[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
INTERNATIONAL TRADE COMMISSION
PATENT LITIGATION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COURTS, INTELLECTUAL PROPERTY,
AND THE INTERNET
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
APRIL 14, 2016
__________
Serial No. 114-67
__________
Printed for the use of the Committee on the Judiciary
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Available via the World Wide Web: http://judiciary.house.gov
______
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COMMITTEE ON THE JUDICIARY
BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin JERROLD NADLER, New York
LAMAR S. SMITH, Texas ZOE LOFGREN, California
STEVE CHABOT, Ohio SHEILA JACKSON LEE, Texas
DARRELL E. ISSA, California STEVE COHEN, Tennessee
J. RANDY FORBES, Virginia HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE KING, Iowa Georgia
TRENT FRANKS, Arizona PEDRO R. PIERLUISI, Puerto Rico
LOUIE GOHMERT, Texas JUDY CHU, California
JIM JORDAN, Ohio TED DEUTCH, Florida
TED POE, Texas LUIS V. GUTIERREZ, Illinois
JASON CHAFFETZ, Utah KAREN BASS, California
TOM MARINO, Pennsylvania CEDRIC RICHMOND, Louisiana
TREY GOWDY, South Carolina SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho HAKEEM JEFFRIES, New York
BLAKE FARENTHOLD, Texas DAVID N. CICILLINE, Rhode Island
DOUG COLLINS, Georgia SCOTT PETERS, California
RON DeSANTIS, Florida
MIMI WALTERS, California
KEN BUCK, Colorado
JOHN RATCLIFFE, Texas
DAVE TROTT, Michigan
MIKE BISHOP, Michigan
Shelley Husband, Chief of Staff & General Counsel
Perry Apelbaum, Minority Staff Director & Chief Counsel
------
Subcommittee on Courts, Intellectual Property, and the Internet
DARRELL E. ISSA, California, Chairman
DOUG COLLINS, Georgia, Vice-Chairman
F. JAMES SENSENBRENNER, Jr., JERROLD NADLER, New York
Wisconsin JUDY CHU, California
LAMAR S. SMITH, Texas TED DEUTCH, Florida
STEVE CHABOT, Ohio KAREN BASS, California
J. RANDY FORBES, Virginia CEDRIC RICHMOND, Louisiana
TRENT FRANKS, Arizona SUZAN DelBENE, Washington
JIM JORDAN, Ohio HAKEEM JEFFRIES, New York
TED POE, Texas DAVID N. CICILLINE, Rhode Island
JASON CHAFFETZ, Utah SCOTT PETERS, California
TOM MARINO, Pennsylvania ZOE LOFGREN, California
BLAKE FARENTHOLD, Texas STEVE COHEN, Tennessee
RON DeSANTIS, Florida HENRY C. ``HANK'' JOHNSON, Jr.,
MIMI WALTERS, California Georgia
Joe Keeley, Chief Counsel
Jason Everett, Minority Counsel
C O N T E N T S
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APRIL 14, 2016
Page
OPENING STATEMENTS
The Honorable Darrell E. Issa, a Representative in Congress from
the State of California, and Chairman, Subcommittee on Courts,
Intellectual Property, and the Internet........................ 1
The Honorable Jerrold Nadler, a Representative in Congress from
the State of New York, and Ranking Member, Subcommittee on
Courts, Intellectual Property, and the Internet................ 3
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, and Ranking Member, Committee on
the Judiciary.................................................. 5
The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Chairman, Committee on the Judiciary 53
WITNESSES
Deanna Tanner Okun, former Chairman, International Trade
Commission, and Partner, Adduci, Mastriani & Schaumberg, LLP
Oral Testimony................................................. 7
Prepared Statement............................................. 9
John Thorne, Partner, Kellogg, Huber, Hansen, Todd, Evans &
Figel, PLLC
Oral Testimony................................................. 25
Prepared Statement............................................. 27
Mark L. Whitaker, Partner, Morrison & Foerster LLP
Oral Testimony................................................. 34
Prepared Statement............................................. 36
Fiona M. Scott Morton, Theodore Nierenberg Professor of
Economics, Yale School of Management
Oral Testimony................................................. 44
Prepared Statement............................................. 46
Thomas L. Stoll, Principal, Stoll IP Consulting
Oral Testimony................................................. 54
Prepared Statement............................................. 56
Dominic Bianchi, General Counsel, United States International
Trade Commission
Oral Testimony................................................. 60
Prepared Statement............................................. 62
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Material submitted by the Honorable Darrell E. Issa, a
Representative in Congress from the State of California, and
Chairman, Subcommittee on Courts, Intellectual Property, and
the Internet................................................... 82
Additional material submitted by the Honorable Darrell E. Issa, a
Representative in Congress from the State of California, and
Chairman, Subcommittee on Courts, Intellectual Property, and
the Internet................................................... 88
APPENDIX
Material Submitted for the Hearing Record
International Trade Commission 337 Statistics Report............. 94
Response to Questions for the Record from Deanna Tanner Okun,
former Chairman, International Trade Commission, and Partner,
Adduci, Mastriani & Schaumberg, LLP............................ 98
Response to Questions for the Record from John Thorne, Partner,
Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLC.............. 126
Response to Questions for the Record from Mark L. Whitaker,
Partner, Morrison & Foerster LLP............................... 159
Response to Questions for the Record from Fiona M. Scott Morton,
Theodore Nierenberg Professor of Economics, Yale School of
Management..................................................... 165
Response to Questions for the Record from Thomas L. Stoll,
Principal, Stoll IP Consulting................................. 167
Response to Questions for the Record from Dominic Bianchi,
General Counsel, United States International Trade Commission.. 174
INTERNATIONAL TRADE COMMISSION PATENT LITIGATION
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THURSDAY, APRIL 14, 2016
House of Representatives
Subcommittee on Courts, Intellectual Property,
and the Internet
Committee on the Judiciary
Washington, DC.
The Subcommittee met, pursuant to call, at 10 a.m., in room
2141, Rayburn House Office Building, the Honorable Darrell E.
Issa, (Chairman of the Subcommittee) presiding.
Present: Representatives Issa, Goodlatte, Collins, Franks,
Jordan, Marino, Farenthold, DeSantis, Walters, Nadler, Conyers,
Lofgren, Johnson, Chu, DelBene, Jeffries, and Peters.
Staff Present: (Majority) Vishal Amin, Senior Counsel; Eric
Bagwell, Clerk; and (Minority) Jason Everett, Minority Counsel.
Mr. Issa. The Committee will come to order. The
Subcommittee on Courts, Intellectual Property, and the Internet
will come to order. Without objection, the Chair is authorized
to declare a recess of the Subcommittee at any time. We welcome
everyone here today to a hearing specifically on the role of
the International Trade Commission (ITC) in patent litigation.
Imagine, if you will, a scenario under current law. A
foreign patent assertion entity has their lawyer file a lawsuit
against a domestic entity in order to have them take a license
and pay some type of royalty. Under current law, once receiving
even one dollar in royalty, they then sue a U.S. company for
patent infringement in Federal court, and concurrently file a
case in the ITC.
The defendant also files an interparty review before the
Patent and Trademark Office, alleging, in validity, or at least
substantial differences between the assertion and the product
being produced. You now have, under current law, three separate
adjudications at the same time. Under the law--and by the way,
you do not have to imagine, this has happened--there can be
discovery, oft times it is simple form discovery by the
plaintiff; and for purposes of my opening statement, plaintiff
and troll will be interchangeable.
Now, under current law, the PAE could succeed in getting an
exclusion order against the defendant. Well, the alleged
infringer could win, at PTAB, the claims that the patent is
ruled invalid. But still, under current law would be prevented
from manufacturing that product, since the exclusion order
would be in effect until the Federal circuit gets around to
reversing the ITC. And under current law, the Federal circuit
reversals, you could be back in district court going through
the whole trial process again. Again, if the PTO only rules
that some patent claims are invalid or limited, but allows a
few limited patent claims to remain, you get to do this all
over again.
The International Trade Commission exists for one purpose:
it is a necessary exclusion organization that protects American
industry, industry being a broad term, from unfair competition;
from, in fact, products coming through our border for a myriad
of reasons.
It is a protectionist trade organization by definition. And
I use that not in a pejorative way, but I use it in a fair way;
that in fact, often, U.S. industries need protection from
unfair trade practices.
When, in 1988, patents became part of it, most envisioned
that you were simply talking about an entity that could not be
reached in the Federal courts, that was sending in a product
that was a knockoff of an American patent. And in that
situation, it would be no different than, in fact, if you were
sending counterfeit goods into the United States with somebody
else's trademark on it.
The ITC exists, and will continue to exist, for those kinds
of protections under any reform. However, in an era in which
this Committee, on a broadly bipartisan basis, has recognized
that troll activity needs to be prevented, we need to recognize
that non-practicing entities are using the ITC not often, but
often effectively, to extort additional dollars.
Plus, to be candid, it is our responsibility to preserve
the constitutional right of an American entity to have their
claims, whether plaintiff or defendant, adjudicated within the
court constitutionally established, or often called an Article
III court. Under the current law, Article I adjudication is
occurring far too often. And not by the PTO, but rather, by the
ITC.
I will just touch for a moment on two notable events.
Several years ago, Kodak v. Apple in the ITC. Now there was a
foreign importer somewhere there; an entity that could not be
reached; an entity who had assets that were beyond the Federal
court. The problem is, I cannot figure out which one it would
be. Kodak was not, in fact, a domestic company to any greater
extent than Apple. Both of them relied on extensive use of
imported parts. Oddly enough, Apple had enough cash in the bank
to buy Kodak in a moment's notice. And yet, Kodak went to the
ITC asserting that they needed to get injunctive relief, or, if
you will, trade relief, against Apple, as though the Federal
court could not give them sufficient remedy.
Prior to the eBay decision, we could all have had a
discussion about--an injunction is an injunction, whether it is
called an exclusion or not. And in the 1990's, when I found
myself in the ITC and in Federal court, they really were a
question of how fast you got to the question of whether or not
you were guilty and whether or not you were--the patent was
valid, and whether or not, quite frankly, you were going to be
enjoined. But that is not the case today.
Post-eBay, it is not an effective or honest case to exclude
a product that ultimately, if they failed in district court,
would not be excluded, but rather, would be adjudicated for
monies. Obviously, in the case of Apple, Apple could have not
only paid all the damages, but could have bought Kodak on the
open market.
Second case, one that Congressman Schiff and I both
participated in with great frustration, was Broadcom v.
Qualcomm in the ITC. Now, these were two companies whose CEOs
could meet, 1 hour drive each, away from their corporate
headquarters. Located less than 100 miles apart, they found
themselves in the District of Columbia, in court, 3,000 miles--
2,700 miles away. Why? Was it because Broadcom believed that
Qualcomm, a company listed on the S&P 500, was unable to pay
damages? No. It was simply because the leverage of the ITC
allowed them to go after, in this case not even Qualcomm
directly, but products being imported bearing chips.
The merits of this case do not particularly make any
difference. The question is, should Broadcom and Qualcomm been
able to be in the ITC, while simultaneously in the district
court? They were not in the ITC because they wanted or needed
an exclusion order for its own sake. They were in the ITC
because they wanted to use it as part of the leverage, hoping
it would move quickly and bring about a settlement that they
would take perhaps longer to get in district court. But
ultimately, the money damages would have been the same.
This Committee has exclusive jurisdiction over patents.
This Committee has exclusive jurisdiction over trademarks. This
Committee has exclusive jurisdiction over the Article III
courts. This Committee has exclusive jurisdiction over the
bankruptcy courts. I do not consider that jurisdiction a
jurisdictional fight.
In fact, I believe that the ITC has a reason to exist. It
appropriately is a trade activity, and should be in the Ways
and Means. But it is my hope that, through this hearing and
likely legislation, that we can, in fact, straighten out a
situation in which, if you should be in one court, another
court, or in fact, at the PTO, that you not be simultaneously
in all three, or that trolls be able to leverage one against
the other. With that, I look forward to our witnesses and
recognize the Ranking Member for his opening statement.
Mr. Nadler. Thank you, Mr. Chairman. Today we consider
patent litigation at the International Trade Commission. The
ITC is not widely known or understood outside of a narrow group
of practitioners and interested parties. But it plays an
important role in shaping trade policy in the United States.
Among its duties is to adjudicate cases involving imports that
allegedly infringe intellectual property rights, and to
potentially exclude such products from entering the United
States.
Because the ITC is becoming an increasingly popular venue
for bringing patent infringement claims in recent years, it is
appropriate for this Subcommittee to examine how the ITC
handles patent litigation, and whether any legislative or
regulatory changes are warranted.
When we last considered this topic in 2013, we did so in
the context of the ongoing crisis of abusive patent litigation.
We heard testimony that patent trolls had identified the ITC as
a friendly forum, and were flooding the system with abusive and
frivolous claims, particularly after the Supreme Court's 2006
decision in eBay v. Merck Exchange.
Prior to the eBay case, injunctions in patent cases were
viewed as almost automatic. However, the court ruled that
patent holders in district court cases must satisfy the same
four-factor test applied to other plaintiffs seeking an
injunction, including showing that monetary damages are
insufficient to compensate the plaintiff, and that the
plaintiff will suffer irreparable harm without an injunction.
By some estimates, the eBay standard reduced the chances of
an injunction being granted to just 1 in 3. Concerns were
raised that, after this decision, non-practicing entities, or
NPEs, were flocking to the ITC, which does not apply the eBay
analysis, and where an exclusion order is almost automatic if
infringement is found.
The drastic step of an exclusion order can serve as a death
knell for a business. As manufacturing has increasingly moved
overseas in recent years, even an American company may find its
products excluded from the U.S. if they are found to be
infringing. Because the consequences of having one's product
prevented from being imported into the U.S. are so great, NPEs
were exploiting this risk to pressure defendants into settling
even frivolous cases.
Since we last considered this issue, the ITC has taken some
steps to attempt to address some of the concerns over NPEs and
abusive litigation. For example, as ITC case law continues to
evolve, NPEs, whose entire business model depends on
litigation, may find it more difficult to establish that there
is a domestic industry that would be threatened by the
importation of a particular product, as is required under
Section 337 of the Tariff Act.
In addition, the ITC has begun a pilot project, which it
proposes to codify and expand, allowing the Commission to
identify potentially case dispositive issues when the
investigation begins, and direct the presiding judge to issue
an initial determination of those issues within 100 days. If
used to its full extent and made permanent, this may help weed
out weak claims at an early stage and discourage many others
from even being filed. Indeed, recent statistics indicate that
filings by NPEs has dropped from its peak, between 2008 and
2011.
I hope our witnesses will help us to understand whether
this reduction in filings is just temporary, or whether the ITC
has adequately addressed the concern over abusive litigation
through these and other measures. And if further action is
necessary, does the ITC have sufficient tools at its disposal?
Or is Congressional action required? I also look forward to a
discussion of whether patent litigation at the ITC serves as a
complement to district court litigation, or whether they
conflict with each other.
As an independent, quasi-judicial Federal agency focused
solely on trade, the ITC operates under a different set of
rules, with a different mandate, than Article III courts. What
sorts of incentives do plaintiffs have to pick district court
or the ITC as an appropriate forum, or to file parallel
litigation in both arenas? Are defendants being treated fairly
in this process? And what are the implications for developing a
uniform understanding of patent law, when it is being
administered and interpreted by two different judicial bodies?
Are any reforms needed? And if so, should Congress enact
legislative changes? Or should they be accomplished through the
regulatory process? I look forward to hearing from our
witnesses about these and other important matters, and I yield
back the balance of my time.
Mr. Issa. I thank the gentleman. We now recognize the
Ranking Member of the full Committee, Mr. Conyers, for his
opening statement.
Mr. Conyers. Thank you, Chairman Issa. And welcome to--we
only have six witnesses today, so I guess we will have to do
the best we can with the subject.
Mr. Issa. John, there are four more panels. Are you going
to come back?
Mr. Conyers. Oh, oh boy. We welcome you all here today for
this discussion. We think it is an important one, because it
gives us an opportunity to study how the International Trade
Commission handles patent disputes, and whether it sufficiently
protects American innovation.
We should focus on whether the Commission produces fair
results to litigants, and, most importantly, whether these
results are beneficial to the American consumer. Congress
established the Commission as an independent, quasi-judicial,
Federal agency to provide non-partisan counsel to the
legislative and executive branches of government. It is charged
with protecting United States consumers and industry from
unfair foreign trade practices, and has the power to issue
cease and desist and exclusion orders.
For example, patent holders who believe that imported
products infringe their patents may file a complaint with the
Commission, pursuant to Section 337 of the Tariff Act. Some are
concerned, however, that as a result of the Commission's patent
dispute resolutions, there have been adverse consequences to
American consumers in the form of higher prices, for example.
I am particularly concerned that some large, monopolistic
players actively collect patents as a way to concentrate their
market power, and to eliminate competitors under the watch of
the Commission. It is imperative that our Nation's patent
system protect American innovation and foster enterprise, but
not at the expense of allowing the system to be distorted to
favor players with the largest litigation budgets.
Also, we should continue to examine whether the increase in
Section 337 investigations is due to abusive behavior by non-
practicing entities and patent assertion entities. There are
concerns that these entities acquire patents solely for the
purpose of litigation before the Commission, to threaten United
States-operating companies with exclusion orders that they
otherwise may not obtain in Federal court.
In support of these concerns, some cite the fact that
Commission filings spiked in 2011, and that a large percentage
of these cases proceeded simultaneously in Federal district
court. While a patent holder is not barred from pursuing a
claim before the Commission and the Federal courts
simultaneously, some argue this presents the problem of
inconsistent results.
At this point, however, we know that, based on the
Commission's own statistics, the number of investigations
instituted has dropped, and it appears the number of filings by
non-practicing entities is also lower. The Commission appears
to be taking effective steps to address the problem.
And finally, any legislative changes to Section 337 should
avoid unintended consequences, particularly with respect to any
adverse impact they may have on American innovators. Any such
changes should also be considered in light of the Supreme
Court's 2006 decision in eBay v. Merck Exchange, which made it
more difficult for patent holders to receive injunctive relief
in Federal district court.
The ramifications of that decision could be driving an
increase in Commission filings, for instance. Although I am
skeptical of current proposals to curb abusive patent
litigation by reforming the Commission legislatively, I do look
forward to the hearing from today's witness. And I thank the
Chairman for holding this hearing. I yield back any time
remaining.
Mr. Issa. I thank the gentleman. All other Members will
have 5 legislative days in which to place their opening
statements in the record.
Today we have a distinguished panel of six witnesses, as
the Ranking Member said. These witnesses' written statements
will be entered in the record in entirety, and I ask that the
witnesses summarize, in approximately 5 minutes, their opening
statements.
For those who have not testified before, the lights are
just like a traffic light. And we ask you to please go as fast
or slow as you want on green, rush through the intersection on
yellow, and stop on red. Before I introduce the witnesses, it
is the Committee's standing rule that all witnesses be sworn.
So would you please all rise, and raise your right hand? Do
all of you solemnly swear or affirm that the testimony that you
are about to give will be the truth, the whole truth, and
nothing but the truth?
Thank you, please be seated. Let the record reflect that
all witnesses answered in the affirmative.
Our witnesses today include the former chairwoman of the
International Trade Commission, Deanna Okun, partner at Adduci
and Mastriani and Schaumberg, LLP. Boy, that is a good one. But
they get better.
The second one is--and welcome--John Thorne, partner at
Kellogg, Huber, Hansen, Todd, Evans and Figel, PLLC.
And next we have Mr. Mark Whitaker, partner at Morrison and
Foerster, thank you.
Dr. Fiona Scott Morton, professor of economics at the Yale
School of Management; Mr. Thomas Stoll, principal of Stoll IP
Consulting, LLC, and Mr. Dominic Bianchi, general counsel at
the International Trade Commission.
So I want to welcome all of you. I recognize that each of
you, perhaps except for the government witnesses, have both
your written statements and individual testimony. I would
suggest that, if you want to deviate from your written
statement, remember your entire written statement will be in
the record. But I would ask that you remain within the 5
minutes.
With that, Ms. Okun.
TESTIMONY OF DEANNA TANNER OKUN, FORMER CHAIRMAN, INTERNATIONAL
TRADE COMMISSION, AND PARTNER, ADDUCI, MASTRIANI & SCHAUMBERG,
LLP
Ms. Okun. Thank you, Chairman Issa, Ranking Member Nadler,
and other Members of the Subcommittee. I welcome the
opportunity to testify for you today. I have been privileged to
be part of the international trade community for more than 25
years. Let me reiterate that I appear today in my personal
capacity, and not on behalf of Adduci and Mastriani and
Schaumberg, or any of our clients. And, of course, I do not
speak for the Commission or for my former colleagues.
My purpose is to share my perspective based on my 12 years
serving on the International Trade Commission. I will focus my
remarks on a few key points, but will refer you to my written
statement.
First, the ITC is an expert trade agency that provides an
effective remedy to combat the pervasive problem of infringing
imports, providing essential protection to U.S. IPR owners and
fostering U.S. competitiveness and innovation.
Second, through its decisions and administrative actions,
the ITC has sent a clear message that only entities with
substantial domestic ties will succeed. The data demonstrate
that NPEs rarely file cases with the ITC, and that particularly
with respect to PAEs, they rarely succeed. And it is important
to set context. We are talking about a docket of 36 cases this
year; and of those 36, 34 of 36 were brought by manufacturing
entities. In 2014, it was 36 of 39. At its high water mark in
2011, there were 69 investigations.
So we are talking about a very small docket, which I say
will remain so because of the high threshold to succeed, and
because of the institutional requirements to be at the ITC.
Third, the ITC, perhaps because it is small, non-partisan,
quasi-judicial, has been nimble in addressing litigation issues
by pursuing case management and rule changes to reduce the cost
and burden of litigation. This type of agency activity should
be encouraged, not criticized. We want our most innovative
companies to have more, not fewer, tools to address the very
real and costly problem of infringement.
In that respect, Section 337, in my view, is functioning as
Congress intended, and recent proposals to amend the statute
are unnecessary and likely counterproductive. Moreover, our
trading partners increasingly recognize that innovation is the
fundamental competitive advantage. Countries like China are
modifying their laws to strengthen IP protection, and the
European Union has moved toward a unitary patent court. It
would send the wrong message for the United States to weaken
protections at a time when U.S. trade negotiators have been
working hard to raise IPR standards in agreements such as TPP
and TTIP.
Allow me to elaborate briefly. There is a direct link
between the protection of U.S. IPR and American
competitiveness. Constitutionally protected patent rights
incentivize investments and innovation, a key engine of
economic growth. IP-intensive industries account for more than
$5 trillion in value added, or approximately 35 percent of GDP.
From a trade perspective, we must have effective border
remedies to stop unfairly traded and infringing imports. The
ITC serves as the front line in protecting domestic industries.
As the Joint Economic Committee found in 2012, infringement of
IPR is a pervasive problem that harms companies, consumers, and
all levels of government.
Between 2008 and 2015, approximately 80 percent of the
products accused in Section 337 were imported from China. And
while this hearing is focused on investigations involving
patents, Section 337 also covers other unfair acts, such as
copyright, trademark, and trade secret laws. Moreover, for many
companies, the advantages of expeditious adjudication,
experienced ITC judges, in rem jurisdiction, and effective
remedies at the border, can make the difference in their
commercial success.
The data simply do not support the assertion that the ITC
has a patent troll problem. Overall, Section 337 filings have
decreased significantly in the past few years, from what was
already a low number, particularly compared to district courts.
The number of cases institute in each calendar year, from 2000
to 2015, has steadily decreased from 69 to 36. Complainants at
the ITC are overwhelmingly domestic industries that manufacture
a product.
Moreover, of the 67 exclusion orders issued by the
Commission in the last 10 years, only four were on behalf of
NPEs. The ITC is not inundated with frivolous cases, nor is its
caseload unmanageable. But that does not mean NPEs--and I do
mean NPEs, not PAEs--should not have the opportunity to
consider the ITC as they evaluate their options for protecting
their intellectual property.
Congress acknowledged the critical role of IPR as a source
of value by expanding Section 337 in 1988 to cover companies
making a substantial investment in a patent's exploitation,
including engineering, research and development, or licensing.
Yet over the last 5 years, it has become more difficult to
establish a domestic industry and obtain relief and, since
2011, only three NPEs have succeeded in establishing a
licensing-based domestic industry. I realize, Mr. Chairman,
that my red light is coming on, and I hope that, in listening
to Mr. Bianchi's testimony, you will hear about the many
actions the ITC has taken to help combat any type of abuse at
the ITC. Thank you.
[The prepared statement of Ms. Okun follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
__________
Mr. Issa. I thank you. And if you had not shortened non-
practicing entities and so on with those acronyms, it would
have been much longer.
Ms. Okun. Try that.
Mr. Issa. Mr. Thorne. For all the witnesses----
Ms. Okun. Not going to worry about it.
Mr. Issa. Yeah, yeah. For all the witnesses here on the
dais, of course, we are familiar with the acronyms. But to the
greatest extent possible, at least once in your testimony, make
sure that you describe fully, because for the record, a lot of
people, including the people behind you in the audience, may
not know the shortened terms. Thank you. Mr. Thorne?
TESTIMONY OF JOHN THORNE, PARTNER, KELLOGG, HUBER, HANSEN,
TODD, EVANS & FIGEL, PLLC
Mr. Thorne. There, I have got my microphone. Mr. Chairman,
Mr. Ranking Member, and other members of the Subcommittee,
thank you for inviting me today.
I have not worked in the government in this area, but I
have represented companies on both sides, bringing cases at the
ITC, defending cases at the ITC, bringing injunction cases in
Federal district court, defending against injunction cases in
district court.
And since the written testimony is going to be submitted, I
just thought I would summarize a little bit about why, from the
private point of view, why would somebody bring a case to the
ITC, as opposed to going to district court? And as you have
seen in the numbers, that both forums are usually available. We
did a quick count of the cases we believe were NPE cases at the
ITC--NPE meaning non-practicing entities of the ITC. We did a
quick count to see, well, how many of those organizations were
American companies that could have been sued in district court?
And the answer is almost all of them. And it is something
like two-thirds of all the cases, not just NPE cases, but all
of them, actually have a parallel district court case, as the
Chairman pointed out at the beginning.
So you have a choice. You can sue at the ITC, you can sue
at the district. What are the considerations? I count four. I
do not know if, in my 5 minutes, I will get through all four,
but the first one is leverage. Just pure leverage.
I have an example similar to the one the Chairman opened
with, similar to the Broadcom case, which I was involved in. My
example involved one New York company bringing an ITC case
against another New York company. One was in Manhattan, the
other was in Long Island. They were maybe 20 miles apart. They
could have sued in the eastern district of New York, probably
in the southern district of New York, maybe other places where
they did business. But the plaintiff who I represented picked
the ITC because its remedy would be uniquely leveraging--if I
can use the L word--it gave power--if we succeeded in obtaining
a recommended exclusion order, that would give a lot of
leverage.
Now, the defendant, or the respondent in the case was a
cable TV company. Most of their business is people installing
wires, fiber optic cables to homes, and managing central hubs
where the TV signals come in. They engage with programmers, the
Hollywood and New York programming.
So almost all of the American activity of the respondent
had nothing to do with what we targeted. We targeted the set
top boxes, which they imported, or some of the components of
the set top box were imported. We had a patent that covered one
of the many functions of the set top box.
So you have got a fairly complicated business doing lots of
things, but if they want to add a customer, they need another
set top box; or if a customer's box breaks, they need to
replace the set top box. The set top box itself is kind of
complicated, many thousands of functions inside it. We had a
patent that addressed one of the functions.
The ITC remedy would allow us to stop them adding
customers, because one of the many functions in the set top box
was infringing a patent we owned. So we could go to district
court, and what I think would have happened at district court
is, under the eBay case, under the normal balancing of equities
the district courts conduct, the district court would say,
``Well, I see a harm to the plaintiff. Your patent is being
infringed.
But I see a much greater harm to the defendant because it
is got a large business that will be disrupted if they cannot
get set top boxes. In fact, I see a harm to the public because,
you know, it is basketball season. You want to watch games.''
And so, if you balance the harms the way a district court does
in a normal injunction case, I think the district court would
have said, ``Well, let's measure your money damages.'' You will
get money for the patent infringement. Maybe over some period
of time, the defendant will be required to stop the
infringement, but no immediate loss of ability to add
customers. That would not have been the remedy at district
court. So where do you get leverage? You get leverage at the
ITC.
Now, I have also brought injunction cases in the district
court. I brought a case against a startup telephone company,
and I won a damage remedy for $50 million, and I won an
injunction, and I then traded the injunction for all the money
they had, which was quite a bit more than 50 million. I gave a
portion of that to intercity educational charities. We were
pleased to do a little bit of good in the case. But you get
leverage with an injunction. That was a case where an
injunction in district court was deserved, based on the facts.
But the difference between a damage remedy and injunctive
remedy is, there is a lot of daylight there.
So just briefly, three other reasons that you might
consider the ITC instead of a district court, as one of former
Commissioner Okun's partners advertises, the ITC is less likely
to invalidate patents, just--that is in practice.
The same rules apply, but the ITC tends to throw out a bad
patent about half as often as a district court. The ITC will
enforce standard essential patents. That is a patent that
governs a standard. And last, the ITC does not follow what this
Congress passed in 2011 that says you cannot bring in 30 or 40
or 50 different respondents in a single case. You have to sue
them individually in district court. Thank you very much.
[The prepared statement of Mr. Thorne follows:]
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__________
Mr. Issa. Thank you. Thanks for your experience. Mr.
Whitaker.
TESTIMONY OF MARK L. WHITAKER, PARTNER,
MORRISON & FOERSTER LLP
Mr. Whitaker. Mr. Chairman and distinguished Members of the
Subcommittee, thank you for convening this hearing, and for the
opportunity to testify. It is an honor to speak with you
regarding this important topic today. I am a partner with
Morrison and Foerster, and I have practiced before the ITC,
district courts, and Court of Federal Claims for the past 24
years. I am currently the president-elect of the American
Intellectual Property Law Association, and serve as a member of
the counsel for the ABA section of Intellectual Property Law. I
appear today in my individual capacity, however, and not on
behalf of my firm or any of its clients, the AIPLA or the ABA.
I offer a few litigator's observations about the ITC's
policies and effectiveness in combatting abusive litigation by
non-practicing entities, as well as overlapping considerations
for litigants bringing patent complaints before the ITC and
U.S. district courts, and I do so referring in part to H.R.
4829, entitled Trade Protection Not Troll Protection Act.
Congress intended that the Commission provide the owners of
intellectual property rights with broad protections against a
wide range of unfair acts of importation. Section 337 is more
than a mere surrogate to the district court to the application
of U.S. patent laws to infringing imports. Instead, it is
directed to trade protection that is informed by U.S. patent
law. At bottom, Section 337 protects American jobs and American
market strength.
First, with respect to the domestic industry requirement,
complainants already have to establish that a U.S. licensing
industry exists related to patents being asserted in cases
being based on licensing. The proposed legislation would not
allow the complainant to rely on the licensing activity unless
it is able to show that, ``The license leads to the adoption
and development of articles that incorporate the claimed
patent.''
While this change could potentially limit the ability of
NPEs to use the Section 337 in practice, investigations brought
by such entities do not account for many investigations--three
in 2014, two in 2015, and just one in the first quarter of
2016. Further, prior to 2014, entities that manufactured and
patented articles in the U.S. had a greater burden of proving
their domestic industry than entities that relied on their U.S.
licensing activities.
As recently confirmed by the Federal circuit, however,
establishing a domestic industry based on licensing now
requires proof of an article that practices the patent in suit.
There also needs to be shown a nexus between the asserted
patent and the U.S. investment in that patent when the domestic
industry evidence is based on licensing.
With respect to the public interest issues, the Commission
introduced new rules that require complainants to submit a
separate statement providing specific content with respect to
the public interest factors. These rules also provide members
of the public, including proposed respondents, an opportunity
to respond to the complainant's statement and highlight public
interest issues before institutions so the Commission can
direct the administrative law judge to make a full record and
recommendation on such issues in appropriate cases.
Next, the proposed legislation would require that a
licensee join an investigation as a co-complainant in order for
licensing activities to qualify under the domestic industry
prong. This would require, for example, a research and
development entity, such as a university, to persuade one or
more of its licensees to agree to be a co-complainant in order
to make use of Section 337.
Also, for example, a technology company that licenses some
subset of its patent portfolios to others to exploit the
technology and that does not exploit that particular technology
itself because of its business structure or economic objectives
might be impacted negatively by provisions in a bill that tries
to reduce NPE filings at the ITC. Remember that Congress
intended to open the ITC up to certain non-practicing entities
with its 1988 amendments as, ``such a change would enable
universities and small businesses who do not have the capital
to actually make good in the United States to still have access
to the ITC forum for the protection of their rights.'' The
Commission also unveiled, as was previously stated, a new 100-
day program aimed at providing expedited investigations without
burden and cost of a full length of investigation.
For both, legislation may also have the effect of importing
the eBay injunction criteria into the ITC's public interest
analysis. But the Federal circuit has held that the eBay
factors are not applicable in these investigations because of
the different statutory underpinnings for relief before the
Commission.
Moreover, inadequacy of money damages is not applicable in
Section 337 investigations, and as such, there is no equitable
balancing of purely private remedial interests, and Congress
eliminated the need to establish industry in a domestic--to a
domestic industry and investigation covering the statutory
acts.
As I see that my time has come to an end, I will leave the
balance of my statement for the written record.
[The prepared statement of Mr. Whitaker follows:]
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__________
Mr. Issa. And we thank you. Dr. Scott Morton.
TESTIMONY OF FIONA M. SCOTT MORTON, THEODORE NIERENBERG
PROFESSOR OF ECONOMICS, YALE SCHOOL OF MANAGEMENT
Ms. Scott Morton. Thank you very much, Mr. Chairman,
Ranking Members and Members of the Committee, for the
invitation to testify today. I am a professor of economics at
Yale, I am a former chief economist at the Department of
Justice Antitrust Division, and I have worked on a number of
ITC cases. The basic problem here is----
Mr. Issa. Could you place your mike a little closer,
please?
Ms. Scott Morton. Is that better?
Mr. Issa. Much better.
Ms. Scott Morton. Okay. The basic problem here is that the
ITC duplicates the function of the Federal courts with a
different process that gives patent holders power in excess of
the value of their intellectual property. That power is used to
extract money from implementers. As the Chairman noted earlier,
this is mostly a U.S.-on-U.S. problem. Companies like Acacia or
InterDigital or Kodak against Apple or Dell or Microsoft, and
this is because, of course, we manufacture so many components
outside the United States, we necessarily are importing them.
However, these are not trade disputes.
The problem that I see with the ITC is not the problem of
trade disputes. Trade disputes, I think, is a very legitimate
issue. It has been covered by other people. There is nothing
wrong with that. But the intellectual property leverage here
that the ITC gives creates a distortion in U.S. contractual
negotiations over intellectual property royalties.
The incentive created by the duplicative but favorable
court creates forum shopping, and a lot of business for the
ITC. We have heard some data today that suggest that this is
going down. I would say that if you count these cases by both
the number of companies involved, and also by whether the
patent holder is interested in money damages, rather than
whether they fall in a narrow bucket called an NPE or a PAE,
you would get a much larger number.
So I am talking about cases where it is not that I have a
widget and you have a widget and I need to block yours because
I am trying to sell mine, but rather I have intellectual
property that I would like to monetize, regardless of whether I
have some widgets in another area that is for sale or not,
okay?
So these cases could be pursued in Federal court, and we
would get an answer that there that was fair and guided by the
Supreme Court. Note that the business model of licensing does
not actually want an injunction. If I am licensing, I need you
to sell in order to take a fraction of your revenue as income
for me. So I do not actually want the injunction, I want
leverage, as Mr. Thorne said. And I get less leverage in
Federal court because it is harder to get an injunction.
Why is the injunction so useful? It is a huge threat.
Suppose my royalty ask is 50 cents on a $600 device? The risk
of exclusion is like a $600 royalty. You cannot sell your
device. So the correct royalty you would get in Federal court
might be two cents, but I may be willing to settle for 50 cents
because I do not like the risk of losing the whole $600 on my
device.
So the injunction in Federal court is only given when money
damages are inadequate, and that is rare. And at the ITC, this
injunction threat is much easier to get, and so monetizers
prefer the ITC. This is not about trade. It is about
duplicative forum shopping in royalty negotiations. This is
particularly a problem with standard essential patents, as I
focus on in my written testimony.
These standard essential patents are patents that are part
of a standard, such as LTE. And in order to make a compliant
product, such as a phone that works, you must infringe that
patent. The owner of that patent has agreed voluntarily to
charge a friend royalty--fair, reasonable, and
nondiscriminatory; so that means that they are in the business
of collecting money. They are licensing their intellectual
property. An injunction, again, is not, at the end of the day,
what they want.
So these patents are ripe for abuse at the ITC because
there is no way to avoid using them, and the injunction, again,
gives the owner a very powerful threat. If the implementer is
not participating in the Federal court system, and we have a
trade issue, that is one thing.
But I think most of these cases are actually--as previously
noted, two-thirds of them are already ongoing in the Federal
courts; and the courts do very well with regular royalty
disputes.
So my policy concern and recommendation is that I think we
need to eliminate ITC jurisdiction over licensing disputes that
can safely go to Federal court. This is, as you pointed out,
you know, the duplication is a waste of everybody's effort and
resources, and we would get the right answer in Federal court.
So I hear today also some attention and--to the process
reforms at the ITC, as if those would be a solution. We have a
100-day process. We have a domestic industry test. These
process reforms are a poor substitute for getting rid of the
incentive in the first place. Process is not going to work if
you have a determined complainant who has got money that they
see that they can get. If you eliminate the incentive to go to
the ITC in the first place, then you do not have to worry so
much about process.
So I really do not think the process reforms will do the
job. Thank you very much.
[The prepared statement of Ms. Morton follows:]
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__________
Mr. Issa. Thank you. It is now my pleasure to recognize the
Chairman of the full Committee, Mr. Goodlatte, for his opening
statement.
Mr. Goodlatte. Mr. Chairman, thank you for your
forbearance. I want to especially thank Mr. Stoll and Mr.
Bianchi, to interrupt you right as you were ready to go, but I
do have to be in two places at one time, so I want to share my
thoughts.
Abusive patent litigation is a drag on our economy.
Everyone from independent inventors to startups to mid- and
large-size businesses face this constant threat. Many of these
lawsuits are filed against small and medium-size businesses,
targeting a settlement just under what it would cost for
litigation, knowing that these businesses will want to avoid
costly litigation and probably pay up. And it is this type of
tactic that has made the International Trade Commission a
potentially attractive venue for patent cases.
The ITC has at its disposal the ability to issue exclusion
orders that block the importation of infringing products into
the United States. Since the ITC is a Federal agency and not an
Article III court, it makes sense that it is limited to this
single remedy.
In recent years, however, patent assertion entities have
used the Commission as a forum to assert weak or poorly-issued
patents against American businesses. It is evident that there
are cases that have come before the ITC that probably should
have been litigated exclusively in our U.S. district courts.
Nowhere is the disharmony between patent law and Article
III court precedent more on display than the application of
exclusion orders in technology cases in the ITC. For example,
Congress established an important counterbalance to the blunt
sanction of the exclusion order in the public interest test
provided under Section 337. The statute requires the ITC to
consider public health and welfare, and the impact of an
exclusion order on competition in the marketplace before
issuing an exclusion order.
Yet the ITC rarely exercises its responsibility to apply
the public interest test. This failure to follow the law has
particularly damaging results in today's technology markets in
which products are often reliant on hundreds or thousands of
patents. The ITC has the ability to take certain immediate
steps within its statutory authority to correct these problems.
The following are some steps stakeholders have recommended the
ITC take to address this problem.
First, a return to a pre-2010 domestic industry standard
that does not allow legal expenses, airplane flights and the
like to satisfy the domestic industry requirement. Second,
application of the public interest test and economic interest
test at the beginning of Section 337 review for purposes of
determining claims consideration, as well as the issuance of
exclusion orders.
And third, based on the public interest and economic
interest test analysis, articulation of standards that clarify
which patent disputes should be adjudicated by the ITC, and
those which are more properly addressed by U.S. district
courts.
I look forward to hearing from the rest of the witnesses,
but I will have to read your testimony since I am about to
leave. And I do want to say that in addition to those remedies,
I do think the suggestions of Dr. Scott Morton with regard to
where the ITC jurisdiction should not exist--and it should be
exclusively the jurisdiction of Article III courts--is also
worthy of our consideration.
So I thank you all for your testimony here today, and Mr.
Chairman, I yield back.
Mr. Issa. Thank you, Mr. Chairman. Mr. Stoll.
TESTIMONY OF THOMAS L. STOLL, PRINCIPAL,
STOLL IP CONSULTING
Mr. Stoll. Good morning, Chairman Issa, Ranking Member
Nadler, and Members of the Subcommittee. Thank you for inviting
me to testify today on patent litigation before the
International Trade Commission. It is an honor to be here today
to discuss this very important topic. My name is Tom Stoll, and
for the last several years I have been advising clients and
employers, including the ABA's Intellectual Property Law
section, the Boeing Company, the USPTO, and the White House on
issues relating to IP litigation and IP-related legislation,
including proposed changes to the laws to limit litigation
abuse in district courts and the ITC.
My advice is informed by more than 20 years of IP
litigation experience with law firms, the USPTO's solicitor's
Oofice, as a law clerk and staff attorney with the Federal
circuit, all in cases filed in district courts, the ITC, the
Federal circuit, and the U.S. Supreme Court. I would like to
emphasize that I am testifying on my own behalf today and not
on behalf of my current client, the ABA.
While ITC filings by patent owners certainly spiked in
2011, over the last few years the ITC has made great strides in
reducing the risk that ITC proceedings can be misused. The
ITC's own statistics show that the number of investigations
instituted has dropped to historically consistent numbers, and
that the number of filings by non-practicing entities is lower
than it was before the jump in overall filings.
To the extent the ITC had a patent troll problem, it
appears the Commission has addressed it. U.S. patent laws are
extremely beneficial to society, by providing the incentive for
inventors and companies to invest in the development of
groundbreaking new technologies, knowing their investment can
be protected, often enabling startups and other small companies
to secure the funding they need to grow.
The ITC is charged with preventing unfair trade practices,
including the theft or unauthorized use of intellectual
property. It has the extraordinary authority to issue general
exclusion orders barring all imports that infringe a patent.
In the U.S. Supreme Court's 2006 decision in eBay vs.
MercExchange, the court held that a district court cannot
automatically issue an injunction in a patent case. Patent
owners, including non-practicing entities, began asserting
their patents in the ITC with much greater frequency. The ITC
had become a more attractive venue for those seeking the threat
of an injunction, and many argued, was being used to extract
unjust settlements.
Two recent developments, however, have significantly
reduced the risk that an ITC proceeding based on frivolous
claims could be used to unjustly extract a settlement. First,
the Commission has applied the domestic industry requirement
much more rigorously. Second, the ITC has instituted a 100-day
program to quickly dispense with cases that lack merit, and
thereby preventing abuse.
Additionally, recent U.S. Supreme Court decisions
significantly limiting the scope of patent-eligible subject
matter and requiring greater clarity and patent claiming may
also deter some patent owners from filing claims of
infringement in the ITC. As a result, the number of cases
instituted by the ITC has dropped in recent years from 69 in
2011 to 36 in 2015. Non-practicing entities were the
complainants in only two of the 36 investigations instituted
last year.
Let me explain how the ITC has changed its application of
the domestic industry requirement. Under that requirement, a
party much show that there is a significant or substantial
investment in a U.S. industry that requires protection. Until
very recently, a patent owner could satisfy the requirement
simply by establishing the substantiality of its economic
investment and licensing activities.
In the last few years, however, the Commission began to
require more, and the Federal circuit now seems to agree. In
Motiva, for example, the Federal circuit affirmed the
Commission's finding of no domestic industry, stressing that
the complainant must show that the licensing program was being
used to encourage adoption and development of articles that
incorporated the patented technology.
In LSI, the Federal circuit again affirmed a Commission
determination that a domestic industry did not exist because
the complainant's licensing activities did not relate
specifically to articles protected by the asserted patent.
The ITC's new 100-day program is designed to help companies
avoid the significant expense associated with litigating a
full-blown proceeding where the claim is baseless, and to deter
those seeking to leverage that expense to extract an unjust
settlement. It enables the Commission to quickly resolve an
investigation by requiring that the ALJ rule on a dispositive
issue, such as lack of domestic industry, within 100 days of
institution of the investigation.
These efforts and the resulting reduction, in the number of
cases that have been instituted in the last few years, appear
to have gone far to address concerns that the ITC has become an
attractive forum for patent owners whose cases lack merit, and
who seek to leverage this proceeding to extract an unjust
settlement. I am grateful to the Subcommittee for taking the
time to conduct this hearing and for taking a close look at
this important issue. I am honored to have been invited to
speak with you today, and look forward to answering your
questions. Thank you.
[The prepared statement of Mr. Stoll follows:]
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__________
Mr. Issa. Thank you. Mr. Bianchi.
TESTIMONY OF DOMINIC BIANCHI, GENERAL COUNSEL, UNITED STATES
INTERNATIONAL TRADE COMMISSION
Mr. Bianchi. Mr. Chairman and distinguished Members of the
Subcommittee, my name is Dominic Bianchi, and I am the general
counsel of the U.S. International Trade Commission. Thank you
for inviting me to appear today before you. As Mr. Conyers
noted earlier on, the Commission is an independent quasi-
judicial Federal agency. We are actually more unique than any
other independent agency or commission that is out there. We do
not do policy. We do not address policy. That is for Congress
and the executive branch to do.
So I want to assure you that the Commission implements the
law that Congress has passed. We will continue to implement
that, based on the interpretations by the Federal circuit until
Congress amends the law. If Congress does amend the law or the
Federal circuit changes one of our decisions, we will implement
that policy.
In Section 337 cases, however, the Commission sits akin to
an Article III Court, as mentioned before, in hearing cases.
The overwhelming majority of investigations that occur under
the Section 337 before the Commission are based on claims of
patent infringement. If a violation is found, as noted earlier,
the statute allows for only two types of remedies, at the ITC--
an exclusion order and/or a cease-and-desist order.
The Commission focuses on conducting expeditious, fair, and
technically sound decision-making to resolve allegations of
intellectual property infringement and other unfair acts.
Similar to the Federal courts, a Section 337 investigation
includes all aspects of patent disputes, including topics
relating to validity, infringement, remedy, and competitive
conditions. We apply the same law that the district courts do.
What differentiates the Commission, however, from Federal
courts is that the Commission does not institute an
investigation before the sufficiency of a complaint is
assessed. This assessment includes the agency requesting input
from the potential respondents and the public regarding whether
there are statutory public interest considerations raised by
the complaint. At the time of institution, if the Commission
determines that there are any particular case-dispositive
issues that may resolve the investigation within a matter of
months, it may place it in an early disposition program, as
mentioned earlier today.
Also as you have heard, the Commission has established a
practice of responding to community input by initiating a
variety of programs to more efficiently and expeditiously bring
to a close those matters that otherwise would impose undue
costs on parties, the Commission, and the broader system.
The Commission also determines whether the public interest
considerations warrant the development of a full factual record
regarding the statutory public interest factors, and thus it
can delegate this issue to the administrative law judge for
fact-finding. Once the investigation begins, the agency
develops a complete administrative record based on discovery,
provides a full and fair opportunity for the parties to present
testimony and cross-examination at a hearing, and provides the
parties with the opportunity to provide written briefs. The
Commission staffs its investigatory process with IP experts, IP
attorneys and qualified ALJs solely dedicated to adjudicating
IP cases.
After the ALJ issues a final, initial determination, the
parties have the opportunity to petition the Commission for
review. Typically, if the Commission determines to review, it
will ask the parties to respond to specific questions,
including specific questions regarding the public interest
factors.
If the Commission finds a violation and a remedy, and
issues a remedy, the President of the United States has 60 days
to review the order and determine whether to disapprove the
order on policy grounds. Appeals of the Commission's decisions
in Section 337 investigations are made to the U.S. Court of
Appeals for the Federal Circuit--the same court that reviews
patent decisions of the district courts.
The Commission recognizes the statutory mandate to resolve
cases at the earliest practical time and has taken a variety of
steps to do so. These include developing pilot programs,
developing new procedural rules, and substantial investment in
the Commission's electronic record system for case management.
The Commission routinely seeks input in its processes and
diligently considers feedback from stakeholders on ways to
improve the processes and procedures. I welcome the Committee's
views. Thank you.
[The prepared statement of Mr. Bianchi follows:]
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__________
Mr. Issa. Thank you. I will now recognize myself for a
question. And do not turn off your mike, Mr. Bianchi. I will
ask you the first question. Since I think four of the six
witnesses mentioned the pilot program: how many cases have been
adjudicated under the pilot program?
Mr. Bianchi. The former--and so, whether there is one
case----
Mr. Issa. Is one not the right answer?
Mr. Bianchi. Sorry, sir. One is the correct answer under
the pilot program. Under the previous program before we
developed the pilot program, there was another case that the
Commission essentially did.
Mr. Issa. Okay. So a lot of talk about a program that has
hardly ever been used at this point. So I have high hopes for
the future that it does something, but I noticed nobody talked
about the benefits and successes of the program, only that it
existed. And I bring that up because I want the record to be
clear that it is pretty premature to talk about a pilot
dismissing cases that are frivolously brought at this point.
Hopefully, it will be a factor in the near future.
Mr. Whitaker, you brought up a point, and I just want to
make sure that I amplify it by asking it. Currently, is it your
understanding that the ITC does not have to meet a standard of
harm to a licensee? In other words, when a non-practicing
entity brings a case in which they have one or more licensees,
currently they do not have to show that there would be any harm
to that licensee, and the licensee does not have to assert any
harm if the importation continues. Is that correct?
Mr. Whitaker. When you say ``does not have to show harm,''
in effect, there is harm that is demonstrated, and that harm is
demonstrated through a few means--the active importation, the
active infringement, and then the damage to the domestic
industry of that license.
Mr. Issa. Right, but the domestic industry damage--let's
just say that as has happened in real cases, that somebody goes
and gets a licensee on an interpretation of the product, and a
completely different product is being imported--not in the same
market, not affecting it at all--that domestic market rule
still is used by the ITC.
In other words, one licensee who may have just paid a
license in order to make the case go away, who would not assert
that they even believe that they infringed the patent, but
rather they simply paid it because somebody came to it and it
was cheaper to settle than to fight it, that person is not a
participant under current law and does not have to be in any
way a plaintiff, or even assert that they are using what they
have licensed. Is that correct?
Mr. Whitaker. If I follow the Chairman's line of logic, I
think that is correct.
Mr. Issa. Okay. Ms. Okun, you know, you had a very long
time on the Commission, and probably the most senior person we
could ask for advice. Is that not a question that has not been
formally answered in the history of the ITC? In other words, as
you as a trade entity have looked to meet the congressional
obligation that there is a domestic industry, has there not
been, if you will, a minimalization of that test, and is that
not one of the challenges? And it is not the main thrust for
today, but is it not a fact that it only takes sort of a straw
to get the requirement when it comes to patent licensing?
Ms. Okun. Mr. Chairman, I would disagree with you.
Mr. Issa. Okay. Can you name a case during your decade of
service in which there was a license and that you ruled that
the entity was not entitled to a domestic market even though
there was a domestic license granted?
Ms. Okun. I mean, for the record, I would be happy to
provide many of those cases, but I think the point, if I
understand, or----
Mr. Issa. For the cases where the ITC said yes, you have
got a license and yes, somebody is importing, but we are going
to turn down the domestic market, we are going to find that you
did not meet it.
Ms. Okun. Right, there are cases where, in looking at the
domestic industry requirement, which requires a substantial
investment and exploitation in the patent where licensing--
having a licensee is not enough. They often bring them into--or
they are often part of a case because it is part of, if you do
not manufacture, that you have a licensee.
But the Commission, if anything--I mean, it is interesting
to hear the reference to the--Chairman Goodlatte's reference to
pre-2010 law because I would say that--post-2010--I would be
curious what my colleagues say; I think there has been a
heightening of the threshold with respect to domestic industry
with----
Mr. Issa. Well, I appreciate that, and I want to quickly
run up an additional question for every member of the panel. I
mentioned and others have mentioned the Dell, Kodak, Apple,
obviously Qualcomm, Broadcom. How many of you believe that
those cases were appropriate for the ITC; that in fact they
were the most appropriate remedy?
Please raise your right hand if you believe they were
appropriate to be before the ITC as trade importers. I have
one. Two. You believe that that was--okay, three. How many of
you believe that it was not appropriate to have these
substantial multibillion dollar companies in a trade dispute
before an administrative court while they all were
simultaneously in Article III courts? Okay.
So I have three, two, and Mr. Bianchi is not entitled to a
vote, apparently. Okay, there will be more questions, but I
want to be respectful of the time, and with that I recognize
the Ranking Member, Mr. Nadler.
Mr. Nadler. Thank you, Mr. Chairman. Mr. Thorne, you
testified, with respect to the leverage, that the ITC process
gives someone--where they can get relief where you could not
get an injunction in court because of the--presumably the
balance of equities that would not yield an injunction. Do you
think it is right you should be able to have a forum to get
relief when on the balance of equity you could not get relief?
Mr. Thorne. My personal belief, not on behalf of any
client, is that----
Mr. Nadler. Well, that is granted.
Mr. Thorne [continuing]. The Supreme Court's law--and in
fact, the history of the court's application of equitable
principles is the right way to approach that. Injunctions are
powerful tools. They are sometimes necessary, they are
sometimes just the right remedy. I have won them and thought I
was right in winning them. But if money will work, that is the
alternative. If your harm as a plaintiff is less than the harm
you are inflicting, it is appropriate to deny the injunction.
Mr. Nadler. That is the balance of equities test that a
court of equity, the Article III court, will do. Now, the ITC
does not use that balance of equity, so my question is, is it
right as a matter of equity and fairness that we have a forum
where those equitable principles are bypassed?
Mr. Thorne. You see, this is a confusion I have, and I
apologize for--I hope this answers the question. 337C, which
lists what does the ITC do if it finds a violation, says ``all
equitable defenses may be presented''--in all cases. The ITC
has power in its current statute to recognize equitable
defenses.
The ITC, when eBay was decided by the Supreme Court, could
have said, ``You know what? We are going to improve our
process, too. We are going to balance the equities, because
equitable defenses are in our statute.'' And they made a
choice, ``Nah, eBay is not for us. Our statute is different.''
And the Federal circuit supported that out of Chevron
deference, so they chose a different path.
Mr. Nadler. So you have a forum where they can bypass the
normal equitable balancing of--the normal balancing of equities
and issue a contrary decision with a powerful--not injunction--
a powerful exclusion which has the effect of an injunction?
Mr. Thorne. That is correct.
Mr. Nadler. Dr. Morton, would you comment on that?
Ms. Scott Morton. I am not going to comment on the law,
because that is not my area of expertise, but----
Mr. Nadler. Do you think it is right that we have such a--
--
Ms. Scott Morton. It is a great tool when you have actual
trade disputes where you have an infringing thing that is
coming in where you cannot go to Federal court and get money. I
think when you have these cases--a lot of the problem here has
arisen because we have many products now that infringe on
thousands and thousands of patents. Your average device, set
top box or handset or whatever, reacts on thousands and
thousands of patents.
So the example I gave before of the $600 device and a two-
cent royalty, is very often the case. And what the ITC is doing
is essentially imposing a $600 royalty with an exclusion order,
and I do not think that is right.
Mr. Nadler. So you are saying, in that kind of a case, an
Article III court with a balance of equities test would be much
less of a blunt instrument.
Ms. Scott Morton. Exactly.
Mr. Nadler. Ms. Okun.
Ms. Okun. Mr. Nadler, I would like to counter that with
respect to a couple things about eBay. First, it is not as if--
I was on the Commission in, during this period--so speaking for
myself, it was not as if the Commission looked at what happened
and said, ``Oh, we do not want to do that.'' The Commission
looked at the Section 337 statute, which does provide for all
equitable defenses, but the Section 337 has additional
safeguards. There is a public interest test--one of the parts
of the injunction test. It applies a public interest test.
There is an additional safeguard. The President can disapprove
any exclusion order at the end for any policy reason, and
Congress only gave--again, it is an independent agency, just
like you have a PTO and others--only gave the ITC one remedy, a
border remedy, exclusion order to cease-and-desist and consent.
Mr. Nadler. I understand that. I am concerned--I am hearing
this--I am concerned about why, as a matter of policy, we
should have a separate remedial forum that is not subject--
although it can use--is not subject to normal equitable
balances. And let me ask one further question first, Ms. Okun
and maybe Mr. Thorne and Dr. Morton. In most administrative
agencies, you can remove a case to Federal court. That would
seem to be a safeguard. Here you cannot. Should you be able to?
Ms. Okun. Well, it is actually the opposite, which is you--
I mean, because of our international trading obligations, you
can stay the district court actions. So if there is both, you
would stay--you can stay.
Mr. Nadler. But why not go the other way around?
Ms. Okun. Well, the statute does not allow that.
Mr. Nadler. I understand that. Why should we not--I am
asking what should the statute say, not what does it.
Ms. Okun. Well, so I am going to answer from the trade--or
the perspective from how you would do that, because what the
statute tells you is if they are imports, okay? It does not
matter if it is import by a U.K.-headquartered company out of
China, or a Chinese company, or an American company, right? An
import is an import, and that is what the Commission has to
look for, for its jurisdiction for the case. Domestic industry,
again, it relates to its activities in the United States, not
actually where it is headquartered.
So, again, I see it from a different perspective, which is
the statute does not--the statute gives a trade remedy--which I
think is an effective trade remedy--and again, I would think is
a complement to the district court, particularly for those
companies who are looking to stop infringing goods at the
border and keep them out of the United States.
Mr. Nadler. My time is expired, but I would like to hear
Mr. Thorne's comment and anyone else who wants to comment on
that.
Mr. Issa. That would be okay.
Mr. Thorne. I just want to strongly say that, in my
personal view, if a district court remedy is available, that is
where the case belongs. There are some situations----
Mr. Nadler. So it should be removable.
Mr. Thorne. It should be exclusive. There would be no
reason for the ITC to do something duplicative. The ITC should
dismiss an investigation that either has been filed in a
district court--in a parallel case in a district court or could
be filed in a district court, because otherwise it is not just
that you have got two forums that would be available. One forum
has very different rules and will attract cases that can
exploit those differences.
Mr. Issa. Mr. Marino, if I could have your indulgence just
to make sure we make something clear that Ms. Okun said, is it
your assertion today, as a former chair of the ITC, that the
Federal court, an Article III judge, has no authority to tell
the ITC to stay its transactions, that under statute they are
limited and do not have that authority?
Ms. Okun. Does the Federal court--does the Federal district
court have the ability to stay that?
Mr. Issa. When you were chair, if you received an order to
stay your case from an Article III judge who had the same case
before him, you would assert that you had a statute which did
not allow you to honor that order.
Ms. Okun. Right, but the statute actually says the
opposite, that the respondent could move to stay the district
court.
Mr. Issa. Okay. I just want to make sure that is clear for
the record, because it is critical to--I think----
Mr. Thorne. Mr. Chairman, may I follow up on that for just
a second?
Mr. Issa. As long as Mr. Marino does not mind.
Mr. Thorne. The situation that Doctor Scott Morton referred
to, where you have a standard essential patent, a patent
necessary to practice a standard, where the patent holder has
promised to seek only a reasonable royalty--not to go try to
shut you down, but only seek a reasonable royalty--in that
situation, it may be an example where you could go to a
district court and say, ``Wait a minute. The patent holder is
doing something beyond what it promised to do. Please make them
stop.'' And you get an injunction not against the ITC but
against the attempted assertion by the person that had
committed to fair licensing.
Mr. Issa. Thank you. Mr. Marino, thank you for your
indulgence. You are recognized.
Mr. Marino. Thank you, Chairman. Dr. Scott Morton, you
talked about there should be situations where the courts,
Federal courts, should be involved, and not the ITC. Could you
give me an example or two of a case or cases, any why?
Ms. Scott Morton. Sure. I would rather actually speak just
generally about the features of the cases that would lead to
that.
Mr. Marino. That is fine.
Ms. Scott Morton. So why? Let's take a standard essential
patent example, as Mr. Thorne just described--there the
license--the holder of the patent has already agreed that it
wants money. So if there is a dispute over how much money, that
is properly dealt with in the district court, and we do not
want consumers to suffer the loss of that product from the
store shelves or the implementers to face a loss of business,
because really you are just arguing over whether it is 2 cents,
3 cents, or 10 cents.
Mr. Marino. Okay. How does timing fit into that with a
situation where a court may settle it quicker or the ITC may
settle it quicker?
Ms. Scott Morton. The court can award interest, can award
any kind of compensation to the holder of the patent that it
deems to be fair.
Mr. Marino. But is that the end of litigation, though?
Ms. Scott Morton. At the end of the litigation, you have an
answer.
Mr. Marino. Right, the whole process.
Ms. Scott Morton. Yep, we go through the whole process. We
get an answer. What is the damage? What is the fair royalty?
What is the appropriate payment to make? The owner of the
patent whole, now that we know it is a valid patent, infringed,
and here is how much it is worth.
Mr. Marino. Thank you. Ms. Okun, you have heard my
question. Do you want me to repeat it? Okay. And you heard the
response from Dr. Scott Morton. Given the ITC's position on
Federal Court vs. ITC--and let's talk about streamlining too, a
little bit.
Ms. Okun. But to be clear, I am not giving the agency
perspective on this question, but just my own personal
perspective.
Mr. Marino. I understand that. I am going for your
experience.
Ms. Okun. But again, I see the ITC as playing a
complementary as opposed to redundant role, and I see it as an
additional tool. And so I guess when I hear these questions, I
wonder why you would say to a patent owner that Congress has
authorized--you know, is authorized in a statute to bring a
case to the ITC, we want you to not seek fast, effective
relief, but we want to send you over to the district court,
which is often longer and be more expensive.
And in some cases damages are not what a company is looking
for, particularly in a high-tech industry where what is
important is getting your product to market quickly. If you
look at an exclusion order, for example, for OtterBox, which
was just trying to stop--because the smartphones change so
much, OtterBox needed to get its products in quickly. Without
an exclusion order--it was not looking for damages. It wanted
to get its products out in front, and not the infringing
products. So I guess that would be an example that I would give
where I just do not see damages as always being the best
remedy.
Mr. Marino. Okay, thank you. Attorney Bianchi, am I correct
when--understanding that you said the omission has two sources
of remedy exclusion and cease-and-desist?
Mr. Bianchi. That is correct.
Mr. Marino. No injunction.
Mr. Bianchi. That is correct.
Mr. Marino. Tell me the difference, because I heard one of
the panelists referred to exclusion as akin to an injunction.
Could you explain that to me, please?
Mr. Bianchi. So in a district court where an injunction is
available, in essence the court would be saying to one of the
parties, you cannot do something.
Mr. Marino. At any given time, early on in a case--and we
are not talking about the end of the case, correct? An
injunction--a court can order an injunction early on if the
evidence is there.
Mr. Bianchi. It depends.
Mr. Marino. If they meet the criteria.
Mr. Bianchi. If the judge were to feel that the evidence
were there and requirements were met for injunctive release,
then yes.
Mr. Marino. Okay, I am going to cut to the chase here. You
have stated that unlike the Federal courts, the Commission does
not institute an investigation before the sufficiency of the
complaint is assessed. What can you do--and how long does that
take? Let's start with how long did--was--an average
investigation take, because that--I am looking at individuals,
small businesses, small entrepreneurs with patents who they
want their patent--they want to get it out. They want to
continue to make money.
Without any injunctive power, based on the fact that you do
an investigation, there is a long time--there could be a long
period of time by which that individual is waiting for a
decision from the Commission. Is that correct?
Mr. Bianchi. Sorry, sir. Mr. Chairman, do I have----
Mr. Issa. He was very indulgent with the prior question.
Mr. Bianchi. I just wanted to make sure. So I think it is
actually the reverse of what you are saying. The Commission is
typically much faster than a district court. So let me give you
an example.
Mr. Marino. Okay.
Mr. Bianchi. At the Commission, once a case is instituted
by the Commission, you will get to a hearing before an ALJ
within about nine and a half months. In a district court, it
could easily be two and a half years.
Mr. Marino. But you could have an injunction long before
two and a half years in a Federal court.
Mr. Bianchi. If the Federal court felt that the measures
were met, but most likely what I was trying to articulate, sir,
under where we differ from Federal courts----
Mr. Marino. I understand.
Mr. Bianchi [continuing]. Is that we have very specific
pleading requirements that--and requirements before we
institute. The Commission has 30 days to decide whether or not
those requirements are met, whereas in a district court
proceeding, you have a notice pleading in general.
Mr. Marino. A notice to appear before Federal court.
Mr. Bianchi [continuing]. And it could be a year later
before you get to the point where we are at after 1 month at
the Commission.
Mr. Marino. Thank you. And, Chairman, thank you for the
extended time.
Mr. Issa. Thank you. And with that, the gentlelady from
California, Ms. Chu.
Ms. Chu. Mr. Thorne, you and other witnesses argue that the
Supreme Court's decision in eBay vs. MercExchange, which made
receiving an injunction more difficult in Federal court, had
the effect of entities moving forward to the International
Trade Commission. At the ITC, these entities could pursue an
exclusion order with less vigorous tests. You also state that
the ITC is an attractive forum for non-practicing entities
because the ITC and district courts apply divergent joinder
rules. Could you describe what effect this has on cases moving
forward at the ITC?
Mr. Thorne. Thank you for those questions. First of all, on
the effect of the Supreme Court's eBay decision, it is been my
experience that that caused a shift, but it was also the ITC's
own experience. So in their 2012 budget request, they wrote to
Congress. Since the United States Supreme Court 2006 eBay
decision, which has made it more difficult for patent holders
that do not themselves practice a patent to obtain injunctions
in district court, exclusion orders have increasingly been
sought by non-practicing entities that hold U.S. patents. That
is the ITC writing to Congress in its 2012 request.
Now, the numbers of NPE cases reached a peak in, I think,
2011 or 2012. I reported numbers in my testimony based on--
there is a company that is good at analyzing these cases called
RPX. But what we counted was not the number of investigations
launched, but the number of companies sued. And under the 2011
American Invents Act, in Federal district court, you now have--
you cannot sue 30 companies or 40 companies or 50 companies
that you say all infringe the patent. You can only sue people
that are involved in the same transaction or occurrence.
And so what the ITC can do with one case against 30
companies, this is the same thing that would be 30 cases in
Federal district court. Counting it that way, the NPE docket of
the ITC is still at about one quarter.
Ms. Chu. Well, Mr. Stoll, you also state the eBay case may
have made the ITC an attractive venue. I understand that in the
last few years the ITC has taken steps to free--to try to weed
out these frivolous claims. And can you describe how the ITC
altered the licensing prong within the domestic industry test
to address frivolous claims? And what effect did it have in the
Federal circuit? And also, Ms. Okun, if you could respond to
what was said.
Mr. Stoll. Yes, I can. I think the ITC has done a better
job of requiring the evidence linking the licensing effort to
the particular--the patent involved to the particular product
that the license relates to so that, you know, we are not
comparing apples to oranges. So the products that are subject
to the license should be pretty closely related to the product
that this patent owner is seeking to have excluded.
So it is the relationship there that they have tightened up
the standard--the burden of proof has gone up. I think what is
going on here is although there was only one case subject to
the pilot program and there was another case before that, but
what is going on is practitioners are getting together with
their clients and discussing, given this higher burden of
proof, should we even try to file in the ITC or not? And I do
believe that even the pilot program, as well as the Federal
circuit cases that are supporting the Commission's efforts to
tighten up the standard, have discouraged people from bringing,
you know, at least frivolous claims to the ITC, which I think
is the goal here.
Ms. Chu. Ms. Okun?
Ms. Okun. Oh, I would agree with those comments. I mean, I
think if you, again, look at the numbers--and just to back up 1
minute about the budget justification, of course, when an
agency is trying to evaluate it--having been there when we were
doing budget justifications, when you are trying to say what
our case load is, it is better to overestimate than to
underestimate in terms of your funding, so I think that
explains some of that.
Because if you actually look at the numbers post-2011, they
have gone down. And I think the point is, there have been
changes both in the case law and with the Commission taking its
own steps to--with the 100-day program and--which is in
rulemaking right now for additional changes. So you see a
decline.
There were three cases, two cases, and we are talking about
a very small number of cases at the ITC, and I think that,
again, these--the case law and the administrative actions have
sent a strong message to lawyers and clients. Do not come to
the ITC unless you can walk in the door with a complaint that
is sufficient.
Ms. Chu. Mr. Thorne, what are your thoughts on these
changes and the fact that the number of cases are going down?
Mr. Thorne. The number of cases, as I said, is probably not
the way you want to measure it. The way you want to measure is
the number of companies that are sued. Each company will be
allowed and will need to present its own claim constructions,
its own non-infringement defense, its own invalidity defense.
There is some coordination between companies, but there is
also often a difficulty to get everybody on the same page
because they have got different products that are differently
accused. It is a kind of bedlam where in 2011, as part of the
America Invents Act, Congress said for district courts we are
not going that anymore.
In district court, it is not enough to say you all infringe
the same patent. You are entitled to your own day in court and
a separate case. So taking the cue from Congress, I would count
the numbers based on how many respondents are sued. And by
those numbers, one quarter of the cases at the ITC over the
last 3 years have been NPE cases.
Ms. Chu. Ms. Okun wants to respond. Could she?
Mr. Issa. Briefly.
Ms. Okun. Just a note on the number of respondents two
things. One, post the Broadcom v. Qualcomm litigation, after
the Federal circuit decision, parties have to name the
downstream producers, and so there was increase in the number
of respondents because you had to name everyone in order to get
the jurisdiction.
Two, it is true that at the ITC, one of its advantages for
someone facing foreign imports coming in from a whack-a-mole
Chinese company, here, there, and everywhere, can name
everybody and get an exclusion order against them without
having to go to district court several times. And there are
many cases in my written testimony where I point that out.
Ms. Chu. Thank you. Thank you, I yield back.
Mr. Issa. Thank you. Ms. DelBene.
Ms. DelBene. Thank you, Mr. Chair. Thanks to all of you for
spending time with us today. As you know, the DOJ opposes
mergers or acquisitions when it finds that a transaction would
unduly concentrate market share, eliminate competition to the
detriment of consumers. So, for example, GE withdrew an
attempted sale of its appliance business to Electrolux after
the DOJ filed suit to block the sale based on similar types of
concerns.
So I wanted to start with Dr. Morton. Do you think some of
the same market conditions appear in ITC investigations and--
where a complainant seeks to ban a large percentage of products
and players in question?
Ms. Scott Morton. It is not the same concern that you have
with a merger, because it is not the case that the two firms
are getting together. But there is consumer harm. Where does
the consumer harm come from? Well, as I said, let's say we have
a $600 device and the owner of the patent asks for 50 cents in
royalty and should be paying only--should be getting only two
cents. That extra 48 cents is passed on to the consumer.
Some fraction of that is passed on to the consumer. Let's
assume there are 20, 50 firms all engaging patent holders, all
engaging in this behavior. The price of that product will be
higher. The consumer will be harmed. There is going to be less
incentive to make that product better and include more
features, if that is going to attract more people suing you at
the ITC. So it does create consumer harm. It is the problem I
wrote about in my testimony, hold-up, and it is of concern. The
tech industry is a very important American industry, and it is
being harmed by these patent assertion entities that are
extracting profits from implementers way in excess of the value
of their technology.
Ms. DelBene. And Mr. Bianchi or Ms. Okun, do you feel--
yeah, how does the ITC take into consideration the effect on
competitive conditions when you are looking at your public
interest analysis? You can look at each other and decide who
wants to go first.
Mr. Bianchi. Well, I have to answer from the perspective of
the Commission, which sits in this instance as a court. So I
cannot address specifics other than to let you know that we are
statutorily required to consider four public interest factors,
including competitive conditions in the United States, and also
the effect on consumers. The Commission does that when it
considers a remedy. And as was noted earlier, there is an
additional backstop there that the president can disapprove any
recommended remedy within 60 days based off of any policy
consideration.
Ms. DelBene. Ms. Okun, go ahead.
Ms. Okun. Briefly, my perspective on that, which is, as Mr.
Bianchi states, it is correct. The Commission does look at that
before imposing any remedy. And I guess my question is, it is
almost like proving a negative. In other words, if all these
technology companies that have somehow come to the ITC, if
their actions have proved to stifle innovation, I do not see
the evidence of that.
I mean, if you look at what is going on in mobile
communications, all these things, I mean, there is leaps and
bounds. And I think I come from the perspective that what you
do not want to do is de-incentivize those companies that are
making these strides from having the ability to seek an
exclusion order when necessary and--but the Commission should
look at it carefully and see if there are other products in the
market and make sure that those competitive conditions are
maintained.
Mr. Thorne. Could I jump in with a supplemental answer?
Ms. DelBene. Certainly.
Mr. Thorne. When Ms. Okun was the chair of the agency,
there was the dispute that the Chairman mentioned between
Broadcom and Qualcomm. The one patent on which everything
hinged was an idea for how to save battery life on a phone. All
the phones that were imported into the U.S. using 3G
technology, all the phones, were threatened by a battery-saving
idea. There are millions and millions of--these are marvels of
engineering--there are millions of functions embedded in these.
There are some fraction of a million patents that read on those
functions. This is a battery-saving idea that was worth
pennies.
And the administrative law judge, using what I would have
thought was a district court-like common sense, said, ``I see
the violation. The battery patent is infringed. But we are not
going to have an exclusion order. The Commission reversed that
and said, ``No, we are going to have an exclusion order against
not just the chips that were defended by Qualcomm, the party in
the case, but all these other people that were not there. Their
phones were going to be excluded.
Ms. DelBene. Dr. Scott Morton, you looked like you were
going to----
Ms. Scott Morton. Yeah, thank you. The issue of stopping
the ITC from excluding a product does not create disincentives
for innovation. A party that has a great patent can go to
Federal court and explain why their patent is great and get a
fair return on that innovation. What the ITC allows that party
to do is get, as John just said, the whole value of the phone,
which is not the value of the battery-saving patent. You want
them to be able to go to a judge and explicitly explain what
the value of the battery-saving patent is and get paid for
that. And that then stimulates innovation that we want in all
sorts of features like batteries.
Ms. DelBene. Thank you. My time has expired. I yield back,
Mr. Chair.
Mr. Issa. Thank you. We now to go the other--oh, no, Mr.
Jeffries of New York.
Mr. Jeffries. Thank you, Mr. Chair. And I want to thank the
witnesses for your presence here today and the informative
testimony today. I will start with Ms. Okun. The ITC
proceedings are limited in terms of the ultimate remedy to
equitable relief. Is that correct?
Ms. Okun. Limited--excuse me--limited to an exclusion order
or a cease-and-desist order.
Mr. Jeffries. Okay. Now once that determination is made as
to what the appropriate remedy would be, either cease-and-
desist or an exclusion order, there is then a process, as I
understand it, for the--I guess it is called the Office of
Unfair Import Investigations. Is that correct?
Ms. Okun. There is an Office of Unfair Import
Investigations, correct.
Mr. Jeffries. And what exactly is the role that they play
in an ITC proceeding?
Ms. Okun. Maybe we can do two questions. I think your first
part was what does the Commission evaluate before it would
impose one of these remedies, and that there is a public
interest test that the Commission goes through. And I would
note it is one of the changes that the Commission has made in
the last few years to allow the administrative law judge in a
case where they think that there might be public interest
issues, including with respect to components to take evidence.
And so the administrative law judge can develop a record
that would then be before the Commission when it looks on
impact on consumers, public health and welfare, competitive
conditions, and like indirectly-competitive products. So that
evaluation is a very important part of what the Commission
does. With respect to the Office of Unfair Import
Investigations, I am actually going to turn that over to Mr.
Bianchi. I could explain it, but because it is a Commission
agency I think it would but helpful to have him elaborate on
that.
Mr. Bianchi. So if I understand your question correctly,
sir, the Office of OUII, as we refer to it, serves several
different functions. But it is a separate--during an
investigation, it serves as a separate, independent body. So it
is a party, sorry, not body. So it serves the role of not one
of the parties of interest, and they are looking to areas that
can help develop the record more.
They also operate in the proceedings as a way to try to
encourage settlements or negotiations amongst the parties. They
help the administrative law judge develop certain kinds of
record evidence. So in that situation, they are acting as a
party but not a party of interest, if you will, in the
proceeding. When it gets to the Commission stage, they also
work as a party.
They may decide that the ALJs--the administrative law
judge's--initial final determination is that there is something
that should be reviewed by the Commission so they can petition
the Commission to review it. Or they may be--or some other
party may and they may comment on it. They also play the role
of--in the remedy proceedings--of making recommendations as a
party to the proceeding to the Commission on what the remedy
may be. Does that answer your questions?
Mr. Jeffries. Yes, and I appreciate the thorough answer.
And the role essentially is to function as an ombudsman in the
public interest or an advocate in the public interest during
the proceedings? Is that right?
Mr. Bianchi. I would say that is one of the roles that it
plays.
Mr. Jeffries. Just sort of walking through the procedural
determinations, if a conclusion is made that there was
infringement but it is subsequently determined, notwithstanding
the infringement, that it is in the public interest not to
permit exclusion, at what point in the process is that public
interest determination made? It is my understanding that comes
at the end, not the beginning. Is that right?
Mr. Bianchi. That is correct, although the Commission, in
order to save time and resources of the parties, oftentimes
will ask the administrative law judge at the beginning of the
process to collect evidence on that so that the Commission will
have that when it needs to make its decision on remedy.
Mr. Jeffries. The issue, in conclusion, that I want to
raise is it seems to me that if, in fact, there are a set of
circumstances which suggest that even if infringement may
ultimately be found during the course of the determinations by
the ALJ or by the ITC, that there is a strong enough public
interest in not allowing for exclusion or even cease and
desist, should that not actually happen at the beginning of the
process as opposed to an entire litigation taking place? A
finding of infringement, but ultimately no order issued to
exclude or cease and desist because of the strength of the
public interest?
Mr. Bianchi. So if I may, I view that as a policy question,
which I should not be opining upon. I believe Ms. Okun would be
able to opine up on that.
Mr. Jeffries. My time is expired.
Mr. Issa. I would allow the gentlelady. She actually is
chomping at the bit. I need to make sure she gets the
opportunity. Please.
Ms. Okun. Just quick. With respect to if you turn--if you
use public interest to deny relief in the very beginning I
think the problem with that is the case that walks in the door
with the number of patents asserted, the number of respondents,
often is very unlike the case at the end that the Commission is
actually considering. It is much narrowed, as happens in
District Court in other litigation. People settle out.
The other thing, and I had this in my written testimony and
I will refer it to you, which is because of the moving-up when
public interest can be considered in particular cases of
administrative law judges, you see settlements where an
administrative law judge has recommended there be no relief and
parties settle out and realize they are not going to make it.
Mr. Jeffries. Thank you. I yield back.
Mr. Issa. Thank you. We now recognize--oh, I now ask
unanimous consent that a letter dated April 14, 2016, to Mr.
Blake Farenthold from a long list of supporters of H.R. 4829 be
placed in the record. Without objection, so ordered.
[The information referred to follows:]
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__________
Mr. Issa. We now recognize the gentlelady from California,
Ms. Lofgren.
Ms. Lofgren. Thank you, Mr. Chairman, and thanks for this
hearing and to each one of the witnesses for their useful
testimony in making the issues before us very clear. I will be
honest. The current jurisdiction of the ITC does seem at odds
with manufacturing practices. I mean, if you have an American
company that does some of its manufacturing overseas, it is
still an American company, and that is frequently the case. So
I am just not seeing what the value added is to have dual
jurisdiction. And I think the idea that if you filed or you
could have filed as an exclusion of jurisdiction makes a lot of
sense to me.
I also think in terms of, you know, I do not think eBay got
enough credit for what it did. I mean, eBay is a company in my
district and they spent a lot of money and a lot of time
pursuing a case they could have settled and successfully, and
it did a world of good for the whole technology sector because
prior to eBay, it was extortion time. And that potential for
extortion exists, I think, in the ITC. That does not mean the
Commissioners even see it because it is happening before it
gets to you. So that is an additional reason not to undercut
what the Supreme Court did. And I think we have got that
situation now.
But I want to talk about another issue, and it relates to
copyright. It is been reported last year that some copyright
holders were considering using the FTC to force IS Internet
service providers to block allegedly-infringing websites. Now
this was a proposal that would trample the safe harbor
protections in the DMCA. But it also was a remedy that Congress
rejected in the Stop Online Piracy Act.
And I am sure all of us who were in Congress at that time
remember the complete meltdown in the Congress. The phones were
off the hook. We got seven million emails in an hour, and the
country was up in arms about it. So, I understand that the
Federal Circuit Court overturned the ITC decision. They have
just rejected en banc a rehearing.
But I am wondering if we ought to make it very clear to the
ITC that they do not have jurisdiction over digital
transmissions to avoid--I mean, the fact that they would do
something like that is shocking to me. And, you know, for the
survivors of the SOPA markup here, and I am sure the Chairman
recalls it very well, we do not want to get in that environment
again. Dr. Morton, I mean you are nodding your head, what--do
you have a comment--anybody who wants to comment on that I
would welcome the----
Ms. Scott Morton. Yeah, I generally agree with you. I do
not see the reason for the ITC to go in this direction. I
wanted to make one other comment that is a little bit related
to your first point, which is I think there is been some
attention in this hearing to NPEs. And that is a narrow
definition. That is a definition that is a party that does not
make anything. Suppose you change the process at the ITC to
make it hard for NPEs. What would they do? They would sell
their patents to somebody who makes something.
Ms. Lofgren. Sure. NPE is a verb, not a noun.
Ms. Scott Morton. Yeah, right.
Ms. Lofgren. Right?
Ms. Scott Morton. And so what we are really worried about
is patent assertion.
Ms. Lofgren. Right.
Ms. Scott Morton. Patent assertion for more than the patent
is worth, whoever owns it.
Ms. Lofgren. I agree.
Ms. Scott Morton. And if you went and used that definition
with the ITC docket, you would get a very large number.
Ms. Lofgren. But I think it is simple just to say what
value does the duplication provide? I mean, we have a general
bias against forum shopping and that is really what this is.
Mr. Thorne. Can I jump in on the copyright question?
Ms. Lofgren. Sure.
Mr. Thorne. Let me disclose first that I represented the
Internet Association in the case you refer to----
Ms. Lofgren. I did not know that.
Mr. Thorne [continuing]. In the Federal Circuit. And the
Internet Association was extremely concerned that the way the
Internet works it slashes back and forth across the borders. At
any given time of day you may be served out of Europe or Asia,
and there is no way to easily distinguish a particular
transmission that might be accused as infringing. The benefit
of the ITC--I want to give to credit occasionally of having
customs police at the borders is irrelevant to the Internet.
Ms. Lofgren. Correct.
Mr. Thorne. The ITC admitted that their exclusion order
remedy could not apply in that case and therefore they fell
back to what was supposed to be a softer secondary remedy, the
cease and desist order. The Federal circuit got that decision
right. I understand the ITC is at a decision point as of today
whether they should ask the Supreme Court to review the case.
And that would be the first Supreme Court review of an ITC case
in a context where the ITC really does not have a role.
Ms. Lofgren. Well, I just think the whole adventure into
this area is very troubling to me. And, Mr. Chairman, I think
we ought to talk about whether we should make it clear that we
do not want the Commission to do what Congress decided not to
do and at least as a possibility. And I see my time is expired
so I yield.
Mr. Issa. Would the gentlelady yield for a----
Ms. Lofgren. I would yield, of course.
Mr. Issa. I share with you that feeling that if we are
going to have multiple places in which people can seek
jurisdiction, and particularly in an Internet age, we have to
figure out both the cost to the Federal Government of entities
being in multiple areas, the cost to defendants who may find
themselves unreasonably in two places.
But I think the last one was the point that you were
bringing, too, which was the original intent of the ITC was to
act against foreign entities. And, you know, you and I saw in
SOPA that often it was a domestic entity that was a target and
a foreign entity that was somewhat involved. We do need to
recognize that Article III is the right place for domestic
entities, and the ITC may have a role in exclusively foreign
entities, and I look forward to working with the gentlelady.
And I think you have hit exactly on the role of, how do we
divide the difference between trade, which is foreign entities,
and the Article III courts we oversee for domestic.
Ms. Lofgren. Thank you, Mr. Chairman, I yield back.
Mr. Issa. Thank you very much. We now recognize with great
pleasure the Ranking Member of the full Committee, Mr. Conyers.
Mr. Conyers. Thank you, Mr. Chairman. And I apologize for
having to remove myself. I hope this is something that has not
been answered already, but I would like to know from anyone
that would care to assist in this question, is there data
indicating whether the number of patent assertion entities that
have filed cases at the ITC is going up or down since our
hearing in this Committee about 3 years ago?
Mr. Thorne. I can quickly answer that.
Mr. Conyers. Please.
Mr. Thorne. In my written testimony, the number of
companies sued by NPEs hit a high point in 2012, of 54 percent
of the companies sued that year. In the last 3 years, 2013,
2014, 2015, the number of NPE-sued companies is now down to a
quarter of the docket. So 75 percent are not sued by NPEs, but
a quarter still are.
Ms. Scott Morton. But an NPE is not the same as a PAE,
okay? And a non-practicing entity does not sell anything that
is a widget. It just sells intellectual property. A patent
assertion entity might be asserting patents and also have other
businesses. But I think that the--this is a narrow definition
that Mr. Thorne is putting forward. The problem is probably
bigger than that.
Ms. Okun. Could I just add something on the data?
Mr. Conyers. Yes, please do.
Ms. Okun. Which is the International Trade Commission
helpfully lists on its website and puts up Section 337 data,
including the number of Section 337 investigations brought by
NPE and they have a definition of an NPE one and two, two being
closer to a patent assertion entity. So those numbers indicate
that in 2015 there were two patent assertion entities, 2014,
three, 2013, six. So again, the number has gone down and it is
publicly-available to look at.
Mr. Conyers. Let me just ask this question for Tom Stoll.
In light of ITC changes made in recent years to I hope better
define the domestic industry as it relates to NPEs and to
implement the 100-day pilot program, do you believe additional
reforms are necessary to combat abusive patent litigation?
Mr. Stoll. Well, I think it is clear to everyone that
whatever problem there was in 2011, 2012, when the number of
filings reached their peak, when the number of NPE--if we--you
know, using the U.S.--using the ITC's term NPE--the number of
those filings have both gone down significantly. And I think it
warrants a further look but maybe not legislative action at
this point. At least, you know, let us sit back and let us
monitor and let us see, you know, if this is going to be a
long-term fix or not.
The ITC has clearly proven capable of addressing these
issues through the domestic industry requirement, through the
pilot program, and I think what we are seeing as a result of
that is that people are not bringing frivolous claims. And I
really think when we talk about abuse of the patent system, we
are talking about people bringing frivolous claims, not
legitimate claims.
Mr. Conyers. Any other comments on that?
Mr. Stoll. I want to make one other point, you know, with
this patent hold-up if I could. You know, the ITC has an EPROMs
analysis, so that if a patented invention is just a tiny
component of a larger product, it is one of the many factors
that they will consider in determining, you know, which
articles will be excluded.
So in that case, the case involved chips, but when the ITC
took a look at it they saw, you know, not only chips but
circuit boards in automobiles. And they said, ``Well, we will
exclude chips, we will exclude, you know, some of these
computers, but we are not going to go so far as to allow this
to extend to automobiles.'' And I think that is a reasonable
application of their authority.
Ms. Scott Morton. I just wanted to point out that a patent
assertion entity seeking money for its intellectual property
need not be a frivolous lawsuit. So I do not think that these
parties who would like to be monetized for legitimate
intellectual property are doing anything wrong by seeking
monetization. I think they should seek it in Federal court so
that they get the correct number. So it does not mean that the
patent is frivolous or that the--or seeking of royalties is
frivolous. Just want to make that----
Mr. Issa. Mr. Whitaker, I know you have been trying to get
in.
Mr. Whitaker. Just one quick comment. One thing that has
not been addressed here at all today is that not all exclusion
orders, not all remedies at the ITC are the same. There are
limited exclusion orders and general exclusion orders, limited
being focused just on the respondents that are named, and
general exclusion orders, directed to entities that you never
can find, and goods that are being brought into the United
States that we do not know their source.
And so I think it is important that we state that context
that the ITC has a very important role. And I know for clients
that I have represented, that is a very important thing. And I
think some of the statistics will bear out that as many as 40
percent of the exclusion orders that are issued by the ITC
actually rise to the level as being general exclusion orders.
Mr. Conyers. Thank you, and thank you, Chairman Issa. I
will be going over some of these comments from these very
worthy six witnesses that we had today.
Mr. Issa. Thank you, Mr. Conyers. I now ask unanimous
consent that a letter from the Consumer Technology Association
dated April 13, also to Mr. Farenthold, be placed in the record
in support of H.R. 4829. Without objection so ordered.
[The information referred to follows:]
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__________
Mr. Issa. I am going to be very, very brief just to
summarize what we have done, and Mr. Nadler if he wants to,
too. Mr. Thorne, you brought up a point that I want to make
sure I understand because you talked in terms of, if you will,
the opportunistic nature of how you would work on either side
of a case. Under current law--and we, of course, have limited
jurisdiction, but we have absolute jurisdiction over the
Federal courts--under current law, Ms. Okun clarified that the
1988 Act specifically prohibited, as a matter of fact,
directed, if you will, the--an Article III court to stay, and
it effectively prohibited them from ordering the ITC to stay
their case.
Taking that at face value, do you think an Article III
judge should have or does have the authority, given a--let's
just use the example you had, which is an already royalty-based
organization that has agreed to give one and all royalties--if
they go to the ITC, do you believe that creates a breach of
that agreement, and do you believe that an Article III judge
today would have the ability to dismiss the case in that they
are seeking a remedy--not stay the case, dismiss the case--
because they are seeking a remedy which would nullify their
claim for dollars?
Mr. Thorne. I believe that if a patent holder in a
standards form--these are where competitors come together to
collaborate--one of the rare exceptions----
Mr. Issa. Right, and I am using that example because I
think it is unique.
Mr. Thorne. In that situation you make promise--I will
enforce my patent only by asking for reasonable royalties. If
you breach that promise by seeking an exclusion order from the
ITC, I believe a district court has power to enjoin that breach
and continued actions in support of that breach so that you
could enjoin someone who had gone to the ITC.
Now I read the statute differently than Ms. Okun. I believe
that the ability to stay a district court decision is in the--
that that option is held by the person sued, not the patent
holder.
Ms. Okun. That is correct. I clarify that. It is the
respondent under the statute who can ask for a stay and that
was in response to, you know, amendments with the Uruguay Round
to make our lock-in system.
Mr. Thorne. Right.
Mr. Issa. Okay, but I just want to make sure we got that
one point in, because likely, anything that Mr. Nadler and Mr.
Conyers and the rest of us would work on would be primarily
directed toward the Article III judges and what we would guide
them to do. Does anyone here want to bet whether or not the
Supreme Court is going to get that case since today apparently
is the date?
Mr. Thorne. Well, my prediction is that if the ITC asks the
Supreme Court to take the question, should the ITC start
working on the Internet, I believe the Supreme Court will
decline that invitation.
Mr. Issa. Okay, so we not only have a prediction--we do not
have a prediction of will they, but we have the results. Ms.
Okun.
Ms. Okun. Well as you said, there is just a question of
Chevron deference in the case, as well, that may be more
interesting to the Supreme Court.
Mr. Issa. As a matter of fact, Justice Roberts constantly
says that we had one hearing on Chevron, they have them every
day. So I would not be surprised that, A, you could both be
right in this matter. We have covered a lot of points.
There were a number of Members who could not make it here,
so I would ask all of you, would you be willing for the next 5
days to take follow-up questions for the record?
I have a yes from everybody, and I very much appreciate it.
Do any of you need to make a--I am sorry, Mr. Nadler do you
have any----
Mr. Nadler. Well I just--thank you, Mr. Chairman. I just
have a general observation. It seems to me very questionable
why you would have--and maybe we ought to do something about
it--why you would have a situation where one body can issue
decrees, call them what you will, that flout the normal
equitable considerations that an Article III court would
impose.
And also, the question is why you have these dual
jurisdictions, we can at least remove a case. These are
questions that I am going to look into further. So you should
develop one body of case law, and enable the normal equitable
considerations to apply because I do not see any reason, unless
someone can show me a reason, why you have one area where
equity does not--where the equitable principles do not apply,
because we all agree on equitable principles, at least I always
thought we did. Thank you.
Mr. Issa. With that I want to thank all of you for
participation and we stand adjourned.
[Whereupon, at 11:55 a.m., the Subcommittee adjourned
subject to the call of the Chair.]
A P P E N D I X
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Material Submitted for the Hearing Record
International Trade Commission 337 Statistics Report
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Response to Questions for the Record from Deanna Tanner Okun, former
Chairman, International Trade Commission, and Partner, Adduci,
Mastriani & Schaumberg, LLP
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Response to Questions for the Record from John Thorne, Partner,
Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLC
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Response to Questions for the Record from Mark L. Whitaker, Partner,
Morrison & Foerster LLP
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Response to Questions for the Record from Fiona M. Scott Morton,
Theodore Nierenberg Professor of Economics, Yale School of Management
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Response to Questions for the Record from Thomas L. Stoll,
Principal, Stoll IP Consulting
Response to Questions for the Record from Dominic Bianchi,
General Counsel, United States International Trade Commission
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[all]