On October 14, 2008, the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”) issued an opinion sharply altering the scope of the remedy available to patent and trademark holders who bring infringement actions in the U.S. International Trade Commission (ITC) when it vacated the portion of a final determination by the ITC excluding third-party downstream products under 19 U.S.C. § 1337 (“Section 337”). See Kyocera et al. v. Int’l Trade Comm’n, No. 2007-1493 (Fed. Cir. Oct. 14, 2008). This client advisory describes ITC exclusion order practice, the Federal Circuit’s holding and the expected impact of the decision on future Section 337 investigations.

ITC Exclusion Orders

Under 19 U.S.C. § 1337(d), the ITC may issue an order instructing U.S. Customs and Border Protection (“Customs”) to exclude from the United States articles found to violate the statute. Such violations are typically based on a finding of patent infringement. The statute provides for two types of exclusion orders. A “limited exclusion order” (LEO) covers the products of named respondents. 19 U.S.C. § 1337(d)(1). A “general exclusion order” (GEO) may extend to any infringing products, regardless of source, if necessary to prevent circumvention of an exclusion order limited to the respondents’ products. See 19 U.S.C. § 1337(d)(2)(A). A GEO may also be issued if the ITC finds that there is a pattern of violation and the source of infringing products is not easily identifiable. See 19 U.S.C. § 1337(d)(2)(B).

Notwithstanding the two exceptions provided in Sections 337(d)(2)(A) and (B), the ITC has historically issued GEOs only upon a showing of (1) a widespread pattern of unauthorized use of the patented invention; and (2) certain business conditions from which one would reasonably infer that foreign manufacturers other than the respondents may attempt to enter the U.S. market with infringing articles.1

The ITC has also extended the reach of LEOs beyond just the devices of the parties named in the investigation, reaching “downstream products” that incorporate these infringing devices. The ITC has considered nine factors to determine whether to exclude downstream products:2

  1. the value of the infringing part as compared to the value of the whole downstream product in which the infringing part is incorporated; 
  2. the identity of the manufacturer of the downstream product (i.e., whether the manufacturer is a third party or a direct infringer); 
  3. the incremental value to the complainant of the exclusion of downstream products; 
  4. the incremental detriment to the respondents of the exclusion of downstream products; 
  5. the burdens imposed on third parties resulting from the exclusion of downstream products; 
  6. the availability of alternative downstream products that do not contain the infringing articles; 
  7. the likelihood that the downstream products actually contain the infringing article and are thus subject to exclusion; 
  8. the opportunity for evasion of an exclusion order that does not include downstream products; and 
  9. the enforceability of an order by Customs.

The ITC has historically applied these so-called “EPROM” factors to exclude even downstream products produced by third parties.

The Baseband Processor Chips Decision

In Certain Baseband Processor Chips, Inv. No. 337-TA-543, the ITC found that respondent Qualcomm’s chips, when incorporated into cellular handsets and programmed with power-saving software, infringe on Broadcom’s patent. After receiving testimony from the parties and affected third parties, and after holding a public hearing on the scope of the remedy, the ITC issued a limited exclusion order. In addition to the Qualcomm chips, the LEO also covered downstream products, namely cellular telephones incorporating the infringing Qualcomm chips. The ITC found that, on balance, the EPROMs factors weighed in favor of downstream relief, particularly because Qualcomm’s infringing chips are rarely imported on their own and Broadcom would be denied effective relief absent an exclusion order covering downstream products.

Qualcomm and affected third party handset manufacturers and cellular network providers appealed the ITC’s decision to the Federal Circuit. The lead case was filed by Kyocera, a third party manufacturer that incorporates infringing Qualcomm chips in the cellular telephones that it sells to the United States.

The Kyocera Opinion and Its Impact on ITC Exclusion Orders

In Kyocera v. ITC, the Federal Circuit vacated and remanded the ITC’s remedy determination in Baseband Processor Chips, holding that the language of Section 337 prevents the ITC from issuing a limited exclusion order that would exclude products of third parties not named in the complaint, because they are not “persons determined to be violating Section 337,” as required by the statute. According to the Federal Circuit’s reading of the statute, a GEO is the only way that products of non-parties may be excluded. Thus, the ITC’s historic practice of extending downstream relief to the products of non-parties that incorporate respondents’ infringing devices was flatly rejected.

This strict statutory interpretation marks a dramatic shift in ITC jurisprudence. LEOs are typically drafted to encompass particular infringing devices irrespective of whether the importer was named as a respondent. Similarly, with respect to downstream relief, the ITC has applied the nine EPROMs factors to downstream manufacturers regardless of whether they are respondents in the investigation. Given the Federal Circuit’s condemnation of both of these practices, the ITC will be forced to rethink its remedial framework, particularly on the issuance of GEOs.

The ITC’s ability to adapt will soon be tested. On October 9, 2008, the ITC requested submissions on remedy in Certain GPS Devices, Inv. No. 337-TA-602. In that investigation, the administrative law judge has recommended downstream relief against third party products containing the accused GPS chips, but the complainant did not seek a general exclusion order or name those third parties as respondents to the investigation. The ITC is presently scheduled to issue a final determination on December 8, 2008.