Welcome to the latest issue of the Section 337 Update. This newsletter is designed to provide you with practical updates and developments on Section 337 proceedings before the US International Trade Commission.

The Collision of Section 337 and the US Bankruptcy Laws

Given the recent economic downturn, corporate bankruptcies have become more frequent. A pending bankruptcy proceeding has implications for litigants – both debtors and those involved in cases with debtors as parties. Policy considerations can trump the interests of private litigants. However, the policy considerations at issue in Section 337 proceedings, including the right to a speedy decision, may not align neatly with the policies in play in bankruptcy proceedings. Discussed below is the seeming conflict that has developed.

The conflict between the Bankruptcy Code and the US International Trade Commission’s (“ITC”) interpretation of Section 337 (19 U.S.C. § 1337) was highlighted in the recent pair of Spansion cases in the US Bankruptcy Court for the District of Delaware (Case Nos. 09-10690, 09-11480). The Bankruptcy Court considered whether the automatic stay of the Bankruptcy Code – 11 U.S.C. § 362, whereby pending legal proceedings against a bankruptcy debtor are stayed – applied to a Section 337 proceeding before the ITC, styled Certain Flash Memory and Products Containing Same, Inv. No. 337-TA-685 (“Samsung ITC investigation”). Over objection from the ITC, the Bankruptcy Court held that the automatic stay applied to the Samsung ITC proceeding. The Opinion and Order enforcing the stay is available online. The ITC filed an appeal of the Bankruptcy Court’s Order on October 23, 2009.

The automatic stay is one of the fundamental planks of the Bankruptcy Code. 11 U.S.C. § 362(a); Constitution Bank v. Tubbs, 68 F.3d 685, 691 (3d Cir. 1995). It is extremely broad in scope and applies to almost any formal or informal proceeding brought against the debtor. As Congress intended, “[t]he automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.” Bankruptcy Reform Act of 1978, S. Rep. No. 989, 95th Cong., 2d Sess. 54, reprinted in 1978 U.S.C.C.A.N. 5787, 5840; Midlantic Nat'l Bank v. New Jersey Dept. of Envtl. Prot., 474 US 494, 503 (1989).

In addition to allowing the debtor breathing room, the stay ensures the even-handed treatment of creditors. The stay not only prevents creditors from seizing the debtor's assets, it eliminates the costs and distractions inherent to the defense of such actions. In theory, this gives the debtor the time needed to formulate a plan of reorganization or an orderly liquidation. Secondly, while the stay may not be in any particular creditor's interest, it serves the interests of the creditors as a whole by allowing the efficient marshalling of the debtor's assets and preserves the assets for the benefit of the entire creditor body.

The stay does not apply to every action; Congress specifically exempted certain actions as set forth in 11 U.S.C. § 362(b). Moreover, although it did not apply to foreign debtors under prior law, under Chapter 15 of the Bankruptcy Code enacted in 2005, the automatic stay also applies to foreign debtors upon recognition of the foreign proceeding under Chapter 15. 11 U.S.C. § 1520(a). Relevant to this discussion, the exempted actions include the “commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit’s police or regulatory power.” 11 U.S.C. § 362(b)(4). Although the Bankruptcy Court disagreed, the ITC asserted that this exception applies to its Section 337 investigations of potential violations of the US trade laws.

In determining whether the statutory exemption applies, the Third Circuit considers: 1) whether the government action relates primarily to the protection of the government’s pecuniary interest in the debtor’s property rather than to matters of public health, safety, and welfare; and 2) whether the government action addresses compliance with a statute, involving harm to the public, or is limited to private interests. The ITC contended that its Section 337 proceedings satisfy both Third Circuit tests.

First, the ITC asserted that its proceedings are non-pecuniary in nature. If the ITC determines that there has been a violation of Section 337 through the importation of articles that violate US intellectual property and unfair competition laws, it cannot assess money damages or recover assets. Rather, the ITC’s remedies are limited to proscribing conduct, e.g., exclusion of infringing goods from entry into the United States.

Second, the ITC contended that its actions relate primarily to matters of public health, safety, and welfare. By preventing the importation of infringing articles in violation of the trade laws, the ITC claimed that it is safeguarding domestic industry, trade, and the US economy. Domestic industry refers to industries that practice, or have invested capital, labor, plant, and resources in, valid US patents. The ITC asserted that Congress understood Section 337 investigations to provide a benefit to the US economy through the innovation that could result from the practice of intellectual property by domestic industries.

Third, the ITC argued that its investigations address public harms rather than private interests. The purpose of Section 337 investigations is to prevent harm to domestic industries, not individual patentees, from the importation of articles that infringe a valid US patent. The statute protects against harm to domestic jobs, infrastructure, and development. Indeed, the legislative history of Section 337 illustrates Congress’ determination that such prevention represents an important public interest.

The ITC also pointed to the public policy nature of its regulatory determinations regarding remedies. Upon finding a violation of Section 337, the ITC considers public interest factors in making its determination whether to exclude the infringing articles from importation. These factors include harm to public health and welfare, competitive conditions in the US economy, the production of like or directly competitive articles in the United States, and US consumers. 19 U.S.C. §§ 1337(d)(1), (f)(1). Furthermore, where the ITC determines to issue a remedial order, the President makes an independent policy decision as to whether the order should stand. 19 U.S.C. § 1337(j). The ITC also asserted that the regulation of importation is itself a public policy function because importation is one aspect of foreign commerce, which can affect the foreign policy of the United States and national security.

The Bankruptcy Court disagreed with the ITC’s position and held that the primary purpose of the Samsung ITC investigation was to adjudicate patent infringement claims of private parties for the benefit of Samsung. The Bankruptcy Court relied on the fact that the investigation was based upon a complaint by Samsung Electronic Co., which named debtors Spansion Inc., Spansion LLC, and Spansion Japan Ltd as respondents, among others. Samsung’s complaint requested the ITC to institute the investigation, conduct a public hearing, and issue a permanent exclusion and cease and desist order to forbid the importation, sale, and promotion of Spansion’s allegedly infringing products. The Bankruptcy Court also relied on a recent decision from the Bankruptcy Court for the Eastern District of Virginia in In re Qimonda AG, No. 09-14766, 2009 WL 2210771 (Bankr. E.D. Va. July 16, 2009). This decision is available online. In addressing the same issue of whether the automatic stay applies to ITC investigations, the Virginia Bankruptcy Court characterized ITC actions as being between two private parties with the ITC itself acting in a judicial, rather than enforcement, capacity.

The Delaware Bankruptcy Court held that the Samsung ITC action was primarily a private matter, and only incidentally served the public benefit. While the ITC acknowledged that there may also be some private benefit from its proceedings, it argued that this does not outweigh the public benefit. The ITC pointed to the fact that no damages are awarded to the individual patent holder. Rather, as stated above, the determination of a violation triggers the ITC’s inquiry into whether to exclude the infringing goods from importation in light of the aforementioned public policy factors. The ITC maintained that the resulting remedy determination is regulatory, rather than adjudicatory, in nature. While an exclusion order may provide some private benefit to the patent holder, the ultimate and intended benefit is to domestic jobs, infrastructure, and development. The ITC also noted that the fact that a proceeding may be instituted upon the filing of a complaint by a private party does not change the character of the action because it is the ITC, based on a vote of the Commissioners, which determines whether or not to institute an investigation.

Similar Proceedings

The ITC’s opposition to the application of automatic stays to its Section 337 proceedings is not limited to its appeal of the Delaware Bankruptcy Court’s decision in the Spansion proceedings. As referenced above, in In re Qimonda AG, a Chapter 15 proceeding, the Bankruptcy Court for the Eastern District of Virginia recently held that the automatic stay applied to the ITC investigation, Certain Semiconductor Integrated Circuits Using Tungsten Metallization, Inv. No. 337-TA-648. The Opinion and Order are available online. On February 26, 2010, the ITC filed a Notice of Appeal of that order. In its Statement of Issues on Appeal, the ITC again claimed that its investigations fall within the “police and regulatory” exception contained in 11 U.S.C. § 362(b)(4).