March 2, 2016
Westlaw Journal Intellectual Property
By Maximilienne Giannelli, Ph.D.; Eric J. Fues
Authored by Eric J. Fues and Maximilienne Giannelli, Ph.D.
Respondents before the U.S. International Trade Commission (ITC) have historically viewed consent orders as a graceful way to exit an investigation by forgoing activities that may result in U.S. sales or importation of products that infringe a valid patent. But these agreements have real teeth, and respondents should proceed with caution when considering this approach in view of two recent decisions from the U.S. Court of Appeals for the Federal Circuit.
In light of uPI Semiconductor Corp. v. International Trade Commission, 767 F.3d 1372 (Fed. Cir. 2014), respondents should be aware that a consent order may impose greater liability than an adverse decision on the merits or a default judgment.
Following DeLorme Publishing Co. v. International Trade Commission, 805 F.3d 1328 (Fed. Cir. 2015), respondents should understand that they may be held liable for consent order violations based on a later-invalidated patent.
As illustrated by uPI Semiconductor, consent orders may impose liability on respondents based on U.S. sales and importations of customers and/or downstream retailers. The consent order goes far beyond the scope of any limited exclusion order that the ITC could issue following an adverse decision on the merits or a default judgment.
In uPI Semiconductor, complainants Richtek Technology Corp. and Richtek USA Inc. sued respondent uPI Semiconductor Corp. in the ITC, alleging trade secret misappropriation and patent infringement based on uPI's importation, sale for importation, and/or sale after importation of certain DC-DC controllers.
Before the hearing in the investigation, uPI unilaterally moved to terminate the investigation based on a consent order that provided uPI would not import into the United States, sell for importation into the United States, or sell or offer for sale in the United States after importation the products at issue without Richtek's consent or agreement.
The consent order also provided that uPI would not "knowingly aid, abet, encourage, participate in, or induce importation into the United States, the sale for importation into the United States, or the sale, offer for sale, or use in the United States after importation" of these products.1
The administrative law judge granted uPI's motion to terminate the proceedings and entered the consent order. The ITC decided not to review the ALJ's decision, rendering it final.
About a year later, at Richtek's request, the ITC instituted proceedings to enforce the terms of the consent order. The ITC concluded that uPI violated the consent order on 62 days, including a single day for importation by uPI and/or its affiliate and 61 days based on U.S. importations or sales by downstream customers. The ITC imposed a fine of $620,000.2
On appeal, uPI challenged the imposition of a penalty for 61 of the 62 days, arguing that the ITC lacked the authority to impose a penalty based on the importation and sales of downstream customers. uPI relied on the Federal Circuit's decision in Kyocera Wireless v. International Trade Commission, 545 F.3d 1340 (Fed. Cir. 2008).
In Kyocera, the Federal Circuit held that the ITC lacked the authority to issue limited exclusion orders blocking importation of products by non-respondents—that is, parties not involved in the investigation—as opposed to respondents. The court explained that if a complainant wishes to obtain an exclusion order against articles of non-respondents, it must seek a general exclusion order and satisfy the heightened burdens of 19 U.S.C.A. §§ 1337(d)(2)(A) and (B).
UPI argued that the ITC lacked the authority to exclude its downstream customers' products absent a general exclusion order, and it noted that the ITC determined that Richtek failed to show that a general exclusion order should issue in the present investigation.3
UPI further argued that the ITC could not impose by consent more severe remedies than would be available in the event of a default judgment or a determination of a violation, noting that "[o]therwise uPI would be agreeing to significantly greater restrictions on its actions than would have been applicable had it simply defaulted and an exclusion order issued against it, which makes no sense."4
The Federal Circuit disagreed and held that the ITC could enforce uPI's consent order in accordance with its terms.
The court did not elaborate on its reasoning, limiting its analysis of the issue to a single paragraph. Presumably, it determined that the holding in Kyocera applied only to exclusion orders, not consent orders.
The Federal Circuit confirmed the ITC's authority to impose liability on uPI for the activities of its downstream customers based on the consent order's prohibition against aiding or abetting U.S. sales and importations, notwithstanding the fact that such liability would not result from the imposition of a limited exclusion order.
Importantly, the ITC rules now require all consent orders to include language prohibiting aiding or abetting U.S. sales and importations. In particular, since April 19, 2013, 19 C.F.R. § 210.21(c)(4) (iii) has required consent orders to include a statement that the respondent "shall not aid, abet, encourage, participate in, or induce the sale for importation, the importation, or the sale after importation," absent consent or agreement from the complainant.
Thus, the ITC presently requires that all consent orders impose potentially broader liability than otherwise available via limited exclusion orders.
The precise impact of this now-mandatory prohibition against aiding and abetting will turn on how broadly—or narrowly—the ITC applies it.
According to the ITC, uPI violated this provision by selling products into "established distribution channels which it knew had been used and almost certainly would continue to be used to effect the importation and sale in the United States of violative controllers incorporated into downstream products."5
If broadly applied, this interpretation may set a relatively low bar for violating the aiding-and-abetting provision, and the ITC could foreseeably impose liability on any respondent that knows that its violative components will wind their way into the U.S. market after incorporation into downstream products.
This has a particularly significant impact on how foreign respondents should weigh their options at the ITC. In particular, if a foreign respondent accepts default judgment or is found to have violated Section 337, the ITC will most likely issue a limited exclusion order as the sole remedy.
Limited exclusion orders do not impose any liability on the respondent for the activities of its customers or any other downstream retailers. By contrast, consent orders may well impose such liability when the ITC determines that the respondent aided or abetted such third-party conduct.
Historically, many respondents considered a consent order a graceful way to exit an investigation, as exiting via consent order may be viewed as more cooperative than failing to participate altogether and accepting default judgment. However, in view of the potentially broad liability imposed by consent orders following uPI, "[n]o one, exercising any degree of common sense, will ever again agree to an ITC consent order. It is better to risk an adverse final determination, or even to default, and have … [a limited exclusion order] issue, than to submit to a consent order imposing more severe restrictions than the LEO."6
Notably, the same is not necessarily true for respondents with significant domestic activities or inventories, as the ITC may issue cease-and-desist orders against such entities when they default or violate Section 337. The ITC's cease-and-desist orders at times prohibit respondents from aiding or abetting U.S. importations and sales, much like consent orders.
However, the ITC typically does not issue cease-and-desist orders against foreign respondents. As explained by the ALJ in the investigation at issue, a cease-and-desist order against uPI would have been "inappropriate because uPI is a foreign company with no operations or agents holding inventory of accused products in the United States."7While all respondents should be aware of the possibility that they may be liable for the activities of downstream retailers under the terms of a consent order, domestic entities may also face such liability under the terms of a cease-and-desist order.
In DeLorme Publishing Co. v. International Trade Commission, 805 F.3d 1328 (Fed. Cir. 2015), the Federal Circuit upheld a fine imposed for violating an ITC consent order based on an invalidated patent.
In DeLorme, the ITC terminated an investigation against DeLorme Publishing based on a consent order. Later, it instituted an enforcement proceeding to determine whether the company had violated the consent order.
Shortly after the ITC instituted the enforcement proceeding, DeLorme filed suit in federal District Court seeking a declaratory judgment of invalidity and noninfringement of the patent asserted in the ITC proceeding.
While the District Court action was pending, the ITC determined that DeLorme had violated the consent order and imposed a fine of over $6 million. DeLorme appealed the ITC's decision. While that appeal was pending, the District Court ruled that the underlying patent was invalid. The patent owner appealed the finding of invalidity.
The Federal Circuit decided both appeals on the same day, affirming both the determination of patent invalidity and the imposition of a $6 million penalty for violating a consent order based on the same invalidated patent.
The court upheld the penalty—despite the eventual determination of patent invalidity—because the consent order violations giving rise to the penalty occurred before a final adjudication of invalidity.
The court's decision hinged on a provision in the consent order that said DeLorme "shall not import into the United States, sell for importation into the United States, or sell or offer for sale within the United States after importation any [accused products that infringe the asserted claims] until the expiration, invalidation, and/or unenforceability of the [asserted patent]."
Because the consent order indicated that the terms would apply "until" the patent was adjudged invalid, the court concluded that DeLorme was liable for violations until entry of a final, non-reviewable decision of invalidity.
The court reasoned that the consent order provided three events that would cause it to no longer apply: patent expiration, an adjudication of invalidity, or unenforceability. It added that all three provisions were to be treated "identically."
According to the court, if subsequent invalidation of the claims at issue removed liability for infringement under the consent order, "then expiration of the claims would do the same," and "expiration of the patent would erase an earlier violation and any civil penalty assessed for that violation," which would amount to an "absurd reading of the consent order."
The court rejected DeLorme's argument that the ITC's subsequent rule amendments supported its position. Specifically, after the ITC entered DeLorme's consent order, it amended its rules to require that consent orders include statements that they become "null and void" as to any claim held invalid or unenforceable in a final decision, no longer subject to appeal, as now required by 19 C.F.R. § 210.21(c)(x) (May 20, 2013).
DeLorme argued that this rule amendment signaled that the ITC did not intend to impose penalties based on invalidated patents. The court disagreed and indicated that even if DeLorme's consent order had included this language, the consent order would become "null and void" only after a final adjudication of invalidity.
The court also rejected DeLorme's argument that the recent decision in ePlus Inc. v. Lawson Software Inc., 789 F.3d 1349 (Fed. Cir. 2015), required a different result. In ePlus, the Federal Circuit vacated an injunction and set aside a related contempt order because the injunction was based on a patent claim that was invalidated by the U.S. Patent and Trademark Office.
The court distinguished ePlus on the basis that the injunction in that case was not final, whereas DeLorme's consent order was final and non-appealable—a distinction the court characterized as "critical."
One Federal Circuit judge dissented, arguing that the ITC should have the opportunity to consider the effect of patent invalidation on the enforcement of a civil penalty based on the consent order.
The dissenter disagreed that the three events triggering an end to the consent required identical treatment. Rather, the dissent concluded that "there is an obvious absence of parallelism of the 'expiration,' 'invalidation,' and 'unenforceability' terms," in part because the term "unenforceability" refers to "a condition that existed from the time of the patent's issuance," raising the possibility that "invalidity" might also refer to a condition present from issuance.
The dissent said DeLorme's consent order explicitly stated that it "shall not apply" to any patent claim that had been adjudicated invalid on a final or nonreviewable basis, which could indicate that the terms of the consent order were not intended to apply to later-invalidated claims.
The dissent lamented the fact that the court had not been adequately informed about a number of issues, received briefing on how the ITC had treated these issues in the past, or been shown how similar consent orders had been interpreted elsewhere. It said the case should have been remanded back to the ITC for consideration of the effect of invalidation on the imposed $6 million penalty.
If the ITC had addressed the impact of patent invalidation in the first instance, it may have set aside the consent order and the related $6 million fine. For example, in the uPI Semiconductor enforcement proceeding, the ITC vacated the portion of the enforcement initial determination related to patent claims that were canceled as the result of ex parte re-examination, indicating that the commission may not seek to enforce civil penalties based on invalid or canceled claims.8
DeLorme has petitioned for review en banc, arguing that a final judgment of invalidity "should preclude a finding of liability for past, present, and future infringement because 'there is no patent to be infringed.'"9No fewer than ten companies joined forces to file a motion for leave to submit an amicus brief supporting the petition for rehearing en banc, arguing that the ITC has no more authority to enforce an invalid patent than a District Court does.10
On January 13, 2015, the court invited the ITC to submit a response by January 27, 2015 regarding whether to rehear the case en banc. The ITC asked for more time and submitted its response February 26, 2016.11
Respondents considering entering into a consent order should be aware of the Federal Circuit's DeLorme decision and should monitor the outcome of DeLorme's request for rehearing en banc.
If the court declines to rehear this case, or if the en banc court affirms the panel's decision, then respondents should carefully consider the potential impact of this decision on their ITC exit strategy.
Endnotes
1 uPI Semiconductor Corp. v. Int'l Trade Comm'n, 767 F.3d 1372, 1375 (Fed. Cir. 2014).
2Id. at 1377.
3Id. at 1378; see also Non-confidential Opening Brief of Appellant uPI Semiconductor Corp. at 28, uPI Semiconductor Corp. v. Int’l Trade Comm'n, No. 13-1157 (Fed. Cir. May 30, 2013).
4 Brief of Appellant, supra note 3, at 32.
5 Certain DC-DC Controllers and Products Containing the Same, U.S.I.T.C. Inv. No. 337-TA-698 (Enforcement Proceeding), Comm'n Op. at 20 (Jan. 4, 2013). This appears to conflict with the ALJ's finding that uPI "engaged in good faith efforts to prevent its customers from importing and/or selling such infringing products in the United States, as opposed to overseas" (emphasis in original). Certain DC-DC Controllers and Products Containing the Same, U.S.I.T.C. Inv. No. 337-TA-698 (Enforcement Proceeding), Enforcement Initial Determination at 60 (Nov. 30, 2012).
6 Brief of Appellant, supra note 3, at 37.
7 Certain DC-DC Controllers and Products Containing the Same, U.S.I.T.C. Inv. No. 337-TA-698 (Enforcement Proceeding), Enforcement Initial Determination at 123 (Nov. 30, 2012).
8 Certain DC-DC Controllers and Products Containing the Same, U.S.I.T.C. Inv. No. 337-TA-698 (Enforcement Proceeding), Comm'n Op. at 17 (Jan. 4, 2013).
9Appellant’s Petition for Rehearing En Banc, DeLorme Publ'g Co. v. Int’l Trade Comm'n, No. 14-1572 (Fed. Cir. Dec. 28, 2015) (quoting Commil USA LLC v. Cisco Sys. Inc., 135 S. Ct. 1920, 1929 (2015)).
10 Motion for Leave to File Amicus Brief, DeLorme Publ'g Co. v. Int’l Trade Commn, No. 14-1572 (Fed. Cir. Jan. 11, 2016).
11 Appellee’s brief, DeLorme Publ'g Co. v. Int’l Trade Comm'n, No. 14-1572 (Fed. Cir. Feb. 26, 2016).
©2016 Thompson Reuters. Originally published by Westlaw Journal Intellectual Property. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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