In late June, the U.S. International Trade Commission (“ITC”) announced a pilot program aimed at limiting unnecessary litigation in ITC Section 337 investigations by forcing an early determination of potentially case dispositive issues. Upon instituting an investigation, the Commission may now identify such an issue and direct the presiding Administrative Law Judge (“ALJ”) to rule on that issue on an expedited timetable.
In the first case testing the procedure, the ALJ opined that the Commission is acting outside its authority in instituting the pilot program. The Commission, sitting in review, rejected the ALJ’s arguments, creating a potential for further review by the Federal Circuit. In the meantime, as it now stands the new program will likely have a disparate negative impact on complainants that are non-practicing entities (“NPEs,” a.k.a. patent trolls), and may even discourage NPEs from filing ITC cases altogether—the Commission’s recent opinion suggests that the program will present NPEs with a steeper hill to climb before gaining the benefits of the ITC’s jurisdiction.
The ITC is a quasi-judicial federal agency that, in part, has the power to institute Section 337 proceedings to investigate allegations that certain products imported into the United States infringe a complainant’s patent. The ITC is headed by six Commissioners (together, the “Commission”) who review ALJs’ initial determinations, reach final determinations, and prescribe appropriate remedies.
In order to prove a violation of the statute, a complainant in a Section 337 investigation must not only show that its patent is valid and infringed, but also that the complainant has, or is in the process of establishing, a “domestic industry” in the United States related to that patent. Generally, a complainant can show that a domestic industry exists if (1) there is significant investment in plant and equipment, significant employment of labor or capital, or substantial investment in exploitation of the patent (including engineering, R&D, or licensing) in the United States (dubbed the “economic prong”), and (2) that U.S. investment or employment relates to products covered by the patent (the “technical prong”).
The Commission officially announced the new pilot program via the ITC website on June 24, 2013 with the goal of “saving time and costs for all parties involved,” and gave examples of potential issues that may be appropriate for early resolution, such as the existence of a domestic industry, standing, or importation. Upon the Commission’s identification of a potentially dispositive issue in a Notice of Institution, the ALJ will normally have 100 days to conduct expedited fact finding (including a short hearing) and issue an Initial Determination (“ID”) on the dispositive issue. The parties are required to file any petitions for review by the Commission within five calendar days of the ID’s service, and replies are due three business days thereafter. Commission review of the ALJ’s decision will normally occur within 30 days. The ALJ is permitted to stay proceedings on all other issues while the case-dispositive issue is litigated.
While recognizing that presenting a full case on an issue in 100 days will be challenging, the Commission’s announcement noted that the complainant should be prepared to prove its case when it files the complaint. Specifically calling out NPEs, the Commission reasoned that “while some complainants rely on licensees’ activities to satisfy the domestic industry requirement, such complainants should have acquired the necessary information from licensees prior to filing the complaint and have a well-developed plan for obtaining any necessary discovery immediately upon institution.”
The Commission issued its first directive under the pilot program even before the program’s official announcement, in instituting Investigation No. 337-TA-874 in late March. The Commission directed the ALJ to expedite a decision on whether complainant Lamina Packaging Innovations, Inc. met the economic prong of the domestic industry requirement. After full fact finding and a hearing solely on whether Lamina presented enough evidence to satisfy the economic prong, ALJ Essex issued his Initial Determination in early July.
The ID did not, however, begin with an analysis of whether or not Lamina satisfied the economic prong. Instead, in response to Lamina’s objections to the Commission’s early-determination directive, Judge Essex unfurled a 19-page analysis of whether the Commission has the authority to implement the pilot program as it did. He agreed with Lamina that the Commission has no power to issue early-determination directives without officially promulgating specific Commission rules permitting the procedure. The ALJ noted that the Federal Administrative Procedures Act (the “APA,” which governs U.S. agencies such as the ITC) sets forth explicit rule-making requirements in 5 U.S.C. § 553 that the Commission must follow before substantively departing from its normal practice. Such requirements include publication of proposed rule changes in the Federal Register prior to implementation, and opportunities for interested persons to submit commentary on the proposed rules. Judge Essex observed that the Commission met neither requirement before issuing the early-determination directive in the 874 Investigation, which he considers a substantive, not procedural, departure from ITC normality.
Summed up, Judge Essex found that “while the Commission could engage in rule making consistent with the APA, and possibly could within its procedural rules allow for the process ordered in this case, it did not. If the Commission chooses to use its authority to set such rules, it must follow statutory law. It cannot waive the requirements of the APA, or its own rules that recognize it operates subject to the APA.”
Despite Judge Essex’s comprehensive opinion that the Commission’s pilot program is unlawful, he alternatively held that Lamina did not meet the requirements of the domestic industry economic prong, thereby disposing of Lamina’s entire case. Lamina does not make any products covered by the patents-in-suit, but argued that a domestic industry exists due to Lamina’s investments in licensing the patents and the investments of its licensees in products covered by the patents. That approach is generally accepted at the ITC, but Judge Essex held, in short, that Lamina did not present enough detailed evidence showing that the investments were substantial and sufficiently related to the patents.
Subsequently, under the procedure set out in the pilot program, both sides submitted Petitions for Review of the ID, in part focusing on the ALJ’s opinion that the Commission’s new program is unlawful. Respondents argued that implementation of the Commission’s pilot program need not follow the § 553 APA rule-making guidelines because subsection 553(b)(A) states that “rules of agency organization, procedure, or practice” are exempt. And respondents urged that, contrary to Judge Essex’s opinion, expediting decisions on potentially dispositive issues is purely procedural, not substantive. Respondents also highlighted ITC rules that afford the Commission flexibility to alter the normal timetables for issuing IDs and filing petitions for review. Respondents argued that the Commission thus did not create or alter any rules at all—it merely exercised its authority to modify such timetables.
On review, the Commission held that it has ample authority to implement its pilot program, rejecting the ALJ’s reasoning.  The Commission agreed with respondents that conducting early fact finding and a hearing on one likely dispositive issue is not substantive in nature, but rather purely procedural, exempting the Commission’s actions from the cited APA rule-making requirements. The Commission, citing Supreme Court precedent, stated that the requirement for an early disposition is procedural because it is just the manner and means by which a right to recover is enforced.
Further, the Commission found that its early determination procedure did not substantially prejudice Lamina. Echoing sentiments from its announcement of the pilot program, the Commission held that “Lamina had ample opportunity to develop evidence of a domestic industry in advance of filing its complaint, including obtaining information from its licensees regarding their activities and investments with respect to the licensed patents at issue here.” And the Commission noted that Lamina had the opportunity to move to prolong the expedited proceedings for good cause, but never did so.
Interestingly, the Commission revealed, in passing, that “there can be no genuine confusion about the basis for the Commission’s action in this investigation, as the face of Lamina’s complaint raised obvious questions as to the sufficiency of Lamina’s claims to a domestic industry.” In particular, the Commission pointed out that Lamina is an NPE formed for the purpose of asserting patents, has a history of starting and then settling litigations, and granted its existing settlement-based licenses in exchange for “trivial” consideration.
The Federal Circuit could review the legality of the pilot program if Lamina appeals the Commission’s decision. In the meantime, the economic prong is a natural candidate for the early determination procedure, because most other dispositive issues such as infringement, invalidity, and the domestic industry’s technical prong largely turn on claim construction (which occurs later in the case). The pilot program will thus likely impact NPEs more than complainants having proprietary products, especially given the Commission’s suggestion that an NPE’s economic prong allegations may generally appear more suspect than those of other complainants.
Undoubtedly, early disposal of a Section 337 investigation under the new program will save the parties significant time and money that otherwise would have been spent litigating the plethora of remaining issues up through the main hearing and post-hearing briefing. The monetary savings could easily reach millions of dollars. In addition, practicing entities generally have scores more employees and documents subject to disruptive discovery than do the NPEs targeting those companies. The potential of avoiding such business disruptions is, therefore, further welcome news for practicing entities.
Going forward, every complainant at the ITC must now ensure that its arguments regarding domestic industry, standing, and importation (and other potential case-dispositive issues susceptible to early resolution) are fully prepared prior to filing the complaint. That is especially true if the complainant is an NPE. Complainants must also be prepared to shoulder greater front-end litigation costs should its complaint be selected for such early determination of a dispositive issue.
As for respondents, it would be prudent to prepare defenses on dispositive issues such as the economic prong immediately upon becoming aware of the complaint, rather than wait until the Commission’s Notice of Institution. Further, because the Commission solicits comments regarding public interest concerns before instituting an investigation, proposed respondents could consider using that submission as a vehicle for persuading the Commission to implement the 100-day procedure.
 See 19 U.S.C. § 1337(a)(3).
 Information in this section and in the introduction can be found at: www.usitc.gov/press_room/news_release/2013/er0624ll1.htm and www.usitc.gov/press_room/documents/featured_news/337pilot_article.htm.
 See March 22, 2013 Notice of Institution of Investigation in ITC Inv. No. 337-TA-874.
 Discussion of the ALJ’s ID is based on the July 5, 2013 Initial Determination in ITC Inv. No. 337-TA-874.
 Discussion of respondents’ arguments is based on Respondents’ Contingent Petition Concerning the Initial Determination, July 12, 2013, in ITC Inv. No. 337-TA-874; see also 5 U.S.C. § 553.
 Discussion of the Commission’s ruling is based on the September 3, 2013 Commission Opinion in ITC Inv. No. 337-TA-874.
Stephen K. Shahida is a Patent Litigation Partner in the Washington, DC office of Weil, Gotshal & Manges LLP, where his practice focuses on complex patent disputes. David M. DesRosier is a Patent Litigation Associate in the Washington, DC office of Weil, Gotshal & Manges LLP.