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Federal Circuit Rejects Constitutional Challenge to ITC’s Authority to Levy and Enforce Civil Penalty

February 08, 2012

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Last Month at the Federal Circuit - March 2012

Judges: Newman (author), Schall, Linn

[Appealed from: ITC]

In Ninestar Technology Co. v. International Trade Commission, No. 09-1549 (Fed. Cir. Feb. 8, 2012), the Federal Circuit affirmed the ITC’s assessment of a civil penalty against Ninestar Technology Co., Ltd. (“Ninestar China”) and its wholly owned U.S. subsidiaries, Ninestar Technology Company, Ltd. (“Ninestar U.S.”) and Town Sky, Inc. (“Town Sky”) (collectively “Ninestar”), for failure to comply with exclusion and cease-and-desist orders arising from violation of Section 337 of the Tariff Act, 19 U.S.C. § 1337. In so doing, the Court rejected not only Ninestar’s argument that manufacture and sale of a product in a foreign country extinguishes the right to enforce a U.S. patent against importation and sale of that product, but also its contention that the ITC does not have constitutional authority to levy and enforce the civil penalty of Section 337(f).

Ninestar China produced ink printer cartridges in China, which were imported into and sold in the United States by various entities, including Ninestar U.S. and Town Sky. In an action under Section 337, the ITC ruled that the ink printer cartridges infringed a number of U.S. patents and issued a general exclusion order, limited exclusion orders, and cease-and-desist orders. After issuance of the ITC’s exclusion and cease-and-desist orders, Ninestar U.S. and Town Sky continued to import into the United States and sell ink printer cartridges that were the subject of the orders.

In a formal ITC enforcement proceeding, the ALJ determined that Ninestar had deliberately and in bad faith violated the exclusion and cease-and-desist orders, and recommended a civil penalty of $20,504,974 for the violation. The ITC adopted the findings and conclusions of the ALJ, describing the violations as “egregious,” but levied a reduced penalty of $11,110,000.

Ninestar appealed to the Federal Circuit, arguing that the ITC incorrectly found infringement by the Ninestar products, that the authority exercised by the ITC to exclude the products and to enforce its orders is in violation of the constitutional principles of separation of powers, and that the proceedings violated Ninestar’s constitutional rights to notice, clarity, and a jury trial. Ninestar also objected to the inclusion of Ninestar China as jointly and severally liable for the penalty with the Ninestar U.S. subsidiaries.

The Federal Circuit first addressed Ninestar’s argument that the sale in a foreign country of a product manufactured in the foreign country extinguishes any right to enforce a U.S. patent against that product if it is imported into the United States. The Court rejected this argument, stating that “United States patent rights are not exhausted by products of foreign provenance. To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent.” Slip op. at 7 (quoting Jazz Photo Corp. v. U.S. Int’l Trade Comm’n, 264 F.3d 1094, 1105 (Fed. Cir. 2001)). The Court disgreed with Ninestar’s position that Jazz Photo and the precedent on which it relied were incorrectly decided and had been overruled. The Court determined that the ITC’s ruling that its orders were violated with knowledge and in bad faith was supported by substantial evidence and was in accordance with law, and affirmed.

Next, the Federal Circuit found that no abuse of discretion had been shown in the imposition of a penalty by the ITC or the amount of the penalty. The Court rejected Ninestar’s contention that there should be no penalty in view of Ninestar’s good-faith belief that the ITC’s orders were based on incorrect law. In so doing, the Court referenced the ITC findings that Ninestar continued the importation and sales of the infringing ink printer cartridges with knowledge that the products were the subject of exclusion and cease-and-desist orders, that Ninestar deliberately evaded the ITC’s orders, and that the record was replete with evidence of bad faith. After reviewing the ITC’s bases for the amount of the levied penalty and the intended deterrent effect of the statutory penalty, the Court found that the ITC’s penalty was within the ITC’s authority and in accordance with the legislative purpose.

The Court then affirmed the ITC’s assessment of joint and several liability of the three Ninestar entities. Unpersuaded by Ninestar’s arguments as to why the penalty could not be assessed against Ninestar China, the Court determined that joint and several liability was commensurate with the evidence of control, commercial relationships, monetary flow, and knowing violation of the ITC’s orders.

Finally, the Federal Circuit addressed Ninestar’s constitutional challenge to the ITC’s authority to levy and enforce the civil penalty of Section 337(f). Ninestar characterized the ITC statute as “an unconstitutional monstrosity” and urged that the Court “should strike down the ability of the ITC to impose financial punishments on those who violate their orders.” Id. at 17.

The Court determined that Section 337 proceedings are integral to the control of unfair competition in trade, and the provision of a civil penalty is within regulatory authority and is appropriately assigned to the ITC. Notwithstanding Ninestar’s exhortations that the statutory penalty is of such magnitude as to be criminal in nature and requiring trial in an Article III court, the Court found insufficient proof to override legislative intent and transform the denominated civil remedy of Section 337 into a criminal penalty.

Accordingly, the Federal Circuit affirmed the ITC’s order assessing a civil penalty against Ninestar for violation of the exclusion and cease-and-desist orders, and holding all three Ninestar companies jointly and severally liable for payment of the $11,110,000 penalty.

Summary authored by Marian T. Flattery, Esq.