through years of development, Chinese enterprises have gained some confidence in the international market. They are eager to win some international litigation and hope that the victories can have an impact on the industry. It is a notion held by the management of many enterprises. For enterprises, a Section 337 investigation is a very good opportunity for public relations, if handled properly.

Dai Xi: What choice should an enterprise make when facing a Section 337 investigation? Actually, we have been through many cases. An enterprise may make different choices under different circumstances. However, the core element an enterprise considers in making choices is the market. In essence, Section 337 investigations are a legal means through which an enterprise protects its private property. Enterprises are the subjects responding to the investigation, while government and business associations play a guiding or supporting role in the investigation.

For example, an enterprise’s products may be subject to a Section 337 investigation, but the products can be easily duplicated and replaced. In this context, it is likely that the enterprise is unwilling to spend a lot of litigation fees to protect such “very delicate” intellectual property rights. Some enterprises do not have direct exports, or the U.S. market is not their core market, or the enterprises think that they lack strength to compete in the U.S. market, and they may choose not to respond. However, the Ministry of Commerce has been encouraging Chinese businesses to respond to the complaint if they have the capacity. Practices prove that an enterprise can safeguard its own rights and interests in varying degrees as long as it participates in the investigation. However, default indicates that an enterprise automatically waives its right of defense. In cases where general exclusion orders are sought or multiple enterprises are involved, failure to respond may damage the interests of an entire industry. Thus, in principle, an enterprise should appear when confronted with a Section 337 investigation.

2. Steep cost is not the only reason for enterprises’ default
Dai Xi: In a Section 337 investigation, theoretically, it will take an enterprise 16 months or nearly two years to undergo the whole investigation process and it will generally cost 2-3 million US dollars. The exact cost depends on the complexity of the cases. If there are multiple responding enterprises, they may choose to respond jointly in order to lower costs. However, due to the technical differences of their products or in consideration of mutual competition, the enterprises may choose to respond separately, which requires specific analysis of specific conditions. But on the whole, it is very costly for Chinese enterprises to participate in a Section 337 investigation.
Ran Ruixue: The prohibitive cost is indeed an important reason that many enterprises shrink from the investigation. However, it is just one factor. Many other factors such as an enterprise’s reserve of talents, an enterprise’s realization of the U.S. market, as well as certain business factors will finally decide whether the enterprise responds to the complaint or not.

From a micro perspective, an enterprise itself may also make a calculation. How much does it cost to participate in the investigation? How much interests can be expected from the market? A Section 337 investigation involves a comparatively lengthy process. Originally it took 12 months to conclude a case. But now it usually takes 15 months or even longer. For example, three years passed before the conclusion of Lysine case. During such a long time, the enterprise invested substantial human and material resources, not to mention the attorney fees.

IV. Strategies and techniques employed in dealing with Section 337 investigations
1. The strategy of dealing with Section 337 investigations should be based on evidence and reconciliation is not a guilty plea

Li Yongbo: Speaking of the strategy of dealing with Section 337 investigations, it is necessary to have a full analysis and understanding of events and facts. Good strategies can only be formulated after doing analysis. First of all, we should familiarize ourselves with the rules and procedures of Section 337 investigations, make sure whether the other party’s patents are stable, consider whether the asserted patents can be invalidated, etc.

In many cases, we can contemplate fighting back. Chinese enterprises should take into account various factors and reasonably utilize some of the U.S. rules. For example, under the U.S. Anti-Trust Law, do they abuse their intellectual property rights? Can we find a breakthrough from other aspects and file anti-monopoly proceedings? Of course such cases have not been found at present. However, there are some constraints and limitations to large companies in some new provisions of the U.S. Anti-Trust Law.

It is inevitable that we will introduce anti-monopoly into our intellectual property work because intellectual property rights and anti-monopoly in the U.S. are essentially a complementary process. The protection of IPRs has varied at different times; sometimes strong and sometimes weak. The same court ruled differently with respect to similar cases at different periods of time. This can be partly attributed to public policies. For example, in the 1970s and 1980s, there was a very loose control over IPRs. However, in the 1990s, the abuse of IPRs began to draw attention. IPR holders cannot monopolize the entire market or exercise their rights without any restrictions.

Dai Xi: An enterprise may have many options in making responding strategies, for example, alleging the asserted patent is invalid or that there is no infringement. Sometimes reconciliation with the complainant is also a realistic choice. For example, a case was concluded very quickly through settlement this year. The reason for the settlement was that the complainant’s asserted patent would expire soon. At that time, it was better for our enterprises to pay small license fees rather than to spend a large amount of money in litigation.

There is also the issue of responding to litigation collectively. The respondents in many cases are many enterprises. For example, in the Sucralose case, nine enterprises were named as respondents. They participated in the investigation in four groups. In this case, it is worthwhile to analyze the way of combination and mutual selection among the groups. Another example is the Mercury-free Alkaline Battery case, in which various enterprises responded jointly to the complaint under the unified organization of an association. How the association led and coordinated the interests of these enterprises is also worth analyzing and learning. If many enterprises are named in a complaint, the choice of responding strategies is often closely related with the overall interests of the industry. Once problems arise with the strategies, those industries with great export potential will suffer heavy blows.

Mark Cohen: In the U.S., the rate of settlement in civil cases is over 98% and less than 2% go to trial. In China, the settlement rate in some courts is about 50%, lower than that in the U.S. Settlement is a very good means. However, in dealing with Section 337 investigations, some Chinese enterprises seemed to feel that settlement is an admission of guilt. Actually, settlement is not a guilty plea but rather a business strategy.

Ran Ruixue: Just as Mr. Cohen said, all strategies are based on evidence and evidence is absolutely inseparable from discovery. Actually, this discovery is quite different from that of China in procedure and they are incomparable both in depth and breadth. Discovery in a Section 337 investigation proceeds in much the same way as in a U.S. District Court case. The documents submitted by the complainants and respondents contain a large amount of trade secret materials, including the companies’ technical information, financial information and personnel information. It is impossible to get such information in civil proceedings in our country and many European countries. The financial information in many listed companies is relatively public. However, not all the enterprises are listed companies. Moreover, even in public companies, some confidential information such as the experimental records of R&D is not likely to be open. But in the discovery process in a Section 337 investigation, such information is provided to the lawyers who have signed the protective order of trade secrets. Therefore, the lawyers can learn the facts of the case to the greatest extent so as to establish proper strategies. The so-called strategy design must be based on facts, which are derived from the evidence produced during the discovery process of the case. The basic evidence is the basis of the entire case.

Many Chinese enterprises just follow the procedure in Section 337 investigations passively, which is an unproductive practice. The right way is to take advantage of the procedure for our own purpose. For example, there are numerous possible reasons to file an application for patent invalidation. Which reason is more convincing? This is absolutely not as simple as consulting technical materials. Materials must be obtained through discovery. For example, in the Lysine case, we exchanged written materials and electronic data. With respect to the collection and preservation of written materials, Chinese enterprises in Section 337 investigations did a very good job and can learn things it would otherwise take decades to discover. However, there is still much room for improvement with respect to electronic evidence. During the entire discovery process, the lawyer team is very important. It must keep the process going in a legal state and at the same time ensure that the process proceeds in the direction favorable to them. However, it is the other way around in many cases.

2. Techniques of cost control in dealing with Section 337 investigations
Ran Ruixue: Section 337 cases involve very high legal expenses. They generally cost 2-3 million US dollars or even more. There are many techniques for saving money. Simply speaking, they are: First, consider whether it is possible to respond collectively. In many Section 337 cases, the respondent named on the complaint is not an individual enterprise but many enterprises, or even all enterprises in an industry. In this case, if these enterprises respond jointly and share the legal cost, the legal cost can be reduced largely. Of course, there are many requirements and problems accompanying joint defense because the interests of these enterprises vary. For example, it is likely that the products of some enterprises indeed involve violation of Section 337 whereas the products of other enterprises do not. It will be very difficult to require them to participate in the investigation collectively. Even though these enterprises respond individually, there are still some things that can be shared, for example, when they all file a petition for patent invalidation. We may share information with other respondents through the entire case. However, the degree of information sharing in some sense depends on the lawyers’ experience.

 Second, corporate lawyers or Chinese lawyers must be aware of cost in Section 337 cases. They must ask themselves which part is most in need of money, what fees can be saved and what fees cannot be saved. In a Section 337 investigation, the most expensive part is the process of discovery. For example, the hourly fee paid to a lawyer in a telephone conference varies ranging from $200 or $300 up to $500 or $600 US dollars per hour. There should be an in-house lawyer controlling the cost and rhythm. Of course, presently only a few in-house lawyers are able to control the cost and rhythm and at the same time are familiar with the evaluating the cost quotes of American lawyers.

Dai Xi: As regards cost control, in addition to the cost of funds for responding to litigation, there may be many hidden costs incurred. However, responding enterprises also have a lot of “invisible” assets.

First: The integration of resources. The Ministry of Commerce has been working hard to integrate resources to provide responding industries and enterprises with systematic support services, not only capital support but also support with respect to legal service, information service and market service. These supportive measures may be scattered among many departments, such as the Ministry of Commerce, the Ministry of Science and Technology, Intellectual Property Office, local governments, business associations, etc. Responding enterprises can get assistance from these departments. Second: The use of foreign negotiations. We continuously express China’s concerns and requests by maintaining aperiodic communication with the U.S. ITC, an organ in charge of Section 337 investigations. Sometimes at the request of enterprises, we express our specific concerns too and exert pressures on the ITC. Third: Information sharing. We are planning to write some books such as a guide to Section 337 litigation and a major cases series through improving the “Section 337 investigation” column in our website. We hope to constantly expand information sharing and the exchange of experience in dealing with Section 337 investigation. Fourth: Publicity and training. Annually, we organize four training programs on dealing with Section 337 investigations throughout the country, mainly for enterprises and local business associations. Now it seems that these efforts have played a very good role and provided strong support for the responding work of enterprises.

Li Yongbo: With respect to cost control, enterprises may consider the following issues. First, which law firm should be hired: domestic or foreign? Some domestic law firms have many international businesses, very proficient translators and interpreters who also have some professional knowledge. It is safe to choose such law firms. But they are unlikely to have a full and complete understanding of the work patterns and workflow of foreign law offices. Therefore, the intervention of a foreign law office is comparatively important. Some domestic enterprises may think that they are competent to communicate with foreign law offices and retain a foreign law office directly. That is OK if that is the case. Second, in choosing a domestic law firm, an enterprise needs to consider whether to increase cost or decrease cost and when to have a foreign law firm intervene. Third is the timing of hiring a foreign law office: Should they be hired from the beginning of the complaint or after a full analysis and understanding of the asserted patent and the formulation of a plan has been completed? The timing is important because foreign law offices charge more than their Chinese counterparts do. Presently, many Chinese lawyers having professional background are fully competent to do analysis with regards to Section 337 cases. After an analysis, they will get to know the trend of the entire case, and then consider whether it is necessary to hire a foreign law office. Additionally, they need to consider how to cooperate and make sure what should be done by domestic lawyers and what should be done by foreign lawyers.

An Lijun: From the standpoint of enterprises, the first thing they should do is to change their preconceptions and treat the participation cost as an investment rather than a cost. Second, they should begin developing an overall strategy, and then find a suitable law firm to help analyze the strategic focus. Some strategic steps can be omitted in order to save money. During the process of implementing the strategy, enterprises should be willing to consider adjusting the direction of cost input at any time. Litigation is one of the means of market competition. What is different is that Section 337 litigation is costly and the involved procedures are complex and professional. However, enterprises must be aware that legal action is one of the market means and its goal is to serve the market. Thus, enterprises should achieve the best combination of law and market. The cost is worth the investment if, through the combination of the two, the best result for the enterprise is achieved. 

V. Challenge regarding Section 337 investigations
Challenging Section 337 and the U.S. companies abusing their right of action
During the discussion, some listeners contested Section 337 of the United States Tariff Act of 1930 and suggested that an action should be brought for amendment of Section 337. The guests participating in the conference expressed their views.

Mark Cohen: The principle of national treatment is not the national treatment of products but the national treatment of intellectual property rights. As an example, I am a foreign right holder and you are an American right holder. Why can’t I use ITC Section 337 investigations in the U.S. to crack down on the U.S. companies or other products imported from a third country? It is an issue of the right of national treatment rather than an issue of products. The respondents in the ITC investigations may become complainants a few years later. They also like to use ITC investigations. Moreover, is it worthwhile to file a complaint with the ITC? The ITC only prohibits importation of goods into the U.S. and awards no other remedies as monetary damages. From the perspective of the complainants, it is better to sue in federal district courts because they award damages, very high damages. In terms of authority, court litigation also has its advantages. In fact, some courts are very fast in their trial of cases.

Ran Ruixue: The ITC rules are in constant change. The rules concerning Section 337 investigations have been modified to fit the requirements of national treatment or other rules because other countries resorted to the GATT. In addition, the ITC’s rules of practice and procedures are also in constant change. For example, the ITC amended the procedural rules of Section 337 investigations last year.

       (Translated by Zhang Meichang)

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