Yesterday, the Federal Circuit decided ClearCorrect Operating, LLC v. International Trade Commission, No. 2014-1527, holding that the International Trade Commission (“Commission”) does not have authority under 19 U.S.C. § 1337 to issue a remedy directed to electronic transmissions of digital data into the United States.

Background

The underlying investigation, Certain Digital Models, Inv. No. 337-TA-833, began when the patent owner, Align Technology, Inc. (“Align”), filed a patent infringement complaint under Section 337 against ClearCorrect Operating, LLC (“CCUS”) and ClearCorrect Pakistan (Private), Ltd. (“CCPK”) (collectively, “ClearCorrect”). The asserted patents are directed to systems for repositioning teeth, using digital data sets to construct orthodontic appliances (also called “aligners”), such as braces, that incrementally reposition teeth from one arrangement to another. CCUS is a Texas-based company that creates digital data, uploads it to a server accessible by CCPK, and subsequently manufactures customized aligners in the United States. CCPK is a Pakistan-based company that manipulates the information received from CCUS and creates digital data models, which it then electronically transmits to CCUS (by uploading them to CCUS’s server) to print 3-D physical models used to manufacture the aligners.

The accused imported “article” is digital data transferred electronically, not digital data on a physical object such as a disc or flash drive. Among other things, CCUS and CCPK disputed whether this digital data constitutes an “article” under Section 337 that can be imported into the United States in violation of the statute. The term “article” is not expressly defined in the statute.

The ITC Proceedings

In his initial determination, ALJ Rogers (retired) found that the accused products, i.e., digital models, digital data, and treatment plans expressed as digital data sets that comprise 3-D models of desired tooth position, are “articles” over which the Commission has jurisdiction, and held that ClearCorrect violated Section 337 with respect to six of the seven patents asserted in the investigation. Rejecting ClearCorrect’s argument that the term “article” as used in the statute requires a tangible object, he recommended that the Commission issue cease and desist orders to prevent importation of the digital data used to make dental appliances.  The Commission affirmed the ALJ’s determination that the accused digital data sets are “articles” within the meaning of Section 337 and that CCPK’s upload of those data sets to CCUS’s server in Texas is an importation into the United States pursuant to Section 337. The Commission found that the scope of the statute is broad with respect to unfair acts and methods of competition, and that the legislative history of amendments to Section 337 shows that Congress intended to prevent every type of unfair act in connection with articles imported into the United States. The Commission also considered dictionary definitions of “article” at the time the 1930 Tariff Act was enacted, concluding that articles are items that may be “used by consumers” and “bought and sold in commerce.” The Commission accordingly found the “articles” cannot be limited to tangible products, as alleged by ClearCorrect, and went on to issue cease and desist orders directed to ClearCorrect.  Commissioner Johanson dissented, stating that the complainant, Align, failed to meet its burden of showing that Congress intended to include digital transmissions within the scope of Section 337. In his view, Section 337 is “not meant to remedy every unfair act in every context,” and including electronic transmissions as “articles” under Section 337 “would be entirely inconsistent with the remedial scheme of Section 337 established by Congress.”    

Opinion of the Court

Chief Judge Prost wrote for the majority in a 2-1 decision. The court held that the Commission’s expansion of its jurisdiction to include electronic transmissions of digital data within the scope of Section 337 “runs counter to the ‘unambiguously expressed intent of Congress’” that “articles” means “material things.”  The court reversed and remanded the Commission’s decision because the Commission does not have jurisdiction over the investigation. To reach this conclusion, as in the recent Federal Circuit Suprema opinion (Suprema, Inc. v. International Trade Commission, No. 2012-1170), the court applied the two-step deference-determination framework set forth in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). (However, the court was careful to distinguish Suprema, noting both that the question in that case was limited to the meaning of the term “infringe” as used in Section 337(a)(1)(B)(1), while here it is the meaning of the term “articles” that is at issue and that, in Suprema, the articles in question were physical objects, not electronically transferred data.) Under the Chevron test, the court found:

1. Has Congress directly spoken to the precise question at issue? Yes, the literal text by itself, when viewed in the context of the statute, is clear that “articles” means “material things” and does not extend to electronic transmissions of digital data. The court provided several bases for its determination. First, because the term “article” is not defined in the Tariff Act, it must be construed within its ordinary meaning. Here, that meaning derives from the 1922 Tariff Act, in which the term “articles” originated as part of Section 316 of that Act. The court disagreed with the Commission that contemporaneous dictionary definitions could include digital data because they indicate that the term is limited to a material thing. In addition, defining articles as material things is consistent with the United States Tariff Commission’s definition of the term “articles” in its “Dictionary of Tariff Information” issued in 1924. Second, the use of the term “articles” throughout Section 337 “reinforces the conclusion that Congress’s unambiguously expressed intent was for ‘articles’ to mean ‘material things’” because, if defined more broadly, “numerous subsections [of Section 337] would be rendered inoperative.” The court used the forfeiture section, which also refers to seizure of articles at the United States border, as an example in which it does not make sense to include electronic transmissions because they do not “move through border crossings” and cannot be stopped at the border through the enforcement mechanisms “contemplated in the statutory scheme.” Third, the original version of Section 337 included one remedy, an exclusion order, which may only be directed to material things that Customs may exclude from the United States: “an expansion of the term ‘articles’ beyond ‘material things’ would mean that Congress included an entire set of commodities in the statute without providing a method to curtail their importation.” Finally, the Harmonized Tariff Schedule supports a definition of articles as material things because, at the time Congress passed the 1930 Tariff Act, the Schedule only included material things, and has since continued to limit articles to tangible goods.

2. The clarity of the statutory context obviates the need to refer to the legislative history. Even so, was the Commission’s interpretation reasonable? No. The Commission failed to explain why it did not consider certain dictionary definitions cited in the Commission’s own opinion that support “articles” being defined as “material things,” and thus it was not reasonable to conclude that articles should have a broader meaning. Further, in its briefing to the court, the Commission misleadingly omitted a key portion of a quote from the legislative history. The actual quote reads: “The provision relating to unfair methods of competition in the importation of goods is broad enough to prevent every type and form of unfair practice ….” The Commission omitted the phrase “in the importation of goods.” The court held that that key phrase limits the Commission’s authority to material things, and the Commission’s use of a misquote to support its argument that the Tariff Act covers all trade, regardless of form, renders its conclusion regarding the purpose of the Act unreasonable.

Concurring Opinion

Circuit Judge O’Malley concurred with the majority’s opinion, but wrote separately to state her belief that the court did not need to resort to the Chevron framework in this case because it does not apply. According to Judge O’Malley, the Commission “concluded that it has jurisdiction over all incoming international Internet data transmissions.” However, Congress did not intend for the Commission, “which has no expertise in developing nuanced rules to ensure the Internet remains an open platform for all,” to regulate Internet transmissions. “Instead, the responsibility lies with Congress to decide how best to address these new developments in technology,” and Congress has enacted laws and debated bills with which to do so.

Dissenting Opinion

Circuit Judge Newman dissented. According to Judge Newman, the majority’s ruling is contrary to the statute and precedent. Section 337 “was designed to reach ‘every type and form’ of unfair competition arising from importation.” Removal of a remedy against infringing imports, whatever the subject matter, including “a preeminent form of today’s technology,” is a “dramatic withdrawal of existing rights, devoid of statutory support and of far-reaching impact.” The purpose of the statute is “to support invention.” Digital data is an article of commerce that did not exist when the Tariff Act was enacted, but Congress cannot have intended to omit later-discovered technology from the definition of “article.” In addition, transmission of software to the United States from a foreign country via the Internet is considered importation within the purview of Customs. It is not justifiable to distinguish between digital data imported via, e.g., a disc or flash drive, from digital data imported via the Internet, in the context of Section 337. The Commission’s statutory interpretation is entitled to Chevron deference.

Key Takeaways • The Commission’s jurisdiction to remedy unfair trade practices is limited to “unfair acts” involving the importation of “articles.” • In the context of Section 337, the term “articles” means “material things” and does not include electronic transmission of digital data. • The Commission does not have jurisdiction over electronically imported data.