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INTERNATIONAL TRADE COMMISSION AND 

PATENT DISPUTES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INTELLECTUAL PROPERTY, 

COMPETITION, AND THE INTERNET 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JULY 18, 2012 

Serial No. 112–143 

Printed for the use of the Committee on the Judiciary 

( 

Available via the World Wide Web: http://judiciary.house.gov 

(II) 

COMMITTEE ON THE JUDICIARY 

LAMAR SMITH, Texas, Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

TREY GOWDY, South Carolina 

DENNIS ROSS, Florida 

SANDY ADAMS, Florida 

BEN QUAYLE, Arizona 

MARK AMODEI, Nevada 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO R. PIERLUISI, Puerto Rico 

MIKE QUIGLEY, Illinois 

JUDY CHU, California 

TED DEUTCH, Florida 

LINDA T. SA ́ NCHEZ, California 

JARED POLIS, Colorado 

RICHARD HERTLING, Staff Director and Chief Counsel 

PERRY APELBAUM, Minority Staff Director and Chief Counsel 

SUBCOMMITTEE ON INTELLECTUAL PROPERTY, COMPETITION, AND THE INTERNET

BOB GOODLATTE, Virginia, Chairman 

BEN QUAYLE, Arizona, Vice-Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

MIKE PENCE, Indiana 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

SANDY ADAMS, Florida 

MARK AMODEI, Nevada 

MELVIN L. WATT, North Carolina 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

JUDY CHU, California 

TED DEUTCH, Florida 

LINDA T. SA ́ NCHEZ, California 

JERROLD NADLER, New York 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

BLAINE MERRITT, Chief Counsel 

STEPHANIE MOORE, Minority Counsel 

(III) 

C O N T E N T S 

JULY 18, 2012 

Page 

OPENING STATEMENTS 

The Honorable Bob Goodlatte, a Representative in Congress from the State 

of Virginia, and Chairman, Subcommittee on Intellectual Property, Competition, and the Internet .................................................................................... 1 

The Honorable Melvin L. Watt, a Representative in Congress from the State 

of North Carolina, and Ranking Member, Subcommittee on Intellectual 

Property, Competition, and the Internet ............................................................ 3 

The Honorable John Conyers, Jr., a Representative in Congress from the 

State of Michigan, Ranking Member, Committee on the Judiciary, and 

Member, Subcommittee on Intellectual Property, Competition, and the 

Internet ................................................................................................................. 4 

WITNESSES 

Colleen V. Chien, Professor, Santa Clara University School of Law 

Oral Testimony ..................................................................................................... 7 

Prepared Statement ............................................................................................. 10 

David B. Kelley, Intellectual Property Counsel, Ford Global Technologies, 

LLC 

Oral Testimony ..................................................................................................... 23 

Prepared Statement ............................................................................................. 24 

Neal A. Rubin, Vice President of Litigation, Cisco Systems, Inc. 

Oral Testimony ..................................................................................................... 27 

Prepared Statement ............................................................................................. 29 

Bernard J. Cassidy, General Counsel and Executive Vice President, Tessera 

Technologies, Inc. 

Oral Testimony ..................................................................................................... 35 

Prepared Statement ............................................................................................. 37 

Albert A. Foer, President, American Antitrust Institute 

Oral Testimony ..................................................................................................... 47 

Prepared Statement ............................................................................................. 49 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Attachments to the Prepared Statement of Colleen V. Chien, Professor, Santa 

Clara University School of Law .......................................................................... 76 

Material submitted by Bernard J. Cassidy, General Counsel and Executive 

Vice President, Tessera Technologies, Inc. ........................................................ 145 

Material submitted by the Honorable Melvin L. Watt, a Representative in 

Congress from the State of North Carolina, and Ranking Member, Subcommittee on Intellectual Property, Competition, and the Internet ............... 172 

Letter from Catherine A. Novelli, Vice President, Worldwide Government 

Affairs, Apple Inc. ................................................................................................ 247 

(IV) 

OFFICIAL HEARING RECORD 

MATERIAL SUBMITTED FOR THE HEARING RECORD BUT NOT REPRINTED

Federal Trade Commission report entitled ‘‘The Evolving IP Marketplace, Aligning 

Patent Notice and Remedies With Competition,’’ submitted by the Honorable Zoe 

Lofgren, a Representative in Congress from the State of California, and Member, 

Subcommittee on Intellectual Property, Competition, and the Internet. This submission is available at the Subcommittee and can also be accessed at: 

http://www.ftc.gov/os/2011/03/110307patentreport.pdf 

Item entitled ‘‘Patently Protectionist? An Empirical Analysis of Patent Cases at the 

International Trade Commission,’’ submitted by Colleen V. Chien, Professor, 

Santa Clara University School of Law. This submission is available at the Subcommittee and can also be accessed at: 

http://ssrn.com/abstract=1150962 

Paper entitled ‘‘Protecting Domestic Industries at the ITC,’’ submitted by Colleen V. 

Chien, Professor, Santa Clara University School of Law. This submission is available at the Subcommittee and can also be accessed at: 

http://ssrn.com/abstract=1856608 

(1) 

INTERNATIONAL TRADE COMMISSION AND 

PATENT DISPUTES 

WEDNESDAY, JULY 18, 2012 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON INTELLECTUAL PROPERTY,

COMPETITION, AND THE INTERNET, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:07 a.m, in room 

2141, Rayburn House Office Building, the Honorable Bob Goodlatte 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Goodlate, Coble, Chabot, Issa, Jordan, 

Marino, Adams, Amodei, Watt, Conyers, Berman, Chu, Deutch, and 

Lofgren. 

Staff Present: (Majority) Blaine Merritt, Subcommittee Chief 

Counsel; Olivia Lee, Clerk; and (Minority) Stephanie Moore, Subcommittee Chief Counsel. 

Mr. GOODLATTE. The Subcommittee on Intellectual Property, 

Competition, and the Internet will come to order. 

I will recognize myself for an opening statement. 

Our Subcommittee had much to celebrate following passage of 

the Leahy-Smith America Invents Act, or AIA. The most comprehensive change to American patent law in 175 years, the AIA 

addresses a number of issues. The dynamic that compelled our 

Subcommittee to debate patent reform for 6 years was the prevalence of frivolous patent suits that drained resources from R&D 

projects and compromised job creation in several industries. I am 

confident that several of the AIA reforms, such as post-grant review, changes to joinder and U.S. district court litigation, and a 

transitional program to scrub business method patents, will rid the 

system of many of these bogus lawsuits. 

One would think that such a legislative accomplishment obviates 

the need for the Subcommittee to conduct additional patent review 

in this Congress. Unfortunately, that is not the case. Today’s hearing focuses on the operations of the International Trade Commission, or ITC, and how that organization handles patent disputes. 

Increasingly, many high-profile patent disputes are adjudicated 

before the ITC. The Commission is an independent, quasi-judicial 

government agency that provides nonpartisan counsel to the legislative and executive branches of the government. It assesses the 

impact of imports on U.S. industries, maintains the Harmonized 

Tariff Schedule of the United States, and oversees actions against 

2 

certain unfair trade practices, including subsidies; dumping; and 

patent, trademark, and copyright infringement. 

As part of the Trade Act of 1974, Congress created the modern 

ITC along with its main attributes: independence as a Federal 

agency, final decision-making authority subject to a Presidential 

veto, the power to issue cease and desist as well as exclusion orders, formalized coverage of unfair trade proceedings by the Administrative Procedure Act, or APA, and a requirement that the 

Commission issue decisions with dispatch. 

Agency proceedings regarding patent infringement are governed 

by Section 337 of the Tariff Act of 1930 as well as the adjudicative 

provisions of the APA and the Commission’s procedural rules that 

are typically supplemented by ground rules issued by the presiding 

administrative law judge. Section 337 declares the infringement of 

certain statutory intellectual property rights and other forms of unfair competition in import trade to constitute unlawful practices. 

Most Section 337 investigations involve allegations of patent or registered trademark infringement. 

To be successful, a complainant must prove the following elements: first, the existence of unfair methods of competition or unfair acts in the importation of articles into the United States. For 

patent cases, infringement of a valid U.S. patent constitutes an unfair act. And, second, the importation of articles or the sale of such 

articles in the United States, the threat of which is to destroy or 

substantially injure a domestic industry. This also includes preventing the establishment of such an industry or restraining or monopolizing trade and commerce in the United States. 

Remedies for Section 337 violations generally consist of either a 

limited exclusion order that is directed to a respondent specifically 

found to have violated Section 337 or a general exclusion order that 

applies to all infringing goods, whatever the source. A general exclusion order has sweeping application and therefore requires a 

complainant to demonstrate that the remedy is necessary to prevent circumvention of a limited exclusion order or because there is 

a pattern of statutory violation and it is difficult to identify the 

source of the infringing goods. 

Prior to the Supreme Court’s 2006 decision in eBay v. 

MercExchange, the issuance of injunctions in patent disputes was 

almost automatic. But the Court’s ruling that the traditional fourfactor injunctive relief test applies equally to patent disputes now 

means that a patent holder has, on average, a one-in-three chance 

of securing an injunction from a U.S. district court. By contrast, a 

patent holder who prevails in the ITC is virtually guaranteed to obtain an exclusion order, the functional equivalent of an injunction, 

absent truly exceptional public interest concerns. 

This has become of great interest to patent trolls who do not 

commercialize their patents. eBay restricts their access to injunctive relief in U.S. district court, but it is technically possible for 

them to fulfill the domestic industry requirement of ITC adjudication through licensing activities. The advent of globalization has 

led to a migration of manufacturing resources from the United 

States to other countries. 

This reality, combined with particular elements of ITC practice, 

has made the Commission an increasingly attractive forum for all 

3 

patent holders to defend their property rights. In fact, the average 

number of ITC complaints filed annually during the past decade is 

nearly triple the average for the previous decade. And at least one 

study indicates that many of the complainants are larger firms 

with multiple product lines and valuable patent portfolios that 

have a better chance to win in the ITC than in U.S. district court. 

However, according to some reports, over the past half-decade we 

have also seen a dramatic increase in the number of cases brought 

at the ITC by nonpracticing entities as well as the number of defendants named in these cases. The number of defendants in these 

cases grew from 22 in 2010 to 232 in 2011. This begs the question 

of whether certain parties are flocking to the ITC in the wake of 

the stricter joinder rules and other provisions enacted as a part of 

the America Invents Act. 

Given the Commission’s burgeoning and high-profile caseload, it 

is a good time for our Subcommittee to conduct an oversight hearing about ITC operations and how the agency handles patent disputes. The scope of the hearing is free-ranging and will address 

any relevant topic, but the Subcommittee will certainly want to address such issues as whether ITC rulings complement or conflict 

with U.S. district court decisions, how the ITC treats standard-essential patents, how a plaintiff satisfies the domestic industry requirement of an investigation, and whether exclusion orders are too 

cavalierly granted. 

That concludes my opening statement, and I am now pleased to 

recognize the Ranking Member of the Subcommittee, the gentleman from North Carolina, Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. 

Let me start by thanking Chairman Goodlatte for two things: 

number one, his excellent summary of some of the concerns that 

have been raised that give rise to this hearing. By going into such 

detail, it enables me to gloss across the surface of a number of 

things. And what an excellent presentation. 

Second, I want to thank Chairman Goodlatte and his staff for 

their willingness to expand the witness panel. We usually have 

three or four witnesses, but today we have five. And that is important. By doing so, it enabled us to invite Bernard Cassidy from 

Tessera, a company that specializes in microelectronic solutions, 

which, in addition to having a facility in my congressional district 

in Charlotte, North Carolina, will provide some different perspectives on some matters for which there is otherwise near-unanimity 

on the panel. And while I may not agree with everything Mr. 

Cassidy will have to say, I always think it is important to hear the 

full range of perspectives on these issues. And I am happy to welcome Mr. Cassidy here today from my congressional district. 

Over the past several months, there have been numerous reports 

of patent wars within the tech and other industries. The technology 

titans especially have been embroiled in contentious battles accusing each other of infringing each other’s patents. Companies that 

previously cross-licensed their technologies in the marketplace now 

instead engage in tactics designed to undermine their rivals. 

In addition, companies are expanding their patent portfolios by 

purchasing hundreds and thousands of patents to bolster their ability to counterclaim. In July 2011, a consortium of companies, inVerDate Aug 31 2005 10:46 Nov 28, 2012 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6601 H:\WORK\IP\071812\75152.000 HJUD1 PsN: DOUGA
4 

cluding Apple and Microsoft, bought 6,000 Nortel patents in an 

auction for $4.5 billion. In August 2011, Google purchased Motorola 

Mobility, including its 17,000 patents, for $12.5 billion. In April 

2012, Microsoft purchased 925 patents from AOL for $1.1 billion. 

And Facebook, also in April of this year, purchased 650 of the 925 

AOL patents from Microsoft for $550 million. These expanding patent arsenals certainly do not signal a retreat in the patent arms 

race. 

While robust enforcement of intellectual property rights, including by litigation, is a necessary and often an effective means to further innovation and restore order to the marketplace, a recent migration of patent infringement actions to the International Trade 

Commission has intensified concerns about the possibility of patent 

holdups, in which patent holders can use the threat of an exclusion 

order banning infringing products from entering the country, often 

as an unfair negotiating tool. 

Patent holdups are particularly concerning where standard-essential patents are involved. Last month, Chairman Smith, Ranking Member Conyers, and I wrote a letter to the ITC in which we 

cautioned that, quote, ‘‘the ability to leverage standard-essential 

patents to obtain an exclusion order may result either in these 

products being excluded from markets altogether or in companies 

paying unreasonable royalty rates to prevent an exclusion,’’ close 

quote. In either case, the consumer loses. 

The uptick in cases before the ITC has also reinvigorated calls 

for Congress to address the so-called patent trolls. The 2006 Supreme Court decision in eBay v. MercExchange arguably made it 

substantially, some would say decisively, more difficult for patent 

holders to obtain injunctions against infringing products by requiring parties to justify why money damages are insufficient to remedy the infringement. Perhaps, as a consequence, it is argued, entities that own but do not practice or otherwise commercialize their 

patents find the ITC a more favorable forum to extract undeserved 

settlements. 

I know our witnesses have passionate views to share about the 

extent to which these activities foster an uncompetitive environment and stifle innovation. So I will conclude with the observation 

that, in my view, whether we are talking about battles between industry leaders in the technology space or those so-called trolls preying upon the deep pockets of those leaders, it is time for the patent 

wars to find patent peace. They are a drain on the economy, a tremendous diversion of resources away from innovation, and ultimately not good for the consumer or the country. 

I look forward to hearing the various perspectives and proposed 

solutions from our witnesses, and again thank the Chairman for 

the hearing and yield back. 

Mr. GOODLATTE. I thank the gentleman. 

The Chair is pleased to recognize the Ranking Member of the Judiciary Committee, the gentleman from Michigan, Mr. Conyers. 

Mr. CONYERS. Thanks, Chairman Goodlatte. 

Today’s hearing is to look at the specifics of how the International Trade Commission process is used to protect the American 

industry and property. But I would like to frame my comments by 

reminding that our system should first and foremost protect comVerDate Aug 31 2005 10:46 Nov 28, 2012 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6601 H:\WORK\IP\071812\75152.000 HJUD1 PsN: DOUGA
5 

petition and the American workers who create intellectual property 

from monopolistic and anticompetitive practices that unfortunately 

are too much in existence at the present time. That is why I think 

this is a good hearing, and I look forward to the comments from 

our witnesses on this part of our responsibilities. 

Now, against the backdrop of deregulation, offshore cash-hoarding, insufficient antitrust enforcement, our government is at a 

crossroads when it comes to protecting our workers and our consumers. The patent litigation system should protect American ideas 

and lay the foundation for American enterprise, but it shouldn’t be 

distorted to favor those with the largest budgets and cash reserves. 

And I am hopeful that the International Trade Commission is accomplishing that objective. 

The large, more or less monopolistic players have taken to collecting patents as a way to attack competitors. It has just become 

a part of the competition that goes on. And, of course, it ends up 

concentrating market power in an unhealthy way. Patents have 

never been more valuable than they are now, and the large corporations have taken to collecting patents as a legitimate competitive tool to concentrate market power. And I hope this concern is 

examined as carefully as we can with the time we have. 

Now, I believe that antitrust review must play an increased role 

in the functioning of Standards-Setting Organizations, SSOs. 

Standards-Setting brings competitors together to work on an industry’s future so that we must make sure that there is less competitive activity occurring—maybe, ideally, no competitive activity occurring. Standards for interoperability and access are crucial to the 

development of high technology, and most evident, at the moment, 

in the evolution of mobile smart phones. 

Now, eBay v. MercExchange, the Supreme Court decision, is cited 

by my staff as a mostly good decision, that injunctive relief can 

only be awarded to patent holders who satisfy the traditional fourprong equitable test for an injunction. To file suit in the ITC, a patent owner must meet the domestic industry requirements, which 

can be shown by demonstrating substantial investment in the patent’s exploitation, including engineering, research, and development, or licensing. 

Now, it is not clear how much of the rise in ITC litigation is 

caused by patentees seeking to avoid the eBay court decision, but 

this is because IT litigation has been increasing prior to the 2006 

decision. So, more than any other time that I can recall, we need 

a more effective and efficient patent system, and that is why we 

are here. 

Thank you, Mr. Chairman. 

Mr. GOODLATTE. I thank the gentleman. 

Without objection, other Members’ opening statements will be 

made a part of the record. 

And we will turn to our witnesses. Each of the witnesses’ written 

statements will be entered into the record in its entirety. I ask that 

each witness summarize their testimony in 5 minutes or less. 

To help you stay within that time, there is a timing light on your 

table. When the light switches from green to yellow, you will have 

1 minute to conclude your testimony. When the light turns red, it 

signals that the witness’ 5 minutes has expired. 

6 

And as is the custom with this Subcommittee, I would ask that 

the witnesses stand and be sworn. 

[Witnesses sworn.] 

Mr. GOODLATTE. We have a distinguished witness panel today. 

Our first witness is Colleen Chien, Assistant Professor at the 

Santa Clara University School of Law in the congressional district 

of the gentlewoman from California, Ms. Lofgren. And I believe this 

is the second law professor from Santa Clara we have had just 

within the last month testify before this Subcommittee. 

And I have had the opportunity to visit Santa Clara on a number 

of occasions for State of the Net West conferences. So you are very 

welcome. 

Professor Chien is nationally known for her research and publications surrounding domestic and international patent law and policy issues. Her work has been cited by the Federal Trade Commission and in Congress. She has testified before government agencies 

on patent issues, frequently lectures at national law conferences, 

and has published several in-depth empirical studies on topical patent matters. She is an expert on the International Trade Commission, a topic on which she has authored several articles. 

Prior to joining the Santa Clara law faculty in 2007, Professor 

Chien prosecuted patents at a San Francisco law firm, served as 

an advisor to the School of Social Medicine at Harvard Medical 

School, worked as a spacecraft engineer at NASA’s Jet Propulsion 

Lab, and was an investigative journalist at the Philippine Center 

for Investigative Journalism as a Fulbright Scholar. She earned 

her A.B. and B.S. in Engineering from Stanford University and her 

law degree from Boalt Hall at the University of California, Berkeley—a well-rounded a witness, I would say. 

Our next witness is David B. Kelley, Intellectual Property Counsel for Ford Global Technologies. Mr. Kelley handles a wide variety 

of IP matters for Ford, including litigation management, licensing 

evaluation, and invention dockets management. Prior to joining 

Ford, Mr. Kelley was an associate attorney at a large IP law firm 

and practiced several years as a civil litigator. He earned degrees 

in Computer Science and Mechanical Engineering from Michigan 

State University and a law degree from the University of Toledo. 

Our next witness is Neal Rubin, Vice President of Litigation at 

Cisco Systems. In that capacity, Mr. Rubin is responsible for managing the company’s portfolio of commercial intellectual property 

and employment litigation as well as other business disputes. In 

addition to hiring outside counsel and resolving litigation worldwide, Mr. Rubin counsels Cisco’s business units on ways to mitigate legal risk. 

Prior to joining Cisco, Mr. Rubin was Assistant United States Attorney for the Northern District of California. He also practiced 

law, focusing on intellectual property and technology litigation, 

claims for violations of corporate security laws, and employment 

disputes. Mr. Rubin has been a trial advocacy and moot court instructor at Stanford Law School. He earned his B.A. with honors 

from Amherst College and his J.D. from the University of Southern 

California Law School. 

Our next witness is Barney Cassidy, General Counsel and Executive Vice President of Tessera. Before coming to Tessera, Mr. 

7 

Cassidy served for more than 9 years as General Counsel and Senior Vice President for Tumbleweed Communications, where he was 

responsible for corporate development and legal matters. He also 

practiced law at two firms and clerked for the Honorable John 

Noonan, Jr., at the United States Court of Appeals for the Ninth 

Circuit. Mr. Cassidy earned his Bachelor’s Degree from Loyola University in New Orleans, his master’s in philosophy from the University of Toronto, and his law degree from Harvard, where he 

served as editor of the Harvard Law Review. 

Our final witness is Albert Foer, President of the American Antitrust Institute. Prior to his work at the Institute, which he founded, Mr. Foer practiced law in Washington, worked at the Federal 

Trade Commission’s Bureau of Competition, and served as the CEO 

of a chain of jewelry stores. Mr. Foer also teaches antitrust law to 

undergraduate and graduate business students. He has published 

widely and is the co-editor of ‘‘The International Handbook on Private Enforcement of Competition Law’’ and of the forthcoming ‘‘Private Enforcement of Antitrust Law in the United States.’’ He 

earned his undergraduate degree from Brandeis, a Master’s degree 

in Political Science from Washington University, and his law degree from the Chicago School of Law. 

Welcome to you all. 

And we will begin with Professor Chien. 

TESTIMONY OF COLLEEN V. CHIEN, PROFESSOR, 

SANTA CLARA UNIVERSITY SCHOOL OF LAW 

Ms. CHIEN. Thank you, Chairman Goodlatte, Ranking Member 

Watt, and Members of the Subcommittee. It is a huge honor to be 

here today. 

We are here to talk about the ITC, and I want to make three 

points today. I want to talk about how the ITC is being used, why 

some of these uses are problematic in my opinion, and how they 

could be addressed. 

First, about how the ITC is being used, my research shows that 

the ITC is being used broadly. Although created to address foreign 

piracy, the venue hears many types of disputes: competitor cases, 

pure domestic disputes, and others. This means that sometimes the 

ITC is being used properly in the way intended, a domestic industry against a foreign company. About 17 percent of cases fit this 

profile. A number of other cases are being filed there because, to 

its credit, the ITC is fast and predictable. Litigants like that. 

But sometimes the ITC is being used opportunistically, meaning 

it is being used by parties specifically to get the injunction that 

they can’t get in district court. As Chairman Goodlatte said, if you 

are a troll, it is almost impossible to get a district court injunction. 

Even if you make products a quarter of the time, you are going to 

be denied an injunction in district court. 

But exclusion orders are still the norm in the ITC. Litigants 

know this. They have compared ITC injunctions to Damocles’ 

swords that ratchet up the pressure. How prevalent in this practice? By my count, a quarter of cases, naming nearly half of the respondents, have been brought by trolls. American companies are 

nearly twice as likely to be named in these suits as foreign ones. 

I have one slide to show that point. 

8 

To me, that litigants are calling ITC injunctions Damocles’ 

swords to get big settlements, a lot of times against American companies, is bad news. What we see on the slide here is, if you look 

at all of the troll cases that have been brought at the ITC in the 

last 18 months and you count up all the defendants that are 

named, you see that 209 of them have been from the U.S., versus 

only 123 from foreign jurisdictions. Many of these are from California, 92 of them, New Jersey, New York, and Texas. So even 

though you think about the ITC as wanting to protect American 

companies, often it is being used against them. 

I think this is something that we need to consider. And that ITC 

injunctions, again, can be considered Damocles’ swords is not a 

good development. It contributes to a favorable climate for patent 

trolling that we have talked about already, and it drives investment toward patent speculation and away from productive enterprise. 

We are talking about the law today, but what really matters is 

how the law drives investment and hiring decisions. What do I 

mean? Well, Congressman Watt mentioned the Nortel patent purchase. In that single purchase, Apple contributed $2.6 billion to 

buy patents from Nortel. In that same year, they only spent $2.4 

billion on R&D. 

Last week, I was disheartened to read and confirm with a prominent venture capitalist that companies that used to invest in 

startups have now begun investing in patent assertion. Why the 

change? Less risk and bigger potential gains. The bottom line is, 

if it is easier for people to make money using patents rather than 

compete or build new companies, they will do so. 

If there is a problem, then, real or perceived, how can it be fixed? 

I see two ways: to change the way that the law applies or to change 

the law. The ITC can do the former; Congress, if needed, should do 

the latter. 

Let me explain. The ITC statute is expansive enough that, as it 

exists, it gives the ITC discretion to change course and narrow the 

gaps between it and the district courts. It could do so in three 

ways. 

First, it could change the way it grants injunctions. An injunction hurts. Literally, it means that you have to stop selling your 

product. That is your entire business, selling products. But if you 

give a company transition time, it hurts less. If you allow them to 

grandfather in existing products, that also reduces the pain to consumers and competitors. The ITC could do both things and, indeed, 

has done them before. 

The ITC could also be more evenhanded about how it applies the 

domestic industry requirement. Right now, ironically, it is easier to 

prove this if you don’t make something than if you do, with respect 

to the technical prong. And, finally, I believe the ITC could be more 

proactive when it decides cases and affirmatively set policy direction. 

Now, so far, the ITC has made some positive changes: on domestic industry precedent when deciding cases, and progress also in 

using delays and grandfathering with respect to public interest. So 

that is encouraging. It has also, however, been reluctant to say it 

9 

is making policy and precedent when it decides cases, and progress 

has been slower as a result. That is less encouraging. 

Now, however, I believe the ITC has received a lot of attention, 

more than in a long time. As a result, I think it will continue to 

evolve the law and maybe do so faster. Over the next 6 to 12 

months, they may have opportunities to prove their adaptiveness 

to the changing conditions. I say ‘‘may’’ because it will depend on 

getting the facts right before them and in the right cases, and also 

for parties not settling. 

Congress’ role, I think, should be to exercise oversight and evaluate how quickly the ITC is moving. If the ITC doesn’t move to discourage opportunistic behavior because it can’t or won’t, Congress 

should step in. 

Thank you very much. 

Mr. GOODLATTE. Thank you. 

[The prepared statement of Ms. Chien follows:] 

10 


Chien-1.eps

The International Trade Commission and Patent Disputes 

Testimony of Colleen V. Chien,' Santa Clara University School of Law 

House Committee on the Judiciary 

colleenchien@gmail.com 

July 18,2012 

Background: Is There a Problem? 

The International Trade Commission (ITC) is an integral part of the American patent 

system. Although it can only block imports on behalf of domestic industries, now that most 

technology products are manufactured abroad and Congress has relaxed the domestic industry 

requirement, 2 nearly every patentee is a potentiallTC complainant and nearly every patent 

defendant is a potentiallTC respondent. The lTC decides patent cases in less than half the time 

district courts do, on average,3 and hears a significant share of the nation's patent trials 4 

But the TTC is also an outlier in the American patent system. The TTC can't award 

damages or hear counterclaims. It's easier to get an injunction from the LTC than from a district 

court, particularly if you are a patent assertion entity ("P AE" or patent "troll") that uses primarily 

1 Assistant Professor if) 2012. My testimony draws upon the scholarly literature about the International Trade 

Commission, including three Imv rc\'ic'w articles, an amicus brice and an TTC treatise that I ha\'c authored or coauUlorcd: Palen1~V Proieciionisl? An Hmpirica/ Ana~vsjs a/Patent Cases a11he international Trade Commission. 50 

WM. & Mary L. Rev. 63 (2008). Protecting DOlllestic Industries. 28 Santa Clara Computer & High Tech. L. J. 169. 

171 (2011). Patents, Holdup, and the ITC (with Mark Lem1ey)_ Comel! Law. Rev. (forthcoming 2012) available at 

h!tp://papers.ssm.com/so13/papcrs.cfm?abstracUd~ 1856608. R.1.V!) Pa/ellls and F.xclusion Orders: !lrie/oJ J 9 

Heonomics and Law Professors, submillcd illlTC Case 337-TA-7~5 (July 2012) (WiUl Carl Shapiro. Richard 

Gilbert, Arti Rai and 1~ others), available at http://papers.ssrn.com/sol3/papers.cfmoabstract_id~2102865. and 

Section 337 Patent investigation Management Guide 11-20 (with Peter Menell and others) Lexis Nexis 

(forthcoming 2012), available at h((p:l/ssm.com/abstract~ 1603110. Able cmpirical rcsearch assistancc was providcd 

by Nicole Shanahan. W cslcy HclmhoiL. Pcluehettc. and Daniclle Dcbrocck. and dalE. was gcnerously supplicd by 

RPX Corp., the Price waterhouse Coopers . Litigation Study, Lex Machina. Gazelle Technologies. Robert Fram and 

Ashley Miller. Support was providcd by Dirk Calcocn. 

'See John Mezzalingua Assocs. v. illlernaJionai 1rade Comm n. 660 F.3d 1322 (Fed. Cir. 20 II) (discussing Ule 

statutory change that permitted PAEs to claim "domestic industry" status at the ITC). 

1 Conunents of Deanna Okun. ITC Chainvoman as reported in May ~. 2012 Daily Update -- BNA's Patent. 

Tradcmark & Copyright Joumal (rcporting that ITC actions took. on avcrage 11.7 months, vcrsus an avcragc district 

court pcndency in35.3 monUls). Accord. Chien. Palemly Proleelionisi. supra. at Abstract 

4 Approximately 150/0 in 2010, Protecting Domestic industries. supra. at n6. 
11 


Chien-2.eps

patents for licensing, rather than to support the commercialization or transfer oftechnology5 In 

the 6 years since the Supreme Court decided eBay,O district courts have given contested 

injunctions to P AEs exactly once by our count, and three-quarters of the time to practicing 

companies;7 in contrast, the ITC still routinely awards injunctions to all comers. The impact of 

an ITC "exclusion order" preventing importation of a product can be dramatic. To comply with 

such an order, a company must pull its products from the market or redesign them. The Supreme 

Court has repeatedly said that an injunction is an extraordinary remedy, 8 but the IrC is not 

bound by the Court's jurisprudence on patent injunctions9 

Patent litigants know this. As a practitioner said recently, "[when] you are asking people 

to write [checks that] are sufficiently large [] they can't write them without the Sword of 

Damocles of a jury verdict or [an] ITC injunction hanging over their heads."l0 Because 

injunctions remain readily available at the ITC, PAEs and product-producing companies alike 

have flocked to this once-obscure trade agency, generally in search of an injunction or the 

credible threat of one. 

In the last 18 months (Jan. 2011-Jun 2012), for example, PAEs brought more than a 

quarter of Section 337 patent cases, and nearly half of the total respondents appearing before the 

IrC were there because of a PAE-initiated case.ll Usually, the patent was purchased by the 

5 See e.g Justice Kennedy's conCUITCncc in eTlay, 547 U.S. 396 (2006) (describing "finns [thatluse patents not as a 

basis [or producing and sclling goods but, instcad. primarily [or obtaining liccnsing [ees "). 

C eBay Inc. I'. MercExchal1ge. L.L.C .. 547 U.S. 388 (2006) 

- Patent Holdup supra, at Fih'llre 1. 

8,)'ee, e.g, TVeinherger v. Romero-narcelo, 456 U.S . .305, .312 (1982), citing Railroad ('mum 'n v. Pullman ('0, . .312 

U.S. 496. 500 (1941); see also. Rizzo v. Goode. 423 U.S. 362 (1976) CUle principles o[ equity lJ militate heavily 

against the grant of an injunction except in the most extraordinary circulllstances."). 

9 Spansion, Inc. I'. I'I'C, 629 F.3d 1331. 1359 (Fed. Cir. 2(10). 

10 Interview WiUI contingent fee patent lawyer as reported in David SchwartL. 1he Rise olContingent Fee Lawyer 

Representatiol1 il1 Patent Lall', _ Ala. Law Rev. _ (forthcoming 2012). at 32. May 30 2012 draft. file with the 

author. a version of the paper available at DJ1p.1iJ2;!pers, ssm,com/so! 3ipapers,cfm?abstract ld= 1990(;::; L 

11 23 out orSl patent invcstigations and 332 out or701non-unique patcnt respondents. using dnta provided bv RPX 

COIp., and [urUler coded and anaiYLed. See also Robert D. Fram & Ashley Mille" 111e Rise olNon-Practicing J..illity 

Litigation at the ITC: The State of the Law and Litigatiol1 Strategy (Jan. 5. 2011). at 7 (llllpublished manuscript 011 

2 
12 


Chien-3.eps

Though Section 337 was created to keep foreign pirates out of American markets, recent 

P AE cases have targeted domestic companies almost twice as often as foreign respondents (209 

times vs. 123 times)13 (Appendix A). Companies in California (92), New Jersey (25), New York 

(14), and Texas (14) have together been named more times than companies in the rest of the 

world. In addition to Cisco and Ford, who are also testifYing today, American companies--like 

Apple, Walmart, and Schering Ploughl4--have been sued by foreign and domestic complainants. 

Tn my opinion, that some litigants are taking advantage of the TTC's injunction record to 

hold up respondents is a significant problem, though not the only problem, In today's patent 

system. It undoes the progress that eBay represents, and it contributes to the favorable climate for 

patent trolling and holdup present in today's patent system. This climate is driving investment 

towards patent speculation, and away from productive enterprises. Although the focus oftoday's 

hearing is on the law, what really matters is what happens outside the courtroom, particularly 

among companies making investment decisions. Consider the following: 

Earlier this year, Google spent $12.5B to buy Motorola Mobility and its patents15 It spent 

less than half of that, $5.2B on R&D in 2011 16 In 2011, Apple spent $2.4B on R&Dl7 

me \\'ilh the author (reponing an increase in the percentage of companies relying on their licensing activities to 

show a domestic industry from 13% in 2000-2006 to 35% in Ule first 8 monUls of 2010). Based on an extension of 

their database provided for purposes of this testimony. the rate in 2011 (through Oct. 1) was 41%. Okl1ll. supra. 

reported that 8-10% investigations from 2006 to 2011 were brought by PAEslNPEs, our analysis found the number 

10 be 12%. 

1: Available assigmnent records at Ule USPTO indicate that at least 15 of Ule 23 investigations were based on patents 

reassigned from their original owner, in some cases many tillles (see. e.g. patent 5.862.511. reassigned 7 times 

before being asserted by Beacon GmBH of Switzerland in investigation 337-TA-814). 

13 Based on an analysis or 332 unique respondents named in PAE suits rrom January 20 II-June 2012. 123 were 

from foreignjurisdictiollS and 209 were from domestic jurisdictions. Sec Appendix A 

14 See, e.g.. TA-337-710 and TA-337-768. 

"Goog1c Official Blog, We've acquired Motorola Mobilitv, http://goog1cblog.blogspot.comI2012/05/we,eaequired-motorola-mobility.html (last visited May 24, 2012): lenna WorUl31lL Google Closes $12.5 Billion Deal to 

Buy Motorola Mobility. http://bits.blogs.nytimes.eom/20 12/05/22/google-closes-12-5-billion-deal-to-buy -llIotorolamobilityl (last visited May 24.2012). 

16 Goog1c, Tnc., Annual Report (FoTInlO-K), (Jan 26, 2012), availahle "I 

http://www.see.gov/ Archives/edgar/data/1288776/000 119312512025336/d260 164dIOk.httn (reporting an R&D 

expenditure of $5.2B in 2011). 
13 


Chien-4.eps

but contributed more, approximately $2.6B, to a single transaction to buy patents from 

Norte!." Though these patent investments will obviously last more than the single year in 

which they were bought, the same can also be said of the R&D investments. 

Acacia, a very well-managed company that asserts patents as a business model, has a 

market capitalization of close to $2B and 55 employees, which puts it into the bottom 

Yz% of public companies in the service sector in terms of employees. 19 Other companies 

in their sector with comparable market cap have an average of 11,500 employees, based 

on our analysis 20 Although they create revenue for the patentholders that they pal1ner 

with, this is 110t unique among service sector companies, many of which generate revenue 

for their customers. 

As one investor put it on a blog board recently: 

"In the past six months I have been approached by two investors with interests in large 

patent portfolio investment. They used to invest in start-ups. Why the change? Less risk 

[and~l bigger potential gains. It's a no brainer. Tnvesting in invention is for schmucks. 

They are wrong but accurate.,,21 

When I asked renowned venture capitalist Brad F eld if this was really happening, he 

replied "of course it's happening.. It's the classically grotesque side of it all - money always 

goes to where there's a perceived opportunity, regardless of the dynamics around it. And in this 

case it has nothing to do with creating jobs or innovation or anything productive for society.,,22 

If There's a Problem, How Can It be Fixed? 

Tfit's true that there's a problem, how can the problem be remedied? Could the TTC fix 

it? Will private litigants work it out for themselves? Or does Congress need to step in? The 

17 Apple. Inc .. Annual Report (Forl1l1O-K). (Oct. 26. 2011), available at 

http://www.sec.gov/Archives/edgar/data/320193/000119312511282113/d220209dlOk.htm (reporting an R&D 

expendituTC or$2AB in fiscal year 2011 (ending September 30.2(11». 

l' Appie, Inc .. Quarterly Report (Forl1l10-Q), (Juiy 20, 20ll), aFai/able at 

http://www.sec.gov/Arehives/edgar/datal320193/00011931251 1192~93/dIOq.htl1l COn J1me 27. 201 L the 

Company, as part of a consortium, participated in the acquisition of Nortel' s patent portfolio for an overall purchase 

price or$~.5 billion. or which the Company's contribution will be approximately $2.6 billion."). 

1Y Microaxis investing report, http://www.l11aeroaxis.com/investlrmioiACTG--Number of Employees 

,u Based on an analysis of 32 companies in the service sector in the $1.9-$2.05 market capitalization range. 

" Comments of Nicolas White. Tangible IP, in response to JoffWild. Intellectual Asset Management blog post Nolt· 

ihat JP is AIainslream. T.ei's ,VoL kress T17i;..; Once in a J.{/elime Orrortuni(v Up. July 6, 2012. both available at 

hltp://\rY'. iI' jam-magadnc.COllllbloo/lk1.31Laspx'7g=.b06 lObah-d37 1-4··i-(j I-bdfy[-()b 123(,t\h8chO 

" Persona! emaii exchange on file with the author. 

4 
14 


Chien-5.eps

remainder of this submission addresses these questions, keeping in mind that even if 27% ofITC 

patent cases are brought by patent trolls, the vast majority of patent cases are not; that the lTC 

has a proven record of efficiently resolving patent disputes; and that in some cases, due to a lack 

of jurisdiction over the defendant, the TTC represents the only fonn of relief available to a 

complainant23 My answer in short is that the current statute gives the ITC many options for 

reducing rent-seeking behavior among litigants. It should use these options. If the lTC proves 

unwilling or unable to do so, Congress should act. 

What the lTC Could Do 

To the question of what the TTC could do, T say: a lot. 

railor r"~~clusiofl Orders Ihrough Grandfi7lhering, J)elay, and in some cases J)enial 

First, the ITC could reduce holdup by changing the way it issues exclusion orders. The 

statute does not compel the TTC to grant exclusion orders in all cases, but only when consistent 

with the public interest24 The LTC has rarely tailored or denied relief based on the statutory 

public interest factors, but today' s cases present new challenges, including whether a patent over 

a small invention by a patent troll should be used to exclude a big product,25 or whether a 

standards-essential patent subject to a promise to license on reasonable and non-discriminatory 

terms (RAND) should be the basis for the exclusion order26 Exclusion orders in these cases can 

:3 Based on my rcsearciL two-Qrirds of lTC cases have a district court countel]lart, suggesting that is not often the 

case. Chien, Patel1tiy Protectionist. supra. at Abstract. However, it is possible that the countel]lart district court case 

named rewer derendants, due to a lack orjurisdiction. 

'" 19 USC 1337(d)(l) 

" See, e.g. in Clrien & Lemley supra, see also Colleen Clrien & Mark Lemley, Patents and the Public Interest. NEW 

YORJ..:: TUdEs.cor'>'i. Dec. 13. 2011, available at lJ.ttQ,!lWl,Yl,v.llYtlmes.com/20 1ll12/1?/opinionJpatents-smmtnhOllesill]d-Ihc-m,blk-inlcrcsl.hlnll. 

:6 18 professors and I argue Qlat it generally should noL unless district courtjurisdiclion is lacking. See Clrien eL al.. 

R4.!.VD Patents and Exclusion Orders_ supra. 
15 


Chien-6.eps

harm competitive conditions and consumers when many productive, non-infringing components, 

third-parties relying on the enjoined product, and pro-consumer, pro-competitive benefits are 

shut down to give the patentee control over only a single small component. 

The TTC could deny exclusion orders in certain types of cases. However, this could be 

unsatisfying after an intense and expensive trial, especially in cases where the patentee has no 

other recourse. A more palatable suggestion, then, would be for the ITC to issue exclusion orders 

but structure them to ameliorate the harms to competition and consumers. Two ways to do so are 

to tailor injunction scope and stay injunctions. Tn a case where a design-around is possible, for 

example, awarding an injunction but delaying its start could deter infringement in a way that 

minimizes disruption to consumers and the holdup to manufacturers 27 The LTC could do so 

without interfering with patentee incentives: a prevailing patentee can seek damages in federal 

court for intnnging sales in addition to bringing a case in the TTe. Tfthe patent truly was 

essential, the patentee could obtain an injunction after the stay expired. If the LTC does make 

expanded use of stays, it should also clarify existing procedures for obtaining Commission 

approval of design-arounds,28 in order to avoid confusion and delay in introducing the new 

product. 

In some cases, more significant limits on exclusion orders may be warranted. Suppose, 

for instance, the infringing component is small but, because of the nature of the product, the 

potential impact of an exclusion order on downstream products, related products, and third 

parties is large. In such a case, the Commission could tailor the scope of the injunction to reduce 

harm to competition, for example by grandfathering in existing products. LTC cases that don't 

:7 See, e.g., Mark A. Lemley & Carl Shapiro, Patent Holdup and Rovaltv Stacking_ 85 TEX. L. REv. 199 L 2OJ5-~0 

(2007) (showing that a stay in il1iunctive relief to allow design-arounds significantly reduces holdup risk). 

28.)'ec, e.g. in Blakeslee & Christopher V. Mcscrvy, ,)'eeking . I (fludiealion (d'a [)esign-. 'jround in ,)'eClioJ1 337 Patent 

Injringemenllnvesligaliol1S: Procedural Conlexl and Siralegic COl1sideraliol1S_ 35 AIPLA QJ. 385,408-411 

(2007). 

6 
16 


Chien-7.eps

implicate these types of concerns, for example covering patented pharmaceuticals or piratical 

copying, shouldn't be affected. 

In Accordance with Ihe Sialule, COflsislenlly Apply Ihe /)omeslic Induslry Requiremenl 

A second way the ITC could limit the ability ofPAEs to bring cases in the ITC is by 

more consistently and rigorously enforcing the statute's domestic industry requirement to 

licensing-based complainants29 The ITC typically requires complainants to prove that they 

practice the asserted patent on an element-by-element basis. However, it applies a relaxed 

"nexus" standard to licensing-based complainants, even when their licensees are making 

products. This practice is inconsistent with the statute and its history. 1(' The LTC should require 

just as much of a connection to be proven between the asserted patent and an "article" (provided 

that the technology exists and is not in the process of being made), when licensing-based 

complainants bring their cases as when others do.'! It should apply the statutory preference it 

recognized in the CO{L'dal Cahle case for ex ante over ex post Iicensing32 in order to exclude 

rent-seeking behavior 

Change, Within Limits, is Underway alldMore Opportunities E>dsrfor Ir To COlltinue 

There are some signs that the TTC is willing to evolve in these directions. The TTC 

recently tailored its exclusion order in the 337-TA-710 case to include delay and 

grandfathering," and it has evolved its domestic industry case law'4 

311d. 

Chien, ProJeciing /)omesiic IndusLries, supra. 

(describing same) 

12 Certain Coaxial Cable Connectors and Components Thereofand Products Containing ,,)'mne. USITC Inv. No. 

117-TA-650, COIlI1I1'n Op. at -19-50 (Apr. 14.2010), EDTS Doc. No. -122812. 

33 COllllllission Decision in Personal iJata andJfobile Communications iJevices TA-710-337 at 83 ("HTC shall be 

permitted to import into the United States [for 19 months] ... refurnished handsets to be provided to COIlSlllllers as 

7 
17 


Chien-8.eps

Yet, these changes have come slowly, especially relative to developments in the industry 

of patent assertion." The lTC's domestic industry and public interest caselaw has not stopped 

P AEs from flocking to the ITC as nuanced injunctive relief remains the exception at the lTC, not 

the rule. The Federal Circuit has said on several occasions that "the Commission has broad 

discretion in selecting the form, scope, and extent of the remedy.,,36 Yet the lTC has been 

reluctant to embrace this discretion and role in setting patent policy. Commissioners have 

repeatedly said that, as a quasi-judicial creature of statute, the ITC is "not a policy-making 

body.,,37 Yet the largely deferential standard of review that the TTC's remedy detenninations 

enjoy'R gives the lTC the ability to make policy through its adjudication 39 

Thus, it seems that for the Commission to change course, the right cases need to come up 

and the facts need to be properly developed. Progress will necessarily be slower if the TTC fails 

to exercise the discretion it has to evolve its caselaw, make forceful precedents, and set policy 

direction. The Supreme Court has not, to my knowledge, ever taken an ITC case, but perhaps it 

replacements") and 81 CT-Mobile itself has advised the Conunission that a fOUf-month transition period would 

likely be sufficient .... We find T-Mobile's suggestion to be reasonable 'Uld within our authority to implement. ). 

14.)'ee, e.g. Coaxial Cahies, supra and Certain Afultimedia Displa:v and .Vavigation Devices and ,\).!stems, 

Components 'thereof, and Products Conwining Same. USITC 1m', No. 337-TA-69-l, C'..omm'n Op. at X (Aug. X, 

2011), EDIS Doc. No. 456236 (stressing the need for a particular nexus between the asserted patent and portfolio 

Jicclls1ng expenses to be shmvn). 

"Described, e.g. in Colleen Chien, Turn the table on Patent Trolls. Forbes.com Augusl9, 2011 available at 

http:f.iwww.forbes.comisites/eioeentraI/20 II/OS/09/tllfll-the .. tables .. on .. patrnt-trollsJ, and Colleen Chien 

The Economics o.lPatent Assertion. drdfi paper in progress. 

36 Tlvundai Fiecironics Induslries ('0., !,td .. j'. US.lnlern. Trade ('om'n .. &99 F.2d 1204 .. 1209 (Fed. CiT. 1990), ciling 

l-'iscojim, 8.,1. v. United Stateslnt'llrade Comm'n .. 787 F.2d 5-l-l, 5~8 (Fed.Cir.1986) 

37 See, e.g .. Stanford Patent Institutions SUllmlltMay 21.. 2012.. video aI'ailable at 

httpJ/\yv'I"\y.vontube.com/\vatch'!v=Qgo lL"'\:lx,yx\y 

38 The lTC's remedy dctcnninatiolls aTC subject to reversal only ,,\"lIen they arc "atbitral)'. capricious, an abuse of 

discretion, or oUlcnvisc not in accordance \vith la\v." Spansion. 629 F.3d 1331 at 1358~ accord £.'pisJar Corp. \'. ini'l 

Trade Comm'n .. 566 F.3d 1321, 1J33 (Fed .. Cir. 2009); Hyundai Elees. Indus. Co. v. Im'l Trade Comm'n, 899 F.2d 

12() .. L 12()X (Fed. Cir. 19(0): see also K.vocera Wire/e.".,· Corp. v. U.S In/ern. Trade Com/H, 545 F.3d 1340, 1355 

(Fed.Cir.2008) (applying the framework established by CheJ'COn U.SA Inc. v. SOlUml Res. Del Council, Inc., 467 

U.S. 837 (1984) to an lTC order, and stating that if "the statute in question is ambiguous and the agency's 

interpretation is reasonable," "a court must defer to an agency's constmction of a statute gmrerning agency conduct--

(quoting ('alhedral Candle Co. v. US Intern. Trade ('ol1l'n, 400 F.3d 1352, 1361 (Fed. CiT. 2005)). 

3Y As ils COlllUllssiollers have rceogniLed, see, e.g .. Slanford Patent lnslillllions Smlllnil Ma) 21.. 2012 .. video 

available at http://-wl,v\\'.vontube.comhyatch?v=Qcro hx lXl-Yx\v 

8 
18 


Chien-9.eps

should, at the recommendation of the Solicitor General for example. The ITC could also use 

additional input from agencies whose consultation to the ITC is required by statute40 

The ITC now has a number of cases before it that raise the issues contemplated by this 

hearing, in some cases for the tlrst time. Through public interest commentary, they are 

developing a better sense of how exclusion orders impact consumers and competitive conditions. 

Unusually, the ITC has also recently received the attention of governmental agencies like the 

FTC, DOJ,41 and Director Kappos of the PTO. 42 In the next six to twelve months, the ITC will 

have a chance to react and potentially change course in response to this greater input from 

outside stakeholders 

The Role of Litigants 

Will litigants be able to solve the "LTC problem" on their own through private ordering? I 

am not optimistic - they have less access to help and self-help than they do in district court. 

However, litigants can play an important role in evolving the TTC's decision-making. 

Help the ne and f)ocumentthe Impact of I'll' Jurisprudence 

Litigants sued in the ITC have several options. Accused parties can try to invalidate the 

patent, fonn joint-defense groups, or control costs43 However, some litigant self-help measures 

don't translate to the ITe. Many of the ALA provisions that were intended to curb litigation 

'0 19 USC I 317(b)(2), read wilh ils sl"lulory hislorv, requires Ihe TTC 10 consuli wilh govenunenlal deparlmenls and 

agencies when considering the public inlercst in Ihe eonlext of an exclusion order" as it considers appropriate," 

41 With respect to the issue of RAND patents and il~unctions, described e.g. in ChielL e1. al R4ND Palel1ts and 

";.J:c/usion Orders, supra and during Senate hearings on this issue on July 11, 2012 described 

hltp:/ !\V\V \\ . (osspatents.collli'20 12/07 ial-senate-hearinp -ftc -and-do i -arglle. himl 

1: JoffWild, Kappas Explains Concerns Ol'er FR-iND-related li(junctions and Calls for Balanced Approach, 

Intellectual Asset M:magement Blog, ~lttP:/I\Y"-"'l,Y. ial!!:".lll!l"(lzine. comlbloFlDet1:li J. a@.x?g=3a92. 8Gc9-ee l2:±l5 9-

Wa-J77:1l.[1ccc~9c (June 27, 2012). 

13 A variety of self-help mcasufCs arc described, e.g., in Colleen Chien, Turn the Table on Patent trolls, Forbes.com 

August 9, 2011 amilable at http://,yww.forbes.com/sitesicioccntralJ21J] 1I08109ltmn-the-wbies-on--palellt-tmllsl 

9 
19 


Chien-10.eps

abuses, such as the misjoinder rules and provisions relating to stays of cases pending a Section 

18 challenge to transitional covered business method patents, apply to civil cases, not to Section 

337 actions at the ITe. By statutory mandate, the ITC must resolve cases "at the earliest 

practicable time",44 making it harder for the agency (0 wait for the Patent and Trademark Office 

(PTO) or district court to determine if a patent is valid or infringed. ITC cases are extremely 

resource intensive, making attorneys less willing to share costs. As is the case with respect to 

district court cases, P AEs that bring ITC actions are invulnerable to countersuit 

Perhaps the greatest contribution litigants can make to reforming the TTC is to help the 

lTC help itself In order for the ITC to make good law, parties need to, for example, avoid 

settlement before the lTC can make a decision, help develop the factual record, ask for flexible 

remedies and the desired application of domestic industry, and where appropriate, appeal 

Commission decisions to allow for appellate courts to weigh in. Tn short, litigants can engage in 

strategic or impact litigation, and continue to help other governmental bodies understand the 

impact of exclusion orders on consumers and competitive conditions. 

What Congress Could Do 

Exercise Oversighr 

Through these hearings, members of Congress are already providing welcome attention 

to the lTe. This attention should be infonned by the good work of the lTC and its important role 

in today's economy. However, the areas that this and related Committees find problematic 

should also be brought to the attention of the ITC with the policy direction that the ITC is 

reluctant to develop. As the TTC makes decisions over the next 6-12 months, on PAEs and other 

cases before it, Congress could commission a study or further hearings to look at the how the 

44 19 USC 1337(b)(l) 

10 
20 


Chien-11.eps

ITC has changed its decision-making in response to the oversight and input it receives and the 

impacts of these decisions. Has the lTC done anything to discourage rent-seeking behavior 

through interpretation of its standing requirements? Have companies been able to design around 

exclusion orders or had to pull their products? Have the injunction standards diverged even 

further as district courts decide similar cases and come to different results? Perhaps members of 

Congress could hold hearings with the Commission and/or commission a study of the evolution 

and impact of the lTC's cases over the next 6-12 month period. If this study shows that things 

have not changed, Congress should change the law. 

Change the Law 

TfCongress does change the statute, it should focus on harmonizing ITC and district court 

remedies. The most effective way to prevent the TTC from becoming a way to circumvent eHay 

is to require eBay to apply to lTC proceedings as well. However, the change should not be 

limited to eRay, but be done in a way that allows the ITC to benefit from the future evolution of 

Federal Circuit and Supreme Court jurisprudence on patent remedies. I take no position on 

whether or not the lTC should be authorized to decide damages, a topic which raises a host of 

issues 45 However, modifying existing bond and penalty provisions to provide more flexibility to 

the TTC to award damages would make the option of denying an exclusion order more palatable, 

and reduce the pressure on the ITC to grant injunctions46 It may also make sense to consider 

creating a "fast track" to district court for lTC cases that have been decided in favor of the 

patentee but without an exclusion order. 

T am more cautious about attempts to redraw the domestic industry requirement. Such 

15 SOlllC of which are discussed in Chien. Palenliy Proleciionisl. supra. 

4" These suggestions are more fully fleshed out in Chien & Lemley. supra. 

11 
21 


Chien-12.eps

attempts must be evaluated with attempts to circumvent the new line in mind - determined 

investors may partner with practicing companies to bring lTC actions or invest in 

commercialization efforts just to gain standing at the lTC should the rules be changed in 

particular ways, for example. Tn addition, the history of accusations of violations of national 

treatment from our trading partners should also be kept in mind47 That the ITC has remained 

relatively available to patentholders belies, in part, accusations that the venue is protectionist. 4' 

Finally, if Congress amends the law to reform patent litigation (for example through 

refonns like the misjoinder rules), it should also keep the TTC in mind and consider how the 

reforms should apply, perhaps in some modified form. 

Conclusion 

The ITC's unique features create opportunities as well as challenges for the patent system 

and its litigants, namely rent-seeking caused by the lTC's more favorable injunction standard. 

The statute provides ways for the ITC to overcome some of these challenges, however the ITC 

must use them. If the lTC does not show a willingness or ability to do so within a limited period 

of time, Congress should act. I thank the Chairman and members of the Committee for the 

privilege and honor of serving our Government by testifying today. 

Respectfully Submitted, 

Colleen Chien 

17 See e.g., in Chien, Palen1~V ProieciionisJ supra. 

48 Id. 

12 
22 

————— 

See Appendix for the attachments submitted with this statement. 


Chien-13.eps
23 

Mr. GOODLATTE. Mr. Kelley, welcome. 

TESTIMONY OF DAVID B. KELLEY, INTELLECTUAL PROPERTY 

COUNSEL, FORD GLOBAL TECHNOLOGIES, LLC 

Mr. KELLEY. Mr. Chairman, Ranking Member Watt, and Members of the Committee, thank you for inviting me here to this hearing today. It is my honor and privilege to appear before you. 

I am an Intellectual Property Counsel for Ford Motor Company, 

and I am here to testify regarding a problem plaguing production 

and manufacturing companies, who employ hundreds of thousands 

of Americans workers. At Ford, we directly employ more than 

65,000 Americans, and our dealers employ more than 150,000 

Americans. 

Ford wholeheartedly supports the underlying purpose of Section 

337 investigations—that is, to prevent unfair competition from foreign entities and to protect American industry, jobs, and innovation. We have utilized the ITC to prevent importation of products 

that blatantly infringed our intellectual property and that unfairly 

competed with our auto parts. 

Nonetheless, Ford has also recently been hauled into the ITC 

under circumstances that cry out for reform. In November of last 

year, a Swiss-based patent-holding company, Beacon Navigation 

GmbH, brought one of the largest Section 337 cases ever against 

major manufacturers, American manufacturers. The case, involving 

GPS navigation systems, named as respondents every major producer of automobiles in the United States. These companies employ 

hundreds of thousands of Americans in good-paying manufacturing 

jobs. 

Beacon asserted that certain Ford vehicles should be excluded 

from the U.S. market; this, despite the fact that these Ford vehicles contain a high percentage of content manufactured in the U.S. 

by American workers. In addition, the navigation component that 

Beacon claimed was covered by its patents was a small part of the 

navigation system and a miniscule part of the total vehicle value. 

And so, a highly complex product with thousands of parts, many 

of which were manufactured and assembled in the U.S. by tens of 

thousands American workers, was subject to exclusion from the 

U.S. Market by a foreign patent assertion entity with a patent allegedly covering a small component of that product. Beacon ultimately withdrew its complaint, but not before costing respondents 

tens of millions of dollars in defense fees. Rather than protect the 

jobs, U.S. jobs, the case threatened U.S. jobs. 

Beacon should not have been allowed to initiate a 337 investigation in the first place because it had no real trade grievance; it was 

only seeking money damages. Nonetheless, Beacon was able to proceed because there is no procedure to challenge the reasonableness 

of an ITC investigation at the beginning and because they claimed 

domestic industry under the licensing clause in Section 337. 

In my opinion, the Federal court system, particularly the Federal 

Circuit Court of Appeals, is doing an excellent job in recognizing 

the PAE problem and fashioning judicial policy to put appropriate 

limits on PAE abusive practices. Congress also deemed it necessary 

to correct some of these practices in the recently enacted America 

24 

Invents Act, which, in part, limits a PAE’s ability to include unrelated defendants in a patent lawsuit. 

Unfortunately, the adjustments made by the courts and Congress 

to limit PAEs do not apply to the ITC, and the ITC is not bound 

by Supreme Court precedent that requires a thorough, equitable 

evaluation prior to the grant of injunctive-type relief. In fact, the 

ITC has only exercised its public interest equitable powers to deny 

an exclusion order a handful of times over the last 40 years. 

While I have the utmost respect for the ITC, including the commissioners, ALJs, staff, general counsel, and others, it is clear to 

me that the ITC is not able to remedy the problem. The ITC is constrained by statute and, to its credit, stays within the statutory authority. Some believe the ITC has the ability to fix this problem 

without statutory change. There is no evidence that it will do so. 

To the contrary, the ITC has stated that it will not distinguish between innovators and PAEs that claim domestic industry based on 

licensing activities. 

It is therefore necessary, and I ask you here today, to remedy the 

problems I have described by supporting the following statutory 

changes to the Trade Act of 1930. First, institute an inquiry into 

the equities of each 337 investigation at an early stage of the proceeding. Second, change the domestic industry requirements by 

limiting qualification to those who engage in production-based licensing. These changes will preserve legitimate uses of the ITC 

while shunting PAEs who have an adequate remedy at law to the 

Federal courts where they may belong. 

Thank you, Mr. Chairman and Ranking Member, for holding this 

hearing and shining a light on a problem that is harming American 

manufacturers. 

Mr. GOODLATTE. Thank you, Mr. Kelley. 

[The prepared statement of Mr. Kelley follows:] 

Prepared Statement of David B. Kelley, Intellectual Property Counsel, 

Ford Global Technologies, LLC 

Chairman Smith, thank you for inviting me to this hearing today. It is my honor 

and privilege to appear before this subcommittee. 

I am an Intellectual Property counsel for Ford Global Technologies, LLC, a wholly 

owned subsidiary of Ford Motor Company that handles all intellectual property 

matters for the company. I am here to testify regarding a problem plaguing production and manufacturing companies who employ hundreds of thousands of American 

workers. At Ford, we directly employ more than 65,000 Americans—and our dealers 

employ more than 150,000 Americans. 

We believe that Section 337 of the Tariff Act is an important tool for the protection of American jobs and intellectual property. Section 337 is a US trade law, enacted in 1930. It was designed to protect U.S. manufacturers from unfair foreign 

competition, and empowers the U.S. International Trade Commission (ITC) to exclude products from the U.S. market. The statute is particularly useful in intellectual property enforcement cases because it sometimes is difficult to enforce a patent 

against foreign infringers in the U.S. courts due to jurisdictional issues. Section 337 

permits direct action against the infringing products, whether or not the maker of 

the products is subject to the U.S. courts. 

Increasingly, Section 337 is being abused by Patent Assertion Entities (PAEs) who 

acquire and hold patents for the purpose of litigation. PAEs don’t produce goods— 

they don’t actually use technology to create products or jobs in the United States. 

Their goal is to threaten other businesses with patent litigation in the hope that 

those other businesses will agree to pay royalties rather than face continuing legal 

claims. 

In recent years, PAEs have targeted Americans manufacturers, threatening their 

U.S. operations, and trying to force them into cash settlements that would not be 

25 

awarded by a court. This began after the U.S. Supreme Court ruled, in the 2006 

eBay decision, that U.S. courts could issue injunctions in patent cases only if the 

plaintiff could show the traditional requirements for injunctive relief. Most importantly, the plaintiff is required to show that irreparable harm would occur if the injunction did not issue. A PAE that is only seeking money can’t show irreparable 

harm: money can always be awarded later. So the Supreme Court decision meant 

that PAEs would have to prove their damages. But the PAE business model is to 

seek quick negotiating leverage, not to pursue a long patent case for damages. So 

after the eBay decision, Section 337 became more attractive to PAEs. It offers an 

injunction-like remedy without requiring proof that an injunction is warranted. 

PAEs use the threat of a Section 337 exclusion order to obtain bargaining leverage, 

just as prior to eBay PAEs used the threat of a court injunction. 

By the time a manufacturer enters production, the company has spent great sums 

of money on design integration, tooling, and other investments to incorporate a particular technology. The technology itself may not be valuable—it may be trivial— 

but it is very expensive to change it after the investments have been made. PAEs 

can assert a minor patent against such a company and demand exorbitant sums— 

amounts far beyond the actual value of the technology in the market—because the 

manufacturer must either pay or walk away from its sunk costs. 

This tactic is a patent ‘‘hold-up.’’ That is, the PAE demands royalties that are 

large not because the patent is valuable, but because the target is vulnerable. This 

behavior by PAEs hinders innovation instead of promoting the adoption of new technology. 

Some believe that most, if not all, Section 337 cases are brought against shadowy 

Asian companies that are counterfeiting American goods or infringing U.S. patents. 

In fact, only a small percentage of Section 337 cases are brought by a U.S. company 

against foreign companies. Most cases are brought against a mix of U.S. and foreign 

companies. PAEs like to bring their cases against prominent U.S. companies, because their goal is not to exclude foreign products from the United States or to protect American manufacturers: it is to negotiate a royalty stream to earn a return 

on their investment. In recent years PAEs have brought Section 337 actions against 

such prominent U.S. companies as Apple, Ford, Google, General Motors, Hewlett 

Packard and Intel, among many others. 

These U.S. manufacturers, and others, operate on a global basis: they sell their 

products globally, and they ensure their products are internationally competitive by 

purchasing parts and materials globally as well. Exclusion of critical parts or components from the U.S. market can lead to a calamitous shut-down of U.S. operations. 

The intensity and fast pace of ITC litigation creates an atmosphere where a respondent in the ITC must divert extensive resources quickly to its defense or face 

a rapid, adverse and unfair result. Even if a company is confident that its imported 

products do not infringe a patent, the costs of litigation, the uncertainty of litigation, 

and the risks of an interruption of business are so great that the company may be 

tempted to settle. 

Ford wholeheartedly supports the underlying purpose of Section 337 investigations, that is, to prevent unfair competition from foreign entities, and to protect 

American industry, jobs, and innovation. We have utilized the ITC to prevent importation of products that blatantly infringed our intellectual property and that unfairly competed with our parts. 

Nonetheless, Ford has also been recently hauled into the ITC under circumstances 

that cry out for reform. In November of last year, a Swiss-based patent holding company, Beacon Navigation GmbH, brought one of the largest Section 337 cases ever 

against major American manufacturers. The case, involving GPS navigation systems, named as respondents every major producer of automobiles in the United 

States, including Chrysler, Ford, General Motors, Honda, BMW, Mercedes, Nissan 

and Toyota. These companies employ hundreds of thousands of Americans in goodpaying manufacturing jobs. Rather than protect U.S. jobs, the case threatened U.S. 

jobs. Beacon also sued the companies in Delaware district court. The patents underlying the 337 investigation allegedly cover certain aspects of automotive navigation 

systems. Despite the fact that Beacon has only a handful of employees in the US, 

did not itself make any products, had not undertaken any research or development 

related to navigation systems, had purchased the patents from another party, was 

only interested in obtaining royalties, and had questionable licensing activities, it 

claimed that it qualified as a ‘‘domestic industry’’ under the licensing clause of the 

statute. 

Beacon asserted that certain Ford vehicles assembled in Mexico and Canada 

should be excluded from the U.S. market. This despite the fact that these Ford vehicles contain a high percentage of content manufactured in the U.S. by American 

workers, and despite the fact that the vehicles were imported under the North 

26 

American Free Trade Agreement (NAFTA). In addition, the navigation component 

that Beacon claimed was covered by its patents was a relatively small percentage 

of the total vehicle value. And so a highly complex product with thousands of parts, 

many of which were manufactured and assembled in the U.S. by tens of thousands 

of American workers, was subject to exclusion from the U.S. market by a foreign 

PAE. 

Beacon was using the ITC to obtain exorbitant royalties far beyond a reasonable 

value. And they attempted to use the ITC as leverage to extract higher fees on products made in the U.S., such as Ford F–150 trucks, that contain a small component 

from a global supplier. Beacon even tried to get royalties for vehicles in countries 

where it had no patents by using the leverage of the ITC investigation. 

Only after diligent inquiry by defense counsel and by forceful direction from the 

ITC judge did it become apparent that Beacon could not sustain its claim of a domestic industry. It subsequently withdrew its complaint. But not before costing the 

respondents tens of millions of dollars in defense fees. 

The Beacon case demonstrates the extent to which 337 investigations have 

strayed from their intended purpose. Beacon should not have been allowed to initiate a 337 investigation because it had no real trade grievance—it was only seeking 

money damages. Its alleged licensees do not make automotive navigation systems, 

and even if they did, they do not have the capacity to supply even a fraction of the 

industry that Beacon sought to exclude. Nonetheless, Beacon was able to proceed 

because they claimed domestic industry under the licensing clause in Section 337, 

and because there is no procedure to challenge the reasonableness of an ITC remedy 

at the beginning of an investigation. 

Licensing is permitted in the domestic industry test to allow innovators who don’t 

make products, like universities, to use Section 337. Innovators engage in production-based licensing, sometimes called ‘‘ex-ante’’ licensing. That is, innovators license 

their patents before a product is developed and encourage their licensees to bring 

new products to market. This helps create American jobs in product development 

and manufacturing. On the other hand, PAEs obtain and license their patents after 

a product has come to market, and seek to share in the value already created by 

others. This is referred to as revenue-based licensing, or ‘‘ex-post’’ licensing. While 

a PAE may have a claim in district court, it should have no place in the ITC, which 

is intended to protect U.S. industries and jobs, not to allocate existing value among 

claimants by awarding damages. The current domestic industry test in Section 337 

does not specifically distinguish between production-based licensing and revenuebased licensing. And so, under current practice, almost any patent owner, even foreign based PAEs with virtually no presence in the U.S. and licensees with limited 

capacity, can bring an action against an entire U.S. industry. The ITC is thus essentially operating as an alternate patent court in many respects. 

In my opinion, the federal court system, particularly the Federal Circuit Court of 

Appeals, is doing an excellent job in recognizing the PAE problem and fashioning 

judicial policy within their authority to put appropriate limits on abusive PAE practices. Congress also deemed it necessary to correct some of these practices in the 

recently enacted America Invents Act (AIA), which, in part, limits a PAE’s ability 

to include unrelated defendants in a patent lawsuit. 

Unfortunately, the adjustments made by the courts and Congress to limit PAEs 

do not apply to the ITC. PAEs can name any number of respondents in their complaints. Recent statistics clearly show an increase in the number of respondents in 

337 investigations, mainly the result of PAEs. And the ITC is not bound by Supreme Court precedent that requires a thorough equitable evaluation prior to the 

grant of injunctive type relief. In fact the ITC has only exercised its public interest 

equitable powers to deny an exclusion order a handful of times in the many hundreds of investigations it has undertaken over the last forty plus years. 

While I have the utmost respect for the ITC, including the Commissioners, ALJs, 

Staff, General Counsel, and others, it is clear to me that the ITC is not able to remedy the problem. This is so because, by its own admission, it is not a policy-making 

body. The ITC is constrained by statute and, to its credit, stays strictly within its 

statutory authority. However, this has resulted in a mechanistic application of the 

law which has ultimately led to absurd situations like the Beacon case that I’ve related, which is one of many examples of PAE abuse in the ITC. 

Some believe that the ITC has the ability to fix this problem without statutory 

change. There is no evidence that it will do so. To the contrary, the ITC has stated 

that it will not distinguish between entities that claim domestic industry based on 

particular licensing activities. That is, any entity that can show it has licensed a 

patent to another party, even if it is revenue-based ‘‘ex-post’’ licensing, qualifies as 

a ‘‘domestic industry’’ under current ITC law. And while recent decisions and proposed rule changes indicate that the ITC may genuinely be trying to address the 

27 

problem in limited respects, these attempts will likely fall far short of eliminating 

PAE activity from unfairly burdening productive US manufacturers that employ 

hundreds of thousands of American workers. 

It is therefore necessary, and I ask you here today, to remedy the problems I’ve 

described by supporting the following statutory changes to the Trade Act of 1930: 

First, institute an inquiry into the equities of each 337 investigation at an early 

stage of the proceeding, or even before an investigation is begun. The inquiry preferably would be the first matter undertaken by an ALJ. An initial determination 

by an ALJ on this issue should be immediately reviewable by the Commission, and 

a Commission determination should be reviewable by the Federal Circuit Court of 

Appeals. This inquiry will allow the ITC to use its discretion in preventing abusive 

PAEs from initiating non-trade related investigations. The inquiry could be similar 

to that used by the courts before awarding injunctive relief. 

Second, change the domestic industry requirements by either limiting qualification to those who engaged in production-based (ex-ante) licensing, or by eliminating 

the licensing aspect entirely, as licensing entities are really seeking money and the 

ITC cannot award damages. 

These changes will preserve legitimate uses of the ITC while shunting PAEs who 

have an adequate remedy at law to the federal courts, thus protecting U.S. industry, 

jobs and technology from abusive and destructive litigation in the ITC. 

Thank you Mr. Chairman and Ranking Member for holding this hearing and shining a light on a problem that is harming American manufacturers. I appreciate your 

efforts to bring forth legislation that will deliver a fair solution that preserves the 

intent of the law while fixing the abuses of PAEs. 

Mr. GOODLATTE. Mr. Rubin, we are pleased to have your testimony. 

TESTIMONY OF NEAL A. RUBIN, VICE PRESIDENT OF 

LITIGATION, CISCO SYSTEMS, INC. 

Mr. RUBIN. Although the International Trade Commission hears 

many patent cases, it is fundamentally a trade forum, charged with 

protecting U.S. industry and U.S. consumers from unfair foreign 

competition. 

I am here today because, under the ITC’s interpretation of its 

governing statute, a Canadian company with one employee in the 

United States that buys a portfolio of Israeli patents can seek to 

enjoin Cisco, a U.S. company that employs tens of thousands of 

U.S. engineers, from selling its products into the U.S. because some 

of the component parts are sourced from abroad. 

That is one example, and there are many others, where patent 

assertion entities that do not design, develop, sell, or import any 

products can nevertheless meet the definition of a U.S. industry 

worthy of ITC protection, while U.S. companies that employ thousands of engineers can be deemed foreign competitors whose products can be excluded from U.S. markets. That needs to be remedied. 

My name is Neal Rubin, and I am the Vice President of Litigation for Cisco Systems. Headquartered in San Jose, California, 

Cisco is one of the world’s largest makers of telecom equipment, 

with 36,000 employees here in the U.S. Cisco invested $5.8 billion 

in our most recent year on research and development, 80 percent 

of that in the United States, with the goal of making the future of 

communication faster, more reliable, and more secure. 

Cisco has more than 9,000 U.S.-issued patents. But like every 

successful technology company in the U.S., Cisco has experienced 

an extraordinary increase in patent litigation in the last 5 to 10 

28 

years. Of the dozens of patent infringement lawsuits filed against 

Cisco, virtually all of them are brought by patent assertion entities. 

In the last few years, these entities have begun to sue Cisco in 

the ITC because, under the Supreme Court’s eBay decision, companies that do not build products can no longer obtain injunctions 

when they sue for infringement in district court. Cisco was a respondent in only one ITC case prior to 2010. Since then, we have 

been named five times. Cisco will spend considerably more than 

$20 million this year defending these cases. 

While this Committee did extensive work to reform the patent 

system, resulting in the American Invents Act, most of these reforms do not apply to the ITC. 

Because the ITC is designed to protect U.S. industry, it can issue 

an exclusion order only when a domestic industry related to the 

patent exists or is being established. One way a patent owner can 

establish and satisfy the domestic industry requirement is to show 

substantial investment in exploiting the patent via its licensing efforts. 

But the Tariff Act and its legislative history illustrate that the 

licensing activity Congress intended to satisfy, the domestic industry requirement, is production-driven licensing, meaning efforts 

that promote the adoption and use of the patented technology to 

create new products and new industries. The ITC, however, has 

recognized a new licensing model, one that we call revenue-driven 

licensing. Patent assertion entities engaged in revenue-driven licensing do not design, develop, sell, or import any products. Their 

efforts merely raise the price of existing products. 

The Supreme Court’s eBay decision recognized exactly this policy 

distinction between production-driven licensing and revenue-driven 

licensing, and precluded injunctive relief in district court for parties engaged solely in revenue-driven licensing. The ITC, however, 

is not bound by the eBay decision and has moved in the opposite 

direction, holding the entities engaged solely in revenue-driven licensing meet the domestic industry requirement. 

The result is that these patent assertion entities are increasingly 

turning to the ITC, with the number of filings and the number of 

companies sued spiking dramatically. The data from last year 

shows PAE cases represent 40 percent of the entire 337 ITC docket 

and includes 60 percent of the respondents. 

One Cisco case from earlier this year is illustrative of the problem. The complainant was MOSAID Technologies, a company 

headquartered in Ottawa, Canada, in the business of patent acquisition and enforcement. MOSAID bought a portfolio of patents from 

a failed Israeli company. And in 2011, MOSAID sued Cisco in the 

ITC, seeking to exclude many of Cisco’s products from sales in the 

U.S. because foreign-made components allegedly infringed those 

patents. 

In an effort to manufacture evidence of a domestic industry, 

MOSAID rushed to open its only office in the United States shortly 

before suing. MOSAID had one employee there at the time. 

But that was just the beginning. MOSAID had to rely on the licensing prong to show a domestic industry, and therefore served 

subpoenas on their licensees, requesting documents and testimony 

to support their domestic industry claim. MOSAID then paid these 

29 

licensees to respond to the subpoenas and to testify, even though 

they were obligated by law to do so. 

MOSAID ultimately dismissed its case when its misconduct was uncovered. But in the end, Cisco spent more than $13 million litigating a case that should never been brought in the ITC. And but 

for MOSAID’s misconduct, we could still be there. 

Congress can solve this problem by clarifying that complainants 

in the ITC can establish a domestic industry only through licensing 

that promotes the market adoption of the patented technology. 

Doing so would return the focus of the ITC to its original intent 

and align the ITC with patent law and the Federal courts. PAEs 

could still pursue monetary damages in Federal courts, and domestic manufacturers and universities would continue to benefit from 

the ITC’s protections. What PAEs would lose is the ability to use 

the ITC to threaten companies with the prospect of an exclusion 

order that does not benefit any U.S. industry. 

Thank you for giving Cisco an opportunity to provide input on 

this important topic. I look forward to your questions. 

Mr. GOODLATTE. Thank you, Mr. Rubin. 

[The prepared statement of Mr. Rubin follows:] 

Prepared Statement of Neal A. Rubin, Vice President of Litigation, 

Cisco Systems, Inc. 

Members of the House Judiciary Committee, thank you for the opportunity to testify before this Committee about the detrimental impact patent assertion entities 

are having on U.S. businesses through their ever increasing use of the United 

States International Trade Commission (the ‘‘ITC’’) as a preferred forum for patent 

assertions. This Committee did extensive work to reform the patent system in the 

America Invents Act. However, most of those reforms and the improvements in case 

law that resulted from the Act do not apply to the ITC. 

The ITC is an international trade forum charged with protecting U.S. businesses 

and U.S. consumers from unfair foreign trade practices. The ITC is not a general 

venue for patent disputes. Nonetheless, patent assertion entities who do not develop, do not make, do not sell and import products are now routinely using the ITC 

to assert their patents against U.S. operating companies, imposing great expense 

and burden on them and on U.S. consumers. These assertions in the ITC are injuring rather than protecting our domestic economy. 

Prior to 2006, patent assertion entities (companies whose only business is licensing and litigating patents to make money) essentially did not use the ITC. But by 

2011, patent assertion entity cases comprised one quarter of ITC investigations instituted, and nearly half of all respondents in the ITC were named in patent assertion entity investigations. This year, 40% of the investigations instituted are patent 

assertion entity cases, and they comprise 60% of ITC respondents. This is happening 

because the 1988 Congressional amendments to Section 337 of the Tariff Act of 1930 

have been interpreted to require the ITC to accept complaints from entities that invest in any kind of domestic licensing, including ‘‘revenue-driven licensing.’’ 

‘‘Revenue-driven licensing’’ also is sometimes termed ‘‘ex post facto’’K licensing. In 

other words, it is licensing or attempted licensing that occurs after another company 

has already sold products allegedly using the patented technology. Generally, the 

targeted products were independently developed without knowledge of the patent, 

and it is not uncommon for the patent claims to be drafted after the targeted product has already been sold. This is not the ‘‘production-driven licensing’’ activity, 

where licenses encourage the development and sales of new products, that Congress 

intended would satisfy the ITC’s jurisdiction requirement when it amended the Tariff Act. 

These types of cases have become particularly prevalent in recent years because 

the remedy the ITC may issue—an exclusion order that bars a U.S. company from 

importing its products for sale in the U.S.—has been unavailable to patent assertion 

entities in federal court since 2006, when the Supreme Court decided eBay v. 

MercExchange. In that case, the Supreme Court held that injunctive relief may only 

be awarded to patent holders who satisfy a traditional four prong equitable test for 

an injunction by proving, among other things, that their patent claims cannot be 

30 

1 eBay Inc. v. MercExchange LLC, 547 U.S. 388 (2006). 

adequately satisfied by an award of money damages.1 Patent assertion entities, 

which by definition are looking for money, have no standing to seek injunctive relief 

in federal courts. Because of this, they have turned their sights on the ITC as a 

preferred venue for asserting their patents against U.S. operating companies, in 

order to threaten them with the prospect of exclusion orders that they would not 

be able to receive in a federal court. By filing in the ITC, these entities hope to extract more than the true value of the patented technology from U.S. operating companies. 

The use of the ITC in this manner should not be allowed. Patent assertion entities 

do not engage in the kind of domestic licensing activities that should qualify them 

to use the ITC. Congress did not intend for its trade statutes to allow patent assertion entities who target existing products for licensing revenues to bring their 

claims in the ITC. The ITC is a trade forum intended to protect U.S. industry and 

U.S. consumers. It was not intended to be a forum for a few individuals to extract 

settlements far beyond what they would be entitled to receive if they sued in a U.S. 

court. 

Claims by patent assertion entities can be and are adjudicated in federal district 

courts empowered to award money damages where appropriate. The ITC is an international trade forum intended to protect U.S. industry. Yet under current ITC practice, it is being used with increasing frequency by patent assertion entities to harm 

U.S. industry. My testimony addresses this problem of patent assertion entities’ increasing filing of claims in the ITC and proposes a solution. 

INTRODUCTION TO CISCO

I am the Vice President of Litigation for Cisco, one of the world’s largest developers of networking and telecommunications equipment that powers the Internet, 

with more than $45 billion in annual sales and over 36,000 U.S. employees. Cisco’s 

success as a company is a direct result of our ability to innovate. Our products originally were designed for communications within private or enterprise networks. 

When the public Internet emerged in the mid 1990s, our products found immediate 

application for worldwide use. Today, Cisco’s networking equipment forms the core 

of the global Internet and most corporate and government networks. We invested 

$5.8 billion in the 2011 fiscal year on researching and developing the next generation of networking equipment, with the goal of making the future of communication 

faster, more reliable and more secure. We have invested another $4.1 billion in research and development of our products in the first three quarters of fiscal year 

2012 alone. 

Like all successful technology companies based in the United States, Cisco has experienced a large increase in patent litigation over the past 5–10 years from entities 

that do not design, develop or sell any products. These entities who are suing Cisco 

are not universities, but instead are entities staffed by lawyers and backed by financiers who seek to profit from patent lawsuits. Of the dozens of patent infringement lawsuits currently pending against Cisco, virtually all of them were brought 

by patent assertions entities. 

Over the past two years, patent assertion entities have begun filing claims against 

Cisco in the ITC. In calendar year 2011, approximately 60 ITC investigations were 

initiated by the Commission and Cisco was a respondent in about 5% of all cases 

filed in the ITC in that period. Looking at it another way, Cisco was a named respondent in exactly one ITC case up until 2010 (which was filed by a US practicing 

entity). Since the beginning of 2010, Cisco has been a named as a respondent in 

five matters, nearly all of which were filed by patent assertion entities. 

THE ITC’S ROLE AS AN INTERNATIONAL TRADE FORUM RATHER THAN AN

INTELLECTUAL PROPERTY FORUM

Complaints filed by patent assertion entity are turning the ITC into general patent forum. This is inconsistent with the role of the ITC as provided in its governing 

statute. The ITC is ‘‘an independent federal agency whose strategic operations are 

to determine import injury to U.S. industries in antidumping, countervailing duty, 

and global and bilateral safeguard investigations; direct actions against unfair trade 

practices involving patent, trademark, and copyright infringement; support policymakers through economic analysis and research on the global competitiveness of 

U.S. industries; and maintain the Harmonized Tariff Schedule of the United 

31 

2 United States International Trade Commission Strategic Plan, Fiscal Years 2009–2014, available at http://www.usitc.gov/presslroom/documents/strategiclplanl2009-2014.pdf 

States.’’ 2 The ITC is a trade forum whose mission is to protect U.S. industries and 

U.S. consumers from injuries they suffer from unfair foreign competition. Where appropriate, the ITC may issue an exclusion order to prohibit unlawful importation 

of an infringing product, where importation harms a domestic U.S. industry in articles protected by that patent. 

The ITC is not, however, empowered to hear any and all U.S. patent infringement 

disputes. U.S. federal district courts have exclusive jurisdiction over most patent infringement lawsuits, where they can award relief such as monetary damages. The 

ITC only has authority to adjudicate patent disputes that involve unfair foreign imports that negatively impact U.S. industry. In particular, because the ITC exists to 

protect U.S. industry, the ITC is empowered to issue an exclusion order in a patent 

case only if ‘‘an industry in the United States, relating to the articles protected by 

the patent, . . . exists or is in the process of being established.’’ (19 U.S.C. Section 

1337). A patent owner can satisfy this domestic industry requirement in a patent 

case in one of three ways: 

• By showing significant investment in plant and equipment in the U.S. related 

to an article protected by the patent; 

• By showing significant employment of labor or capital in the U.S. related to 

an article protected by the patent; or 

• By showing substantial investment in exploiting the patent via engineering, 

R&D or licensing in the U.S. 

It is the third method of satisfying the domestic industry requirement—exploiting 

patents via ‘‘licensing’’ investments in the U.S.—that I will focus on in these comments. In particular, patent assertion entities, which do not design, develop, make, 

or sell any products, often rely upon the statute’s reference to a ‘‘substantial investment’’ in ‘‘licensing’’ of articles protected by the patent to claim that they have a 

domestic U.S. industry in need of protection. In addition, such patent assertion entities often rely upon the domestic activities of their unwilling licensees (unwilling because most such licenses are agreed upon in settlement of litigation or after the licensee has been threatened with patent litigation on its existing products). 

But this statutory language, added by Congress in 1988, should not apply to the 

‘‘revenue-driven licensing’’ model. Patent assertion entities engaged in ‘‘revenuedriven licensing’’ target already existing products for licensing revenues. Congress 

added the ‘‘licensing’’ language to the Tariff Act in 1988 to permit a domestic industry based upon a substantial investment in production-driven licensing by patentees, such as universities or U.S. production companies, who had made substantial investments in developing technology and engaged in ‘‘production-driven licensing’’ to commercialize that technology—licensing efforts that promote the adoption 

and use of a patented technology and create new products and industries. A ‘‘production-driven license’’ generally is between two willing parties; one party that developed the technology and another party that wants to use the technology to create 

its own products. ‘‘Revenue-driven licensing,’’ by contrast, seeks to use patents, not 

as a basis for creating new goods, but rather for extracting licensing fees from others for sales of products that were already in the marketplace. ‘‘Revenue-driven licenses’’ generally involve an unwilling party who developed its products on its own 

and then entered into a subsequent license, often during or under threat of litigation. Further, in many of these cases, the patent holder did not even develop the 

technology, but instead purchased the patents from the original inventor. 

We believe Congress intended to protect a domestic U.S. industry of new products 

created through licensing, not to create a windfall for those who seek to make 

money from suing operating companies after those companies have created and developed new products through their independent efforts and investments in the 

United States. 

INCREASING USE OF THE ITC BY PATENT ASSERTION ENTITIES HARMS U.S. INDUSTRY

The increasing use of the ITC by patent assertion entities (entities whose business 

is ‘‘revenue-driven licensing’’) appears attributable in substantial part to a Supreme 

Court case that has made real progress in balancing the enforcement of patents in 

the federal district courts, but that has been held to not apply to the ITC. In 2006, 

the U.S. Supreme Court issued its eBay v. MercExchange decision which made clear 

that patentees who can be adequately compensated with monetary damages, such 

as a reasonable royalty, should not be awarded permanent injunctions as a matter 

32 

3See, e.g., Certain Multimedia Display and Navigation Devices and Systems, Components 

Thereof, and Products Containing Same, Inv. No. 337–TA–694, Comm’n Op. at 15 (Aug. 8, 2011). 4 Id. 

5 U.S. International Trade Commission, Budget Justification Fiscal Year 2012 at p. 21, available at http://www.usitc.gov/presslroom/documents/budgetl2012.pdf. 6 U.S. International Trade Commission, Supplement to the Strategic Human Capital Plan 

2009–2013, January 2011, available at http://www.usitc.gov/intellectuallproperty/documents/ 

2009l13lSHCP.pdf 7FTC, The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition, 

29–30 (Mar. 2011). 

of course as had been the past practice. Rather, district courts should apply a four 

part test to evaluate the equities of granting injunctive relief. Under that test, patent assertion entities, which exist only to assert patents and collect money, do not 

have standing to obtain a permanent injunction. While they may pursue a reasonable royalty, they cannot use the threat of a permanent injunction to unfairly coerce 

U.S. operating companies to pay exorbitant and unreasonable royalties. 

Since the eBay decision issued, patent assertion entities have sought to try to find 

new ways to impose the threat of an injunction against U.S. operating companies, 

in order to extract excessive royalties. Because the ITC may award exclusion and 

cease and desist orders in patent proceedings, these entities increasingly have used 

the ITC as a preferred forum for patent assertion. Indeed, prior to the eBay decision, 

patent assertion entities essentially did not use the ITC. However, the year following that decision, the ITC instituted four investigations brought by patent assertion entities, and the trend has continued ever since. 

Although many companies believe that the domestic industry provisions of our 

trade statutes should prevent patent assertion entities from routinely using the ITC 

this way, case law has recognized a licensing model called ‘‘revenue-driven licensing’’ as being within the ambit of the statute.3 Although the ITC has concluded that 

‘‘revenue-driven licensing’’ is entitled to ‘‘less weight’’ than the ‘‘industry-creating, 

production-driven licensing activity that Congress meant to encourage’’ in its statute, ITC case law interprets the Tariff Act of 1930, as amended, as recognizing all 

licensing including ‘‘revenue-driven licensing.’’ 4 Further, the ITC may consider the 

U.S. activities of such unwilling revenue-driven licensees as part of the domestic industry of the licensor. In light of this expansive interpretation of the licensing provision of the ITC statute, patent assertion entities routinely use the ITC as a preferred forum for their disputes, relying upon ‘‘revenue-driven licensing’’ to claim a 

substantial investment in licensing, rather than the ‘‘production-driven licensing’’ 

intended to be protected by Section 337. 

Statistics unquestionably bear this out. Last year, we estimate that approximately 1⁄4 of all ITC cases were filed by patent assertion entities, with the ITC reporting 

record breaking levels of ITC case filings. And, this figure understates the actual 

impact of these ITC cases because approximately 50% of all respondents named in 

an ITC investigation last year were respondents in ITC investigations filed by patent assertion entities. Further, based on the data available for this year, patent assertion entity cases account for over 40% of the entire 337 ITC docket and respondents in those cases account for over 60% of all respondents. Consistent with these 

observations, in the ITC’s Budget Justifications for every year from FY 2008 to FY 

2012, the ITC has noted its expanding case load, and has attributed this in substantial part to the availability of exclusionary relief in the ITC. In its Budget Justification for FY 2012, the ITC specifically referred to the eBay case as a contributing 

factor for this difference in remedies and the attractiveness of the ITC as a forum 

for patent suits.5 The ITC has become so inundated with patent proceedings that 

it has noted the exceptional demands patent cases are placing on its budgets and 

staff, for example, supplementing its Human Capital Plan for 2009–2013 to change 

its procedures to reflect a record breaking increase in patent litigation.6 Likewise, 

the FTC reported in 2011 that the eBay decision may be the cause of this activity 

and suggested that the ITC should only find domestic industry where there is a production-driven licensing activity.7

This increased use of the ITC by patent assertion entities is detrimental to the 

U.S. economy in many ways, and I will discuss one example involving Cisco below. 

Patent assertion entities—often staffed by lawyers and backed by financiers—purchase patents for the sole purpose of asserting them against operating companies 

as a tax on an operating company’s research and development efforts. These entities 

are engaged in ‘‘revenue-driven licensing.’’ Although ‘‘revenue-driven licensing’’ is 

recognized by the ITC as being entitled to ‘‘less weight’’ than the ‘‘industry-creating, 

production-driven licensing activity that Congress meant to encourage,’’ the ITC still 

permits ‘‘revenue-driven licensing’’ to qualify for a domestic industry because the 

case law suggests all licensing activities qualify. ‘‘Revenue-driven licensing,’’ howVerDate Aug 31 2005 10:46 Nov 28, 2012 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6621 H:\WORK\IP\071812\75152.000 HJUD1 PsN: DOUGA
33 

8 ITC Patent Disputes Continue to Provide Steady, Profitable Work (Law.com, 2009). 

ever, results in no new products; it merely raises the prices of existing products. 

Firms engaged in ‘‘revenue-driven licensing’’ are not a domestic industry that needs 

to be protected from foreign competition. 

In addition to burdening U.S. industries and harming U.S. consumers, these cases 

also are straining the resources of the ITC. Patent assertion entity litigation has 

shifted the ITC from an administrative agency charged with protecting U.S. manufacturers and securing U.S. jobs to a generalized intellectual property court routinely used by patent assertion entities to place a tax on the development and sales 

of actual products by U.S. based companies. Patent assertion entity cases undermine the ITC’s purpose of protecting domestic industry from unfair foreign competition. 

CISCO’S RECENT HISTORY IN THE ITC ILLUSTRATES THE DISPROPORTIONATE IMPACT

ITC CASES CAN HAVE ON OPERATING COMPANIES

Patent assertion entity litigation before the ITC is particularly injurious to U.S. 

operating companies and the domestic economy because of the disproportionate costs 

such litigations impose. For example, although ITC cases comprise only about 10% 

of Cisco’s overall litigation docket, these few cases account for almost half of our 

overall litigation budget. Cisco spends more than ten million dollars defending individual actions in the ITC. Cisco’s experience in this respect is consistent with experiences described in legal trade journals, such as the American Lawyer’s law.com 

publication, which reported back in 2009 that litigating just one ITC case can ‘‘easily cost $10 million or more.’’ 8

ITC cases are disproportionately expensive because the ITC allows for broader 

discovery than do the district courts. For example, the Federal Rules of Civil Procedure limit the number of interrogatories and substantive requests for admissions 

that can be asked of a party to 25, and limit the number of depositions of a side 

to ten. The ITC does not. In a recent ITC proceeding, a complainant asked Cisco 

over 7,000 Requests for Admission (6,975 more than a district court would permit) 

that had to be answered in short time frames. Similarly, the ITC does not limit the 

number of interrogatories a party can ask, although some Administrative Law 

Judges permit 175 interrogatories per party, which is still seven times the amount 

permitted by the Federal Rules for a district court matter. Depositions are typically 

not limited in number, either. In a recent case, 22 Cisco witnesses were deposed in 

28 days, more than double the ten allowed by the Federal Rules. Cisco also produced over 3.5 million pages of documents in an extremely short time frame required by the ITC rules. 

These enormous costs are becoming routine in cases brought by patent assertion 

entities. A recent example of such a case involving Cisco is Investigation No. 337– 

TA–778, In the Matter of Certain Equipment for Communications Networks, Including Switches, Routers, Gateways, Bridges, Wireless Access Points, Cable Modems, IP 

Phones, and Products Containing Same. Although we believe that the ALJ in charge 

of our Investigation did an excellent job adjudicating the matter—taking unprecedented steps to address misconduct by our opponent—the matter still consumed 

over ten million dollars in legal fees and costs, and imposed countless hours of business distraction on our company. 

Complainant in the 778 Investigation was Mosaid Technologies, a company 

headquartered in Ottawa, Canada, that at the time of filing was publicly traded on 

the Canadian stock exchange, and in the business of patent acquisition and enforcement. Mosaid purchased a portfolio of patents from a failed Israeli company and 

then sent Cisco an unsolicited letter claiming that Cisco needed to license the patents. In 2010, after Mosaid accused Cisco of infringing these patents, Cisco filed a 

declaratory judgment action in the United States District Court for the District of 

Delaware seeking to establish that its products did not infringe and that the patents 

were invalid. In May 2011, apparently unhappy with what Mosaid claimed to be the 

slow pace in the district court, Mosaid brought claims against Cisco in the ITC accusing Cisco of infringing some of the same patents-in-suit in Delaware. Mosaid 

claimed, among other things, that it had a domestic industry based upon its licensing activities for the patents-in-suit and the activities of its alleged licensees. And, 

in a transparent attempt to enhance its domestic industry case (given that it is a 

Canadian company), Mosaid rushed to open its only ‘‘office’’ in the United States— 

in Plano, Texas—shortly before filing its ITC complaint against Cisco. But that was 

just the beginning. Mosaid had to rely on the ‘‘licensing’’ prong to show a domestic 

industry, so it Mosaid served subpoenas on two third parties, including at least one 

of its licensees, requesting documents and testimony from them to support Mosaid’s 

34 

domestic industry claims. In a further attempt to bolster its claims, Mosaid improperly gave inducements to these two third parties in order to generate ‘‘goodwill’’ 

from them to respond to the subpoenas that they were legally obligated to respond 

to under the law. 

After Cisco’s counsel learned of these facts, Cisco filed a motion to preclude 

Mosaid from relying on any evidence connected to Mosaid’s misconduct. The ALJ 

ruled in Cisco’s favor, finding that Mosaid improperly compensated third parties to 

obtain evidence from them in support of Mosaid’s claims. The ALJ then took an unprecedented step of ordering the trial of Mosaid’s case to proceed first on domestic 

industry, expressing skepticism over whether Mosaid could establish a domestic industry in light of the sweeping exclusion of evidence. After several of these orders 

had issued, on the eve of trial Mosaid dismissed its entire ITC case—sending the 

parties back to Delaware where they had started. Cisco had by then spent thirteen 

million dollars litigating in the ITC. Cisco produced in excess of 3.5 million pages 

of documents, responded to 121 interrogatories (five times the amount permissible 

in a district court case), and presented 22 of its personnel for depositions over a period of 28 days (more than double the number permitted in a district court case), 

all within an expedited time frame. 

Although Cisco greatly appreciates the time and attention that the ALJ put into 

the Mosaid matter, and the public orders that preceded the dismissal, Cisco believes 

that as a matter of public policy this case should not have been before the ITC in 

the first place. Mosaid is a Canadian company; other than its purported Plano office 

opened just before the ITC complaint was filed, it has no U.S. presence. More important, it has no product business and so it sought to rely upon licenses it entered 

into after it purchased the patents-in-suit. If the current proposed amendments had 

been in place, Mosaid would not have been able to make even a colorable argument 

that it satisfied the domestic industry requirement. 

This matter caused Cisco to spend millions of dollars that could otherwise have 

supported the research and development of Cisco’s own products. Every dollar spent 

on ITC litigation detracts from Cisco’s ability to employ people in the United States 

to develop new products. And Cisco is but one example. Last year, over 230 respondents in the ITC were named in investigations initiated by patent assertion entities. 

This trend harms U.S. competitiveness, U.S. industry and U.S. consumers, and detracts from the ITC’s guiding principle to protect U.S. competitiveness, U.S. industry and U.S. consumers from unfair foreign competition. 

CONGRESSIONAL LEGISLATION CLARIFYING WHEN LICENSING MAY SUPPORT A DOMESTIC INDUSTRY AND CONFIRMING APPLICABILITY OF THE EBAY FACTORS WOULD BEN- EFIT U.S. INDUSTRY

Cisco appreciates the efforts by the ITC—including its Commissioners, Administrative Law Judges, Office of General Counsel, and Staff—to handle a burgeoning 

caseload of patent infringement proceedings and the ITC’s focus on domestic industry and public interest issues. Cisco also appreciates the ITC’s ongoing efforts to explore ways to reduce costs such as developing electronic discovery guidelines. 

Cisco believes there is a simple solution to the problem posed by patent assertion 

entities and their ‘‘revenue-driven licensing’’ models. Specifically, Congress should 

amend Section 337 of the Tariff Act of 1930 to clarify that complainants in the ITC 

cannot rely on ‘‘revenue-driven licensing,’’ or the activities of revenue-driven licensees, to satisfy the domestic industry requirement and gain access to the ITC. Instead, a domestic industry can be established only through licensing efforts that promote the market adoption and use of the patented technology, i.e., where the license 

was entered into before the licensee’s adoption and use of the patented technology. 

The Federal Trade Commission has made a similar recommendation in its March 

2011 Report, The Evolving IP Marketplace: Aligning Patent Notice and Remedies 

with Competition. Congress should state that the ITC should only grant exclusion 

orders in accordance with traditional equitable factors as set forth in eBay. Doing 

so would align the ITC with traditional principles of equity set forth in the Supreme 

Court’s eBay decision. 

Patent assertion entities would still have federal courts available to them and 

could still pursue fair monetary damages if they showed ownership of a valid and 

infringed patent and an entitlement to damages. And domestic manufacturers and 

universities would continue to benefit from the ITC’s protections. What patent assertion entities would lose is the ability to use the ITC to threaten companies with 

the prospect of an exclusion order, and the certainty of an extraordinarily expensive 

patent litigation, to obtain settlements far in excess of the true value of the patented technology. This litigation tactic does not benefit any U.S. industry. 

35 

Mr. GOODLATTE. Mr. Cassidy, welcome. 

TESTIMONY OF BERNARD J. CASSIDY, GENERAL COUNSEL 

AND EXECUTIVE VICE PRESIDENT, TESSERA TECHNOLOGIES, INC. 

Mr. CASSIDY. Thank you, Chairman. 

Chairman Goodlatte, Ranking Member Watt—— 

Mr. GOODLATTE. Mr. Cassidy, you may want to turn on that 

microphone and pull it close. 

Mr. CASSIDY. Thank you. 

Chairman Goodlatte, Ranking Member Watt, and Members of 

the Subcommittee, my name is Bernard Cassidy. I am the Executive Vice President and General Counsel at Tessera Technologies, 

Inc., headquartered in the heart of Silicon Valley in San Jose, California, with operations in Charlotte, North Carolina, and elsewhere. I deeply appreciate this opportunity to speak before you regarding the importance of the ITC to my company and to the innovation economy. 

Tessera is a cofounder of the Innovation Alliance, a coalition of 

companies seeking to enhance America’s innovation environment 

by improving the quality of patents and protecting the integrity of 

the U.S. patent system. The Judiciary Committee and its Members 

appreciate the importance of strong intellectual property law to the 

U.S. economy. We applaud your leadership in helping to build a 

legal system that encourages investment and innovation. The IA 

welcomes a discussion of the role of the ITC in safeguarding American industries from unfair trade. Nonetheless, we are skeptical 

about many of the changes being discussed today. We believe that 

the long-term interests of our innovation-based economy outweigh 

the near-term interests of a few important companies. 

Licensing U.S. intellectual property strengthens the economy and 

improves our trade balance. Section 337, the statute that regulates 

unfair practices in import trade, is a key element of the Nation’s 

trade laws and ensures that American innovators, including companies that license their patents, will not be harmed by the importation of goods that infringe valid U.S. patents. 

Permit me to briefly address four issues. 

First, the domestic industry inquiry. To be able to pursue an action in the ITC, a patent holder must be or be in the process of 

establishing a domestic industry. What is clear to us is that the 

ITC has interpreted this term of art in a balanced manner. Harnessing its administrative expertise, it has consistently remained 

mindful of the 1998 amendment’s intent to liberalize Section 337, 

but also remained equally vigilant in not allowing an expansion of 

the domestic industry test beyond the intent of Congress. Congressional action, despite the real concerns of some of my fellow panelists, should be reserved for a time when there is strong disagreement with the interpreted efforts of the ITC. 

Second, public interest factors. Section 337 states that the Commission, quote, ‘‘shall,’’ end quote, exclude goods it has found to be 

infringing from entry into the United States, quote, ‘‘unless,’’ end 

quote, it finds that relief is not appropriate in light of four public 

interest factors set out in the statute. 

36 

Importantly, even if the ITC decides that remedy is appropriate, 

the President has the power to prevent the remedy from going into 

effect if he or she determines that a remedy is not appropriate for 

what the statute refers to as, quote, ‘‘policy reasons,’’ an openended, undefined term. In short, the statute provides a remedy 

with robust built-in safeguards against misuse. 

Moreover, in November of 2011, about 8 months ago, the ITC 

issued new rules that allowed the administrative law judges to develop full records about public interest factors early in each case. 

This new and early focus on public interest factors supplements the 

multiple opportunities that interested parties have today to comment during the full commission review at the end of the case. We 

believe it would be premature for Congress to legislate on the process until the ITC has had an opportunity to determine whether it 

sufficiently and fairly addresses the concerns voiced about these 

factors. 

Third, the eBay factors. The argument that the ITC should be required to apply the so-called eBay standards for injunctions used 

in U.S. district court ignores the fact that the ITC and district 

courts are markedly different venues with different jurisdictions 

and different powers, necessitating different standards. Mandating 

application of eBay would substantially weaken the power of the 

ITC to deal with unfair trade practices. 

Fourth, standard-essential patents. A blanket a priori rule prohibiting or limiting the availability of exclusion orders to holders 

of patents that may be standard-essential patents would tip the 

balance in favor of infringers, to the detriment of innovation and, 

ultimately, consumers. Such proposals would essentially create a 

compulsory licensing regime and are contrary to the intent of SSO 

policies that encourage good-faith bilateral negotiations. One must 

consider whether innovators would have any incentive to participate in an SSO if their patents were effectively made unenforceable. That would result in technologically inferior standards and 

reduce investments in research and development, postponing innovation and competition that are the drivers of U.S. economic 

growth. 

In conclusion, the ITC has the capability, the resources, and the 

track record to permit it to resolve the difficult questions being examined by this Committee and to apply the law. If there are specific examples of where the ITC has erred that warrant attention, 

the Innovation Alliance will be happy to work with Congress to develop consensus solutions. But, to be clear, we are generally of the 

view that the long-term interests of our innovation economy and 

the public better will be better served if the ITC is permitted to fulfill its obligations pursuant to existing law. 

Thank you. 

Mr. GOODLATTE. Thank you, Mr. Cassidy. 

[The prepared statement of Mr. Cassidy follows:] 

37 


BJC-1.eps

Prepared Testimony ofBcrnard J. Cassidy 

Executive Vice President & General Counsel, Tessera Technologies, Inc. 

July 18,2012 

Before the House Committee on the Judiciary 

Subcommittee on Intellectual Properly, Competition and the Internet 

Hearing on: The International Trade Commission and Patent Disputes 

1 
38 


BJC-2.eps

Chairman Goodlatte, Ranking Member Watt, and Members of the Subcommittee, 

My name is Bernard 1. Cassidy, and I am Executive Vice President and General Counsel at 

Tessera Technologies, Inc, which is headquartered in the heart of Silicon Valley, in San Jose, 

California. We have facilities in Charlotte, North Carolina, Rochester, New York, and Arcadia, 

California as well as in Europe and Asia. I deeply appreciate this opportunity to speak before 

you regarding the importance of the International Trade Commission to my company and our 

innovation economy. 

The Tessera Story 

Tessera Technologies, Inc. is a small publicly-traded holding company that traces its roots 

to three former mM technology pioneers who set out on their own in 1990. Tessera, Inc., our 

oldest subsidiary, pioneered chip-scale packaging solutions for the semiconductor industry. We 

have become a leader in semiconductor packaging via our inventions which are now widely 

adopted by the semiconductor industry. This technology enables electronics devices such as cell 

phones to become as small as they are today. 

Today, through subsidiaries, we operate two businesses: Intellectual Property and 

DigitalOptics. Our Intellectual Property business generates revenue from patented innovations 

through license agreements with semiconductor companies and outsourced semiconductor 

assembly and test companies. Our DigitalOptics business offers breab:through imaging 

technologies and products will that bring full-featured digital still camera capabilities to the 

mobile phone camera market through its miniaturized camera module solutions. 

None of this would have been possible had we not had a strong patent system to protect our 

inventions and reward our innovators. Maintaining a strong patent system is essential to our 

continuing success. 

The Innovation Alliance 

Tessera Technologies, Inc. is a co-founder of the Innovation Alliance CIA"), a coalition 

of companies seeking to enhance America's innovation environment by improving the quality of 

patents and protecting the integrity of the US. patent system. The Innovation Alliance represents 

innovators, patent owners and stakeholders from a diverse range of industries that believe in the 

critical importance of maintaining a strong patent system. Many Innovation Alliance members 

also manufacture and/or sell products and services that use not only their own patents, but those 

of third parties as well. The 1'\'s positions on a strong patent system - on the importance of 

high-quality patents, the pro-innovation and pro-competitive beneJits of voluntary 

standardization efforts and bilateral negotiation of licenses and cross-licenses among 

standardization participants - are not new. 

2 
39 


BJC-3.eps

The Judiciary Committee and its Members appreciate the importance of strong 

intellectual property law to the u.s. economy. We applaud your leadership in safeguarding our 

Nation's intellectual property, thereby helping to build a legal system that encourages 

investment in innovation. The Innovation Alliance welcomes a discussion of the role of the IrC 

in safeguarding American industries from unfair trade. We believe that the Committee will 

conclude that the long-term interests of our innovation-based economy outweigh the near-tenn 

interests of a few. 

Licensing us. intellectual property strengthens the economy and improves our trade 

balance. Section 337, the statute that regulates unfair practices in import tTade, is a key element 

of the nation's trade laws and ensures that American innovators, including licensing companies, 

will not be hanned by the importation of goods that infringe valid and enforceable U.S. patents. 

Importers of foreign made products - both US. based and foreign companies- have appealed to 

Congress for several changes to Section 337 that would, in effect, limit access to the ITC and/or 

weaken the powers of the ITC to deal with cases of unfair trade practices. Weakening the lTC's 

jurisdiction would benefit foreign economies, foreign competitors, and other foreign 

manufacturers to the detriment of the u.S. economy. Although one can appreciate the near-term 

concerns expressed by some US. -based technology companies, a discussion of issues affecting 

the HC should be undertaken with the long view in mind. Specifically, weakening Section 337 

to disadvantage patent holders relative to infringing importers will retard American innovation, 

weaken the trade position of the United States, and hurt American innovation and manufacturing 

hy protecting infringing products manufactured in other countries. 

The International Trade Commission 

The U.S. International Trade Commission ("ITC,,)1 is a federal administrative bodv that 

"administer[sJ US. trade remedy laws within its mandate in a fair and objective manner.,,1 

Among those trade laws, the lTe administers Section 337 of the Tariff Act of 1930, as amended 

("Section 337"), which makes the JTC responsible for regulating "unfair practices in import 

trade'" To enable the HC to perform this regulatOlY duty, Section 337 vests the lTC with 

authority to issue orders excluding ariicles from entry into the United States where those articles 

are imported utilizing (1) unfair methods of competition and unfair acts or (2) infringement of 

U.S. intellectual property rights. 

Section 337 was enacted in 1930, the decade that expanded the role offederal 

administrative agencies. From the onset of this era, a central pillar supporting administrative 

expansion was the necessity of regulating technical fields that demanded expertise beyond that 

fOLmd in the legislative and judicial branches of government. Stemming from this longstanding 

policy, Congress and the federal courts have accorded administrative agencies deference and 

discretion to implement their prescribed regulatory tasks as reOective of their heightened 

1 The ITC was established in 1916 as the "Tariff Commission. ' Its name was changed to the International 

Trade Commission in 1974. 

']vfission Slalemenl, U.s. l"(L TR.ADE COMM'N, 

htlp:!/www.usitc.gov/press_room/missionstatement.htm (last visited May 3.2(12). 

319 U.Se. § 1337 (2006) 

3 
40 


BJC-4.eps

expertise. In light of this practice, the lTC's interpretation of Section 337 should not be 

disturbed, unless or until Congress finds fault with the Commission's interpretation of the law. 

The 1988 Amendments Recognized the Importance ofLicensimo Our Economy 

Prior to amendment in 1988, Section 337 treated all unfair import trade practices alike. 

By the 1980s, however. manufacturing was shifting abroad, and the United States was 

increasingly becoming a technology-based economy. Therefore, Congress amended Section 337 

in 19884 to renect these economic realities. Importantly, the 1988 amendments restructured 

Section 337 to treat intellectual property infringement separately-and more liberally-from 

other types of unfair acts. 

Particularly noteworthy among these changes, the 1988 amendments eased the domestic 

industry requirement for Section 337 investigations based on intellectual property rights. First, 

Congress removed the "injury" requirement, therehy eliminating any test of economic harm to 

the domestic industry. Second, a new provision, § 1337(a)(3)(C), provided that a domestic 

industry could be establisbed wbere there was "substantial investment in [tbe asserted intellectual 

property's] exploitation, including engineering, research and development or licensing"S 

Until quite recently, the procedural posture of many Section]37 investigations prevented 

the HC from fully defining the boundaries of new § 1337(a)(3)(C)6 How·ever, in more current 

Section 337 investigations where parties have attempted to establish domestic industries based 

exclusively upon licensing, the lTC has been utilizing its administrative expertise to determine, 

on a case-by-case basis and in a series of balanced and carefully-considered Commission 

opinions, which entities Congress sought to protect in enacting the 1988 amendments. 

Four Key Issues 

The remainder of this written submission will brieny address four issues of recent interest 

to the lTC patent community: domestic industry, public interest factors, the so-called eBay 

principles, and standard-essential patents. I incorporate by reference the attached papers recently 

published by the Innovation Alliance which deal with the latter two issues in more detail. 

The lTC's Ongoing Development of the Domestic Industrv Inquiry Under § 

1337(a)(3)«( ) 

The first notable instance where the lTC thoroughly elaborated upon the standard for 

establishing a domestic industry based upon licensing occurred twenty years after the 1988 

amendments, in Certain Stringed Afusical Instruments and Components Thereof ("Stringed 

, See Omnibus Trade and Competitiveness Act of 1988. 102 Stat. 1107. Pub. L. 100-418 (Aug. 23, 1988). 

5 lei. (cmphasis added). hl addition to this new statutory provision, the 1988 amcndments retained the 

ability of a complainant to establish a domestic industry under Section 337 hy demonstrating the more 

traditional manufacturing-based clements. 

, Indeed, many investigations where the issue had arisen settled prior to the ITC having an opportunity to 

refine the meaning of this ne,v provision in an authoritative Commission Opinion. 

4 
41 


BJC-5.eps

InstrumeTlts ,,). 7 In Stringed Instruments. the complainant, an individual inventor. invested 

$8,500 on research and development over multiple years and made numerous unsuccessful 

attempts to license the asserted patents at trade shows. At issue was whether this investment in 

licensing and research and development was "substantial" enough to establish a domestic 

industry under § 1337(a)(3)(C). 

Upon a thorough analysis of Section 337's legislative history. S the lTC stressed that the 

proper inquiry is highly "fact-dependent," and set forth the following guidelines: 

There is no minimum monetary expenditure that a complainant must demonstrate 

to qualify as a domestic industry under the 'substantial investment' requirement 

of[§ 1337(a)(3)(C)]. . [SJhowing the existence ofa domestic industry will 

depend on the industry in question, and the complainant's relative size. 

[TJhere is no need to define or quantify the industry itself in absolute 

mathematical terms 9 

After carefully applying the facts to this standard, the HC held that that the individual inventor 

had not made a showing "of substantial investment of the type described in Section 

337(a)(3)(c).,,10 However, based upon its earlier statutory analysis, the He cautioned (hat 

"access to section 337 should not be foreclosed to individual inventors simply because their 

operations or activities are not on the scale of many corporations or universities.'·ll 

In 2010, in Certain Coaxial Cable Connectors and Components Thel'eoj"Containing 

Same ("Coaxial Cable "), 12 the HC further developed its interpretation of the 1988 statutory 

provision. At issue was whether expenses incurred in prior patent litigation could be considered 

investments in licensing and, thus, help establish a domestic industry under § 1337(a)(3)(C). 

After thoroughly examining Section 337's text and legislative history, 13 the HC determined that 

litigation expenses, per se, could not establish a domestic industry under ~ 1337(a)(3)(C). 

However, the Commission also held that, if prior litigation expenses exhibited a clear nexus to 

the complainant's concerted eff0l1s to license the asserted patent they could be considered as 

one factor, among others, as to whether there was substantial investment in exploiting tue patent 

via licensing efforts. 14 Thus, Coaxial Cable-carefully interpreting Section 337's text and 

7 337-TA-586, Comm'n Op. (May 16.2008). 

R See id. at 14-16 (analyzing House and Senate reports pert-lining to Section 331's 1988 amendments). 

9 1d. at 25-26. 

10 Id. at 26. 

11 !d. at 27. 

12 337-TA-650, Comm. Op .. (Apr. 14. 2010), a[rd. John Mezzalingua Assocs., Inc. v. Int'! Trade 

Con1111'n (Fed. Cif. 2012) 

13 Jd. at 44-50. 

14 The Commission provided the following guidance as to whether a sufficient nexus between litigation 

expenses and licensing efforts may exist: 

Depending on the circumstances, [licensing activitiesl may include, anlOng other things. 

drafting and sending cease and desist letters, tiling and conducting a patent infringement 

litigation. conducting settlement negotiations, and negotiating, drafting and executing a 

license. The mere fact however. that a license is executed docs not mean that a 

complainant can necessarily capture all expenditures to establish a substantial investment 

5 
42 


BJC-6.eps

legislative history-deliberately built upon Stringed Instruments, allowing for interpretation of 

the statute to develop as additional factual nuances arose in future investigations. 

The IIC further honed its interpretation of § 1337(a)(3)(C) in Certain Multimedia 

Display and Ncn'igatioll Devices and Systems, Componenrs Thereof, and Products Containing 

Same CNaviga{ion f)el'ices,,).l5 In NaI'igation /Jevices, the primary issue was whether a 

complainant could establish a domestic industry based upon its investment in licensing its entire 

patent pOJ1folio without allocating expenditures to licensing the asserted patents. Despite public 

comments advocating this broad approach, the IrC determined that Congress did not intend 

Section 337 to encompass such a liberal interpretation. Instead, the Commission stated that the 

test is governed by "the strength of the nexus between the licensing activity and the asserted 

patent."l6 Specifically, the Commission analyzed the complainant's patent portfolio and related 

activities in three areas to determine whether a "substantial investment" had been made to exploit 

the patents at issue, namely: (1) "the relative importance or value of the asserted patent within 

the pOltfolio"; (2) the extent to which activities are "sole{v related to licensing" versus "serv[ing] 

multiple purposes,"; and (3) "the extent to which the complainant conducts its licensing 

operations in the United States, including the employment of US. personnel and utilization of 

U.S. resources in its licensing activities."l7 Consequently, the ITC determined that the burden is 

on the complainant!o "present evidence that demoflstra{es the extent of the nexus between {he 

asserted patent and the complainant's licensing activities and investments." 18 

With respect to the "substantial investment" test, the Commission stated that "[tJhe type 

of efforts that are considered a 'substantial investment' under 337(a)(3)(C) will vary depending 

on the natllfe of the industry and the resources of the complainant.,,]9 The Commission also 

in the exploitation of the patent. A complainant must clellr~)' link each llctiviZI' to 

licensing efforts concerning the asserted patent. 

ld. at 43-44 (emphasis added). Ultimately. the Commission remanded the investigation to the 

AU for determination of whether the complainant's litigation expenses exhibited a sumeient 

nexus to licensing efforts. A portion of the prior litigation expenses satisfied the nexus test. 

However, thev were not suftlcientiy "substantial" under 1337(a)(3)(C). 

15 Inv. No. 337-TA-694, Conllll'n Op. (Aug. 8,2011). 

16 lei. at 9. 

17 fd. at 9-15. TI,e nexus between the licensing activity and the asserted patent, as wen as the nexus 

between the activity and the U.S., is "fact-focused and ease-specitlc." Id. at 'l, 14. 

18 ld. (emphasis added). In so holding. the lTC provided a list of non-exhaustive considerations to better 

guide ti,tul"c litigants: 

In determining whether there is a strong enough nexus between an asserted patent and a 

larger patent portfolio as a whole, the lTC identitled the following non-exhaustive 

factors: "( I) the number of patents in the portfolio, (2) the relative value contributed by 

the asserted patent to the portfolio, (3) the prominence of the asserted patent in licensing 

discussions, negotiations and any resulting license agreement. and (4) the scope of 

technologv covered by the portfolio compared to the scope of the asserted patent. 

lei. at 10. 

19 ld. at 15. The ITC also provided a list of several additional factors to take into consideration: 

Other factors that might be relcvant in determining \\·hether a complainant" s investmcnt is 

substantial are (1) the existence of otiler types of 'exploitation' of the asserted patent such 

6 
43 


BJC-7.eps

emphasized that investment in licensing "must be domestic, i.e., it must occur in the United 

States,,20 Ultimately, the Commission found that the complainant had not made a substantial 

U.S. investment in exploitation of the specifically asserted patents through its licensing activities. 

By carefully analyzing and applying the statutory language, the Commission detenllined that the 

complainant's activities did not create the type of domestic industry envisioned by Congress. 

The Commission's most recent comments on the economic prong of the domestic 

industry analysis came in Cerlliin Uquid Crystal Dilplay JJevices, Ineluding Monilors, 

Televisions, 1vlodu{es, and Components Thereof ( "Liquid Ciystal Display Devices '')21 and 

demonstrate that the lTC's balanced interpretation of § I 337(a)(3)(C) continues. In Uquid 

Crystal JJj,lplay /)el'ices, the complainant purchased a substantial patent portfoliu covering a 

broad array of technology and subsequently tIled parallel suits at the district COUlt and the ITC 

against a number of respondents. The Commission was tasked with determining which orthe 

complainant's activities and investments related to its efforts to license the patents at issue in the 

suit and ultimately detennined that only the "activities relating to [complainant's] LCD licensing 

program, including employee time, facility use, travel, and product acquisition," qualified as 

"substantial investment" under Section 337(a)(3)((:)22 The Commission began its analysis by 

reiterating the guidance laid out in NaFigation Devices, that "the complainant must demonstrate 

that a particular activity: (I) relates to the asserted patent; (2) relates to licensing; and (3) 

occurred in the United States.,,2] Importantly, the Commission determined that expenses and 

activities related to the purchase of patent portfolios, litigation of underlying 337 investigations 

and parallel district court actions, and reexamination of the patents at issue did not qualify as 

exploitation through licensing2 -l 

Specifically, the Commission reasoned that the act of purchasing a patent portfolio "is 

solely related to ownership, not licensing," and noted that "Congress clearly stated that it did not 

intend mere patent ownership to constitute a domestic industry ,,25 Similarly, the Commission 

rejected complainant's argument that expenses relating to reexamination of the patents in the 

context oflicensing negotiations initiated by one of the respondents during the course of the 

investigation should qualify as exploitation through licensing. The Commission thus held that, 

like the act of purchasing a portfolio, "reexaminations are simply a continuation of prosecution 

that reaffinn or modify the boundaries of the patentee's ownership.,,2b 

as research, development or cngineering, (2) the existcnce of license-related ancillary 

activities such as ensuring compliance with license agreements and providing training or 

technical support to its licensees, (3) whether cOlllplainant's licensing activities are 

continuing_ and (4) whether complainant's licensing activities are those that are 

referenced favorabl) in the legislative history of Scction 337(a)(J)(C). TI1C 

complainant" s retum on its licensing investment (or lack thereof) lllay also be 

circumstantial evidence ofthe complainanfs investment 

ld at 16. 

?O ld at 8. 

71 LiqUid Crystal Dispkzv Devices, lnv. Nos. 337-TA-74I, 337-TA-749, COlU111-n Op. (Jul. 6, 2012). 

22 Jd at 110. 

23 !d at 109 (citing Navigation J)evices at 7-S). 

24 Id 

25 ld. at III. 

26 Jd at 115. 

7 
44 


BJC-8.eps

Finally, the Commission reaffirmed lTC precedent that, generally, only activities 

occurring before the filing of the complaint are eligible to qualify as part of the "substantial 

investment" analysis 27 Consequently, the Commission rejected complainant's argument that its 

litigation expenses for an underlying 337 investigation and parallel district court action should 

count towards the establishment of a domestic industry. This, the Commission noted, "would 

essentially eliminate the domestic indusuy requirement,,2R The Commission added that 

"[pJermitting complainants to rely on these activities and investments to establish a domestic 

industry, would be inconsistent with the statute and legislative history,,,29 again demonstrating 

the TTC's abiding commitment to careful and well-reasoned statutory interpretation. 

The preceding discussion illustrates that the TTC has interpreted Section 337 in a 

balanced manner. Harnessing its administrative expertise, it has consistently remained mindful 

of the 1988 amendments' intent to liberalize Section 337 but also remained equally vigilant in 

not allowing an expansion of the domestic industry test beyond the intent of Congress. As 

illustrated in Commission opinions analyzing § 1337(a)(3)(C), the TTC continues to interpret 

Section 337 in a balanced, case-by-case manner, carefully considering the statutory language and 

intent of Congress. As the HC continues to harness its expertise, further Congressional action 

should be reserved for a time when there is disagreement with the interpretive efforts of the TTC. 

Public Tnterest Factors in Fashioning TTC Remedies 

The lTC has no authority to award damages based upon past infringement; it can only 

issue prospective relief by issuing limited or general exclusi on orders that block infringing goods 

at the border, as well as and cease and desist orders that forbid the domestic sale of alreadyimported infringing goods. Section 337 states that the Commission "shall" exclude goods it has 

found to be infringing from entry into the United States, "unless" it finds that relief is not 

appropriate in light of its consideration of four public interest factors set out in the statute: 

• the public health and welfare, 

• competitive conditions in the United States economy, 

• the production oflike or directly competitive articles in the United States, 

• and United States consumers. 

Importantly, even if the lTe decides that a remedy is appropriate, the President has the 

power to prevent the remedy from going into effect if he or she determines that a remedy is not 

appropriate for what the statute refers to as "policy reasons," an open-ended term not defined in 

the statute. 

27 Id. at 113. "The Commission agrees with the AU that as a general matter. 'only activities that occurred 

before the filing of a complaint with the Commission are relevant to whether a domestic industry exists or 

is in the process of being established;" (quoting Certain Coaxial ('ohie Connectors. Componcnls Thereof' 

and Prods. Containing Same. Inv. No. 337-TA-650, COllllu'n Op .. at 51n.17 (Apr. 14.2010)). 2B ld. 

29 ld. at 114. Section 337 "imposes a.n affimlative requirement of demonstra.ting the domestic industry, 

one which cannot be automatically fulfilled by the filing of a Section 337 complaint." 

8 
45 


BJC-9.eps

In short, the statute provides a remedy along with robust built-in safeguards against 

misuse. 

Moreover, following the 2007 investigation titled Baseband Processor Chips, the ITC 

plunged itself into an internal and public comment review of how the public interest factors 

would best be treated within the investigation process. The result was a pilot program which in 

turn was followed by the issuance of new rules in November 2011. Under this recently enacted 

regime, the complainant must file a statement on the public interest concurrently with the 

complaint, and include cettain information relevant to the public interest factors. The 

respondents and the general public have an opportunity to respond and the complainant may 

reply. These fllings help the TTC Administrative Law Judge to develop a full record about public 

interest factors early in the case, and supplement the multiple opportunities interested parties 

have to comment during full Commission review at the end of the case. 

It would seem be premature for Congress to legislate on (he public interest factors 

process until the TTC has had an opportunity to determine whether its new process sufficiently 

and fairly addresses the concerns voiced about these factors. 

eRar: Should an Interpretation of the Patent Act Be Imported Into the Tariff Act? 

It has also been suggested that the ITC be required to apply the so-called eRay standards 

for injunctions used in U.S. district courts. This arb'lllnent ignores the fact that the ITC and US. 

District Courts are markedly ditferent venues with different jurisdiction and powers necessitating 

the differing standards. Given that the only remedy available to the ITC is exclusion orders, 

mandating application of eRay would substantially weaken the pm,ver of the ITC to deal with 

unfair trade practices. Furthermore, the Federal Circuit Court of Appeals expressly rejected 

homogenization of injunction and exclusion standards in the case of Spansion. Inc. v. lTC, 629 

F.3d 1331 (Fed Cir. 2010). 

Standard-Essential Patents 

Finally, a few important comments about standard-essential patents ("SEPs"). The 

Innovation Alliance hopes the Congress will seriously consider the adverse and unintended 

consequences of a blunt response to dealing with disputes involving SEPs. The IA would be 

very concerned if the HC or the courts established a bright line rule or presumption that 

prohibited a patent holder from seeking or obtaining an exclusion order! injunction due to the 

"possibility" of patent hold-up or because the patent(s) at issue is a SEP. A rule prohibiting or 

limiting the availability of exclusion orders or injunctions to SEP holders would tip the balance 

in favor of infringers to the detriment of innovation and ultimately consumers. 

There is no evidence to suggest that such sweeping changes to the current law, remedies 

or processes are necessary or in the public interest. Rather than presume hold-up exists in every 

instance, it should he noted that a patent holder and a standards implementer both have strong 

incentives to negotiate in good faith. The implementer does not wish to J;sk an injunction that 

could prevent or disrupt its manufacturing, and the patent holder wants a return on its investment 

and funding for continued R&D. These incentives encourage negotiation, which has been the 

9 
46 


BJC-10.eps

preferred mechanism under most standard setting organization ("SSO") policies for establishing 

license terms. Under a no-exclusion-order!no-injunction policy, however, the implementer has 

little incentive to bargain in good faith because by litigating it can avoid paying royalties until at 

least the litigation is over, if not longer. Moreover, a patent holder's good faith oiler becomes a 

ceiling that caps the implementer's litigation risk. The result would be more and longer 

litigation, with the inetllciency that litigation entails, and an unjustifled shift in bargaining power 

from patent holders to implementers that would destroy the balance which currently exists. 

A no-injunction rule would also create a perverse incentive: innovators who participate in 

SSOs (and give FRAND commitments) would have fewer rights than innovators that do not 

participate. The predictable result would be that fewer innovators would participate in SSOs with 

such WR rules (or make FRAND commitments if they do participate) or engage in R&D for 

technologies that may be standardized. Reduced participation in SSOs or reduced funding of 

R&D would likely result in delay, technologically inferior standards, and reduced information 

about patents implicated by standards. Refusals to make FRAND commitments would similarly 

lead to delay and technologically inferior standards as SSOs would attempt to "design out" the 

technologies of companies that refuse to make FRAN!) commitments. 

Conclusion 

The ITC has the capability, resources, and track record to permit it to resolve the difficult 

issues being examined by this Committee and apply the law. If there are specific examples of 

where the ITC has erred that warrant attention, we will work with the Congress to develop 

consensus solutions. Nevertheless, we are generally of the view that the long term interests of 

our innovation economy and the public will be served if the ITC is permitted to fultlll its 

obligations pursuant to existing law. 

At a time when policymakers rightly argue that other countries need to do more to clamp 

down on IP infringement overseas, it is unwise to impose new hurdles on U.S. IP ovvners trying 

to protect their lP rights against foreign infringers. 

Tessera and the Innovation Alliance thank the Subcommittee for affording us the 

opportunity to provide our views. We stand ready to work with the Congress 011 consensus 

proposals to enhance the rights of patent owners and improve the operation of our courts and the 

rre. 

10 
47 

Mr. GOODLATTE. And, Mr. Foer, we are pleased to have your testimony. 

TESTIMONY OF ALBERT A. FOER, PRESIDENT, 

AMERICAN ANTITRUST INSTITUTE 

Mr. FOER. Thank you, Mr. Chairman, Ranking Member Mr. 

Watt, and Subcommittee Members. 

As president of the American Antitrust Institute, an independent, nonprofit Washington think tank, I am pleased to offer 

our observations and recommendations regarding standards-setting, intellectual property, and antitrust. 

We believe that globalization and the rapid pace of technological 

development have brought us to a point where it is no longer feasible to muddle through with three distinct legal regimes—intellectual property, antitrust, and international trade—each working 

more or less independently of the others. 

The current system of mutual assured destruction, requiring the 

acquisition of huge portfolios of patents as a condition of competing, together with the emergence of substantial nonpracticing 

entities committed to maximally aggressive patent enforcement activity, is enormously wasteful. The system often blocks rather than 

facilitating innovation. It is unduly anticompetitive. It has led to 

proliferation of patent holdup conduct and resulting corruption of 

open standards initiatives that would otherwise promote more competitive market outcomes. 

I am going to summarize a dozen points that receive more detail 

in my statement. 

Coordination is essential, both within the U.S. and among economies of the globe. Resolution of standards issues should include 

consultations with foreign jurisdictions in an effort to achieve the 

maximum feasible global consistency. The basic goal is to achieve 

better balance between competition and exclusion in the name of 

innovation. Improved functioning of standards-setting organizations is crucial to achieving better balance. Antitrust considerations 

must play a larger role in the functioning of standards-setting organizations. And in this regard, we urge Congress to revisit the 

Standards Development Organization Advancement Act of 2004, 

which has failed to reduce the risks of ex post anticompetitive patent holdup outcomes. 

Congress should also state its intent that the antitrust authorities and courts should apply the principles of the Hydrolevel case 

to the standard-essential patent situation. And coalitions of leading 

competitors should not be permitted to purchase patent portfolios 

with an intent to exclude from the market or otherwise seriously 

disable one or more nonincluded competitors. 

The concept of FRAND—fair, reasonable, and nondiscriminatory 

commitments—itself needs to be more standardized. We would 

apply the following five principles: One, FRAND should imply a 

waiver of the right to seek an injunction against a user of the 

standard. Two, FRAND should imply meaningful ex ante transparency on both price and nonprice license terms. Three, FRAND 

should imply that nonprice conditions to license a standard-essential patent be reasonable. Four, FRAND should imply that 

acquirers of standard-essential patents should be required to fully 

48 

adhere to prior owners’ public commitments to SSOs or others to 

license on FRAND terms. And, five, FRAND should imply a commitment to arbitrate disputes on the application of the FRAND 

commitment. 

Let me comment very quickly on the role of the International 

Trade Commission, which after the eBay opinion of the Supreme 

Court has become a primary forum for challenging alleged patent 

infringements. 

We support the Supreme Court’s approach to injunctions and 

urge that its principles be applied by the ITC such that exclusionary injunctions would no longer be so automatic a remedy. 

Now, the ITC has recently shown signs of flexibility, and perhaps 

that agency can deal with the problem that has emerged by applying a broader interpretation of the public interest jurisprudence in 

their statute. If not, then we believe that Congress ought to act. 

I would be happy to elaborate on any of these points in the questioning. Thank you very much. 

Mr. GOODLATTE. Thank you, Mr. Foer. 

[The prepared statement of Mr. Foer follows:] 

49 


Foer-1.eps

Statement of Albert A. Foer, President 

THE AM[RICAN ANTITRlJST INSTITlJT[ 

Before the 

HOUSE JUDICIARY COMMITTEE 

SUBCOMMITTEE ON INTELLECTUAL PROPERTY, COMPETITION, AND 

THE INTERNET 

Hearing on 

THE INTERNATIONAL TRADE COMMISSION AND PATENT D1SPlJTES 

July 18,2012 

Chairman Goodlatte, Ranking Member Watt, and members of the Subcommittee: 

The American Antitrust Institute (AAI) is an independent non-profit consumer 

organization devoted to enhancing the role of competition in the economy and sustaining 

the vitality of the antitrust laws. l We believe that competition benefits consumers and the 

economy by lowering prices, promoting innovation, elevating customer service, and 

enhancing the choices available to consumers. 

For many years America has muddled through with three separate regimes that 

collectively shape the competitive structure of our industries. Please picture an equilateral 

triangle with a silo situated at each comer. These silos are three legal regimes: antitrust, 

intellectual property, and international trade. To an unfortunate extent, each regime has 

developed and operated separately. Each works within its own statutory and regulatory 

framework, each is associated with a separate occupational sociology, each has its own 

values, special interests, and political oversight. So long as intellectual property played a 

relatively unimportant role in our economy, so long as most of trade was not conducted 

by global mega-corporations in highly concentrated global industries, so long as antitrust, 

1 The AA1 is managed by its Boord of Directors with the guidance of an Adyisory Board consisting of more 

lhan 130 prominent anlitrusllu\vyers, economists, and husiness leaders. The Board oC Directors alone has 

approved this written testimony~ individual views of members of the Adyisory Boord moy dilIer hom the 

AAI's positions 

1 
50 


Foer-2.eps

trade, and IP did not constantly bump up against one another, the competition triangle 

managed to function. 

But something has dramatically changed. Picture the triangle again -- only this 

time fill up the space enclosed by the triangle with global high technology companies, 

companies with names like Microsoft, Google, Apple, Cisco, 18M, Samsung, Sony and 

the like. And recognize that the way they do business and the way governments oversee 

and regulate them require their constant collision with all the sides of the triangle. There 

is a mismatch between the three legal regimes and the facts oftoday's most important 

economic life. Reform has rather suddenly come to appear essential. 

In particular, the current crisis in standards results from the emergence of an 

essentially unplanned system of Mutual Assured Destruction, in which the major high 

technology companies accumulate large portfolios of patents that are intended to be used 

as both offensive and defensive weapons against competitors, indeed as bargaining chips 

for assuring access to essential patents and protection against claims of infringement. 

This system has three grievous faults. First, it is enormously wasteful of 

resources, including both the resources to purchase portfolios of intellectual property, and 

also expensive, time-consuming, attention-demanding litigation to utilize or protect these 

portfolios2 Second, it creates a barrier to entry and innovation by companies that do not 

already own a large portfolio and would therefore find themselves at high risk that their 

entry product would be attacked as infringing someone's patent, or perhaps hundreds of 

patents. The risk would deter investment. Third, it enables and incents and has therefore 

led to proliferation of patent holdup conduct and resulting corruption of open standards 

initiatives that would otherwise promote more competitive market outcomes. 

'In a cnrrcnt "high-stakes patent infringement trial pitting Apple Inc against Samsllllg Electronics Corp." 

before the TntenlatTonal Trade Commission, Apple \vas represented by a 70-lawyer team from vVilmer 

Cutler Pickering Hale and Dorr and Quinn Emanuel Urquhatt & Sullivan. "In the months leading up to 

lriul, \Vilmer lawyers deluged the cOLLrl \\,ilh documents-rOT example, when the judge asked ror a simple 

chart, lawyers submitted a 3.000-page filing." "According to patent analyst Florian Mueller. Apple and 

Sam sung are cUlTently opponents in about 50 patent suits spanning 10 countries and four continents_ 

fighting for dominance in the $100 billion-plus global smartphone market." Jenna GTeene, "In Apple fight. 

sharp elbows," Ihe National Law Joumal, June 25, 2012. http://www.nlj.colll, 

2 
51 


Foer-3.eps

But Mutual Assured Destruction has another flaw that has almost literally blown 

up the system. This flaw has been given a nasty nickname: patent trolls. It also has a 

more neutral name, non-practicing entities ("NPEs") that we will use. When 

organizations buy up patents, not to utilize them in productive output but to use them as 

assets upon which they can demand monopoly rents by attacking companies on patent 

infringement grounds, withollt hcn'ing to worry abo lit return fire, something new and 

potent has been injected into the armory. 

The AAI has been listening to a wide variety of companies and experts on the overlap 

of antitrust and intellectual property. In keeping with the subject matter of this hearing, 

but providing somewhat enlarged scope, we offer the following dozen observations with 

regard to standards and competition policy. 

I. Better coordination is essential. 

To the maximum extent feasible, the Department of Justice and the Federal Trade 

Commission should promulgate the same approach. Joint guidelines following the 

model of the Horizontal Merger Guidelines would be an appropriate vehicle. The 

International Trade Commission, U.S. Trade Representative, the U.S. Patent and 

Trademark Office, and the Intellectual Property Enforcement Coordinator should all 

have an important say in the development of these guidelines. In addition, however, 

given the global nature of so many issues, the U.S. agencies should work as closely as 

possible with the European Commission and other major trading nations to maximize 

international consistency. 

2. The basic goal is to achieve better balance between competition and 

exclusion in the name of innovation. 

3 
52 


Foer-4.eps

A consensus on basic objectives seems to be within reach. The basic 

understanding would be that the exclusionaty power of intellectual property can 

provide an important incentive for innovation, but that without appropriate 

limitations, IP can become a mechanism that not only facilitates monopolistic waste 

in the economy but actually inhibits innovation. The consensual goal is to find a 

socially beneficial balance between competition and exclusion. 

3. Standard setting organizations are crucial to achieving balance. 

Standards for interoperability and access are crucial to the development of high 

technology, most evident at the moment in the evolution of mobile smartphones. The 

primaty institution for developing standards is the standard-setting organization 

("SSO"), a self-governing mechanism for the members of an industty to come 

together to make critical technical decisions about the future of their industty. 

Overwhelmingly, these are discussions among engineers and their function is 

positive, but when antitrust investigations have focused on SSOs, it has become clear 

that they have a potential for anticompetitive abuse. Once a standard is agreed upon, 

it is often too late for the industty to switch to another direction. Thus, it is 

appropriate for government to focus on best practices for SSOs and, as a matter of 

priority, especially on standard-essential patents (SEPs). 

4. Antitrust must playa larger role in the functioning of SSOs. 

Because standard-setting brings competitors together to work on an industry's 

future, there is always a risk of anticompetitive activity. The Standards Development 

Organization Advancement Act of 2004 ("SDOAA") mandates application of the 

antitrust "rule of reason" rather than any stricter antitrust rule or scrutiny for SSOs' 

"standards development activity," defined to include "actions relating to [an SSO's] 

4 
53 


Foer-5.eps

intellectual property policies." 3 It also enables SSOs to avoid the treble damages 

remedy that would otherwise be automatic for any antitrust violation4 and to obtain an 

award of the costs of suit including reasonable attorneys' fees against any antitrust 

claimant if the claim against the SSO was "frivolous, unreasonable, without 

foundation, or in bad faith." j The statute thereby protects or exempts SSOs from 

central aspects of the antitrust laws that apply to many other kinds of concerted 

activity among competing enterprises. 

This Act was intended "to encourage disclosure by intellectual property rights 

owners of relevant intellectual property rights and proposed licensing terms"; it 

"further encourages discussion among intellectual property rights owners and other 

interested standards participants regarding the terms under which relevant intellectual 

property rights would be made available for use in conjunction with the standard or 

proposed standard.,,6 In short, the Act sought to incent SSOs to experiment with new 

policies and practices that would increase ex ante transparency about intellectual 

property rights and associated license terms, thereby reducing risks of ex post 

anticompetitive patent holdup outcomes. 

In the immediate aftermath of that enactment, two SSOs -- VITA and IEEE--

adopted new policies of that very kind, both of which received antitrust comfort under 

OOJ's Business Review Procedure7 To our knowledge, however, few if any other 

SSOs have even begun to move in any similar direction. In short, all too many SSOs 

have been slow to embrace any such effort or even to consider the continued 

adequacy of their longstanding patent policies as protections against patent holdup 

outcomes in their standards. It is thus not surprising that there has been a dramatic 

3puh. L No. IOR-237, IIR Slat. ()()I, 151J.S.C §§ 4301-02 

, 15 U.SC S 4303 

5 15 USC §§ 4304-05. 

6 150 Congo Rcc. 3657 (June 2, 2(04) 

7 See Letter rrom DOJ to VIT A counsel (Ocl 30,2000), availahle at 

http://www.justice.gov/atr!public/busreview/219380.htm~ Letter hom DOJ to I];];]; counsel (Apr. 30, 

20(7), available at hill' :II"" w.j uslice. gov lalr/puhliclbusreview 122297R.htm. 

5 
54 


Foer-6.eps

increase in patent holdup conduct and associated litigation over the eight years since 

enactment of the SDOAA. In short, it appears that the SDOAA has failed to incent 

SSOs in the desired direction. Indeed, by reducing antitrust exposure, it may well 

have had the opposite effect. 

Accordingly, the AAI suggests that Congress now consider (a) repeal or revision 

of the SDOAA in conjunction with (b) a Congressional statement of intent that the 

antitrust authorities and courts should apply the principles of American Society of 

Mechanical Engineers v. Hydro/evel Corp., 8 to the standard-essential patent 

situation. The Supreme Court there established an SSO's strict antitrust liability in 

circumstances where anticompetitive harm occurs as a result of the SSO's failure to 

implement procedures aimed at preventing abuse of its processes. As the Court said, 

"a standard setting organization ... can be rife with opportunities for anticompetitive 

activity"; "a rule that imposes liability on the standard setting organization -- which is 

best situated to prevent antitrust violations through abuse of its reputation -- is most 

faithful to the congressional intent that the private right of action deter antitrust 

violations.,,9 Congress should accordingly confirm its support for applying those 

precepts to the situation here at issue: an SSO's failure to implement eilective 

safeguards against patent holdup outcomes from its proceedings should result in that 

SSO's liability for the resulting anticompetitive effects. 

5. The concept ofFIRAND itself needs to be standardized. 

It is not uncommon for SSOs to require that any participant in a standardsetting process who owns a patent that reads on the proposed standard has an 

obligation to identify the patent and/or agree to license it on a fair, reasonable, and 

non-discriminatory basis. Europeans abbreviate this as a FRAND commitment, 

8 456 U.S 556 (19g2). 

'Id"t 571-73 

6 
55 


Foer-7.eps

Americans as "RAND", or increasingly as "FIRAND" As a first step in clarifying 

the concept, we propose recognizing that all three abbreviations have essentially 

the same meaning and can all therefore be referred to as "FRAND". 

Unfortunately, FRAND has no agreed-upon minimal meaning, which 

leads to expensive, drawn out, and largely unnecessary litigation. The AAI calls 

attention to the following areas in which the provision of a minimal standard 

meaning would resolve many of the problems of SEPs: unreasonable price; other 

unreasonable conditions; assuring that subsequent owners are bound by prior 

owners' commitments; arbitration of disputes; and limitations on the use of 

injunctions. 

6. FRAND should imply that ex ante negotiations on price are both 

legitimate and critical. 

Although it is not feasible to establish pert'ect rules on what price for licensing a 

SEP would be fair and reasonable, some minimal standards are appropriate. The AAI 

agrees with the FTC's promotion of two principles. First, the determination should 

rest on ex ante incremental value rather than ex post total market value. Second, the 

royalty base should be the smallest affected component rather than the entire device. 

Because FRAND commitments are today so generally vague that they do not 

provide adequate protection against holdup conduct, SSOs should be required to 

move in the direction of ex ante disclosure of proposed or maximum license terms. (A 

SEP owner should not be required, however, to specify a royalty rate when it is not in 

fact looking for royalties and therefore commits not to assert its SEPs against any 

implementer of the standard in question.) 

7 
56 


Foer-8.eps

7. FRAND should imply that non-price conditions to license a SEP be 

reasonable. 

With current vagueness, SEP owners sometimes demand overly broad 

grantback provisions. The AAI believes it is inconsistent with a FRAND 

commitment for the SEP licensor to demand a grantback covering licensee patents 

beyond those that are essential to the same standard implicated by the licensor's 

patents. It is unreasonable for the SEP owner to demand a higher royalty for the 

license to its SEPs than it is willing to pay as a royalty for SEPs within the scope 

of the required grantback. There should always be a "cash-only" option available 

to any licensee in lieu of any grantback demand. Where defensive termination 

provisions or covenants not to sue are functionally similar to grantback 

provisions, they too should not be "unreasonably" broad. 

8. FRAND should imply that acquirers of SEPs should be required to 

fully adhere to prior owners' public commitments to SSOs or others 

to license on FRAND terms. 

It is essential to a balanced SSO process that FRAND commitments be 

maintained, even if the SEP is later transferred. The AAI believes that a new SEP 

owner's enforcement activity in a manner inconsistent with an applicable FRAND 

commitment may constitute "exclusionary conduct" in violation of Section 2 of 

the Sherman Act and Section 5 of the FTC Act. Moreover, a patent portfolio's 

acquisition that may enable or facilitate this kind of exclusionary conduct can, on 

that basis, be challenged as a violation of Section 7 of the Clayton Act. (SSOs can 

assist in this regard by clarifying that participants making FRAND commitments 

during their proceedings thereby promise to condition any sale of the covered 

patents on the promise to abide by the same commitments.) 

8 
57 


Foer-9.eps

9. FRAND should imply a commitment to arbitrate disputes on the 

application of the FRAND commitment. 

The disproportionate leverage that a patent owner has in the interpretation 

of a FRAND commitment rests largely on the time and expense of reaching a 

solution via litigation. If an SSO's rules or legislation were to require that a 

FRAND commitment automatically includes an agreement to arbitrate disputes 

over the interpretation of the FRAND commitment, the dynamics would change 

in a substantial way, with the overall result that a FRAND commitment would be 

given weight it does not currently carry. 

10. FRAND should also imply a waiver of the right to seek an injunction 

against a user of the standard. 

An injunction is not an appropriate remedy for SEP infringement as a 

matter of both good law and good policy. In deciding the Apple/Motorola case in 

Illinois just a few weeks ago, Judge Posner noted that the Supreme Court requires 

a plaintiff seeking an injunction on a patent infringement claim to first establish 

that monetary damages are inadequate to compensate for any alleged injury. 10 

Yet when a SEP owner makes a FRAND commitment, it has implicitly 

acknowledged that a reasonable royalty is adequate compensation for a license to 

use the patent. ll Monetary damages are therefore adequate compensation for 

infringement of a FRAND-encumbered SEP. Moreover, monetary damages avoid 

the disproportionate outcomes and public harm that can result from injunctive 

relief. Particularly where an infringer benefits by infringing on a patent that 

accounts for only a small component of a device, and the effect of an injunction is 

to remove the entire device from the market, the penalty imposed on the infringer 

lU See Apple, Inc. v. Motorola, Inc., No. I: II-cv-08540, at 21 (N.D. JII. Jun. 22,2012) (eiling enay Inc. v 

MercExchange. LLC .. 547 U.S 388.391-92 (200G)) 

9 
58 


Foer-10.eps

far outstrips the benefit the infringer enjoys for infringing, not to mention the 

harm caused to the SEP-owner. 12 The result is a punitive rather than 

compensatory remedy that provides a windfall to the SEP-owner and 

unnecessarily deprives the public of access to the affected device and competition 

in the affected market. 13 

SSG rules should make clear that the provider of a FRAND commitment 

in the course of a standard development proceeding waives any right to seek 

either injunctive relief in court or an exclusion order at the International Trade 

Commission. The AAI endorses the FTC's lIC comments 14 and the legislative 

advocacy of the lIC Working Group. IS We are encouraged by signs that the lIC 

appears to be taking a serious look at whether it can become more flexible and 

less automatic in its use of exclusionary injunctions. We hope that the ITC will be 

able to apply the principles that the Supreme Court evoked in its e-Bay opinionl

'; 

under its "public interest" authority. If not, Congress should be prepared to 

customize an appropriate application of these principles. 

11. Resolution of standards issues should include consultations with 

foreign jurisdictions, in an etTort to achieve the maximum feasible global 

consistency. 

The issues being aired in these hearings are of concern to many of our 

12 1d. at 25 

13 Jd 

11 United States Intemationallrade Commission investigation N 337-1A-745 and 337-IA-752. IhirdParty United States Pederal Trade Commission's Statement on the Public Tnterest (June 6, 2012) 

15 See Jan Wolfe. Tech-Sector Working Group IFants 'i'atent Trotls' Gut of the I1C LAW.COM (Mar. 22. 

20 12), hllp:l/www.law.com/jsp/cclPuhArlicleCC.jsp?id~ 12025465031 OJ& TechSeclor Johhying_ Group_ 

Wants _Patent_Irolls _ Out_ oCthe _l1e 

16 eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006) 

10 
59 


Foer-11.eps

trading partners. For example, in 2011, the European Commission adopted in final 

form its Guidelines on the Applicability of Article 101 of the Treaty to Horizontal 

Co-operation Agreements17 Section 7 of the Guidelines addresses requirements 

for "standardization agreements" to avoid violation of Article 101. Note in 

particular that par. 283 expressly requires that the SSO's rules ensure access to the 

standard on FRAND terms; par. 285 says that, to ensure the effectiveness of the 

FRAND commitment, "there would also need to be a requirement on all 

participating IPR holders who provide a commitment to ensure that any company 

to which the IPR owner transfers its IPR ... is bound by that commitment, for 

example through a contractual clause between buyer and seller." Par. 286 says the 

IPR policy "would need to require good faith disclosure, by participants, of their 

IPR that might be essential for the implementation of the standard under 

development." 

Par. 289 says in "case of a dispute, the assessment of whether fees charged 

for access to IPR in the standard-setting context are unfair or unreasonable should 

be based on whether the fees bear a reasonable relationship to the economic value 

of the IPR" and "it may be possible to compare the licensing fees charged by the 

company in question for the relevant patents in a competitive environment before 

the industry has been locked into the standard (ex ante) with those charged after 

the industry has been locked into the standard (ex post)." Par. 290 says "Another 

method could be to obtain an independent expert assessment of the objective 

centrality and essentiality to the standard at issue of the relevant IPR portfolio. 

The royalty rates charged for the same IPR in other comparable standards may 

also provide an indication for FRAND royalty rates." Par. 299 promotes ex ante 

disclosures of most restrictive licensing terms including maximum royalties. 

The proposed guidelines published for comment in 2010 flatly prohibited 

ex ante "joint negotiation" of license terms. In response to objections from several 

17 See C11156, OIllei,,\ JOLllTI"\ of ti,e European Union 14.1.2011 

11 
60 


Foer-12.eps

companies that that prohibition was in conflict with U.S. FTC and DO} guidance 

in their 2007 IP Report that said such joint negotiation should be assessed under 

the rule of reason, the EC dropped the prohibition altogether and simply omitted 

the whole subject from these final guidelines. 

The AAI urges the U.S. government to make every effort to provide 

comparable guidance. To the extent possible, U. S. and EC guidelines should be 

substantively similar. 

U.S. authorities and U.S. consumers should be concerned when SEP 

owners seek and obtain injunctions from courts in Germany; EC and Asian 

authorities and consumers should be concerned when SEP owners seek and obtain 

ITC exclusion orders. SSOs develop standards that define the shape and 

competitiveness of global markets regardless of where their working groups meet 

or the language in which they conduct their meetings. Patent holdup conduct 

directed against innovative entrants into new markets in Europe or Asia can 

adversely affect competition within the U.S. as well as in their home countries. 

For all of these reasons, SEP-related problems demand global solutions. Public 

and private stakeholders throughout the world will need to deepen their dialogue 

about the desirable policies and remedies in this area. 

12. Coalitions of leading competitors should not be permitted to purchase patent 

portfolios with an intent to exclude from the market or otherwise seriously 

disable one or more non-included competitors. 

An antitrust issue arose when the Rockstar group, consisting of three 

leading (and three other) mobile device operating system competitors, 

combined to bid five times as much as their competitor, Google, in order 

jointly to acquire Nortel's portfolio of patents. As the AAI wrote to the DOl at 

the time, this "raises questions about the concerted intentions and objectives 

12 
61 


Foer-13.eps

of the six consortium members that could not be achieved through 

independent bidding and eventual individual ownership or licensing of some 

or all parts of the patent portfolio at stake.,,18 The acquisition was not 

challenged but a post-acquisition question is also raised because of Rocks tar's 

apparently "new" status as an NPE owning 4,000 of the 6,000 Nortel patents 

and now committed to maximizing revenue from them. Congress should urge 

the antitrust agencies to aggressively investigate any coalition ofleading 

competitors that appears to be formed or utilized for the purpose of 

disadvantaging an excluded rival such as by depriving it of access to a SEP. 

We thank the subcommittee for its consideration of these observations and 

recommendations. 

1< See Letter rrom the AAT to Christine Varney (Julv Ii, 2011), availahle at 

http://www.antitmstinstitute.org/sites/default/files/N0l1el%201etter%20to%20DOJ.7.6.11. pdf 

13 
62 

Mr. GOODLATTE. We will now beginning our questioning, and I 

will start with a question that I will direct to the three in the middle—Mr. Kelley, Mr. Rubin, and Mr. Cassidy. 

Are you generally satisfied with how the ITC operates now as it 

conducts Section 337 investigations? And what changes, if any, 

would you make to agency operations? 

Mr. Kelley? 

Mr. KELLEY. Thank you, Mr. Chairman, for the question. 

We are satisfied with the ITC handling of cases that we brought 

there. As I said, we have utmost respect for the ITC. 

I think with respect to cases that are brought against us by the 

PAEs, we believe that there should be some changes made. One 

change would be to address the appropriateness of an exclusion 

order at the beginning of an investigation. So we believe that that 

would be more fair to everyone involved. And it would reduce the 

amount of litigation cost that many companies spend in the ITC, 

and I believe it would also reduce the ITC’s workload. 

Mr. GOODLATTE. Thank you. 

Mr. Rubin? 

Mr. RUBIN. Well, I agree that the ITC is doing a terrific job with 

the cases in front of it. But I think that the world has changed dramatically, Mr. Chairman, since the last time Congress amended 

this particular law in three significant ways: number one, the rise 

of patent assertion entities that we are talking about today; number two, a global economy where companies like ours, it is virtually 

impossible to have a supply chain that is purely domestic, so you 

source products from all over the world to remain globally competitive; and then, number three, as you pointed out earlier, the eBay 

decision that takes away the injunctive remedy in Federal court for 

patent assertion entities. 

So it is those three changes that lead to the rise of all of this patent assertion litigation that you are seeing today in the ITC and 

require a change. And the change that we would like to see made 

is just to narrow the licensing prong of the domestic industry requirement so that only those licensing efforts that are before the 

fact, that are designed to actually foster the use of the new patented technology, can meet the domestic industry requirement, but 

that after-the-fact licensing efforts that are really a game of gotcha 

after a huge amount of investment is made, those should not be 

sufficient to meet the domestic industry requirement. I think that 

distinction needs to be drawn. 

Mr. GOODLATTE. Thank you. 

Mr. Cassidy? 

Mr. CASSIDY. Generally, Chairman Goodlatte, we are satisfied. 

We think that the ITC is a very effective Federal agency. We don’t 

think it is fair to characterize it as a tool that people use for patent 

holdup. 

Mr. GOODLATTE. You don’t think the statistical trend that we 

have seen here of the increasing number of U.S. defendants in 

these cases is an indication that this is being used for a purpose 

that it wasn’t originally intended? 

Mr. CASSIDY. No, sir. I think it is an indication of the increased 

importance of intellectual property in our economy today. 

63 

To give one example, there are 7 billion people on the planet; 

there are 6 billion mobile phone subscriptions. This is not an industry that is being held up by the ITC or anyone else. It is a burgeoning, successful industry. 

Similarly, I think in the cases discussed here today there have 

been successful outcomes for companies that have been attacked by 

people that did not have sufficient status to meet the domestic industry requirement. 

I feel for companies that are dragged into court, but we have to 

look at this from a systemic point of view, not from the point of 

view of the individual litigant. And it has been successful. 

I hesitate to think of what it would be like if we weaken the ITC. 

I believe the United States consumers would be—— 

Mr. GOODLATTE. Even if we try to say, hey, the ITC is intended 

for domestic companies so be a domestic company before you bring 

an action? 

Mr. CASSIDY. The concern with that, Mr. Chairman, would be 

that it would be discriminatory against others who have intellectual property rights in the United States. 

Mr. GOODLATTE. Well, certainly they have intellectual property 

rights in the United States, but that is not the intention of the 

ITC, the formation of the ITC. 

Mr. CASSIDY. A fair point. 

Mr. GOODLATTE. Let me ask Professor Chien, is the ITC an appropriate forum to settle disputes over royalties for standard-essential patents between domestic industries, which is essentially how 

it is being used in a number of these cases? 

Ms. CHIEN. Thank you for your question, Mr. Goodlatte—Chairman Goodlatte. 

I think the way that the ITC is set up now it is not really designed to decide royalties. It doesn’t have that statutory authority. 

Nor because of the time frame it is on you can’t really put the time 

in to deciding that. 

I think that your question raises a good possible use of the ITC 

to try to get people to settle potentially by using delay, but I don’t 

think the way that it is structured now under the statute can really accomplish the aim of getting damages or royalties awarded, if 

that is was your question. 

Mr. GOODLATTE. Let me ask another question. Should the ITC’s 

jurisdiction over patent disputes be limited to those in which the 

accused infringer is not subject to a Federal court’s jurisdiction? 

Ms. CHIEN. That would be a clean way to separate out and make 

sure that the ITC is really complementing rather than overlapping 

or conflicting with the district court, to actually just have it be 

hearing those cases which cannot in real life be heard in district 

court. I think, however, that the ITC does provide some valuable 

functions beyond just jurisdiction filling, that because it is a fact 

venue that it is—and also an efficient one that those are merits 

that would give it—would benefit the system in general, not just 

those small cases. 

Mr. GOODLATTE. Thank you. 

My time has expired. The gentleman from North Carolina, Mr. 

Watt, is recognized. 

64 

He is going to defer his questioning; and we will now recognize 

the gentleman from Michigan, Mr. Conyers, for 5 minutes. 

Mr. CONYERS. Thank you very much, and I apologize for my absence. But I was so impressed with the appearance of Mr. Cassidy 

but not as impressed by his comments, and so I am going to have 

to direct my questions to the president of the American Antitrust 

Institute. 

I am concerned about the larger corporations using patents to enhance their competitive position. Let’s be honest with it. Some of 

you have testified that is not much of a problem. Some have been 

neutral on it. Where do you see this going, Bert Foer? 

Mr. FOER. Thank you, Mr. Conyers. 

I don’t think I see it as a big-versus-small issue particularly. I 

think it is a matter of getting the process right. For years and 

years, antitrust pretty much ignored standards-setting. It only 

came up in a couple of extreme cases. And generally this has been 

a totally deregulated area, which is good, except that now we have 

some problems. And when you take a look at the system for standards-setting, it is time to give more antitrust oversight to the way 

things work. 

If the Standards-Setting Organizations would voluntarily do 

what Congress urged them to do, then they could have—they could 

have a lot of this taken care of. But they haven’t done that. They 

have conflicts internally with their members, and they can’t seem 

to reach the right kinds of decisions. So I think Congress needs to 

become involved if antitrust is really going to work. 

Mr. CONYERS. Wasn’t that the process—isn’t it endangered by 

the larger corporate interests that are squabbling here? I mean, I 

can’t—we are in a capitalist system, whether you like it or not. The 

question, is how do we regulate? And I don’t think it is the little 

companies that are keeping us disorganized. I gave up that naivete 

many decades ago. 

Mr. FOER. Well, certainly the largest corporations that participate in a standards-setting process are going to have more clout in 

that process, which means we have got to make the process fair, 

we have to standardize the process itself much more than it is. And 

if we can’t get the organizations to do it voluntarily, then Congress 

should step in and push it along. 

Mr. CONYERS. Okay. 

Mr. FOER. Because if it is going to be a fair process, then it has 

to have fair rules. 

Mr. CONYERS. Who else wants to comment here? 

Mr. RUBIN. Congressman, I would I agree that I don’t see this 

as a big-company/small-company issue. Even large companies like 

Ford and Cisco were small companies. Less than a generation ago, 

Cisco was started by Stanford professors who couldn’t communicate 

between disparate computer systems. 

And so we you agree that when you look at who can be a litigant 

in ITC you have to make sure that small businesses, universities, 

and large businesses alike have access to the ITC. We agree with 

that. But if you look at the problems that we are talking about 

today about domestic industry, if you have research and development activities like universities, small businesses, and large busiVerDate Aug 31 2005 10:46 Nov 28, 2012 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6601 H:\WORK\IP\071812\75152.000 HJUD1 PsN: DOUGA
65 

nesses, you have access to the ITC. If you employ labor and capital, 

you have access to the ITC, and you should. 

The only issue that we are looking at is this question of licensing. And we don’t think that all licensing efforts need to be excluded, just those licensing efforts that don’t support the adoption 

of new products. We don’t think that really meets the definition of 

a trade group, and therefore that shouldn’t be protected by the 

ITC, which is designed to protect U.S. industries. 

Mr. CONYERS. Mr. Cassidy, you get the closing comment. 

Mr. CASSIDY. I am sorry. I lost track of the question. 

Mr. CONYERS. So have I, but you get the closing comment anyway. 

Mr. CASSIDY. There is a question about whether or not licensing 

is a protected industry under statute, under 337. This has already 

been litigated, and the answer is when Congress said licensing in 

1988, it meant licensing. It did not mean merely licensing for products that are already fully adopted or merely licensing for products 

that have not yet been adopted. It meant licensing which covers 

both spectrums. So that is the law, and I don’t see the reason to 

change it. 

Mr. CONYERS. Thank you, Mr. Chairman. 

Mr. GOODLATTE. I thank the gentleman. 

The gentleman from California, Mr. Issa, is recognized for 5 minutes. 

Mr. ISSA. Thank you, Mr. Chairman. 

Professor Chien, your figure that 17 percent of the ITC patents— 

or cases—are essentially large U.S. companies. U.S. companies to 

U.S. companies exploiting the ITC in order to have a battle in the 

second venue. 

Ms. CHIEN. In order to have a what? 

Mr. ISSA. In order to have a battle in the second venue, whether 

it is Broadcom v. Qualcomm or Kodak, Apple, or Motorola. Were 

these, in your opinion, part of the original intent? Did we intend 

to have major U.S. entities in ITC over what is often essentially 

the importation of a component? 

Ms. CHIEN. That is a great question. And just to get clear on the 

numbers, my 2008 report shows that actually about 60 percent of 

cases involved competitors or large companies being sued. So it is 

a larger percentage than 17. That is the number that applies to foreign companies being sued by domestic industries. 

Mr. ISSA. So, in effect, it is the majority of companies simply 

seeking an alternate venue not originally intended in the statute. 

Ms. CHIEN. That is correct. I believe that two-thirds of cases in 

the ITC have a district court counterpart. So they are not cases 

that could not have been brought in district court. In fact, they are 

being brought in district court as well. But here I think is where 

the ITC has provided a service to our economy and to these companies by providing a faster venue for—this needs to be resolved. 

Mr. ISSA. This is a Committee that has been working on the 

rocket docket. A great deal of the work done in patent reform originated in this Committee. I think we are all for it. 

Look, we are the jurisdiction not of the ITC. The ITC is not really our game. Our game is the Article III courts. If what you are 

saying here today is two-thirds of the cases don’t really belong in 

66 

the ITC, they belong in Article III courts, but they are in the ITC 

for one of two reasons: one, likelihood of an exclusion order, which 

is effectively an injunctive relief when they may or may not be 

given it under the eBay decision, and speed to trial. 

If that is the case, then from a standpoint of protecting the Federal Government, protecting the taxpayer ultimately, shouldn’t we 

find a way to have an ITC level of speed on those cases that would 

otherwise be or already are in Article III courts? In other words, 

the time to a decision if it was accelerated to meet or exceed the 

ITC, wouldn’t that in fact eliminate the government spending 

money twice, particularly in the cases in which the Article III court 

may not stay the case? 

Ms. CHIEN. Yes, I think that would be the ideal solution. I don’t 

think that our Federal court system is there yet. But through proposals and different initiatives like the patent pilot program then 

maybe we will get there. 

Mr. ISSA. So let me just ask one follow-up, though. 

This Committee was very involved in the SOPA-PIPA discussion. 

You may have heard that. During that discussion one of—sometimes truth is the first casualty. There were a lot of statements 

made, but since I have you here, is it true that the ITC is less administratively burdensome, less expensive, and quicker to decision 

than Article III courts? 

Ms. CHIEN. I think that the schedules are compressed so it is actually more expensive in a shorter amount of time. Many of the 

cases do not settle and so net usually the cases are more expensive 

to litigate, but they are litigated on a faster basis. 

Mr. ISSA. But that is a question of cases that are not settled. I 

mean, if you take out the ones that aren’t settled in an Article III 

court, they go longer, cost more. 

And I don’t know about everybody else here, but I, for one, have 

paid those multimillion dollar legal fees. I will tell you that your 

expense goes up during time often more than actual work. Every 

month you are in litigation you have a certain large amount of 

money for reevaluating, rethinking, redoing. 

So the reason I ask the question is during that discussion when 

we were looking at—and I still have a bill that would move intellectual property in the case of overseas piracy of copyright, move 

some jurisdiction into the ITC. Many people wanted to say that it 

was likely to not be able to quickly expand, as though we can get 

Federal judges quickly in Article III, and that it would be more expensive and take longer. Is there any basis under which you think 

that was true—would be true? 

Ms. CHIEN. I think that the ITC has proven able to keep its 

deadline of trying to keep cases resolved as quickly as possible and 

that they have experience in doing that and doing it well. 

Mr. ISSA. Thank you. 

Mr. Chairman, I thank you for the opportunity to ask questions 

that were tangential to today’s hearing but important to I think the 

Committee, and I yield back. 

Mr. GOODLATTE. I thank the gentleman. And the Chair is now 

recognizing the gentlewoman from California, Ms. Lofgren, for 5 

minutes. 

67 

*The Federal Trade Commission report entitled ‘‘The Evolving IP Marketplace, Aligning Patent Notice and Remedies With Competition,’’ is not reprinted in this hearing record. The report 

is on file at the Subcommittee and can be accessed at: 

http://www.ftc.gov/os/2011/03/110307patentreport.pdf 

Ms. LOFGREN. Thank you, Mr. Chairman; and it is great to see 

a majority of the witnesses from the 16th congressional district, 

Cisco headquartered in the district and also Tessera. And you can 

see that not everyone in Silicon Valley sees this the same way. 

And certainly, Professor Chien, it is great to have you here with 

your tremendous expertise and such a distinguished member of my 

alma mater. 

So I think this is a very important hearing. 

And I guess one of the questions that I have, I think that certainly there are is an issue here—and you have identified it, Professor, as our witness Mr. Rubin—is how to get a remedy in a time 

frame that is reasonable. 

You know, I was thinking as Mr. Berman walked out that in 

1997, as a freshman Member, I ended up helping manage a patent 

reform bill that ultimately through other iterations passed last 

year. It takes a long time for the Congress to do anything. 

And so the question is, what can the FTC do? The court has I 

think indicated that they can’t merely adopt the eBay rule without 

some guidance from us. However, the FTC has suggested—and, 

Mr. Chairman, I would ask unanimous consent to put the FTC report into the hearing record, at least the relevant pages that—in 

using kind of an eBay standard—— 

Mr. GOODLATTE. Without objection, the report will be made a 

part of the record.* 

Ms. LOFGREN [continuing]. To determine jurisdiction that you 

could end up with the same result. Have you seen that FTC report 

from last year and do you think that is a viable approach? 

Ms. CHIEN. I have seen the report, and I think that the report 

correctly identified the flexibility that the public interest statutory 

framework gives the ITC to do its analysis. It is not completely 

aligned, and I think one of the big differences is thinking about irreparable harm which is something you have to prove in district 

court and ITC will really focus on competitive conditions and impact consumers. But I think that in important ways we can coalesce the standards in this way. 

Ms. LOFGREN. Mr. Rubin, do you have a comment on that same 

question? 

Mr. RUBIN. Well, I think the FTC got it right. You can certainly 

apply the eBay factors. For example, irreparable harm, almost by 

definition dollars will fix this problem. There is not going to be irreparable harm if an injunction isn’t issued, because you are talking about a company that doesn’t actually compete in the marketplace. So while I do think that eBay factors can be applied, I think 

they can be applied pretty quickly and rather easily. 

I think what the ITC has, though, here is sort of two problems. 

The first is the question of jurisdiction that we are talking about. 

Who can be a plaintiff? Who can be a complainant? And that goes 

to this issue. 

The second one that we are talking about in terms of how expensive are these cases, how fast are they, it is true that longer tends 

68 

to be costlier, but if you look at the ITC there are no limits on the 

type of discovery that can be taken in the ITC. In the case I was 

discussing earlier in my comment, Cisco was asked to respond to 

7,000 requests for admissions. The Federal courts only allow 25. So 

while it is the case that sometimes ITC cases move more quickly, 

it is an incredible flurry of activity and incredibly costly. 

Ms. LOFGREN. Mr. Cassidy, you may have a counterpoint of view 

on the FTC suggestion. 

Mr. CASSIDY. Our main point is not that there may not be lurking problems and issues that deserve the attention of Congress but 

that the horror stories have not arisen to the level that congressional action is needed. 

To date, the ITC has been careful in applying both the domestic 

industry requirements to shield companies from nuisance lawsuits 

and we believe has been careful in applying the public interest factors and has been flexible in the way it has applied its remedies. 

Ms. LOFGREN. Thank you, Mr. Cassidy. 

EBay also is headquartered in the 16th congressional district, 

and I think they did a tremendous service for the country in spending the money to bring that case really to stop shakedowns, is what 

it was about. And the question is—we have a shakedown situation 

here that has migrated to the FTC and how can that be fixed. 

Here is a question: Could the ITC have the same kind of hearing 

we are? Have they reached out to you, Professor, to see whether 

they could heal themselves? And is that something that we might 

suggest to them that might lead to a suitable resolution faster than 

the ordinary legislative process? 

Ms. CHIEN. That is a great question, and I think if you look at 

their case law you see that they are considering the input that they 

are getting from different quarters and trying to use that to reflect 

their decision making. 

But the problem is that they have to wait for the right cases to 

come forward. They have to take them forcefully. They need to take 

a strong line. And I think they have been reluctant to do that because they do not see themselves as a policymaking body. So I do 

think that Congress can play a constructive role in holding oversight hearings and talking to ITC and reminding them of what the 

basis is. 

As to these comments about, for example, domestic industry 

which I think have been very compelling in hearing the stories of 

companies that have affected by IT actions. If you look in the congressional history, there is an emphasis that favors productionbased licensing over revenue-based licensing, as these gentlemen 

have put it. In the Coaxial Cable decision, the ITC has acknowledged that, but they didn’t take a strong line in saying this is what 

we are going to do in the future. They said, this is going to be case 

by case, and they didn’t send I think the strong message that they 

could have. So I do believe that within their statutory power and 

with some encouragement they could try to reform some of their 

own—— 

Ms. LOFGREN. Mr. Chairman, my time has expired, and we can 

discuss this further, but I would love to see some kind of interface 

between us and the commission, if that is possible to do. I think 

we might have some real benefit for the process. 

69 

Mr. GOODLATTE. If the gentlewoman would yield, I think the gentlewoman has a good suggestion. And I won’t speak for the Ranking Member, but I think there is interest in a bipartisan fashion 

to communicate with the commission and offer some of our ideas 

and ask them if there is such a process they could pursue. 

Ms. LOFGREN. Thank you, and I yield back. 

Mr. GOODLATTE. I thank the gentlewoman. 

The Chair is pleased to recognize the gentleman from Nevada, 

Mr. Amodei. 

Mr. AMODEI. Thank you, Mr. Chairman. I yield my time back. 

Mr. GOODLATTE. The gentleman yields his time back. 

The Chair will move over to gentleman from Pennsylvania, Mr. 

Marino. 

Mr. MARINO. I yield back. 

Mr. GOODLATTE. He yields back as well. 

So we will turn to the gentlewoman from California, Ms. Chu, for 

5 minutes. 

Ms. CHU. Thank you, Mr. Chair. 

I would like to ask Mr. Rubin. You spoke at length regarding 

Cisco’s experience defending a patent suit against a nonpracticing 

entity, also known as ‘‘troll,’’ in the ITC. Can you provide us with 

additional details about the suit? Did the entity have jobs in the 

U.S.? Did it invest in R&D? 

Mr. RUBIN. The short answer is, no, it did not. We were already 

engaged in litigation with that company in Federal district court in 

Delaware when this entity decided to sue in the ITC. At the time 

it brought the lawsuit it quickly tried to open one office in Plano, 

Texas. It had one employee in the United States. And it did that 

because it felt like it needed—correctly needed to meet the domestic industry requirement, and that is why it opened that particular 

office. 

Their view was that the litigation in Delaware was moving too 

slowly, and so they wanted to bring the case as well in the ITC. 

But I think the thinking was, well, Cisco is not going to want to 

defend this case in two different forums. We will be able to deluge 

Cisco with discovery requests. And, in fact, that is what they did. 

And, ultimately, as I said before, Cisco spent $13 million defending 

itself in the ITC in a case that was ultimately voluntarily dismissed. 

So it really turned the case into the world’s most expensive dress 

rehearsal. Because now we are back in Delaware where the case 

started, litigating these exact same issues. And I think that is why 

it is emblematic of the problem here. When you have the ability to 

bring cases in Federal court and the ITC, it doubles or potentially 

triples the cost with really very little benefit. 

Ms. CHU. In fact, you stated that companies have been able to 

achieve settlements far beyond what they would have been entitled 

to receive if they were sued in U.S. court. Can you give an example 

of those settlements? 

Mr. RUBIN. Well, our company has faired reasonably well in the 

ITC. But what you have is the threat of injunction in the ITC that 

now no longer exists in Federal district court. And so the negotiation is different by sometimes an order of magnitude. Because 

when a company has already made the commitment of R&D, has 

70 

a product out in the market, that company is, frankly, vulnerable 

to any risk of disruption to its supply chain, disruption to its sales. 

And so that is the context in which you are negotiating to try to 

settle the case. 

The irony here, Congresswoman Chu, is the patent assertion entities don’t even want the exclusion order that they are asking for. 

They want money damages at the end of the day, but they feel as 

though the ITC provides a forum where they are more likely to get 

larger damages. 

Ms. CHU. Mr. Kelley and Mr. Rubin and Professor Chien, there 

has been the critique about the patent adjudication substantially 

increasing partly because of the Supreme Court’s decision in eBay 

v. MercExchange. And to back up the point, the article published 

just last year showed that the average number of ITC complaints 

annually has nearly tripled from the previous decades. To what do 

you attribute the rise in cases and what should Congress do about 

it? 

Mr. KELLEY. Thank you, Congresswoman, for that question. 

I attribute the rise in those cases at the ITC to the eBay case 

in part because it allowed or it prevented the PAEs from going into 

district court and getting the injunction. 

And I believe it also is attributable in part to the fact, as has 

been discussed, a PAE can get a very heavy hammer to use in leverage negotiations with the companies that it is litigating against. 

So I think that that is a big part of why we are seeing these rise 

in cases. 

Ms. CHIEN. Traditionally, the ITC has been reserved for domestic 

industries against foreign imports. But now that everyone makes— 

or many products are made overseas, it becomes easier. Every potential patent defendant becomes a potential ITC defendant as 

well. So I believe that the growth in global economy is a major 

driver as well as the favorable conditions for injunctions that the 

ITC presents. 

As to your question of what Congress can do, I think that I am 

in agreement, I think, with the gentleman from the American—on 

the antitrust side as well that there may be some opportunity for 

the ITC to reform itself with some oversight and direction from 

Congress, but if that is not proven to work out that Congress 

should act to change the statute. 

Ms. CHU. Mr. Rubin? 

Mr. RUBIN. I agree with the comments that were made that the 

impetus here is the rise of patent assertion entities, the rise of a 

global economy that requires companies to source materials and 

parts abroad and then the eBay decision. All three of those things 

result in the rise of this kind of litigation in the ITC. 

I think the answer is to segregate out what licensing is appropriate and what is not and make it very clear that licensing efforts 

that are designed to promote the advancement of the technology related to the patent, that is to be protected, but not after-the-fact 

licensing when products are already out in the marketplace. And 

I think that can be done statutorily. 

Ms. CHU. Thank you. I yield back. 

71 

Mr. AMODEI [presiding]. The Chair recognizes the distinguished 

gentleman, who is also a member of the Congressional Baseball 

Hall of Frame, from the Tarheel State, Mr. Watt. 

Mr. WATT. I thank the gentleman for all of that introductory 

comment. 

Let me see if I can approach this and explore some other options 

that might be available. 

Mr. Kelley, you talked about the Beacon case; and Mr. Rubin 

talked about a case in which they spent—what—$17 million—— 

Mr. RUBIN. Thirteen. 

Mr. WATT [continuing]. Thirteen million dollars only to have the 

cases dismissed. Does ITC have any kind of authority to really punish somebody or bite somebody who brings a case with faulty intentions such as maybe assessing $13 million in cost to the other side 

or attorneys fees? What discretion does the ITC have there to get 

at this in an absolutely different way? 

Mr. KELLEY. Thank you for the question, Ranking Member Watt. 

I believe that the ITC does have the ability to assess sanctions 

or some other penalties, but in practice and reality that is not 

done. So in the Beacon case that I have discussed, after Beacon dismissed the case in the ITC, we sought to get sanctions. There were 

some shenanigans going on in this case, and they ultimately withdrew. And there are some procedural issues that get in the way of 

us being able to successfully pursue sanctions. 

I like your thinking. I believe that that is one way perhaps to go 

about this, and I believe that the ITC should consider perhaps 

going down that route, and that might prevent some of what we 

consider this frivolous and expensive litigation. 

Mr. WATT. What would you think of that approach, Mr. Cassidy, 

as a precursor to legislative action? 

Mr. CASSIDY. I think the ITC should have the ability to shift fees 

and otherwise impose the ordinary sanctions that district courts 

are allowed to impose against litigants who are acting in bad faith, 

absolutely. 

Mr. WATT. And do you—let me be clear. Do you acknowledge that 

some of these cases are being brought in bad faith? I mean, you 

walked a pretty tight line there. You said we shouldn’t be acting 

yet. It is not at crisis proportions. But do you acknowledge that 

there is some gaming of the system? 

Mr. CASSIDY. I think all of litigation is gaming the system, generally. 

Mr. WATT. I agree with you that there is a lot of gaming of the 

system in all litigation. 

Mr. CASSIDY. But to answer your question, I am not aware personally of a single bad-faith litigant. 

Mr. WATT. You don’t think this case—either of these two cases 

that these gentleman have described were brought in bad faith? 

Mr. CASSIDY. No, sir. I have no evidence whatsoever to draw that 

conclusion. I think in each case the correct outcome was reached; 

and I think, for better or for worse—— 

Mr. WATT. $13 million in cost? 

Mr. CASSIDY. Yes, sir. And I think some of the same law firms 

that represent Cisco represent Tessera, and they are expensive. 

72 

*The material referred to is available in the Appendix. 

But it is a part of our system to allow people into court and into 

the ITC at a very low threshold. That is one the fundamental parts 

of the American civil justice system that we fought a revolutionary 

war to obtain, and every district court judge knows there are going 

to be nuisance cases brought, there are also going to be strike suits 

brought—— 

Mr. WATT. They also have some pretty aggressive sanctioning capacities, and they use them quite often to discourage people from 

gaming the system. And so it sounds like maybe perhaps in our 

discussions if we create a dialogue with ITC or have that opportunity, that might be at least one option that can be looked at. 

Did you have a comment, Professor? 

Ms. CHIEN. I just think it is a very interesting proposal or idea. 

And I would just say I have done some empirical work and I think 

Mr. Cassidy is right, that nuisance suits have existed since Justinian time. They have always been around. And Europe has tried 

with the English rule, fee shifting, and other jurisdictions have 

studied a lot of different jurisdictions that have tried to do it. 

And I think it is hard, that I think that judges are reluctant to 

say any litigant is bringing their case in bad faith. They want to 

give everybody an equal chance. So it is hard to tell before the fact 

if somebody is bringing something in bad faith, and so I think the 

problem with these rules is that they don’t deter as much as they 

should. 

Mr. WATT. Okay, well, I thank all of you for testifying. 

I will yield back. It is not my role to thank the panel, but I thank 

you anyway. Good hearing. 

Mr. AMODEI. Thank you. 

I would like to thank our witnesses on behalf of myself and the 

Ranking Member today. 

Mr. WATT. You want to ask questions? You are the last person 

on—- 

Mr. BERMAN. Me? This hearing goes on because I showed up? 

Mr. WATT. One could say that, but one could also say it was a 

worthy purpose for the hearing to go on because you showed up. 

Mr. AMODEI. In keeping with responsibility where it is due, the 

Chair now recognizes either for purposes of questions or yielding 

back the distinguished gentleman from the Golden State. 

Mr. BERMAN. Ten seconds. 

Mr. WATT. Now you really are holding us up. 

Mr. CASSIDY. Mr. Chairman, during that time may I ask that two 

documents that I incorporated into my testimony—my prepared 

testimony be submitted to the record? A letter to the ITC from the 

Innovation Alliance and a white paper we wrote on the ITC. 

Mr. AMODEI. Without objection, they will be included as part of 

the record today.* 

Mr. WATT. And since we are trying to give Mr. Berman more 

time, let me ask unanimous consent to insert three articles from 

Professor Rudolph Peritz: one called ‘‘Intellectual Property Rights 

as State-Initiated Restraints of Competition—or State-Initiated 

Competition;’’ two, ‘‘Patents and Payoffs or How Generics are Kept 

Off the Market;’’ and, three, ‘‘Competition Within Intellectual PropVerDate Aug 31 2005 10:46 Nov 28, 2012 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6601 H:\WORK\IP\071812\75152.000 HJUD1 PsN: DOUGA
73 

*The material referred to is available in the Appendix. 

erty Regimes—the Instance of Patent Rights.’’ And also a submission of views by Kevin H. Rhodes for the Coalition for 21st Century 

Patent Reform and 3M Company. 

Mr. AMODEI. Without objection, they will be included in the 

record of today’s hearing.* 

Mr. Berman? 

Mr. BERMAN. I am getting some of this secondhand, as you might 

imagine, and I apologize for not being here during the whole testimony, and I thank you very much for indulging me here to just 

catch up. 

There was one particular issue that I am told there may or may 

not have been agreement on, and basically it is that Mr. Cassidy 

testified that he was open to addressing—address some of these 

issues at the ITC if there was some remedy that was needed. And 

Mr. Rubin in his testimony described a situation with a Canadian 

patent—Canadian asserting a patent presumably showing it isn’t 

quite as simple as about a domestic industry. Is that the kind of 

an issue that you think becomes problematic in terms of the current way the ITC is working? 

Mr. CASSIDY. I think the intent of the ITC was not in its creation 

to govern American companies—but rather to govern importation 

when it comes to the matters we are discussing here under Section 

337. And I think, as other panelists would readily agree, the world 

has changed and we all import. Every manufacturer virtually imports. And when you import something into the United States, that 

is not a right, that is a privilege, and it comes with certain responsibilities. And I think it is settled law that importing an infringing 

good of—infringing a valued patent is an unfair trade practice. 

The question is, should we rewrite the law so that if you have 

to be headquartered in the United States you can import and not 

be subject to those rules? I don’t think anyone is proposing that. 

But I think in working toward something that makes more sense 

and takes on the character of a 21st century ITC we would have 

to look very carefully at who is an American company and what 

rights come with that when one imports. 

I don’t think there is an easy solution at all. And to be candid, 

notwithstanding the significant issues that are raised here, none of 

these specific proposals are compelling to a company and to an alliance that represents people who invent for a living, who instead of 

manufacturing create things and leave it to others to implement 

them. It is an important part of our economy. 

Mr. BERMAN. Look, I shouldn’t even be taking everybody’s time, 

because I wasn’t here for the whole testimony. But my assumption 

is it was certainly part of both the Chair’s and the Ranking Member’s opening statements, which I did hear, there is something that 

seems inappropriate that in the context of importation things can 

happen that in the context of the general patent system don’t always happen. And it seems to me that was the quandary that this 

hearing was trying to sort of develop, delve into. Is that an unreasonable reaction? 

Mr. CASSIDY. No. 

Mr. BERMAN. Okay. I think I will stop there. 

74 

Mr. RUBIN. I would just conclude, Congressman Berman, that 

the problem we are seeking to address is jurisdictional in nature. 

Who can be a complainant in the ITC? 

Like Mr. Kelley, I like Congressman Watt’s idea about thinking 

about other sanctions. Are there other things that we can to do 

strengthen this? 

At the end of the day, nobody is taking away a patent assertion 

entity’s right to go to court. The Federal district court, that forum 

is readily available, and dozens of cases are filed every day. 

The only question here is who can be a plaintiff, who can be a 

complainant in the ITC and you need a domestic industry. So the 

question to Mr. Cassidy’s point about what is a U.S. industry, what 

is an American company, who has a U.S. industry worthy of protection, that is really the issue we are dealing with today; and I think 

the proposals that have been made actually can quite help solve 

that problem. 

Mr. BERMAN. I guess another jurisdictional issue is ours with the 

Ways and Means on ITC. 

Thank you very much. I appreciate you indulging me here. 

Mr. AMODEI. Thank you. 

I would like to thank our witness for your testimony today. 

Without objection, all Members will have 5 legislative days to 

submit any additional materials for inclusion into the record in addition to those that we have already dealt with. 

Finally, without objection, all Members will have 5 legislative 

days to submit to the Chair additional questions for witnesses, 

which we will forward and ask the witnesses to respond as promptly as they can so that their answers may be part of the record of 

the hearing today. 

With that, again I want to thank you gentlemen and lady for 

coming here today and being witnesses; and this hearing is adjourned. 

[Whereupon, at 11:43 a.m., the Subcommittee was adjourned.] 

(75) 

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

76 

*Two additional attachments submitted by this witness are not reprinted in this record but 

are available at the Subcommittee and can be accessed at: 

http://ssrn.com/abstract=1150962 and http://ssrn.com/abstract=1856608 

Attachments to the Prepared Statement of Colleen V. Chien, Professor, 

Santa Clara University School of Law* 


ChienA-1.eps

By Electronic Filing 

July 9,2012 

The Honorable James R. Holbein 

Secretary, U.S. International Trade Commission 

500 E Street, S.W. 

Washington, DC 20436 

Re: In the Matter of Certain Wireless Communications Devices, Portable Music and Data 

Processing Devices, Computers, and Components Thereof, Investigation No. 337-TA-745 

SUBMISSION OF 19 ECONOMICS AND LAW PROFESSORS 

The Statute Requires the ITC To Consider Competitive Conditions and Consumers 

19 U.s.c. § 1337(d)(1) states: "If the Commission determines, as a result of an 

investigation under this section, that there is a violation of this section, it shall direct 

that the articles concerned, imported by any person violating the provision of this 

section, be excluded from entry into the United States, unless, after considering the 

effect of such exclusion upon the public health and welfare, competitive conditions in 

the United States economy, the production of like or directly competitive articles in the 

United States, and United States consumers, it finds that such articles should not be 

excluded from entry.'" Congress intended public interest considerations to be 

"paramount" to the statute's administration. S. Rep. No. 93-1298, 93rd Cong., 2d Sess. 

193 (1974).' Under Commission Order, administrative law judges of the ITC now may 

take evidence on the public interest at the outset of a case, rather than waiting until the 

end.' 

Our Qualifications To Talk about Competitive Conditions and Consumers 

In this submission, we consider one aspect of Section 337 (d)(l): the impact of 

excluding products that practice standards-essential patents (SEPs) on competitive 

conditions and United States consumers.4 We have studied patent and competition 

policy for years, and in some cases decades. Collectively we have published over 100 

scholarly articles, casebooks, treatises, and book chapters, on the subjects of standards, 

, 19 U.S.c. § 1337(d)(I). 

2 The Senate Report further reads: "Should the Commission find that issuing an exclusion order would 

have a greater adverse impact on the public health and welfare; on competitive conditions in the United 

States economy; on production of like or directly competitive articles in the United States; or on the 

United States consumer, than would be gained by protecting the patent holder [] then [an] [] exclusion 

order should not be issued." 5. Rep. No. 93·1298, 93rd Cong., 2d Sess. 197 (1974). 

3 Rules of Adjudication and Enforcement, 19 CFR Part 210, 76 Fed. Reg. 64803 (Oct. 19, 2011) available at 

http://www.usitc.gov I secretary Ifed _reg_ n otices/rules/fi nalru les210. pdf. 

4 In so dOing, we take no position on Questions 1-6 of the Request for Written Submissions, which ask 

about the particulars of this case. 
77 


ChienA-2.eps

competition policy, patent remedies, patent licensing, administrative law, and the 

International Trade Commission. 

We provide these views as teachers and scholars of economics, antitrust and 

intellectual property, remedies, administrative, and international intellectual property 

law, former Department of Justice lawyers and chief economists, a former executive 

official at the Patent and Trademark Office, a former counsel at the ITC Office of the 

General Counsel, and a former Member of the President's Council of Economic Advisers. 

The ITC Should Not Grant Exclusion Orders Based on SEPs Subject to RAND 

Commitments 

Some of us have been called "pro-competition"; others among us have been 

accused of being "pro-patent." However, we all agree that ITC exclusion orders5 

generally should not be granted under § 1337(d)(1) on the basis of patents subject to 

obligations to license on "reasonable and non-discriminatory" (RAND) terms. Doing so 

would undermine the significant pro-competitive and pro-consumer benefits that RAND 

promises produce and the investments they enable. A possible exception may arise if 

district court jurisdiction is lacking, the patent is valid and infringed, and the public 

interest favors issuing an exclusion order. We explain our position below. 

SEPs Subject to RAND Commitments Differ from Other Patents 

The Federal Circuit has said that "Congress intended injunctive relief to be the 

normal remedy for a Section 337 violation.,,6 However, the Federal Circuit has also 

repeatedly stated that "the Commission has broad discretion in selecting the form, 

scope, and extent of the remedy.'" Furthermore, a unique set of factors comes into play 

for SEPs that are subject to RAND commitments. Holders of SEPs put aside their rights to 

exclude when they agree to make their technology available on terms that are 

reasonable and non-discriminatory and imply that legal remedies (i.e. monetary 

damages) are adequate 8 Through their promises, patent holders have traded the right 

to exclude for the privilege of being declared essential to the standard. 

Having a patent declared standards-essential benefits the patent holder. Broadlyadopted standards like Wi-Fi get implemented in thousands of products sold to 

o And ITC cease and desist orders, the grant 01 which are governed by § 1337(1)(1). 

6Spansion, Inc. v. United States Int'l Trade Comm'n, 629 F.3d 1331, 1358 (Fed. Cir. 2010). cert. denied, 132 

S. Ct. 758, 181 L. Ed. 2d 482 (U.s. 2011). 

7 Hyundoi Electronics Industries Co., Ltd. v. U.S. Intern. Trade Com'n, 899 F.2d 1204, 1209 (Fed. Cir. 1990), 

citing Visco!an, S.A. v. United States Int'l Trade Comm'n, 787 F.2d 544, 548 (Fed.Cir.1986). 

8 See eBay Inc. v. MercExchonge, L.L.C., 547 U.s. 388,391 (2006) (a plaintiff must demonstrate the 

inadequacy of legal remedies before a court may grant injunctive relief). 
78 


ChienA-3.eps

hundreds of millions of consumers, in many cases earning large royalty streams. Failure 

to be included in a standard, in contrast, can relegate a technology to irrelevance. 

Knowing this, patent owners are often willing to provide standards setting organizations 

(SSOs) with RAND commitments and lobby for the privilege to do SO,9 even though the 

standards setting process may be painstaking and slowlO Indeed, royalty-free or RAND 

licensing of standard-essential patents is required by many of the major standards 

bodies including American National Standards Institute (ANSI). which administers and 

coordinates US private sector standards among 100,000 companies, and the European 

Telecommunication Standards Institute (ETSI), which sponsors the development of 

European telecommunications standards among more than 700 members." 

Critically, SEPs cannot, by definition, be designed around without sacrificing 

compliance with the standard. This makes them different than non-SEP patents that, if 

they cover minor features, can be designed around without sacrificing key functionality. 

While inventing around does not eliminate the danger of patent hold-up, it does provide 

a check on the bargaining power wielded by patent holders that seek injunctive relief. 

This check is much weaker when the patents are standards-essential. There, disabling 

even a single feature to avoid infringement of an SEP can greatly detract from the value 

of a product by making it inoperable for its intended purpose, for example, a laptop that 

cannot connect to a Wi-Fi network. Furthermore, many consumers, counting on 

standards to provide the functionality they require, are unwilling to purchase noncompliant products. An exclusion order that forces manufacturers to produce noncompliant products would undermine the network effects associated with successful 

standards and harm consumers. 

Furthermore, hundreds or even thousands of patents can read on a single standard, 

especially in the information and communications sector of the economy. In the ETSI 

9 Joseph Farrell et aI., Standard Setting, Patents and Hold-Up, 74 Antitrust l.J. 603, 606(20071. 

10 Discussed, e.g. in Carl Shapiro, Setting Compatibility Standards: Cooperation or CoJ/u5ion?, in 

EXPANDING THE BOUNDARIES OF INTELLECTUAL PROPERTY 85 (Rochelle Dreyfuss et al. eds., 2001), and 

Timothy Simcoe, Standard Setting Committees: Consensus Governance for Shared Technology Piatforms, 

102 American Economic Review 305(2012). 

11 Guidelines for Implementation of the ANSI Patent Policy (February 2011), ANSI Essential Requirements, 

at Section II and available at 

http://publicaa.ansi.org/sitesjapdljDo(uments/Standards%2OActivitiesjAmerican%20National%20Standa 

rdsjProcedures,%20Guides,%20and%20Forms/Guidelines%20for%20Implementation%20of%20ANSI%20P 

atent%20Policy%202011.pdf; ETSI's IPR Policy (Nov. 30, 2011), at Annex 6 available at 

http://www.etsi.orgjwebsite/aboutetsi/iprsinetsi/iprsinetsi.aspx. See also Mark A. Lemley, Intellectual 

Property Rights and Standard-Setting Organizations, 90 Calif. L. Rev. 1889, 1906(2002) (finding that 29 

out of the 36 standard-setting organizations studied with policies required RAND licensing, another 6 

required outright assignment and three others suggested but did not require FRAND licensing). See also 

Benjamin Chiao, Josh Lerner, and Jean Tirole, The Rules oj Standard-Setting Organizations: An Empirical 

Analysis, 38 RAND Journal of Economics 90S. 

3 
79 


ChienA-4.eps

standard setting organization, patent owners have declared more than 750 unique 

patent families as essential to the GSM cellular standard, more than 1,600 as essential 

to the third-generation UMTS cellular standard, and more 500 as essential to the fourth 

generation LTE cellular standard." More than 900 patents have been declared to be 

essential to the MPEG-2 standard for encoding digital video and audio, including over 

100 US patents l3 

This situation - which is common to SEPs - gives owners of SEPs undue bargaining 

leverage if they are permitted to obtain injunctions, because the inability to practice 

even a single SEP will result in the product being noncompliant. As a result, the 

bargaining leverage of patents covering minor aspects of the standard far outweighs 

their contribution 14 The Federal Trade Commission has reached this same conclusion, 

based on reasoning very similar to ours1S 

Excluding Products that Practice SEPs Adversely Impacts Competitive Conditions and 

Consumers 

19 U.s.c. § 1337(d)(1) does not compel the Commission to grant exclusion orders. 

Rather, it empowers the ITC to evaluate whether or not an exclusion order is in the 

public interest, and to proceed accordingly. The Federal Circuit parses the statute to 

identify four separate factors." "The enumerated public interest factors include: (1) the 

public health and welfare; (2) competitive conditions in the United States economy; (3) 

the production of like or directly competitive articles in the United States; and (4) United 

States consumers.,,17 On the three occasions that the ITC has declined to enter an 

injunction,'8 its focus has been on two factors: the public interest in health and welfare 

and the unavailability of alternatives. We use these precedents to inform our 

12 K. Blind et aI., Study on the Interplay between Standards and Intellectual Property Rights (JPRs), Tender 

No ENTR/09/015 (OJEU S136 of 18/07/2009) Final Report, April 2011. 

13 MPEG LA, MPEG-2 Patent Portfolio License Briefing (Aug. 4, 2010); See also Richard J. Gilbert, Ties That 

Bind: Policies to Promote (Good) Patent Pools, 77 Antitrust Law Journal No.1, 13 (2010). 

14 See Farrell, et. ai, supra, Mark Lemley and Carl Shapiro, Patent Holdup and Royalty Stacking, 85 Texas 

Law Review 1991, Carl Shapiro, Injunctions, Hold-Up, and Patent Royalties (2010),12 American Law and 

Economics Review 218; See a/50 Richard J. Gilbert, Deai or No Deal? Royalty Negotiations by Standard 

Development Organizations, 77 Antitrust Law Journal 855 (2011). 

15 United States Federal Trade Commission Statement on the Public Interest, Inv. No. 337-TA-74S. (June 

2012) 

1G See Spansion, 629 F.3d at 1358 (Fed. Cir. 2010). 

17 Id. 

18 See Opinion of Vice Chairman Alberger and Commissioners Bedell and Stern In re Certain Automatic 

Crankpin Grinders at 17-18, USITC Inv. No. 337-TA-60 (Dec. 17, 1979); Commission Action and Order In re 

Certain Inclined-Field Acceleration Tubes at 22-31, USITC Inv. No. 337-TA-67, (Dec. 291980); Commission 

Memorandum Opinion In re Certain Fluidized Supporting Apparatus and Components Thereof, at 1-2, 

USITC Inv. No. 337-TA-182, 337-TA-188, 225 U.s.P.Q. 1211, 1984 WL 63741 (Oct. 5, 1984). 

4 
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description below of how competitive conditions and consumers are particularly 

impacted when the use of SEPs is withheld through an exclusion order. 

First, companies count on the availability of standards-essential technology to make 

significant investments. Electronics manufacturers spend hundreds of millions of dollars 

on fabrications plants that can make products compatible with a standard such as the 

IEEE 802.11 wireless local area network protocol. Comparable sums are spent in the 

information and communications sector to design and build products that comply with 

various product standards. The companies making these investments depend on their 

ability to license any technology necessary to comply with these standards on 

reasonable terms. They typically become "locked-in" to the standard, meaning that a 

significant portion of their investments would be rendered uneconomic if they were 

blocked from producing standards-compliant products. 

If the ITC were generally to allow RAND-obligated patents to be used as the basis of 

injunctions, this would undermine the basic bargain RAND commitments represent. 

Industry participants would be less willing to make the investments needed to design 

and build standards-compliant products, due to the risk they will later be unable to 

make and sell those products. A clear statement from the ITC that it will generally 

refrain from issuing exclusion orders for SEPs, in contrast, will increase certainty for 

firms making investments in complementary technology.'9 

Second, these investments promote competition and inure to the benefit of United 

States consumers 20 There are an estimated 700,000 standards and technical regulations 

around the world, and 450 standards setting organizations in the United States alone. 21 

Without these organizations and the standards they develop, the Internet would not 

work, phones could not talk to each other, and it would be harder to buy printer 

paper. 22 Standards facilitate network effects - the more devices that can read my text 

messages, the more valuable my text messages become. Open standards enable greater 

1':1 Federal Trade Commission, supra at S. 

20 For a thoughtful recent statement describing how standards promote competition and generate 

substantial benefits to consumers, while elevating the dangers of patent holdup, see the February 13, 

2012 Statement by the Department of Justice's Antitrust Division regarding its decision to close its 

investigations into several transactions involving SEPs, Qvailable at 

http://www.justice.gov/atr/public/press_releases/2012/280190.htm. It closed these investigations in part 

based on commitments not to seek injunctions in disputes involving SEPs. However, citing "more 

ambiguous statements that do not provide the same direct confirmation," the Division stated that it 

"continues to have concerns about the potential inappropriate use of SEPs to disrupt competition and will 

continue to monitor the use of SEPs in the wireless device industry." 

21 Report to the European Round Table 01 Industrialists (ERT) prepared by FIPRA International, October 

2010, pp.3, 12 and available at 

http://www.ert.eu/sites/delault/liles/Standard%20setting%20in%20a%20changing%20global%20Iandsca 

pe%20Final%20Report_0.pdl. 

22 Lemley, supra at 1892. 

5 
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competition in interoperable products and services. 23 A lack of standardization, in 

contrast, can leave a consumer "stranded" - as anyone who has forgotten the charge 

cord for their mobile phone can attest. 

Proprietary formats can lead to greater market power when the technology is not 

made available to all comers.24 Undoing the standards bargain through an exclusion 

order may leave consumers who have already bought the product stranded, unable to 

get support or services for products already purchased. 25 

Furthermore, issuing an order to exclude standards-compliant products would have 

consequences not only on individual respondents but also on third parties - for 

example, service providers, application developers, and other members of the 

ecosystem of the enjoined product.'6 The larger the market for the enjoined product, 

the greater the collateral impact. 

Finally, we are mindful of several other relevant sources of authority. One is the 

Federal Trade Commission's official comment on issues of public interest in this case27 

Similar to the present comment, it urges the ITC to consider the "[hJigh switching costs 

combined with the threat of an exclusion order could allow a patentee to obtain 

unreasonable licensing terms despite its RAND commitment ... because implementers are 

locked into practicing the standard." 28 Agencies don't often comment publicly in ITC 

cases,'9 giving the FTC's statement additional significance. The Department of Justice 

has also pUblicly expressed its concern about the use of RAND patents to seek 

23 Shapiro, supra at 89-90. 

24 1d. 

2S Id. at 72, 79-84. 

26 See Certain Baseband Processors, p. 153 (''The potential harm to economic actors, in this case 

including handset manufacturers and telecommunications service providers, is properly part of our 

EPROMs analysis, and we have indeed fully weighed potential harm to third parties and to legitimate 

trade in that prior analysis. In fact, under our EPROMs analysis, we found that full downstream relief was 

not permitted in this investigation due to, among other things, the magnitude of the impact on third 

parties.") (ultimately concluding "a downstream remedy with a grandfathering exception does not raise 

public interest concerns" because "the relief we propose has a much more limited impact on availability 

of 3G-capable handsets, and thus a lesser impact on the public interest.") (see also id. at 153-154). 

27 United States Federal Trade Commission Statement on the Public Interest, Inv. No, 337-TA-745 (June 

2012). 

2a

'

d. at 3. 

2.9 Based on a search of EDIS, the lTC's electronic docketing system and related research, Politicians have 

sent letters on behalf of their constituents to the ITC. See generally Colleen Chien, Publicly Influencing the 

ITC (unpublished paper, on file with the author). 19 USC 1337 (b)(2) requires the ITC to consult with 

governmental departments and agencies "as it considers appropriate," According to the legislative 

history, the requirement of these consultations reflects Congress' "[belief] that the public health and 

welfare and the assurance of competitive conditions in the United States economy must be the overriding 

considerations in the administration of this statute." S. Rep. No. 93-1298, 93rd Cong., 2d Sess.197 (1974). 

6 
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injunctions.'o The President has made several statements about the importance of 

wireless technologies for consumers and the national economy.31In previous cases 

when the ITC has declined to award or has tailored an exclusion order, it has relied upon 

such official comment and agency, Presidential and Congressional policy to explain its 

position." 

In addition, the statute's legislative history addresses opportunistic behavior by 

patent holders. It cautions against using the statute to reward such behavior, noting 

that an "exclusion order should not be issued ... particularly in cases where there is 

evidence of price gouging or monopolistic practices in the domestic industry." S. Rep. 

No. 93-1298, 93rd Cong., 2d Sess. 107 (1974). 

Money Damages, not Injunctions, are the Appropriate Remedy for SEPs Subject to 

RAND Commitments 

In short, though standards create value by facilitating interoperability and enabling 

competition in complementary products to thrive, they increase the vulnerability of 

standards implementers to patent holdup. RAND promises counter these concerns. 

They reassure companies that they will not be held up, but rather will be able to access 

the required technologies on fair, reasonable, and non-discriminatory terms. 

Holders of SEPs who have promised to license their patents on reasonable terms 

should not generally be allowed to obtain injunctions against products that comply with 

the standard. Regardless of the respondent specifics referred to in Question 7 of the 

Request for Written Submissions, the patentee has received the benefit of the bargain 

by having their patented technology included in the standard. In return, they are 

obligated to license their patent on RAND terms. Allowing holders of SEPs to obtain 

injunctions would give the RAND licensing obligation an implicit "unless we don't feel 

like it" clause that would render the commitment virtually meaningless. 

30 See February 13, 2012 Statement by the Department of Justice's Antitrust Division, supra. 

"See Verilon Statement on the Public Interest, Inv. No. 337-TA-745 (June 20121. 

32 See Commission Action and Order In re Certain Inclined-Field Acceleration Tubes at 21, USITC Inv. No. 

337-TA-67, (Dec. 29 1980) (citing in support of its decision to not grant an order enjoining Dowlish tubes 

used for research, "the President and the Congress have issued declarations of support for basic science 

research," and "[t]he National Science Foundation Act" (in this case the NSF submitted a comment); 

Opinion of Vice Chairman Alberger and Commissioners Bedell and Stern In re Certain Automatic Crankpin 

Grinders at 17-18, USITC Inv. No. 337-TA-60, 205 U.S.P.Q. 71,0079 WL419349 (Dec. 17, 19791(justiiying 

the Commission's decision not to exclude efficient crankpin grinders in part by "the fact that Congress and 

the President have also clearly established a policy requiring automotive companies to increase the fuel 

economy of the automobiles they produce."); See also Commission Decision in Certain Baseband 

Processor (TA-337-S43), where the ITC custom tailored the injunction it ordered, and cited the public 

comments of FEMA and the FCC. 

7 
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Patent owners may legitimately worry that without the threat of an injunction, 

infringers will turn down reasonable offers. We are sympathetic to these concerns. 

However, district courts are in a better position to deal with them by imposing 

attorneys' fee sanctions for bad behavior or enhanced damages in certain situations. 33 

District courts also can issue injunctions, even for SEPs subject to RAND commitments, if 

the equities favor doing so. 

Exceptions to the Rule and Injunction Tailoring 

As one of us has written elsewhere: "[t]here is at least one situation where an ITC 

action and exclusion order on the basis of a RAND patent may be appropriate, however. 

[]In the cases when the district court lacks jurisdiction over a defendant but the in rem 

jurisdiction of the ITC is available, 34 the ITC provides the patentee with its only 

recourse." 35 In such cases, ITC review and relief may be appropriate, provided that the 

other prerequisites to relief have been met. However, it may well be the case that even 

if the ITC is the only venue in which relief is available, an exclusion order is still not 

appropriate due to the failure to meet public interest or other prerequisites. 

If the ITC decides to issue injunctions based on SEPs subject to RAND commitments, 

we urge the Commission to consider tailoring its order to minimize harm to the public 

interest, for example through delay or grandfathering. Delaying injunctions can address 

certain holdup problems. Faced with the threat of an exclusion order, the respondent 

will sometimes design around the standard even if it means disabling standards 

essential functionality.36 But if the patent is found invalid or not infringed, the effort will 

have been wasted. 37 Delaying the exclusion order reduces investment in unnecessary 

design-a rounds and gives competitors time to adjust. 38 Grandfathering existing models 

can also help consumers, at a minimal cost to the patentee. Thus, in Certain Baseband 

Processors, the Commission adjusted the scope of the exclusion order by grandfathering 

33 Joseph Scott Miller, Standard Setting, Patents, and Access Lock-In: RAND Licensing and the Theory afthe 

Firm, 40 Ind. L. Rev. 351, 390 (2007). 

34 65% of ITe cases have a district court counterpart, suggesting that this isn't a problem in the m<ljority of 

cases, since the ITe and district court both have the power to hear the case. See Colleen Chien, Patently 

Protectionist? An Empirical Analysis of Patent Cases at the International Trade Commission, SO WM. & 

MARY l. REV. 63, 64 (2008). 

35 Colleen Chien & Mark Lemley, Patents, Holdup, and the ITe _ Cornell Law. Rev. (forthcoming 2012), at 

53, available at http://papers.ssrn.com/soI3/papers.cfm?abstract_id=1856608. 

36 See Lemley & Shapiro, supra at 2002. 

37 See id. at 2002, n. 71. 

38 See id. at 2038, Commission Decision in Personal Data and Mobile Communications Devices TA-337-

710, at 81. (liT-Mobile itself has advised the Commission that a four-month transition period would likely 

be sufficient .... We find T-Mobile's suggestion to be reasonable and within our authority to 

implement."). 

8 
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in existing models of handsets.,,39 Likewise, in Personal Data and Mobile 

Communications Devices, the Commission grandfathered refurbished replacement 

handsets into its exclusion order.'o In Sortation Systems" and Transmission Trucks," 

the ITC exempted from its exclusion order spare parts to service existing systems and 

facilities, citing public interest. 

Responses to Questions 8-13 

In sum, we believe that ITC relief should generally not be granted under §1337(d)(1) 

on the basis of patents subject to RAND commitments 43 A possible exception arises in 

cases where district court relief is unavailable due to a lack of jurisdiction and the patent 

is valid, infringed, and public interest favors granting relief. In the rare case where an ITC 

exclusion order is appropriate, the ITC should make use of its remedial flexibilities, 

including grandfathering and delay, to minimize harm to competition and u.s. 

consumers. 

Applying these principles to the Commission's specific questions," we believe that 

the answer to Question 8 is "affirmative": a RAND obligation should generally preclude 

issuance of an exclusion order, except as we have described. The addition of the 

patentee's unwillingness to offer or license their RAND obligated patents as 

contemplated by Questions 9-12, or a failed negotiation as contemplated by Question 

13, should not change this result. The patentee has committed to making the 

technology available on RAND terms, and received the benefit of that bargain. If the 

respondent fails to accept an offer made to them that has been determined by a 

39 Commission Decision in Certain Baseband Processors Inv. No, 337-TA-543, supra at 150. 

40 Commission Decision in Personal Data and Mobile Communications Devices 337-TA-710, supra at 83. 

("HTe shall be permitted to import into the United States [for 19 months] ... refurbished handsets to be 

provided to consumers as replacements."). 

41 Certain Sortation Systems, Parts Thereof, and Products Containing Same; Notice of Violation of Section 

337 of the Tariff Act of 1930 and Issuance of Limited Exclusion Order, 68 Fed. Reg. 5047 (Jan. 31, 2003) 

(''The Commission determined to ir'ciude an exemptio~ in the limited exclusion orderfor importations 

of spare parts for United Parcel Service's Hub 2000 facility in Louisville, Kent'--lcky,"). 

42 Certain Automated Mechanical Transmission Systems for Medium-Duty and Heavy-Duty Trucks, and 

Components Thereaf, Termination of Investigation; Issuance of a Limited Exclusion Order and a Cease and 

Desist Order, at 3, EDIS Doc. 10. 228343, USITC Inv. No. 337-TA-503 (Apr. 7, 2005) ("The limited exclusion 

order does not cover parts necessary to service infringing automated mechanical transmission systems 

installed on trucks prior to the issuJl'1ce of the order."). 

43 Though the question of whether relief should be relief on the basis of SEPs not subject to FRAND is 

beyond the scope of the lTC's request, we note that many of the same impacts to consumers and 

competitive conditions discussed in this comment also extend to this situation. 

44 As discussed above at note 2 we take no position on Questions 1-6 which ask about this specific 

investigation or otherwise do not implicate public interest concerns. Question 7 is addressed supra at the 

top of page 6. 

9 
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suitable fact finder to be RAND, district court damages, sanctions, and/or injunctions 

may be appropriate. 

We thank the Commission for the opportunity to comment on these important 

issues. 

Respectfully Submitted, 

10 
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ChienA-11.eps

lsi Colleen Chien 

Colleen Chien 

Assistant Professor of Law 

Santa Clara University School of Law 

lsi Carl Shapiro 

Carl Shapiro 

Transamerica Professor of Business Strategy 

Haas School of Business 

UC Berkeley 

1t~f~ 

Richard Gilbert 

Emeritus Professor of Economics 

UC Berkeley 

lsi Arti Rai 

Arti Rai 

Elvin R. Latty Professor of Law 

Duke Law School 

lsi Dan Burk 

Dan Burk 

Chancellor's Professor of Law 

UC Irvine 

lsi Daniel Cahoy 

Daniel Cahoy 

Associate Professor of Business Law 

Smeal College of Business 

Pennsylvania State University 

lsi Michael Carrier 

Michael A. Carrier 

Professor of Law 

Rutgers Law School Camden 

lsi Jorge Contreras 

Jorge Contreras 

Associate Professor of Law 

American University Washington College of 

Law 

11 

lsi Thomas Cotter 

Thomas Cotter 

Professor of Law 

University of Minnesota School of Law 

lsi Stefania Fusco 

Stefania Fusco 

Visiting Assistant Professor of IP 

University of New Hampshire School of Law 

lsi Shubha Ghosh 

Shubha Ghosh 

Vilas Research Fellow 

Professor of Law 

University of Wisconsin Law School 

lsi Eric Goldman 

Eric Goldman 

Associate Professor of Law 

Santa Clara University School of Law 

lsi Joseph Miller 

Joseph Miller 

Professor of Law 

University of Georgia Law School 

lsi Michael Risch 

Michael Risch 

Associate Professor of Law 

Villanova University School of Law 

Is/Jason M. Schultz 

Jason M. Schultz 

Assistant Clinical Professor of Law 

UC Berkeley School of Law 

lsi Ted Sichelman 

Ted Sichelman 

Professor of Law 

University of San Diego School of Law 
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lsi Katherine J. Strandburg 

I(atherine J. Strandburg 

Professor of Law 

New York University School of Law 

12 

lsi Esther van Zimmeren 

Esther van Zimmeren 

Post-doctoral Research Fellow 

KU Leuven and Maitre de Conference at 

University of Liege 

lsi Christal Sheppard 

Christal Sheppard 

Assistant Professor of Law 

University of Nebraska College of Law 
88 


ChienB-1.eps

Patent Holdup, the lTC, and the Public Interest' 

Colleen V. Chien' & Mark A. Lemley' 

AB5!1?ACI 

The Supreme Court's eBay decision requires district courts to weigh the equities before 

permanently enjoining a defendant. This is a good thing. Since eBay, the tactic of threatening 

injunctions to, in the Court's words, "extract exorbitant fees" has declined. It's now harder for a 

patent assertion entity (PAE), or patent "troll," and in certain cases, operating companies, to 

win on injunction. But eBay's discretionary test doesn't apply at the ITe. This has had the 

unintended consequence of driving those who seek to circumvent eBay's ruling to the lTC, where 

the odds of getting an injunctions are better. In this paper, we document that trend, which is 

dramatic. Increasingly, cases filed at the ITC are filed by PAEs against an entire industry, often 

information technology. Practicing entities too have turned to the ITC to seek injunctions 

district courts won't give them, for example on patents covering industry standards. 

Because the ITC can't award damages, it has granted injunctions as a matter of course. 

But as we suggest in this paper, the Commission has more power to adjust the remedy it grants 

than previously recognized. We think it should use that flexibility to limit exclusion orders when 

competitive conditions demand it. A PAE may not be any mare justified to receive an exclusion 

order fram the ITC under its public interest analysis than to receive an injunction from a district 

court applying eBay. Even practicing entities should be denied the power to exclude in same 

circumstances, for example when the patents are standards-essential and/or encumbered bV a 

RAND license, there is no evidence of bad faith, and the patentee con seek damages in the 

district court. When exclusion orders are issued, delays in their implementation and 

grandfathering in existing products can reduce holdup. Band and penalty provisions could be 

used to ensure that patentees are compensated for ongoing infringement during these 

transition periods. Using its discretion wisely, the ITC can administer the statute to fairlv and 

efficiently give patentees their due while minimizing harm to the public interest. 

't© 2012 Colleen V. Chien & Mark A. Lemley. This is the 7/17/12 version submitted for the purposes 

of the House Committee on the Judiciary Subcommittee on Intellectual Property, Competition and 

pthe Internet 7/18/12 Hearing on the ITC and Patent Disputes. The final version of this article will be 

posted to www.ssrn.com. An earlier version of this article provided the basis for our Editorial, Patents 

and the Public Interest, NEWYORKTIMES.COM, Dec. 13, 2011, 

b.1:!fJ:Li..www.nytimes.com/2011/12/13/opinionMtents·sDl.!!!Phones·ond·the·public:inter:..... t.html. 

Thanks to Jonas Anderson, John Golden, Rose Hagan, Sapna Kumar, Stefani Schanberg and participants 

at the 2012 Hastings IP Law Workshop and at the Stanford·Samsung Conference on Patent Enforcement 

for helpful discussions, RPX Corp. for sharing litigation data and to Gerald Wong, Lee-Ann Smith 

Freeman and Wade Malone for research assistance. 

2 Assistant Professor, Santa Clara University School of Law. 

3 William H. Neukam Professor, Stanford Law School; partner, Durie Tangri LLP. 
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T.A8LE Of CONTEIIITS 

INTRODUCTION ............................................................................................................................... 3 

I. THE RUSH TO THE ITC ................................................................................................................ 10 

II. EXCLUSION ORDERS AND THE PUBLIC INTEREST.. .................................................................... 23 

III. TAILORING, BONDING, AND PAUSING IN THE PUBLIC INTEREST ............................................ 34 

A. Grandfathering/Tailoring Injunction Scope .......................................................................... 39 

B.~~ ...................................................................................................................................... " 

C. Bonds and Penalties .............................................................................................................. 45 

D. In Sum ................................................................................................................................... 48 

IV. CONCLUSION ........................................................................................................................... 52 

2 
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Introduction 

In the wake ofthe Supreme Court's 2006 e8ay decision: courts rarely grant injunctions 

to parties that assert patents as a business model, aka "patent trolls" or patent-assertion 

entities (PAEs).s This is a good thing. By requiring courts to consider the equities of a particular 

case before granting an injunction, the Court in one fell swoop wiped out much of the holdup 

problem that had beset the patent system. As Justice I<ennedy put it in his e8ay concurrence, 

this hold up problem results when "an injunction ... can be employed as a bargaining tool to 

charge exorbitant fees [l.,,6 

But there is another jurisdiction that routinely grants injunctions in patent cases: the 

International Trade Commission (lTC). In the past five years, both PAEs and product-producing 

companies have flocked to this once-obscure trade agency, generally in search of an injunction 

or the credible threat of one 7 

4 eBay Inc. v. MercExchange, L.L.c., 547 U.S. 388 (2006). 

5 Colleen V. Chien, From Arms Race to Marketplace: The Complex Patent Ecosystem and Its Implications 

tor the Patent System, 62 HASTINGS LJ. 297, 328 (2010) (PAEs are "entities ... focused on the 

enforcement, rather than the active development or commercialization of their patents."), accord, FTC 

The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition 8 n.5 (Mar. 2011), 

available at http://''Y!oYw.ftc.gov/os!2011/03!110307patentreport.pdf. We use this term at various 

points, rather than the more popular (and more all-encompassing) "non-practicing entity (NPE)" 

because, as our data show, various types of non-practicing entities do get injunctions after eBay, though 

PAEs rarely do. 

6 eBay, supra note 4, at 396. 

7 See, Sapna Kumar, The Other Patent Agency: Congressional Regulation of the lTC, 61 FLA. L. REV. 529, 

529,532 (2009); Editorial, The Android Patent War, WALL ST. J., at A16, Dec. 5, 2011, available at 

http://onllpe.wsj.com/articie/SB10001424Q5297020482E!Z!J4577074523,239966352.html (subscription 

required). Accord Testimony of Laura Quatela, Eastman-Kodak, before the Federal Trade Commission, 

Hearings on The Evolving Patent Marketplace Hearings, April 17, 2009, transcript at p. 127, available at 

<>("e8ay has driven a lot of litigation towards the lTC, and that trend is dear.") 

3 
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ChienB-4.eps

Indeed, the ITC is busier with patent cases than it has ever been before 8 The result - a double 

standard in patent law about when an injunction is available - has drawn the scrutiny and in 

some cases, fury of mainstream media,9 academics,lo practitioners/I and the Federal Trade 

Commission. 12 The practical effect has been to undo much ofthe desirable effect of e8ay. 

The impact of an ITC "exclusion order,,13 preventing importation of a product can be 

dramatic. To comply with such an order, a company must pull its products from the market and 

8 See, e.g, Jenna Greene, Record Number of ITC Cases Filed in First Half of 2011, Nat'l LJ., July 5,2011. 

The ITC instituted 56 IP investigations in the first nine months of 2011, as many as it did in all of 2010, 

and a record 70 investigations throughout 2011. http://www.usitc.gov/press_room/337_stats.htm. 

9 See, e.g., id. (calling an ITC patent case "a weapon of protectionist mass destruction against 

competitors"; and section 337 an "absurdity ... that could do great economic harm to one of the few U.S. 

industries that is growing rapidly."). ; Editorial, Smoot-Hawley's Revenge, WALL ST. J., Aug. 23, 2006, at 

AI0 (describing section 337 as "potentially crippling the U.S. wireless-phone industry"); and Colleen V. 

Chien & Mark A. Lemley, Patents and the Public Interest, NEW YORK TIMES.COM (Dec. 13, 2011). 

10 See, e.g., Colleen V. Chien, Patently Protectionist? An Empirical Analysis of Patent Cases at the 

International Trade Commission, 50 WM. & MARY L. REV. 63, 67-68 (2008); Robert W. Hahn & Hal J. 

Singer, Assessing Bias in Patent Infringement Cases: A Review of International Trade Commission 

Decisions, 21 HARV. J.L. & TECH. 457, 464 (2008); Sapna Kumar, supra note 7, The Other Patent Agency: 

Congressional Regulation of the lTC, 61 FLA. L. REV. 529, 532-33 (2009); Thomas A. Broughan, III, 

Modernizing § 337's Domestic Industry Requirementfor the Global Economy, 19 FED. CiR. B.J. 41, 78-79 

(2009); Taras M. Czebiniak, When Congress Gives Two Hats, Which Do You Wear? Choosing Between 

Domestic Industry Protection and IP Enforcement in § 337 Investigations, 26 BERKELEY TECH. L.J. 93, 93-94 

(2011) (all noting and describing the divergence in federal court and ITC rules and law); see also Eric 

L. Lane, Keeping the LEOs an and the Electric Motors Running: Clean Tech in Court after Ebay, 2010 DUKE 

L. & TECH. REV. 13, at i-ii, xxx-xxxi (2010) (noting that non-practicing patentees have moved to the ITC to 

avoid eBay and warning that this may "adversely affect implemented clean technologies"). 

11 See, e.g. Edward H. Rice & Marina N. Saito, After Ebay: Can the ITC Offer Better Remedies than District 

Courts?, 19 INTELL. PROP. lITIG. vol. 19 no.2 (2008), available at 

http:/Lwww.loeb.com/afterebavcantheitcofferbetterremediesthJrldistrictcourts/; James R. Klaiber & 

Ethan Lee, Seeking Disapproval: Presidential Review Of ITC Orders, LAw360, Nov. 10, 2011, 

http://www.law360.com/articies/283970/seeking-disapproval-presidential-review-of-itc-orders 

(subscription required). 

12 See FTC, supra note 5, at 239 (noting that the "discrepancy [between the ITC and District Court 

injunction standards] has generated some concern that the ITC may attract suits by patentees that are 

less likely to obtain injunctions in district court, potentially leading to hold-up and the resulting 

consumer harm II). 

13 19 U.s.c. §1337(d). To similar effect is an ITC cease and desist order. 19 U.s.c. §1337(f). 

4 
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ChienB-5.eps

redesign them.14 Many household devices including computers, flat-screens, GPS devices, and 

printers have been the subject of an ITC 337 investigation. 15 In 2011, every major smartphone 

maker was embroiled in a dispute there.'6 As the impact of this trade agency has grown, 

mainstream commentators have warned that the ITC "could do great economic harm to [] U.S. 

industries that [are] growing rapidly,,,17 and calls for legislative reform ofthe ITC have 

intensified18 Driving these calls is the perception that the lTC's exclusion orders are 

14 See Kumar, supra note 7, at 538; see also Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty 

Stacking, 85 TEX. L. REV. 1991, 1996 (2007) (discussing the withdrawal from market in the context of 

downstream firms). 

15 See generally, e.g., In re Computer Products, Computer Components and Products Containing Same, 

USITC Pub. 4183, Inv. No. 337-TA-628 (September 2010), available at 2009 ITC LEXIS 2440 (computers); 

Certain Flat Panel Digital Televisions and Components Thereof; Notice of Investigation, 75 Fed. Reg. 

51286 (Aug. 19, 2010) (flat screens); In re Certain GPS Chips, Associated Software and Systems, and 

Products Containing Same, USITC Pub. 4133, Inv. No. 337-TA-596 (March 2010), available at 2010 ITC 

LeXIS 58l (GPS devices); In (e Certain Inkjet Ink Supplies and Components rhereof, Order No. 14, Inv. 

No. 337 -TA730 (Aug. 3, 2011)' avaiioble at 2011ITC LEXIS 1702 (printers). 

16 Certain Electronic Devices with Communication Capabilities, Components Thereof; Notice of 

Institution of Investigation; Institution of Investigation Pursuant to 19 U.s.c. 1337, 76 Fed. Reg. 60870, 

60870 (Sept. 3D, 2011) (HTC Corp, is the complainant and Apple Inc, is the respondent); Certain 

Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing 

Devices, and Tablet Computers; Notice of Institution of Investigation; Institution of Investigation 

Pursuant to 19 U.s.c. 1337, 76 Fed. Reg. 45860, 45860 (Aug. 1, 2011) (Samsung is the complainant and 

Apple is the respondent); In re Certain Mobile Telephones and Modems, Order No, 17, Inv, No. 337-TA758 (Aug, 11, 2011), available at 2011ITC LEXIS 1557 at *1 (terminated ITC investigation involving Sony 

and LG); In re Certain Mobile Devices, Associated Software, and Components Thereof, Initial 

Determination on Violation of Section 337 and Recommended Determination on Remedy and Bond, Inv, 

No. 337-TA-744 (Dec. 20, 2011) (Motorola is the respondent); Certain Wireless Devices with 3G 

Capabilities and Components Thereof; Notice of Institution of Investigation, 76 Fed, Reg. 54252, 54253 

(Aug. 31, 2011) (Nokia is the respondent); In re Certain Mobile Telephones and Wireless Communication 

Devices Featuring Digital Cameras, and Components Thereof, Notice of Commission Determination to 

Affirll' in Part and Reverse in Part a Determin<ltion of No Violation of Section 337: Remand of the 

Investigation for Further Proceedings at 2, Inv. No. 337-TA-703 (Jun. 30, 2011) (on going ITC 

investigation involving Research in Motion). Major mobile handset and smartphone makers, based 

upon market share, include Apple, Samsung, Sony, LG, Motorola, Nokia, and RIM. See Global 

Smartphone Sales for 2011 Peggpd ilt 470 Million Units, Infographic, .iJ.ttp://www.infogenr ... mm/global2p:!.i'l!ffi2lli:..g:.!£lill>i.:1QlLl2£lli~.i!!:::!1Q.!ill!l!QQ.:.l.!Lll!2..!D.1:gE!@f1!ll\:J:liDJ.! (last visited Feb. 21, 2012). 

The Android Patent War, supra note 7. 

18 See Bernard Cassidy, Follow the Money - Will the ITC Lose its Patent Jurisdiction?, IP Watch Dog Blog 

Post, ova ilabl e at http://wNw.ipwatchdog.com/2 0 12/0 2ln/fo II ow-the-m oney-wi 11-the-ite-I ose-itsI@.tent-jurisdictioniid-224IQL (describing the "ITC Working Group" as a lobby that "wants to block the 

5 
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"economically destructive and inflexible.,,'9 The ITC can't award damages; it can only exclude 

products in what, indeed, might seem to be an all-or-nothing affair.'D 

We believe, however, that the Commission has more flexibility in remedies than has 

been previously recognized. In this paper, we offersuggestions for how the ITC can use its 

statutory authority to decide both whether to grant an injunction and how to structure its 

remedies to minimize harm to the public interest. 

In the sections that follow, we review the rules the ITC uses in deciding whether to grant 

an injunction." While the Federal Circuit has held that e8ay's equitable test does not apply to 

the ITC,22 the agency must consider the effect of an injunction on the public before it orders 

one." To date the ITC hasn't given these public interest factors many teeth. We think the ITC 

should pay more attention to the public interest and use prevailing economic theory and its 

precedents to assess the impact of patent injunctions on consumers and competitive 

conditions. 

International Trade Commission (ITe) from hearing patent infringement cases brought by 'non-practicing 

entities' - i.e., patent holders like universities, independent inventors, and others who license their 

patents for manufacturers to commercialize. And second, it wants to weaken the lTC's power to block 

the importation of infringing products into the U.S."); Michael A. Ladra, Domestic Disturbances: The 

Latest/rom the ITC on Establishing a Domestic Industry, 11-12 (2011) Presentation to the Advanced 

Patent Law Institute Palo Alto, Dec 9,2011 (presentation on file with journal) (describing fall 2011 

efforts to lobby Congress to change the ITC), program available 

at http://www.utcle.orgiconferenceprogramsj2011/PJ11.pdf.ButseeColleenV.Chien & Mark A. 

Lemley, Patents and the Public Interest, NEW YORKTIMES.COM (Dec. 13, 2011), supra note 9 (arguing that 

legislative reform of the ITC is not necessary). 

19 The Android Patent War, supra note 7. 

20 See 19 U.s.c. §§1337(d), (f). 

21 The ITC offers three forms of injunctive relief: a limited exclusion order, a general exclusion order, 

and a cease and desist order. 19 U.s.c. § 1337 (d)-(f). 

22 Spansion, Inc. v. lTC, 629 F.3d 1331, 1359 (Fed. Cir. 2010). For an argument that it should, see 

Federal Trade Comm'n, The Evolving IP Marketplace: Aligning Patent Notice and Remedies with 

Competition 31-72 (2011). 

23 See 19 U.S.c. § 1337. 

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In a common situation, for example, the patent covers a small part of a larger product 

and the defendant's infringement was inadvertent. If the infringing feature is covered by an 

industry standard,>4 removing it is may disable the product. 25 Consumers are harmed when a 

big product is eliminated from the market because of a small patent, and competition is 

distorted as a large number of lawful components and features are blocked from the market 

along with the infringing one.'6 

In another common situation, a patent holder brings a case against a large number of 

product companies, threatening to hobble an entire industry. An injunction would exclude a 

large number of participants from the marketplace and dramatically reduce competition. 27 

In each of these scenarios, the harm to consumers and competition from an exclusion 

order is greater than the contribution made by the individual infringing component. One way 

for the ITC to address these harms is to decline to award exclusion orders at all. But that would 

leave the patentee without a remedy, in the ITC at least. Alternatively, the ITC could issue 

exclusion orders but structure them to ameliorate the harms to competition and consumers. In 

24 On the prevalence of industry standards in many industries, see Mark A. Lemley, Intellectual Property 

Rights and Standard-Setting Organizations, 90 CALIF. L. REV. 1889, 1892-95 (2002). 

25 For example, Innovatio IP Ventures has sued several companies including Cisco, Motorola, Accor 

North America, Caribou Coffee Co., Inc., Cosi, Inc., Dominick's Supermarkets, Inc., LQ Management LLC, 

Meijer, Inc., and Panera Bread Company on patents directed at the IEEE 802.11 standards, or "Wi-Fi". 

See Defendants' Motion to Stay This Matter Pending Resolution of Cisco Systems, Inc. and Motorola 

Solutions, Inc. V. Innovatio IP Ventures, LLC, Case No. 1:11-CV-00425 (D. Del.) at 1, 3, Innovatio IP 

Ventures, LLC v. ABP Corporation, et aI., No. 1:11-cv-01638 (N.D. III. Jun. 15, 2011), available at 

http://vmo-blog.com/files/l06598-99438/lnnovatio_ Ventures_(Customers_Motion_to_Stay). pdf. If a 

wireless router does not comply with this standard, it cannot provide wireless services. See id. at 6-7. 

26 See generally, Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 TEX. L. REV. 

1991 (2007) (demonstrating the holdup cost in this situation) .. 

27 See S. Rep. No. 93-1298, 93rd Cong., 2d Sess. 197, at *7330 (1974). 

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this paper, we discuss three methods of structuring injunctions: tailoring injunction scope,2S 

staying injunctions, and bonding. 

These ways of structuring injunctions provide the ITC with previously-unappreciated 

flexibility in ordering remedies. In a case where a design-around is possible, for example, 

awarding an injunction but delaying its start could deter infringement in a way that minimizes 

disruption to consumers and the holdup to manufacturers.>9 And it could do so without 

interfering with patentee incentives; patentees can seek damages in federal court for infringing 

sales in addition to bringing a case in the lTC, and if the patent truly was essential, the patentee 

could obtain an injunction after the stay expired. A change to the statute or the way the 

Commission applies it would enable the Commission to extend the terms of the bond it 

normally sets during the Presidential Review period to compensate for the entire stay period.'o 

In some cases, more significant limits on exclusion orders may be warranted. Suppose, 

for instance, the infringing component is small but, because of the nature of the product, the 

potential impact of an exclusion order on downstream products, related products, and third 

parties is large. In such a case, the Commission could tailor the scope of the injunction to 

reduce harm to competition, for example by grandfathering in existing products. The ITC 

28 The proper scope of patent injunctions has come under greater scrutiny recently. See, e.g., Tivo Inc. 

v. Echostar Corp., 646 F.3d 869, 879, 889 (Fed. Cir. 2011) (en ban c); John M. Golden, Injunctions as More 

(or Less) than "Off Switches": Patent-Infringement Injunctions' Scope, 90 TEX. L. REV. 1399, 1400-01 

(forthcoming 2012). 

29 See, e.g., Lemley & Shapiro, supra note 26, at 2035-40 (showing that a stay in injunctive relief to 

allow design-arounds significantly reduces holdup risk). 

30 See 19 U.S.C §1337(j). Doing so might require some tweaks to the statutory language, or alternatively 

that the Commission delay final entry of its order pending the period of delay. See infra Part III.C 

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already has the power to use the injunction levers we have identified in these situations. 31 In 

this paper, we explain why, and develop the economic grounding for how it could do so. 

Alternatively, if the ITC won't use its existing public interest authority (or if the Federal 

Circuit won't let it). Congress could easily act to apply e8ay to the ITe. But we don't think that 

is necessary. The ITC has proven to be adaptive to the changing conditions of competition. The 

agency is in a better position to adapt its decision-making to the particular facts before it than is 

the Federal Circuit or Congress, which has already given the ITC the authority to take into 

account consumers and competition. The lTC, in short, already has the power to take account 

of the effect of an exclusion order on competition; it just needs to use that power. 

We realize that a move away from the current practice of issuing automatic, immediate, 

and comprehensive exclusion orders does have a downside: It decreases the predictability that 

has long been associated with the ITC and the clarity it provides to the parties about the 

remedy. We think the loss of certainty is outweighed by the benefits to competition of tailoring 

remedies to the facts of the case. But there are ways to reduce the uncertainty problem. Early 

proceedings on issues of public interest and remedy'2 could be used to provide notice to 

litigants about the likelihood and form of an exclusion order should the patentee prevail. 

The paper proceeds as follows. In Part I we examine how e8ay has affected patent law 

and practice, both in the district courts and in the ITe. In particular, our empirical study shows 

a major shift to the lTC, particularly by PAEs filing complaints against multiple defendants. In 

Part II, we review the public interest factors that the ITC must consider before awarding an 

31 And indeed, the limited times that they have done so before is described In Part III infra. 

32 Using a motion analogous to a summary judgment motion in district court, parties in the ITe can 

move for "summary determination" on any issue in a Section 337 investigation. 19 C.F.R. § 210.18 

(2011). 

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exclusion order and describe how the economic theory of holdup maps to these factors. In Part 

III, we discuss options for tailoring injunctive relief available to the ITe. 

I. The Rush to the ITe 

The Supreme Court's 2006 decision in eBay v. MercExchangeB represented a sea change 

in patent litigation. Before 2006, a patentee that won its case was entitled to an injunction that 

prevented the defendant from selling its product.'4 The result was a significant problem with 

patent holdup.35 Patentees who owned rights in very small pieces of complex, multicomponent products could threaten to shut down the entire product.36 As a result, even a very 

weak patent could command a high royalty in settlement from defendants afraid of gambling 

their entire product on a jury's decision. 37 

eBay changed all that. Under eBay, district courts have to consider four equitable 

factors before granting an injunction, including whether money damages are adequate, and 

whether public and private interests, on balance, favor granting or denying the injunction. 38 

Justice Kennedy, concurring in eBay, emphasized that injunctions might be inappropriate when 

the plaintiff licenses the patent as a business model or when the patent covered only a small 

component of the product.39 

33 eBay, supra note 4. 

34 See Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 TEX. L. REV. 1991, 2008-09 

(2007). 

35 See id. 

36 Seeid. 

37 Seeid .. 

38 See eBay, 547 U.s. at 391. 

39 See eBay, 547 U.S. at 396-97 (Kennedy, J., concurring) ("When the patented invention is but a small 

component of the product the companies seek to produce and the threat of an injunction is employed 

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Some version of the "four-factor test" standard has been used by courts for centuries to 

decide whether or not to award an injunction 4D The Supreme Court has repeatedly said an 

injunction is an "extraordinary remedy.,,41 In the marketplace, an injunction disrupts the free 

flow of goods and services, impacting not only the parties but the public who must abruptly 

adjust to life without the enjoined product or service. 4Z By its terms, eBoy prescribes injunctive 

relief as a last-ditch option - justified only when the harm cannot be fixed by money and the 

hardships and public interest, carefully considered, weigh in favor of granting it. 43 

Commentators predicted eBoy would make it harder to get injunctions.44 They were 

right. Based on our review of district court decisions since eBay,45 about 75% of requests for 

simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the 

infringement and an injunction may not serve the public interest."). 

40 See DOUGLAS LAYCOCK, THE DEATH OF THE IRREPARABLE INJURY RULE 19-23 (1991) (tracing the origins of the 

"irreparable injury rule" to the specialization in remedies by the courts of chancery and the courts of law 

in 14th century Britain and its transmission to the courts of the colonies and United States in the 17th 

century); But see DOUGLAS LAYCOCK, MODERN AMERICAN REMEDIES 426-27 (Aspen Publishers, Inc. 4th ed. 

2011) (criticizing the majority's characterization of the traditional four-factor test as the norm in 

remedies law). 

41 See, e.g., Weinberger v. Romero-Barcelo, 456 U.S. 305, 312 (1982), citing Railroad Comm'n v. 

Pullman Co., 312 U.S. 496, 500 (1941); see also, Rizzo v. Goode, 423 U.S. 362 (1976) ("the principles of 

equity [] militate heavily against the grant of an injunction except in the most extraordinary 

circumstances."). 

42 See, e.g., Paice v. Toyota, No. 2:04-CV-211-DF, 2006 U.S. Dist. LEXIS 61600, at *16 (E.D. Tex. Aug. 16, 

2006) (discussing potential disruption of an injunction against Toyota's hybrid cars to car dealers, parts 

suppliers, and related business entities); Broadcom v. Qualcomm, No. SACV 05-467 JVS (RNBx), 2007 

U.s. Dist. LEXIS 97647, at *15, *20, *28 (CD. Cal. Dec. 31, 2007) (citing the harm to the public caused by 

the removal of a "beneficial, cutting-edge service" from millions of customers and tailoring the 

injunction to allow for an 18-month transition period). 

43 See eBaY,at 391-92. 

44 See, e.g., Steve Seidenberg, Troll Control, 92 A.B.A. J. 51, 52 (2006). 

45 There were 191 requests post-eBay through August 11, 2011. List of cases and outcomes initially 

sourced from the excellent website www.patstats.org, and obtainable at 

http://patst<lts.org/Patstats2.html(''Post-eBay Permanent Injunction Rulings in Patent Cases to 8-11-

11") and checked by a research assistant. In a few instances that we checked, the injunction was later 

vacated due to a change in the court's liability determination. However, because the reasoning of the 

court was not challenged by this later determination, we kept the cases and the court's decision on 

injunction in the database. 

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il1jUl1c\lon have been granted," down from a 95% rille pre-eBay." There 15 more to the ~tory, 

of course. The courts are distinguishing between different types of entitles and their different 

types of behavior. While individuals and universities have actually enjoyed hlgher than average 

injunction grant rates, PAEs have been denied injun~tjons about three·quarters of the time, and 

over 90 percent of the time when tilt> injunction has been contested, as figure 1 demonstrates, 

Figure 1: post-Ebay Oistrlct Court Injunction Rates by Plaintiff Type" 

>O'K 

"'" 

OK 

Pr.Cl 'l~g Campilny P.tef\! As ..... ion 

entil'/ (Total 

R~"l!m) 

Pare~1 As ... rtlon 

Enlitv{Cpntonti!d 

~I!Q""'1S1 

.. Accrxd. fTC Evolving Markelpla~e Report, at 211 (reporting an injunction rate of 72·77%1 . 

.. Set' Steve Malin .. 1 aI., InjunctiVl! ~lie/o/le, .. Say". Merc£Xchange, P'e<entarion to Ihe AtPlA 1.007 

Annual Patent law Commiltee, ovollobl" m 

hUp://www.justlnteliectuals.com!publfcat!ons!lnj\lf1ctiveRellfdAlter[bay.ppl (d~scribint the pre·e8ay 

,njunctron rale at about 95%) . 

.. Source: authors' analysis, based on cases taken Irom May lEi, 2006 to August II, 2011. We u~1I 

Pam.lS.or, for the lisl of cases and outcomes. 3nll PACER, leK Machina, Lexis and We>tla ..... lor lhe 

deciSions. Wit profiled the plaintiff, ba,ed on the methodology we have previously described if] Collee" 

V. Chien, O/Tralls, Davids, Goliochs, ond Kings, No"otiVl!sond Evidence in the titigalion 0/ High-Tech 

I'or"nlS. 87 N.C. L REV. 1511. 1593·99 (2009). We categorlled CSIRO is a university although others 

.,.,aV ciasslf.t them as a troll because of their active ef\ll~e."enl in tt\.e developme~t 3n<1lr~~ f .... of 

tKhnologv. 

12 
100 


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Clltf'gO '·Y Grant R9t~ Gr a nt ed Denied Tot:!.1 

UniversitylResearch Drs ''''''. J 0 J 

Individual 90% , , 10 

Practicing Company 19"10 12b JJ ", 

PAEs (tolal injunclion requests) 26% , 14 19 

PAEs (cuntested injunction 7% , 14 

requests) " .. These re sults may seem surprising, partlcularlv our finding that cenaln non pract.clng 

entilies have been more successful than practicing companies at8elting injunctions. Bar.ed on 

our analysis of poSt·t8ar district court decisions, however, we found Ihat courts. based on a 

variety of fact patterns, have reached resu lts that a re remaoi!;ably consistent with each olher. 

When practicing companies have been denied an illjullcllon, it's because they arell't practklng 

.. This categoryindudes car.es: brought bV i4i, LP and US Philips corp .. the patent subsidiaries: of 

aperating companies 14i, tnc. and Kaninktij~ e Ph li~ ElectIonics N.V. [Royal Phili~ Electranicsl, 

,espectivelv. See U.S. Philfp, Corp. v. Iwasaki EI""" ltd., 2006 U.S. Oi'l. tEXIS 71276, 'U (S.D.N.Y. Sepl 

28. ~0(6) ("The Local Rule 1.9 Statement liled by U.S. Ph;li~ reveals that thereh" pubikafillrate known 

as 'Ko!"llnklijike Philips Electro!"lics N.V: "); U.s. Phili~ Corp. v.lwasaki EJec. CO.,.so:. 3d 1371, 1373 

(F~. dr. 2001) (· U.s. Philip, Corporation Is ·"n IP holdins comtxtnv on behalf 01 ... theoverall Phliip$ 

orsani,ation' and has no employft's."). 

'" We da"ilied '" ··PAEs·· entilie" that, b<lsed on the pleadlns< and internet ''''eareh, we belleve U'i<'d 

p.Jtenls primari1v for enforcement purpose", I1Itherti"t"n to transler orcommerciali,e technol08'l. 

Sl"f' Chiel\ D/ rrolls,lupra note 48, at 1578 (definins 1n NPE ~s; ·colporale patent enforcement entity 

that neither pl1lctice, nO!" seeh to develop its ,nventions."); Qccrxd, Chien, Arms Race, supra note 5. at 

Ai>s1l1lcl (defining 35 a palent """rtion entily as"1l entity ti"tat ~rn.arily us", patent.- 10 obtailllicen ..... 

fees, rati"ter than transfer or commertialite te<hnolOllY·)· 

. , T~" rusonins of these cases Is deKfitled;n/ro note 57. 

" We da,silied as ·PAEs·· entitles Ihat, based On the pleadings and internet researei"t, web£<lk!ve used 

p"tenlS prim"rllv for enforcement purposes, rathertll"n to transler or commercialile technologv Olller 

than the patent itself. See Ch ien. D/ Tro/ls, ' Yp(iI note 48, al 1578 (defoning an NPE "sa ·corpor~te patent enlorcemPOt enlity that neithe , practices nOr seek!; to develop 

il< in""mions.'); rucord, Chien, Arm, Race, supra note S, at Abstract (definins as a patent "ssertion 

ent,ty as an elltily thaI primarily uses patents toabtain licen<e fees. rather Ihan transfer 01 

commerdalile technolosy). 

S! The rea,o!"lina of these cases Is des((ibed ",/ranote 57. 
101 


ChienB-14.eps

the particular patent they've asserted, for example. 54 Or they can't show irreparable harm 

because it's a multiple-competitor market, and it therefore can't be assumed that defendant's 

gains have come at plaintiff's expense. 55 

Conversely, universities, who do not practice their own patents, nonetheless have been 

able to get injunctions by suing on behalf of their exclusive licensees who are in fact practicing 

the patent. 56 Of all groups, PAEs are the least likely to get an injunction, and by and large have 

succeeded in their requests only when the defendant has failed to object. 57 In the single case 

we found since eBay where a no-longer-practicing company sued and succeeded in getting a 

54 See, e.g., Ricoh v. Quanta, No. 06-cv-462-bbc, 2010 U.S. Dist. LEXIS 38220, at *3-4 (W.O. Wis. Apr. 19 

2010). This case was described in the press under the headline "Ricoh gets the Troll Treatment." See 

Jan Wolfe, Patent Litigation Weekly: At Injunction Time, Ricoh Gets the Troll Treatment, THE PRIOR ART, 

(Apr. 8, 2010), http://thepriorarUvpepad.com/the prior art/2DlO/04/ricoh-v-quanta.htr'11. 

55 See, e.g., Advanced Cardiovascular v. Medtronic Vascular, 579 F. Supp. 2d 554, 559-60 (D. Del. 2008); 

Bosch v. Pylon, 748 F. Supp. 2d 383, 408 (D. Del. 2010); LG Elec. USA Inc. v. Whirlpool Corp., 798 F. 

Supp.2d 541, (D. Del. Jul. 1, 2011). 

56 See, e.g., Emory University v. Nova Biogenetics, Inc., No. 1:06-CV-0141-TWT, 2008 U.S. Dist. LEXIS 

57642, *3-4, *12-13 (N.D. Ga. Jul. 24, 2008); Johns Hopkins v. Datascope, 513 F. Supp. 2d 578, 581 (D. 

Md. 2007). 

For a discussion of universities as non-practicing entities, see generally Mark A. Lemley, Are Universities 

Patent Trolls?, 18 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 611, 629-30 (2008) (arguing that they aren't). 

57 PAEs obtained five injunctions since eBay, in the following cases: Acticon Techs. v. Heisei Elecs. Co., 

Ltd., 2008 U.S. Dist. LEXIS 8978, *2-3 (S.D.N.Y. Feb. 5, 2008) (defendant failed to object to Magistrate 

judge's report, therefore the Court adopted the Magistrate's findings) adopt'g Acticon Techs. v. Heisei 

Elecs. Co., 2007 U.S. Dist. LEXIS 100081, *10-12 (S.D.N.Y. Aug. 1, 2007); Antonious v. Merchs. of Golf, 

Inc., 2011 U.S. Dist. LEXIS 3332, *1-2 (CD. Cal. Jan. 5, 2011) (defendant's initial failure to respond 

resulted in default judgment and the entering of an injunction); PB&J Software LLC v. Code 42 Software, 

Inc., No. 009-cv-00206-D\I\iF-JSM (D. Minn. 2011), available at 

https:/IIexr'1achina.com/cases/80048jdocuments/2000026538.pdf (login required) (Cucku consented to 

entry of final judgr'1ent for injunctive relief); Systermation Inc. v. Production Prod. Inc., No. 1:11-cv-487-

LPS, 1-2 (D. Del Jun. 27, 2011) (injunction entered because two parties settled); Joyal Prods. v. Johnson 

Elec. North Am., Inc., 2009 U.S. Dist. LEXIS 15531, *30-31, *33 (D. N.J. Feb. 26, 2009) (Joyal was not an 

on-going business and looked to sell its patent; failure to grant an injunction would severely affect the 

sale value of the patent) but see Voda v. Cordis, No. CIV-03-1512-L, 2006 U.S. Dist. LEXIS 63623, *18-19, 

*21 (W.O. Okla. Sept. 5, 2006) (harm to right to exclude is not enough to justify an injunction), a/I'd in 

relevant part, 536 F.3d 1311, 1315 (Fed. Cir. 2008). 

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ChienB-15.eps

contested injunction, the court cited its belief that the patent would be sold to a 

manufacturer. 58 

When applying eBay, courts have focused on the first two prongs: irreparable injury and 

adequate remedy at law. 59 Competitive considerations have predominated: courts have been 

willing to grant injunctions when the defendant's infringement credibly threatens the market 

share,'o reputation," or business model" of the plaintiff, and unwilling to grant injunctions 

when these harms are absent." Predicted loss of market share, reputation and goodwill are 

58 Joyal Products v. Johnson Elec. North America, No. 04-5172 (JAP), 2009 U.S. Dist. LEXIS 15531, *30-31 

(D.N.J. Feb. 26, 2009) (ailing company plaintiff Joyal's patents would be worth less in the marketplace if 

unable to/incapable of excluding others, and "the most likely purchaser of the patent would be a 

manufacturer"); but see Voda v. Cordis, No. CIV-03-1512-L, 2006 U.S. Dist. LEXIS 63623, *18-19, *21 

(W.O. Okla. Sept. 5, 2006) (harm to right to exclude is not enough to justify an injunction). aII'd in 

relevant part, 536 F.3d 1311, 1315 (Fed. Cir. 2008). 

59 It is hard to come up with circumstances that would distinguish irreparable injury from the absence 

of an adequate remedy at law. 

60 In the following cases, the court cited the indicated market-share related reason when deciding to 

grant the injunction: i4i LP v. Microsoft, 670 F. Supp. 2d 568, 599-601 (E.D. Tex. 2009) (citing injury to 

market share, brand); Wald v. Mudhopper, No. CIV-04-1693-C, 2006 U.S. Dist. LEXIS 51669, *16 (W.O. 

Okla. Jul. 27, 2006) (market share, damage to reputation); Global Traffic Technologies LLC v. Tomar, No. 

05-756 MJD/AJB, Findings of Fact, Conclusions of Law, and Order for Injunctive Relief at 9 (D. Minn. 

2008), available at https:lllexmachina.com/cases/9356/documents/278997.pdf (login required) (market 

share, customer relationships); Broadcom v. Qualcomm, 2007 U.S. Dist. LEXIS 97647 at *16 (market 

share in the market for design wins); Emory at *12 and Johns Hopkins at *586 (both citing competition 

including in a two-competitor market); see also Advanced Cardiovascular v. Medtronic Vascular, 579 F. 

Supp. 2d at 558 {injunctions usually granted in scenarios where there is two-competitor market). 

61 See, e.g. CSIRO v. Buffalo, 492 F. Supp. 2d 600, 604 (E.D. Tex. 2007). vacated and remanded on other 

grounds, 542 F.3d 1363 (Fed. Cir. 2008) (harm to reputation); Emory, 2008 U.S. Dist. LEXIS 57642 at *12-

13 (harm to reputation and goodwill); Johns Hopkins, 513 F. Supp. 2d at 586 (harm to reputation). 

62 See, e.g. Judkins v. HT Window, 704 F. Supp. 2d 470, 477 (W.O. Pa. 2010) (exclusive licensor would 

experience harm to business relationships); ReedHycalog, LP v. Diamond, No. 6:08-CV-325, 2010 U.S. 

Dist. LEXIS 83011, *35-36 (E.D. Tex. Aug. 12, 2010) (disruption to P's business and licensing and pricing 

strategy); Joyal v. Johnson, 2009 U.S. Dist. LEXIS 15531 at *30-31 (denial of injunction would decimate 

the value of the patent in planned asset sale). 

63 In each of these cases the following factors were cited in the denial of the plaintiff's request for 

injunction: Advanced Cardiovascular v. Medtronic Vascular, 579 F. Supp. 2d at 559; Bosch v. Pylon, 748 

F. Supp. 2d at 408; LG Elec. USA v. Whirlpool, 798 F. Supp.2d 541, 563 (D. Del. 2011); Sundance v. 

Demonte, No. 02-73543, 2007 U.S. Dist. LEXIS 158, *8 (E.D. Mich. Jan. 4, 2007) (all citing presence of a 

mUltiple-competitor market); Nichia v. Seoul Semiconductor, No. 06-0162 MMC, 2008 U.S. Dist. LEXIS 

15 
103 


ChienB-16.eps

difficult to quantify and restore, making money damages inadequate.54 Entities that don't sell 

products typically don't experience these types of harms6 ' 

The relationship between the patented invention and the enjoined product has also 

mattered in a number of cases. Following Justice Kennedy's suggestion,66 when the patented 

invention covers a small component of the defendant's product, courts have been less inclined 

to award an injunction67 Courts have also taken into account the impact on consumers, under 

the auspices of the public interest prong68 

12183, *5 (N.D. Cal. Feb. 7, 2008) (no loss of market share, reputation or brand); Ricoh, 2010 U.S. Dist. 

LEXIS 38220 at *3-4 (plaintiff not in competition with defendant because plaintiff does not practice 

invention); Hynix v. Rambus, 609 F. Supp. 2d 951, 984-85 (N.D. Cal. 2009) (no harm to reputation, but 

harm to defendant's business); Telcordia v. Cisco, 592 F. Supp. 2d 727, 747 (D. Del. 2009) (no evidence of 

"lost sales, licensing, or research and development opportunities"); Calcar v. Honda, No. 06cv2433 OMS 

(CAB), 2008 U.S. Dist. LEXIS 106476, *2-3 *(S.D. Cal. Nov. 18, 2008) (insufficient evidence of lost 

opportunities, reputation); Paice, 2006 U.S. Dist. LEXIS 61600 at *14 (unable to prove damage to market 

share or brand name); WhitServe LLC v. Computer Packages, Inc., No. 3:06CV01935 (AVe), Whitserve's 

Motion for Permanent Injunction (D. Conn. 2011), (no evidence of lost market share, customers, or 

goodwill), order denying injunction at 

http,:/ /lexmachina.com!casesj80048/documen ts/2000026538. pdf (login required); Creative Advertising 

v. Yahoo! Inc., 674 F. Supp. 2d 847, 852 (E.D. Tex. 2009); Enpat v. Budnic, 773 F. Supp. 2d 1311, 1317 

(M.D. Fla. 2011); Orion IP v. Mercedes-Benz USA, No. 6:05 CV 322,2008 U.S. Dist. LEXIS 108683, *12 

(E.D. Tex. Mar. 28, 2008); Paice, 2006 U.S. Dist. LEXIS 61600 at *13-14 (no evidence that money damages 

are inadequate to compensate licensing company's loss). 

64 Emory, 2008 U.S. Dist. LEXIS 57642 at *13. 

65 NPEs sometimes assert injury to their reputation resulting from the fact that the defendant used a 

product that turned out to be covered by the patent claims. See CSIRO v. Buffalo Tech., 492 F. Supp. 2d 

600,604 (E.D. Tex. 2007), vacated, 542 F.3d 1363 (Fed. Cir. 2008). This theory strikes us as wildly 

implausible. To the extent consumers are even aware of the patent and the fact that the defendant 

infringes it, it is hard to see how awareness of that fact will injure the NPE's reputation. If anything, the 

widespread use of the patentee's technology should enhance its reputation. 

66 e8ay at 396-97. 

67 See Ricoh, 2010 U.s. Dist. LEXIS 38220 at *6 (small component of the overall product); Sundance v. 

Demonte, 2007 U.s. Dist. LEXIS 158 at *7-8 (patented tech is but one feature of the defendant's 

product); z4 v. Microsoft, 434 F. Supp. 2d 437, 441 (E.D. Tex. 2006) (in a small component scenario, 

damages are z sufficient); see also Broadcom v. Qualcomm, 2007 U.s. Dist. LEXIS 97647 at *19-21 

(tailoring the injunction to ameliorate the impact on consumers by providing time for design around 

when the scope of the infringed patent is limited); accord Steve Malin & Ari Rafilson, Empirical Analysis 

of Permanent Injunctions Following eBay, presented 

at FTC Hearing: The Evolving IP Marketplace (Feb. 12, 2009), avaifable at 

16 
104 


ChienB-17.eps

Hundreds of district courts throughout the country, then, have engaged in the same 

exercise of considering whether an injunction is really justified in cases of patent 

infringement. 69 Yet one decisionmaker has been exempt from doing so. The lTC, an 

administrative agency rather than Article III court, has declined to follow eBay, a practice that 

has been approved by the Federal Circuit. 70 This apparent anomaly has a simple explanation: 

although the ITC applies patent law71 to decide whether there has been an unlawful 

importation," the Commission follows its own procedures and prescribes its own remedies. As 

the Federal Circuit explained in Spansian, "[there are] different statutory underpinnings for ... 

Section 337 actions and ... district courts in suits for patent infringement.,,73 As a result, the 

ITC neither hears counterclaims nor recognizes certain defenses to infringement,'4 and can't 

http://www.ftc.gov/hciworkshops/ipmarkctplace/febll/docs/smaiin.pdf.at 29. (reporting a district 

court injunction rate of 0% when the invention was a "trivial component" of a product, as compared to 

75% grant rate when the infringing feature was not a trivial component). 

6S See, e.g., Amgen v. Hoffman-La Roche, 581 F. Supp. 2d 160, 213 (D. Mass. 2008) (considering patient 

health, Medicare savings, and the public's interest in a robust patent system in its decision to grant an 

injunction). 

69 See supra notes 49-65. 

70 Spansion, Inc. v. lTC, 629 F.3d 1331, 1359 (Fed. Cir. 2010). 

71 As well as other forms of intellectual property law, see TianRui Group Company Limited v. U.s. 

International Trade Commission, 661 F.3d 1322, 1326-27 (Fed. Cir. 2011) (confirming that section 337 

applies to imported goods produced through the exploitation of trade secrets). The majority of 337 

cases are patent cases, however. See Colleen Chien, Patently Protectionist, 50 WM & MARY L. REV. 63, 70, 

n. 123 (2008) (patent cases make up 85% of the lTC's § 337 docket and explaining why copyright and TM 

cases are less likely to be brought in the ITe). The ITC has heard a handful of antitrust cases, and 

commentators have speculated that it could also be used for child labor and other violations. 

(Described, e.g. in Tom Schaumberg, ed. A Lawyer's Guide to Section 337 Investigations before the 

International Trade Commission ABA-Intellectual Property Section, Chapter 17.A.2., p. 226-27.) And one 

pending bill would give the ITC the authority to oversee the issuance of cease and desist orders against 

"rogue websites" for copyright infringement. See OPEN Act, H.R. 3782 (2011). 

72 19 U.S.C §1337(a)(I)(B). 

73 Sponsion, 629 F.3d at 1359. 

74 See Kinik Co. v. Int'I Trade Comm'n, 362 F.3d 1359, 1362 (Fed. Cir. 2004) (holding that 271(g)(2) does 

not apply in the ITe); Colleen V. Chien, Protecting Domestic Industries, 28 SANTA CLARA COMPUTER & HIGH 

TECH. L. J. 169, 171 (2011) ("In an ITC proceeding, there are no juries, no counterclaims, few stays for 

reexamination, and no damages."). 

17 
105 


ChienB-18.eps

award damages.75 These omissions were intended to speed things along," reflecting the 

original intent of the ITC to offer a special solution to the special problem of foreign 

infringement 77 Now that most technology products are manufactured overseas's and Congress 

has relaxed the domestic industry requirement,'9 nearly every patentee can bring an ITC 

complaint and nearly every accused infringer is a potential ITC defendant, converting the ITC 

into a mainstream venue in which to file patent grievances.BO 

The statute's history and structure limit its uptake of changes to the patent system. 

Legislative and judicial improvements made to patent law procedures and remedies simply 

don't apply in the ITe. When Congress recently enacted a rule limiting the naming of multiple 

defendants in a patent infringement lawsuit,"' for example, the reform did not extend to the 

ITe.82 While the number of defendants per case declined in the district court immediately 

following passage of the law, it has stayed steady in the lTC, as Figure 2 shows. 

75 See 19 U.S.c. §1337. 

76 See Czebiniak, supra note 10, at 93-94,105-06. 

77 See id. at 95. 

78 See, e.g./ Commission Decision in Personal Data and Mobile Communications Devices and Related 

Software TA-710-337 ("[T]o HTC's knowledge no smartphones ... are produced in the United States; 

rather they are all manufactured overseas and imported in the United States.") (Citing HTC Br. at 161). 

79 See John Mezzalingua Assocs. v. International Trade Comm'n, 660 F.3d 1322 (Fed. Cir. 2011) 

(discussing the statutory change that permitted PAEs to claim "domestic industry" status at the ITC and 

interpreting the new statute); Czebiniak, supra note 10, at 110. 

80 See id. at 107-08. Figure 4 reports the growth in the portion of ITC cases involving NPEs. 

81 See PUBLIC LAW 112-29-SEPT. 16, 2011. LEAHY-SMITH AMERICA INVENTS ACT § 19(d), 35 U.s.c. § 

299 (limiting joinder of defendants to cases relating to the same transactions, occurrences, or accused 

products.). 

82 See Colleen V. Chien, Protecting Domestic Industries, 28 SANTA CLARA COMPUTER & HIGH TECH. L. J. 169, 

175 (2011). 

18 
106 


ChienB-19.eps

Figure 2: 2011 NPE"' Defendants/Case Pre and PMt· AlA (red dashed line) 

-

-

ITC 

, 

, --- ~ 

---" -,,-- 1- " ••• 

-

-

r--

r--

Data SOurce: RPX Corporation Il:l 2012 

-

-

-

District Court 

, 

, 

, 

, 

, 

, 

" , 

, 

, - , os " 1.1 

:1 • I 

" 

I.L. 

The most pointed rift has been created by eBoy. While the overall injunction rate in thl! 

district coun has dedi ned to 7~" since eBay, it has remained steady at lOO'l(, in the ITC OVE'r the 

last five years." (Figure 3) The difference in grant rates is eVE'n more dram~lic for patent 

assertion entities - whk/l~re unHely to gel an injunction from dislrict coun,"' but. based on its 

track record, arE': vlntlally guaranteed one in thE': ITC.'" This ~ in pan because injunctions are 

not only the preferred remedy alt he lTC, they are the orllV remedV." An agency whose 

adminlstrali\fe law judges carry out inveJitigatlons without Juries, the ITC is not statutorily 

authorized to granl money damageJi . 

... RPX Corp. defines NP(, 3S Mtitles that havesubstal)tiall~ 1\0 assets Olher tllan the patent and 

bs antially nO re-.enue other than licensin&" which [Quid indude individuals and uniworslties as well ~ 

p.>lent assertion entiUes. BeCilusewe rely on thlSr d~I", we repart NPE, rather than PAEfigur(>'5, In Ihis 

and related chans . 

.. SP~ Figu( ~ l . 

.. SPe 'U(1fO Figure 1 . 

.. 5~e ,upro note_, 

11 5eeSj:lorufon. 629 F.ld at ll58. (citing the statute's legislative histor'/ for the proposition th3t "an 

Injunction IS the onlv avaIlable remedy l or violations ofS.ctioo a37."). 

" 
107 


ChienB-20.eps

Figure 3; os 8av Injunction Rates In the ITC and District Court " 

"'" -------------.. , 

.~ +-------------------~'-------------- 'I. , - __ --

, , 

" 

t-----------------------------------

"" t---------------

The word ~a5 apparently gotten out, e~rning the ITC a reputation for being "a more 

advarltageous forum for patent holder~ with what i~ viewed to be a less stringent standard for 

obtaining injunttive relief.~ " NPEs, and in particular PAEs, are flocking to the ITC (Figur! 41. ~ 

• Author an~ vsis b.l>e<:l on: Inj"ncti_e Reliejo/tere8ay v. Me rchchange, P,esentation to the AIPtA 

1001 Annual Patent law Committee, aWlilablt 

or hUp:/lwww.lu .. intelle<:tuals com/pub icatioll.i/lnjunctiVi.RelieIAfterEbav.~t (for pte-eSav injuncliQ/l 

rate of 95'16): s« also. Scott McClelland, A MorJej Jo' Predicrlng Pe'monent InjunctiOns After eBoy v. 

Mercr .. crnmge, 8 1,.1ll!.. P'IOP. REl'OIIf 11, (No~. 

2011) http://www.b~k~rbott\.com/flle upl();ldI20lI vemberIP ReporteB3W erc E~rn anRe.h m 

Ide5Cribing the dlstrkt coyrt injunctlon grant rale 1n the ye~r prior to eBay ~s lOO'llo); PilUlat •. org post· 

eBay injurldion dalabase, supta not e 45 (lor posl·e8av di5lricl courl injunclion rate); aulhor's own 

database of Ire cases deyelo~ in conjunction with Chien. Pottntl¥ Protectionisf, supra nOle 10, RPK 

Corp. damb.", 01 ITC cases (foro,e- and post·.,Say ITC injunction rat~) . 

.. Albel! 8. Chen & Mauhl'w Abbou. Protecti"'1 Green PD/tOts: Oimic/ Court \IS. ITC; Uw3&O, Jan. S. 

1012, hltp:1 /www.lilw360.com/art!cles/295637Iptolecting·gr~en p3 enu-di tdct·cour vs· i!C (jog1n 

r~qui'!'CI) . 

" 
108 


ChienB-21.eps

In the years following eBay, the number of ITC investigations brought by NPEs has grown from 2 

in 2006 to 16 in 2011 and the number of total respondents named in NPE cases has grown from 

8 to 235.91 Growth in ITC NPE92 cases has outpaced the growth in ITC cases in general during 

this period, with the NPE share of alllTC cases growing from 7% to 25%,"3 and the number of 

respondents from NPE-initiated ITC cases growing to over 50% of all ITC respondents, as Figure 

4 shows. 

Figure 4: Growth in share and number of NPE94 cases at the ITe 

90 See Figure 4; accord Robert D. Fram & Ashley Miller, The Rise of Non-Practicing Entity Litigation at 

the ITC: The State of the Law and Litigation Strategy, 10 (Jan. 5, 2011) (unpublished manuscript on file 

with the authors) (finding an increase in the number of ITC complaints brought by companies relying on 

their licensing activities in accordance with 19 U.s.c. § 1337(a)(3)(c) to show standing from 13% from 

2000-2006 to 27% from 2007-August 2010). 

91 Analysis on file with journal. 

92 Category includes universities and individuals as well as patent assertion entities. See RPX Corp. 

definition of NPE described supra at note 83. 

93 2 out of 27 ITC patent cases in 2006 and 16 out of 63 ITC patent cases in 2011 were brought by NPEs. 

The growth in ITC cases is somewhat surprising in light of the concern of some that the lTC's Kyocera 

decision would result in a noticeable decline in ITC filings. See Chris Cotropia, Strength of the 

International Trade Commission as a Patent Venue, 20 TEX. INTELL. PROP. L.J. 1,3 (2011); Kyocera v. lTC, 

545 F.3d 1340. That hasn't happened. See Cotropia, supra note 93. at 4. 

94 Category includes universities and individuals as well as patent assertion entities. See RPX Corp. 

definition of NPE described supra at note 83. 

21 
109 


ChienB-22.eps

'" t-----------------------------

t-------------------------

r------------

r---------~ 

"'" 

"" '''0> " .. 2010 2GB 

Source data of NPE designation: RPX Corporation Cl 2012 

• NP'5h~, oITot,I TCca~, 

• ~P! S/la .... of lotal fTC 

R~.pcnd~nlS 

This diVl'l1!ence in remedIes undoes the pfOl!re~s t'BoV represents.¥.! Parties who wirl In 

the district court but would not rea-Ive 3rlinjuJlction under !'Boy un drCUfrwent the result by 

refiling their t:3ses il' the lTC.·· Tbe dellial of ~n injl,lnctiorl reque51 by a distrkt court is flO 

.. It is also potl'oUallyllle&3t underinternaHonallaw. Statutory chilng~ to the I"win 1995 were meant 

to Cure Ihe statutem the 3dvantages itgav",- to domestically-made goods - specillcally a mandate')' 

timetabl~, parallel proceeding. again'! forei@n m~nufacturer~, and the Inability of defendant. to raise 

counterclaims - whiCh iI GAn panel found to be io violation of TRIPS. (SI!e Report 01 !lIe Panel, United 

S!a!es~Section 337 of !he Tariff Act 011930, 'Ii 4.2, L/6439 (Nov. 7, 1989); GATI B.I.S.O. a! 365/345 

(1990). 115.10.) Und~r the logic of tlla! cas", Ilia! cerlain dome~tic"lIy made goods m~v be immune f,om 

injunctions while international on ... a,e not could Slmilarlv be found { a violate national {,ealm""l. e 

'd. Arcorc/Computer and Communications Induw,! Assodation (CClA). submittoo comment to the lTC', 

NOIi<e of Proposed Rulemaking 75 FR 6067 1 lOci. 1. 2010) on tho! tal<lns of public interl'St evidence, 

,.,mmariled at httD:I!WWW.g oo.govlfdsvslpkI/FR-2011·10·19/hlmI/2011.26664.htm (suUl.SI;... that 

the ITC adopt eBay in order to comply with Unl!ed Slates obligations under Arlicle III: 4 of Ihe CiAn. 

specifically, 11 GATI de<iiion, United Stat~ 5ecI;on 337 of Ihe Tariff Act 011930 (Nov. 7. 1989)) . 

.. Compare, t.g., Paier LLC •. Toyota Motor Corp. (PalcO! II), S04 Ud 1:193, 1314-15 n.14 (fed. (lr_ 

2001) (upholding the district court',lail",e 10 is",e an injunction) with Certa in Hybrid Electric Vehicles 

and Componentl Thereof. USITC In •. No. )3J-TA-688, Complainl (Oct_ S. 2009). falS Doc. No. 4115% 

(inlHating an Inve1Hgation of the behavlo, not enjoined by Ihe d[strlci court); described In 011en, 

P,ottcting DOIm'Jfi< Industries, 211 SANrA ClARA eoMf'U1EJI & HIG .. TECH. LJ. 169 at nn. 96· 102. 

" 
110 


ChienB-23.eps

barrier to the grant of an exclusion order by the ITe. The result is an end-run around e8ay that 

allows patent holders to block the defendant's product even without a district court injunction. 

II. Exclusion Orders and the Public Interest 

The ITC statute does not compel the Commission to grant exclusion orders. It states: 

If the Commission determines, as a result of an investigation under this section, 

that there is a violation of this section, it shall direct that the articles concerned, 

imported by any person violating the provision of this section, be excluded from 

entry into the United States, unless, after considering the effect of such 

exclusion upon the public health and welfare, competitive conditions in the 

United States economy, the production of like or directly competitive articles in 

the United States, and United States consumers, it finds that such articles should 

not be excluded from entry.9? 

The Federal Circuit parses the statute to identify four separate factors."8 "The enumerated 

public interest factors include: (1) the public health and welfare; (2) competitive conditions in 

the United States economy; (3) the production of like or directly competitive articles in the 

United States; and (4) United States consumers.,,99 

Taken together, these factors might seem to give a fairly wide-ranging power to the ITC 

to consider things like patent holdup, the relationship between the patent and the ultimate 

product, and whether or not the patentee practices the invention. Indeed, the statute directs 

the ITC to take the public interest into account every time it considers issuing a remedy.IOO 

97 19 U.S.c. § 1337(d)(1). 

98 See Sponsion, 629 F.3d at 1358. 

99 Id. 

100 See, e.g., 19 U.s.c. § 1337(d)(1) (covering exclusion orders) and § 1337 (f)(l)(coveri ng cease and 

desist orders). Indeed, we believe that the mandate that the ITC "shall" exclude articles "unless" one of 

the public interest cautions otherwise, as a matter of statutory interpretation, requires their 

consideration, more so than it does the lTC's remedy. See a/so, e.g., Commission Opinion IN THE 

MADER OF CERTAIN AUTOMATED MECHANICAL TRANSMISSION SYSTEMS FOR MEDIUM-DUTY AND 

23 
111 


ChienB-24.eps

Nonetheless, in the vast majority of § 337 cases, the International Trade Commission 

("ITC") finds that excluding goods does not threaten the public interest. Historically, the ITC has 

found that the public interest trumped exclusion in only three cases: car parts necessary for 

improved fuel efficiency,'Ol scientific equipment for nuclear physics research,102 and hospital 

burn beds.,o3 The unifying theme in those cases is that the products were necessary for 

something important (human health or some other nationally-recognized policy goal) and that 

no other supplier could meet demand in a commercially reasonable period oftime104 And 

none of those cases was decided in the last twenty-five years. More recently, the ITC has 

indicated that unless something is a drug or medical device it is unlikely to meet the public 

interest exception.lOS 

The reason seems to be that the ITC views enforcing patents as in the public interest, 

with the result that the public interest analysis starts out with a thumb on the scale in favor of 

HEAVY-DUTY TRUCKS AND COMPONENTS THEREOF, USITC Inv. No. 337-TA-503, Pub. No. 3934 at 7 

("Section 337(d) and (f) directs the Commission to consider public interest factors before issuing 

remedial orders, including the effect of any such remedial order on the 'public health and welfare, 

competitive conditions in the United States economy, the production of like or directly competitive 

articles in the United States, and United States consumers."'). 

101 See Commission Determination and Order In re Certain Automatic Crankpin Grinders at 1, USPTO Inv. 

No. 337-TA-60 (Dec. 17, 1979); Opinion of Vice Chairman Alberger and Commissioners Bedell and Stern 

In re Certain Automatic Crankpin Grinders at 17-18, USPTO Inv. No. 337-TA-60 (Dec. 17, 1979); infra at 

notes Error! Bookmark not defined.-113. 

102 See Commission Action and Order In re Certain Inclined-Field Acceleration Tubes at 1, USITC Inv. No. 

337-TA-67, 0080 WL 594319 (Dec. 29 1980); Commission Action and Order In re Certain Inclined-Field 

Acceleration Tubes at 22-31, USITC Inv. No. 337-TA-67, (Dec. 29 1980); infra at notes 114-116. 

103 See Commission Memorandum Opinion In re Certain Fluidized Supporting Apparatus and 

Components Thereof, at 1-2, USITC Inv. No. 337-TA-182, 337-TA-188, 225 U.S.P.Q. 1211, 1984 WL 63741 

(Oct. 5,1984); infra at notes 117-Error! Bookmark not defined., 120-123. 

104 See generally notes Error! Bookmark not defined.-123. 

105 See In re Certain Toothbrushes And The Packaging Thereof, Commission Opinion On Remedy, The 

Public Interest, And Bonding at 6, USITC Inv. No. 337-TA-391, 1997 WL 803475, at *2 (October 15, 1997) 

("toothbrushes are not the type of product that have in the past raised public interest concerns (such as, 

for example, drugs or medical devices).") 

24 
112 


ChienB-25.eps

the patentee. The Federal Circuit has accepted this approach. In San Huan New Materials High 

Tech, Inc. v. International Trade Com'n, the Federal Circuit affirmed the lTC's imposition of a 

significant penalty, saying: 

Finally, addressing the "public interest" factor, the Commission determined that 

the public interest favors the protection of intellectual property rights and 

weighs in favor of a "significant penalty.,,106 

And the court has interpreted the legislative history as supporting exclusion of infringing 

products: 

The legislative history of the amendments to Section 337 indicates that Congress 

intended injunctive relief to be the normal remedy for a Section 337 violation 

and that a showing of irreparable harm is not required to receive such injunctive 

relief107 

The Federal Circuit's review of ITC remedies is deferential, 108 meaning that most of the 

substantive discussions of the public interest factor come from ITC decisions, not Federal Circuit 

decisions. 

In the three cases the ITC has in fact denied injunctive relief, its focus has been on two 

factors: the public interest in health and welfare and the unavailability of alternatives. When 

the ITC has denied an exclusion order, both factors have been present 109 

106 San Huan New Materials High Tech, Inc., et al. v. International Trade Commission, et ai, 161 F.3d 

1347,1363 (Fed. Cir. 1998). But cf. Rosemount, Inc. v. U.S. Intern. Trade Com'n, 910 F.2d 819, 822 (Fed. 

Cir. 1990) (examining section 1337(e); "We also agree with the Commission's rejection of the view that 

the public interest inevitably lies on the side of the patent owner because of the public interest in 

protecting patent rights, although that is one factor to consider and may be a dominant factor."). 

107 Sponsion, 629 F.3d at 1358. 

108 The Federal Circuit "reviews the Commission's action in awarding injunctive relief as to whether it is 

arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." Spansion, Inc. v. 

Int'I Trade Comm'n, 629 F.3d 1331, 1358 (Fed. Cir. 2010). 

109 See Opinion of Vice Chairman Alberger and Commissioners Bedell and Stern In re Certain Automatic 

Crankpin Grinders at 17-18, USITC Inv. No. 337-TA-60 (Dec. 17, 1979); Commission Action and Order In 

re Certain Inclined-Field Acceleration Tubes at 22-31, USITC Inv. No. 337-TA-67, (Dec. 29 1980); 

25 
113 


ChienB-26.eps

The ITC first denied a remedy on the basis of the public interest exception in In re 

Certain Automatic Crankpin Grinders llo The ITC based its decision on the public interest in fuel 

efficiency, which automobile manufacturers claimed was put in jeopardy without access to the 

crankpin grinders. 111 The ITC noted that the domestic industry could not meet the demand in a 

reasonable length of time and that the President and Congress had a clearly established policy 

of increasing fuel economy.ll2 The existence of a major oil crisis in 1979 probably contributed 

to the decision. '13 

Something similar occurred the following year in In re Certain Inclined-Field Acceleration 

Tubes.'14 There, the Commission was confronted with claims of public interest in "pure 

Commission Action and Order In re Certain Inclined-Field Acceleration Tubes at 21, USITC Inv. No. 337-

TA-67, (Dec. 29 1980). 

110 Opinion of Vice Chairman Alberger and Commissioners Bedell and Stern In re Certain Automatic 

Crankpin Grinders at 17-18, USITC Inv. No. 337-TA-60, 205 U.S.P.Q. 71, 0079 WL 419349 (Dec. 17, 1979). 

111 See id. 

112 See id. 

The Commission wrote: 

The primary reason for our determination is that the domestic industry cannot supply 

the demand for new orders of the patented product within a commercially reasonable 

length of time. 

In view of the fact that Congress and the President have also clearly established a policy 

requiring automotive companies to increase the fuel economy of the automobiles they 

produce and that some of these companies are encountering difficulties in obtaining 

automatic crankpin grinders on a timely basis, to produce the statutorily mandated 

energy efficient automobiles, we believe that it is not in the public interest to provide a 

remedy in this case. In this period of rapid changes in the energy field, there are 

overriding public interest considerations in not ordering a remedy which will hamper 

the supply of energy efficient automobiles. This is not merely a matter of meeting the 

demands of individual consumers for fuel efficient automobiles. The public as a whole 

has an interest in conserving fuel through the provision of energy efficient alternatives 

represented in this case by automobiles with more efficient engines which are produced 

with the assistance of crankpin grinders which are the subject of this investigation. See 

id. at 18, 20. 

See Commission Action and Order In re Certain Inclined-Field Acceleration Tubes at 1, USITC Inv. No. 

337-TA-67, 0080 WL 594319 (Dec. 29 1980); Commission Action and Order In re Certain Inclined-Field 

Acceleration Tubes at 22-31, USITC Inv. No. 337-TA-67, (Dec. 29 1980). 

26 
114 


ChienB-27.eps

scientific research and the advancement of knowledge" in the context of federally-funded 

nuclear research115 The ITC concluded that the infringing Dowlish tubes were "greatly 

superior" and "substantially less expensive" than their counterparts, and that they were 

"indispensable" to research, and that research was in turn in the public interest."6 Thus, as in 

Crankpin Grinders, the Commission believed both that the public needed the infringing 

products for health and welfare reasons and that the products wouldn't be available if it 

granted the exclusion order. 

115 Commission Action and Order In re Certain Inclined-Field Acceleration Tubes at 21, USITC Inv. No. 

337-TA-67, (Dec. 29 1980). 

116 The Commission wrote: 

We believe that basic scientific research, such as the nuclear structure research 

conducted with inclined-field acceleration tubes, is precisely the kind of activity 

intended by Congress to be included when it required the Commission to consider the 

effect of a remedy on the public health and welfare .... Although there are few 

indications in the record of practical applications for nuclear structure physics, it shows 

that the tubes at Los Alamos are used for nuclear weapons development and the 

University of Arizona uses them as mass spectrometers for carbon 14 dating, essential 

to paleontological and archaeological applications. Many scientists would argue, of 

course, that basic research is intrinsically beneficial regardless of immediate practical 

application. The support of universities and public agencies is ample support for that 

proposition. 

Finally, the President and the Congress have issued declarations of support for basic 

science research. The National Science Foundation Act, which supports with grants 

much of the research done with both the domestic and imported tubes, is codified in 

title 42, United States Code, which is entitled Public Health and Welfare. 

The users consider the Dowlish tube to be greatly superior in performance to the High 

Voltage tube-not to mention substantially less expensive-and therefore indispensable 

[sic] to their research efforts. The tubes provide the greater stability of operation and 

more consistent results essential for accurate research. 

Once the importance of basic research in nuclear structure physics is established, we 

are faced with a difficult balance-the impact of a remedy on users of the imported 

device versus the impact of the violation on the owner of the patent. After weighing 

these considerations, we determine that public interest factors preclude a remedy in 

this investigation. See id. at 22, 23, 27, 29. 

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The final case in which the Commission denied an exclusion order is In re Certain 

Fluidized Supporting Apparatus and Components Thereaf117 Unlike the other two, this case 

involved denial of temporary relief under § 1337(e)118 The ITC noted that this allowed it more 

discretion in framing a remedy, just as district courts have more freedom to deny preliminary 

injunctions. 119 The technology in Fluidized Supporting Apparatus was hospital burn beds lzo 

The ITC concluded that the infringing beds "provide[d] benefits unavailable from any other 

device or method of treatment" and that other suppliers could not meet the demand within a 

reasonable time l21 The Commission affirmed the AU's finding that "if a temporary exclusion 

order were issued some patients might not have access to burn beds at all in the interim 

period," both because of the patentee's higher prices and because of concerns about the ability 

of the patentee to meet manufacturing demand. 122 Unlike the others, this case focused more 

on the public interest in health than on unavailability, but the Commission did find at least 

partial unavailabil ityl23 

In contrast to these cases, the Commission has regularly rejected public interest 

arguments when it found either that alternative suppliers could provide comparable products 

or that the products were not critical to public health and welfare. For example, the 

117 See Commission Memorandum Opinion In re Certain Fluidized Supporting Apparatus and 

Components Thereof, at 1-2, USITC Inv. No. 337-TA-182, 337-TA-188, 225 U.S.P.Q. 1211, 1984 WL 63741 

(Oct. 5, 1984). 

118 See id. at 1. 

119 See id. at 3 ("if the relevant substantive elements are established, the issuance of temporary relief is 

largely discretionary, while the issuance of permanent relief is mandatory"). 

120 Commission Memorandum Opinion In re Certain Fluidized Supporting Apparatus and Components 

Thereof, at 1. 

121 Id. at 23. 

122 See id. 

123 See id. at 23-25. 

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Commission has recognized the public interest in supplying consumers with needed drugs.'24 

However, it has held that if the patentee can supply all domestic demand, there is not a public 

interest problem even if the patentee would satisfy the demand only at a higher price. '2S 

Significant public health interests, then, aren't enough unless coupled with unavailability. 

On the other end of the spectrum, the Commission has also held that the unavailability 

of equivalent products is insufficient grounds to refuse an exclusion order when there is no 

reason to think there is an important health or welfare interest in the products. In Certain 

Hardware Logic Emulation Systems, the respondent argued that while the patentee provided 

hardware logic emulators, they were not of the same quality as the respondent's emulators. 126 

The Commission rejected that argument, not by disagreeing with the factual claim, but by 

concluding that emulators weren't critical to the public interest: 

hardware logic emulators are not the type of product that has in the past raised 

public interest concerns (such as, for example, drugs or medical devices) and we 

124 See In re Certain Crystalline Cefadroxil Monohydrate, Public Disclosure Version: Commission Opinion 

On The Issue Under Review, And On Remedy, The Public Interest, And Bonding at 46, USITC Inv. No. 337-

TA-293, 1990 WL 10008086 at *17 (March 21, 1990). 

125 "There is, of course, an additional public interest in maintaining an adequate supply of 

pharmaceuticals for U.s. consumers. This interest also does not bar relief. Bristol has 

sufficient capacity and resources to satisfy all domestic demand for cefadroxil, as it had 

until respondents entered the market in March 1989. Moreover, the availability of 

other cephalosporins will not be affected by the issuance of relief. The record indicates 

that Bristol perceives a number of these cephalosporins to be competitive with 

cefadroxil; that at least one of the competitive cephalosporins, cephalexin, is available in 

generic form; and that, even if generic cefadroxil were unavailable, [ ] [redaction in 

original]. The record consequently refutes respondents' contention that granting relief 

will somehow deprive the ill and indigent of necessary medication. 

The only remaining argument respondents make is that granting relief will raise 

prices to consumers. The Commission has previously held that this alone is not 

sufficient grounds for denying relief." 

Id. at 46-47.1990 WL 10008086 at *17·18. 

126 In The Matter Of Certain Hardware Logic Emulation Systems And Components Thereof, Commission 

Opinion On Remedy, The Public Interest, And Bonding at 8, USITC Inv. No. 337-TA-383, 1996 WL 

1056217 at '5 (October 15, 1996). 

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are not aware of any other public interest concern that would militate against 

entry of the remedial orders we have determined to issue.127 

Thus, it seems to be the confluence of both the unavailability of alternatives and the important 

nature of the products that leads the Commission to deny an exclusion order.'28 

The result might not seem particularly encouraging for the use of the public interest 

exceptions to combat patent holdup. Patent holdup tends to occur in complex, multicomponent products, particularly in the information technology industries.'29 Holdup is a 

greater risk in those industries not only because there are more patents asserted in those 

industries, but also because those patents tend to cover small parts of a much larger product130 

A patent that covers the active ingredient in the drug gives the patentee the right to prevent 

the sale of that drug; that isn't holdup, but the normal right of the patentee to exclude 

infringing products. By contrast, a patent on a particular circuit layout may constitute only a 

tiny fraction of the value of the microprocessor that uses the layout, but an exclusion order will 

exclude the microprocessor as a whole, preventing the defendant from importing both the 

127 Id. at 9,1996 WL 1056217 at *5 

128 See also In re Certain Toothbrushes And The Packaging Thereof, Commission Opinion On Remedy, 

The Public Interest, And Bonding at 6, USITC Inv. No. 337-TA-391, 1997 WL 803475, at *2 (October 15, 

1997) ("the public interest favors the protection of U.S. intellectual property rights, the u.s. market for 

toothbrushes of the type at issue could be supplied by complainant or by non infringing alternatives, and 

toothbrushes are not the type of product that have in the past raised public interest concerns (such as, 

for example, drugs or medical devices)."); CERTAIN PROCESSES FOR THE MANUFACTURE OF SKINLESS 

SAUSAGE CASINGS AND RESULTING PRODUCT, INVESTIGATION NO. 337-TA-148/169; REVIEW OF INITIAL 

DETERMINATION, REMEDY, BONDING, AND THE PUBLIC INTEREST, USITC GC-84-187, 1984 WL 273326 

(November 9,1984) ("Sausage casings are not an essential item forthe preservation of the public health 

and welfare."). 

129 See FTC, supra note 5 at 3,35,160. Indeed, John Turner finds that PAEs depend for their business 

model on a critical mass of other inventions made by product-producing companies. John L. Turner, 

Patent Thickets, Trolls and Unproductive Entrepreneurship (working paper August 2011). 

130 See, e.g., Mark A. Lemley, Ten Things to Do About Patent Holdup of Standards (and One Not To), 48 

B.C. L. REV. 149, 150-51 (2007). 

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(small) infringing element and the (much larger) non-infringing elements. The social harm in 

the latter case is disproportionate to the social benefit, as many productive, non-infringing 

components in are shut down to give the patentee control over only a single small component. 

The ITC cases applying the public interest exception, however, have generally not found much 

of a public health and welfare interest in IT products, where the holdup problem is most 

acute131 

Nonetheless, there are reasons to think the application of the public interest factors 

going forward may be broader than they have been in the past. To begin, it is worth noting that 

the ITC has traditionally focused most of its attention on only a subset of the statutory factors. 

Commission cases pay close attention to the effect of such exclusion upon the public health and 

welfare and the production of like or directly competitive articles in the United States. 132 But 

they have paid very little attention to competitive conditions in the United States economy and 

the effect on United States consumers.133 

131 See J. Gregory Sidak, The Law and Economics of Section 337 Exclusion Orders for Patent Infringement 

at the International Trade Commission 49-60 (working paper October 18, 2011) (arguing that the existing 

public interest analysis at the ITC does not sufficiently take account of the problem of holdup). 

132 See supra notes Error! Bookmark not defined.-123. 

133 Congress indicated that competitive conditions were intended to be an important part of the public 

interest analysis. From the legislative history: 

"The Committee believes that the public health and welfare and the assurance of 

competitive conditions in the United States economy must be the overriding 

considerations in the administration of this statute. Therefore, under the 

Committee bill, the Commission must examine (in consultation with other 

Federal agencies) the effect of issuing an exclusion order or a cease and desist 

order on the public health and welfare before such order is issued. Should the 

Commission find that issuing an exclusion order would have a greater adverse 

effect on the public health and welfare; on competitive conditions in the United 

States economy; on production of like or directly competitive articles in the 

United States; or on the United States consumer, than would be gained by 

protecting the patent holder (within the context of the U.S. patent laws) then the 

Committee feels that such exclusion order should not be issued. This would be 

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The mix of cases before the Commission has changed. When a domestic company is 

suing a foreign counterfeiter, the public interest is clear: ban the importation. However, this 

type of case is becoming less and less common - only 12% of ITC cases fit the prototypical 

profile of a domestic plaintiff suing a foreign defendant.'34 Cases brought against "knockoffs" 

are also comparatively rare - 58% of cases were brought against public companies, who are, for 

reasons of reputation and brand, unlikely to fit in the category of "counterfeiters."m In 

addition, more cases are fitting the troll profile.'36 

In the wake of e8ay and various changes to the ITC statute and case law, non-practicing 

entities are flocking to the lTC, both because of the relaxed domestic industry requirement137 

and because courts are no longer a sure bet for injunctions."8 The cases they are bringing 

disproportionately involve complex, multi-component technologies. 139 

As a result, the balance of public interest factors is different today than it traditionally 

has been. First, one of the factors that the Commission has always considered important - will 

another company fill the gap created by exclusion - is less likely to be satisfied when the 

complainant is a non-practicing entity. That is especially true when the patentee complains 

particularly true in cases where there is any evidence of price gouging or 

monopolistic practices in the domestic industry. 

s. Rep. No. 93-1298, 93rd Cong., 2d Sess. 197, at *7330 (1974). 

134 Chien, Patently Protectionist, supra note 10 at 89, Table 3. 

135 Id. p. 92 table 4. 

136 See supra Figure 4. 

137 See Czebiniak, supra note 10, at 110. 

138 See eBay, 547 U.s. at 391. 

139 Eighty-six percent of ITC cases filed by N PEs between 2005 and 2011 were in high-tech sectors. 

Michael Kallus and James Conlon, International Trade Commission: The Second Theater, RPX Corp. 

10/3/11 Presentation, slide (on file with author) (showing that 86% of ITC NPE cases involved mobile 

communications, semiconductors, consumer electronics, pes, networking, storage, or e-commerce 

technologies, in contrast to ITC cases in general, 63% of which involved these sectors.) [ER 14[ 

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against a host of companies at once, as is often the case in troll actions.!4D If the patentee 

claims that the entire industry infringes, there is no one exempt from the exclusion order 

available to fill market demand14! 

Second, both competitive conditions and consumers are affected to a greater degree by 

the grant of exclusion orders in complex multi-component cases than was true in traditional 

counterfeiter cases. The effect is not just on the supply of the infringing feature, but also on 

the price and supply of non-infringing features and functionalities, customers and third parties 

that rely on these non-infringing features, and - through the mechanism of holdup - on the 

research and development activities of the defendants and of companies who make the 

noninfringing components142 Patent holdup was not a feature of most ITC actions until 

recently, both because they weren't filed by PAEs against an entire industry and because they 

weren't usually filed against complex, mUlti-component products 143 The changed 

circumstances permit the ITC to take a different approach. 

There is some reason to think the ITC may be open to rethinking its public interest case 

law. In 2011, the ITC incorporated public interest considerations into its decision not to deny, 

140 See Figure 2. 

141 The issue is more complex when the patentee sues an entire industry but settles by licensing some 

parties before trial. In that case, the settlement means that there are in fact some parties who can sell 

licensed products if an exclusion order issues against the remaining defendants. But it would seem odd 

to say that whether a patentee can exclude defendants should depend on whether other defendants 

choose to go to trial. District courts after e8ay have been unwilling to view nonexclusive licenses 

granted in settlement of patent disputes as evidence of irreparable injury justifying injunctive relief, see 

z4, 434 F. Supp. 2d at 440; the same logic might apply here. 

142 See, P.g., (ease and Desist order in Broadband Base Processors at 1, LJSITC Inv. No. 337-TA·543 

(restricting Qualcomm's research, development, and testing of broadband base processors) discussed in 

Commission Opinion on Remedy, the Public Interest, and Bonding in Broadband Base Processors at 154, 

USITC Inv. No. 337-TA-543 (rejecting Qualcomm's position that a Cease and Desist order would impair 

the public interest). 

143 See supra Part I. 

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but to delay the start of, an exclusion order in a case involving smartphonesl44 Around that 

time, the ITC has changed its rules to allow an administrative law judge, under Commission 

order, to take evidence on the public interest at the outset of a case, rather than waiting until 

the end. '45 This information could be used to identify likely remedies earlier in the 

proceedings, leading to the more efficient resolution of cases. 

We applaud this new-found flexibility. In the next Part, we offer specific suggestions for 

how the Commission could update the public interest considerations for the new, post-eBay 

world. 

III. Tailoring, Bonding, and Pausing in the Public Interest 

Remedies in the ITC might seem to be an all-or-nothing affair. The ITC can't award 

damages; it can only exclude productS.'46 As a result, even judges and Commissioners who 

believe an exclusion order is not in the public interest might hesitate to apply the public 

interest standard to deny relief, for fear that the result will be that the patentee wins its case 

but gets no remedy at all. That fear has always been somewhat overstated; patentees can file 

suit in district court in parallel with the ITC (and do, two-thirds ofthe time14\ and they may be 

entitled to an award of damages in court even if neither the ITC nor the court enjoins the sale 

144 Order in 337-TA-710, Personal Data and Mobile Communications Devices and Related Software, at 3 

(December 19,2011); see also Colleen V. Chien and Mark A. Lemley, Patentsand the Public Interest, 

supra note 9, NEWYORKTIMES.COM, December 13, 2011 (recommending this very tailoring remedy in that 

case). 

145 Rules of Adjudication and Enforcement, 19 CFR Part 210, 76 Fed. Reg. 64803 (Oct. 19, 2011), 

http://www.usitc-gov Isecretary/fed reg notices/rules/fi nalrules210. pdf. 

146 See 19 U.s.c. §1337; Chien Patently Protectionist, supra note 10, at 102. 

147 Chien, Patently Protectionist, supra note 8, at 70 (noting that "65 percent of the ITC cases studied 

had a district court counterpart"). 

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ofthe defendant's product.148 But that may be cold comfort to patentees who will have wasted 

the time and effort of going to the ITC only to have the Commission give it no remedy. And the 

Commission may understandably be reluctant to condemn itself to seeming irrelevance. 

In fact, however, we think the Commission has more flexibility in remedies than 

previously recognized. Historically, the ITC has used this flexibility at several points to restrict 

the relief given to patentees. In 1981, the Commission created the limited exclusion order to 

supplement the remedy of a general order, as "a limitation on the relief afforded a prevailing 

complainant.,,149 It did so while determining the proper scope of an injunction even though 

"Congress ha[d][] never specifically authorized the Commission to issue limited exclusion orders 

as the final remedy in a section 337 investigation."lSo In the EPROMs case, the Commission 

148 In the case of co-pending ITC and district court cases, the district court case shall be stayed upon a 

timely request. See 28 U.S.c. § 1659(a) ("district court shall stay, until the determination of the 

Commission becomes final, proceedings in the civil action with respect to any claim that involves the 

same issues involved in the proceeding before the Commission"). While the lTC's findings are not 

accorded res judicata by the CDurts, Texas Instruments, Inc. v. Cypress Semiconductor Corp., 90 F.3d 

1558, 1568-69 (Fed. Cir. 1996). in practice, the default assumption is that district courts are to reach a 

similar result on the same claims and explain and distinguish the ITC decision if they don't. 

149 As recounted in 337-TA-276, EPROMS, n. 159. ("[TJhe limited exclusion order is itself a limitation on 

the relief afforded a prevailing complainant, created by the Commission without specific authority in the 

statute. Congress has never specifically authorized the Commission to issue limited exclusion orders as 

the final remedy in a section 337 investigation, although it has specifically authorized them when 

directed at defaulting respondents. Nevertheless, the Commission has been issuing limited exclusion 

orders since 1981. In light of the extensive attention devoted to section 337 in the past two years, 

resulting in the amendments effected by the OTCA, we believe it is reasonable to infer Congressional 

acquiescence in the Commission's practice of issuing limited exclusion orders from Congress' silence on 

the matter. This is particularly so, since with respect to remedy matters, Congress noted the 

Commission's belief that it was precluded from issuing both exclusion and cease and desist orders with 

respect to the same unfair act, and provided specific authority for the Commission to do so, presumably 

in order to expand the extent of relief available to a prevailing complainant. Had Congress objected to 

the issuance of limited rather than general exclusion orders as insufficient relief, it would presumably 

have acted to limit the Commission's authority to issue such orders.") 

150 {d. In general, an administrative agency's latitude to craft appropriate remedies, while not 

unlimited, is broad. See Jacob Siegel Co. v. Federal Trade Comm'n, 327 U.S. 608, 613 (1946) ("the courts 

will not interfere except where the remedy selected has no reasonable relation to the unlawful practices 

found to exist"). 

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devised a special, 9-factor test to apply when so-called "downstream products", products that 

incorporated the infringing component, were implicated by an exclusion order.'51 This test 

reflects, in large part, a concern about the proportionality of the ITC remedy to the "wrong" of 

patent infringement as reflected in Factor 1 (the value of the infringing articles compared to the 

value of the downstream products in which they are incorporated), Factor 3 (the incremental 

value to the complainant ofthe exclusion of downstream products). Factor 4 (the incremental 

detriment to respondents of exclusion of such products), and Factor 5 (the burdens imposed on 

third parties resulting from exclusion of downstream products).'52 When the value of the 

invention is small compared to the value of the enjoined article that incorporates that invention 

downstream, the ITC has paused to consider whether and what type of injunction is 

deserved.'53 Today's component cases raise the same concerns about undue interference with 

the market. 

EPROMs, supra note 149 at 124-26. The nine EPROM factors require the ITC to evaluate: 

(1) the value of the infringing articles compared to the value of the downstream products in 

which they are incorporated; 

(2) the identity of the manufacturer of the downstream products, i. e., whether it can be 

determined that the downstream products are manufactured by the respondent or by a third 

party; 

(3) the incremental value to the complainant of the exclusion of downstream products; 

(4) the incremental detriment to respondents of exclusion of such products; 

(5) the burdens imposed on third parties resulting from exclusion of downstream products; 

(6) the availability of alternative downstream products that do not contain the infringing 

articles; 

(7) the likelihood that the downstream products actually contain the infringing articles and are 

thereby subject to exclusion; 

(8) the opportunity for evasion of an exclusion order that does not include downstream 

products; and 

(9) the enforceability of an order by Customs. 

152 See supra note 151. 

153 See, e.g., EPROMs, supra note 149, at 127. 

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Although the EPROMs standard has arguably diminished in importance with the Federal 

Circuit's Kyocera decision, 154 the concerns that prompted it endure. High-tech component 

cases are now the norm at the ITC: eighty-six percent of ITC cases filed by NPEs between 2005 

and 2011 were in high-tech sectors. ISS In this section, we suggest some ways in which the ITC 

can use its discretion to craft remedies consistent with the statute's public interest provisions 

and the Commission's EPROMs test. 

Much of that flexibility results from the statute, which gives the ITC broad discretion to 

fashion an appropriate remedy.1S6 The Federal Circuit is largely deferential to the lTC's remedy 

determinations, reversing them only when they are "arbitrary, capricious, an abuse of 

154 At least as applied to the exclusion of downstream products though a limited exclusion order, which 

Kyocera prohibited. See Kyocera Wireless Corp. v. International Trade Commission, 545 F.3d 1340, 

1357-58 (Fed. Cir. 2008). 

155 Kallus, supra note 139. 

156 See 19 U.s.c. § 1337(c) ("Commission determinations ... with respect to its findings on the public 

health and welfare, competitive conditions in the United States economy, the production of like or 

directly competitive articles in the United States, and United States consumers, the amount and nature 

of bond, or the appropriate remedy shall be reviewable in accordance with [5 U.s.c. § 706]."), and 

Hyundai Elecs. Indus. Co. v. Int'I Trade Comm'n, 899 F.2d 1204, 1208 (Fed.Cir.1990) (finding, based on a 

review of section 337 legislative history, that 5 USC 706 2(A) governs the Federal Circuit's review of ITC 

remedy determinations.); 5 U.S.C § 706 2(A) ("The reviewing court shall ... hold unlawful and set aside 

agency action, findings, and conclusions found to be (A) arbitrary, capricious, an abuse of discretion, or 

otherwise not in accordance with law"); accord, Spansion, Inc. v. Int'l Trade Comm'n, 629 F.3d 1331, 

1358 (Fed. Cir. 2010) citing Epistar Corp. v. Int'I Trade Comm'n, 566 F.3d 1321, 1333 (Fed. Cir. 2009). 

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discretion, or otherwise not in accordance with law.,,157 This standard of review is less stringent 

than the one that applies to the lTC's substantive patent law determinations158 

The structure of the ITC process also provides some flexibility. Once the Commission 

finds a violation, it is entitled to enter an exclusion order keeping infringing products out of the 

market. 159 In some circumstances, the Commission holds a separate hearing after a liability 

finding to determine whether and what particular form of injunctive relief is appropriate160 

Assuming it is (and as noted above,'6' the Commission essentially always finds that it is), the 

order is then subject to a 60-day Presidential review period. '62 But the exclusion order goes 

into effect immediately - before the Presidential review period - unless the respondent posts a 

bond adequate to compensate for sales made during the review period 163 And once the 

Commission's order is final, the respondent can appeal to the Federal Circuit.'64 

157 See Spansion, 6Z9 F.3d 1331 at 1358; accord Epistar Corp. v. Int'I Trade Comm'n, 566 F.3d 1321, 

1333 (Fed. Cir. Z009); Hyundai Elecs. Indus. Co. v. Int'l Trade Comm'n, 899 F.Zd 1Z04, 1Z08 (Fed. Cir. 

1990); see also Kyocera Wireless Corp. v. International Trade Commission, 545 F.3d 1340, 1355 

(Fed.Cir.Z008) (applying the framework established by Chevron U.S.A. Inc. v. Natural Res. Dej. Council, 

Inc., 467 U.S. 837, (1984) to an ITC order, and stating that if "the statute in question is ambiguous and 

the agency's interpretation is reasonable," "a court must defer to an agency's construction of a statute 

governing agency conduct." (quoting Cathedral Candle Co. v. U.s. lTC, 400 F.3d 135Z, 1361 (Fed. Cir. 

ZOOS)). 

158 Hyundai at 1208 ("Congress ... desire[d] to subject Commission determinations on the public 

interest .... bonding, and remedy, to a less stringent standard of judicial review than determinations of 

substantive violations of section 337."). 

159 19 U.S.c. § 1337(e)(1). 

160 Commission Decision in Personal Data and Mobile Communications DevicesTA-710-337. 

161 See Figure 3. 

162 19 U.S.c. § 1337(j)(Z) ("If, before the close of the 60-day period beginning on the day after the day 

on which he receives a copy of such determination, the President, for policy reasons, disapproves such 

determination and notifies the Commission of his disapproval, then, effective on the date of such notice, 

such determination and the action taken under subsection (d). (e), (f), (g), or (i) of this section with 

respect thereto shall have no force or effect."). 

163 19 U.S.c. § 1337(e)(1) ("The Commission shall notify the Secretary of the Treasury of its action under 

this subsection directing such exclusion from entry, and upon receipt of such notice, the Secretary shall, 

through the proper officers, refuse such entry, except that such articles shall be entitled to entry under 

bond prescribed by the Secretary in an amount determined by the Commission to be sufficient to 

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This process creates three remedies less harsh than simply excluding the products but 

more powerful than simply denying an injunction. First, the ITC can decide what its exclusion 

order will cover. That is to say, it can choose, and indeed has chosen,'65 to include certain 

products, and exclude others in its orders. Second, the ITC can decide when it will implement 

its exclusion order. It doesn't have to choose between immediately enjoining the product or 

doing nothing; it can delay the order or apply it only prospectively. Finally, the ITC can use its 

statutory authority to set a bond to permit continued importation during the review period, but 

condition that importation on the payment of money. Small tweaks to these aspects of how 

the ITC awards injunctions can potentially yield big benefits to the public interest, as we explain 

below. 

A. Grandfathering and Tailaring injunctian Scape 

19 U.s.c. §1337 (d) directs the Commission to exclude infringing articles unless public 

interest concerns dictate otherwise. Read with an eye towards tailoring, the provision 

essentially requires the Commission to fashion its exclusion order so that it will pass public 

interest muster. An exclusion order tells a company to stop importing its product. 166 But it is a 

remedy whose harshness can be softened, for example, if existing models or units are 

grandfathered in. When the product remains available in some form, and the exclusion order is 

protect the complainant from any injury. If the Commission later determines that the respondent has 

violated the provisions of this section, the bond may be forfeited to the complainant."); id. § 1337(j)(3) 

("articles directed to be excluded from entry under subsection (d) of this section or subject to a cease 

and desist order under subsection (f) of this section shall, until such determination becomes final, be 

entitled to entry under bond prescribed by the Secretary in an amount determined by the Commission 

to be sufficient to protect the complainant from any injury. If the determination becomes final, the 

bond may be forfeited to the complainant. The Commission shall prescribe the terms and conditions 

under which bonds may be forfeited under this paragraph."). 

164 1d. §1337(c). 

165 See, infra Part III(A). 

166 19 U.S.c. §1337(d)(1). 

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applied to future versions or units of the product, consumers and competition are less likely to 

suffer. 

These types of public interest concerns have led the ITC to engage in just this kind of 

tailoring. In Certain Baseband Processors, the Commission found that the requested exclusion 

order was "not permitted in [the] investigation" due to the potential harm to third parties.'67 

However, the Commission adjusted the scope of the exclusion order by grandfathering in 

existing models of handsets.'68 The exemption enabled the exclusion order to "adequately 

address public interest concerns,,'69 and the Commission to issue the exclusion order. 

The Commission has tailored exclusion scope in other cases as well. In Personal Data 

and Mabile Communications Devices, the Commission grandfathered refurbished replacement 

handsets into its exclusion order. 170 In Sortatian Systems 171 and Transmission Trucks,172 the ITC 

exempted from its exclusion order spare parts to service existing systems and facilities, citing 

the exemptions in its public interest analysis. We believe it could use grandfathering and 

167 Commission Decision in Certain Baseband Processors Inv. No. 337-TA-543, supra note 142, at 83. [ER 

16] 

168 Id. at 150-1. 

169 Id. at 150. 

170 Commission Decision in Personal Data and Mobile Communications Devices 337-TA-710, supra note 

78, at 83. ("HTC shall be permitted to import into the United States [for 19 months] ... refurbished 

handsets to be provided to consumers as replacements"). 

171 Certain Sortation Systems, Parts Thereof, and Products Containing Same; Notice of Violation of 

Section 337 of the Tariff Act of 1930 and Issuance of Limited Exclusion Order, 68 Fed. Reg. 5047 (Jan. 31, 

2003) (" rhe Commission determined to include an exemption in the limited exclusion order for 

importations of spare parts for United Parcel Service's Hub 2000 facility in Louisville, Kentucky."). 

172 Certain Automated Mechanical Transmission Systems for Medium-Duty and Heavy-Duty Trucks, and 

Components Thereof, Termination of Investigation; Issuance of a Limited Exclusion Order and a Cease 

and Desist Order, at 3, EDIS Doc. 10.228343, USITC Inv. No. 337-TA-503 (Apr. 7, 2005) ("The limited 

exclusion order does not cover parts necessary to service infringing autom<lted mechanical tr<lnsmission 

systems installed on trucks prior to the issuance of the order. ") 

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related exemptions in appropriate circumstances to protect consumer access to the 

noninfringing portions of a complex, multicomponent product.'73 

8. Delay 

The Commission may also choose in certain circumstances to delay the exclusion 

order. 174 The Commission normally imposes an exclusion order immediately, though as noted 

above, the respondent can effectively stay that injunction for 60 days by posting a bond.'75 The 

respondent may also be able to obtain a stay of the exclusion order pending appeal to the 

Federal Circuit.'76 But even if neither occurs, the Commission has the power to delay the 

implementation of the exclusion order for a period of time. It could do so to give the 

respondent time to design around the patent or substitute non-infringing products for goods in 

the pipeline, or to ensure that consumers don't go without products until the patentee can 

ramp up production. 

Delaying injunctive relief has the potential to significantly ameliorate the holdup 

problem. As Mark Lemley and Carl Shapiro have shown, holdup is a result of two factors: the 

fact that an injunction will prevent the sale of noninfringing as well as infringing components in 

a complex multi-component product and the fact that roughly % of litigated patents are either 

173 See also John M. Golden, Injunctions as More (or Less) Than "Off Switches"; Patent-Infringement 

Injunctions' Scope, 90 Tex. L. Rev. _ (forthcoming 2012). 

174 Commission Decision in Personal Data and Mobile Communications Devices TA-710-337/ supra note 

78, at 81. ("T-Mobile itself has advised the Commission that a four-month transition period would likely 

be sufficient .... We find T-Mobile's suggestion to be reasonable and within our authority to 

implement."). 

175 19 U.S.c. §1337(e)(1). 

176 1d. at §1337(c). 

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invalid or not infringed. 177 The fact that the injunction will shut down non-infringing matter 

means that it costs the respondent more than the patent itself is worth. '78 Rather than pay 

that extra cost in settlement, the respondent will sometimes design around the patent to avoid 

the effect of an injunction. 179 But because most patent suits lose, most advance designarounds are wasted effort. 180 The patentee can opportunistically capture in settlement the cost 

of design-around, even if the patent is likely to be invalid or not infringed.lSl 

Delaying onset of the injunction or exclusion order changes that dynamic. As Lemley 

and Shapiro show, respondents who can count on a delay to allow them to design around the 

patent don't need to invest in unnecessary design-a rounds to avoid the risk of injunction 

holdup.182 As a result, they don't need to pay the owners of weak patents a premium to avoid 

spending the money on design-a rounds. They can design around the patent only if it becomes 

necessary to do so. Design-arounds take time - not only to devise, test, and implement in the 

177 Lemley & Shapiro, supra note 26 at 1996, 2019, n. 71. A number of scholars have tried to attack 

this holdup analysis. See Einer Elhauge, Do Patent Holdup and Royalty Stacking Lead To Systematically 

Excessive Royalties?, 4 J. COMPETITION L. & ECON. 535, 535-40 (2008); J. Gregory Sidak, Holdup, Royalty 

Stacking, and the Presumption of Injunctive Relieffor Patent Infringement: A Reply to Lemley and 

Shapiro, 92 MINN. L. REV. 714, 718-20 (2008). But those attacks miss the mark; rather than demonstrate 

that holdup doesn't exist, these scholars have uniformly argued that patentees deserve the holdup value 

of their patents, asserting that patentees - unlike everyone else in a market economy - should be paid 

the full social value of their invention. See Thomas M. Cotter, Patent Holdup, Patent Remedies, and 

Antitrust Responses, 34 J. CORP. L. 1151, 1153-54, 1162-71 (2009) (making this point). 

John Golden has taken a different tack, arguing that it is unfair to treat PAEs differently than 

product-producing plaintiffs John M. Golden, "Patent Trolls" and Patent Remedies, 85 TEX. L. REV. 2111, 

2114-17 (2007). But that too misses the point; if one patient needs a kidney and another doesn't, it is 

not discrimination to give a kidney only to the one who can show they need it. Similarly, granting 

injunctions only to parties who can prove they will suffer irreparable injury without it isn't discrimination 

even though it has different effects on different plaintiffs. See Mark A. Lemley & Carl Shapiro, Patent 

Holdup and Royalty Stacking: Reply, 85 TEX. L. REV. 2163, 2163-65, 2169 (2007); 

178 Mark A. Lemley & Philip J. Weiser, Should Property or Liability Rules Govern Information?, 85 TEX. L. 

REV. 783, 794-95 (2007). 

179 See Lemley & Shapiro, supra note 26, at 2002. 

180 See id. at 2002, n. 71. 

181 See id. at 2002, 2005. 

182 See id. at 2038. Accord Golden, supra note ~ at 2131. 

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manufacturing process, but sometimes also to gain necessary regulatory approvals. With a 

transition period, the blow of abruptly pulling a product from the market is softened. The 

Federal Circuit acknowledged this in Broadcam v. Qua/camm, remarking that the "sunset 

provisions mitigate the harm to the public" as a remedy that protected rights "while allowing .. 

. time to develop non-infringing substitutes." 183 

A limited delay to allow design-around has another benefit as well- it can help 

distinguish between patents that really are critical and those that aren't. Giving a respondent, 

say, six months to design around the patent provides a sort of acid test of the claim that the 

patent is in fact necessary to practice the invention. If the respondent can design around the 

patent in six months, the invention it embodies arguably wasn't that valuable, and it probably 

isn't worth holding up the entire product for a patent that was essentially optional. By contrast, 

if the respondent can't design around the patent and still sell a product economically, the 

patent really is valuable, and arguably we should worry less about the risk of holdup caused by 

the exclusion order. And unlike the district courts with their limited Article III jurisdiction, the 

ITC has the power to issue an advisory opinion as to whether the design-around is also 

infringing the patent,'B4 a fact that can save a great deal of cost and uncertainty in subsequent 

litigation. 'BS 

183 Broadcom Corp. v. Qualcomm Inc., 543 F.3d 683, 704 (Fed. Cir. 2008) (approving a district court's 

injunction that included a twenty month "sunset provision" that reduced harm to the public interest); 

Verizon Servs. Corp. v. Vonaae Holdings Corp., 503 F.3d 1295. 1311 n. 12 (Fed.Cir.2007) (noting, in dicta, 

the benefits of a workaround period, though one was not requested by the defendant.). See also 

Golden, supra note . at note 261 (noting and describing cases where courts have delayed to avoid the 

"special disruption" of immediately entered injunctions.) 

184 19 C.F.R. §210.79; Eaton Corp. v. United States, 395 F. Supp. 2d 1314, 1318 (Ct. Int'l Trade 2005) 

(noting this option). For discussion of the strategic considerations that go into deciding whether to seek 

such an opinion, see Merritt R. Blakeslee & Christopher V. Meservy, Seeking Adjudication of a Design43 
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Patentees might object that delaying the injunction is unfair to them, because if the 

respondent can design around the patent, the patentee ends up getting nothing. That's not 

entirely true; if the design-around costs more than the original product, the parties should be 

able to settle for the difference in value - which is really the value of the patent in the first 

place. And if the design-around is easy and just as cheap, the actual value of the patented 

technology is zero; any payment to the patentee in that case is a windfall. 

The ITC has started to recognize the benefits of staying exclusion orders. In Personal 

Data and Mobile Communications Devices, the Commission found that the immediate exclusion 

of the infringing devices "would not be in the public interest" because of its impact on market 

competition.'86 A four-month period of exclusion, however, would provide time for 

replacement handsets to be devised and provided to customers.'S' The Commission tailored its 

injunction accordingly, explaining that "competitive conditions in the United States do not 

weigh against the issuance of an exclusion order, but favor providing a transition period.,,'88 

As this case demonstrates, incorporating a delay allows the ITC to award exclusion 

orders where public interest might dictate otherwise. During the period of stay, there may be a 

way for patentees to be compensated for the value of their technology during the period of 

stay. That relates to the final area of remedial flexibility at the ITC - monetary relief. 

Around in Section 337 Patent Infringement Investigations: Procedural Context and Strategic 

Considerations, 35 AIPLA Q.J. 385, 408-411 (2007). 

185 Indeed, in Ninestar, the Federal Circuit chastised the respondent for not taking advantage of this 

procedure before implementing its alleged design-around. Ninestar Tech. Co. v. lTC, 667 F.3d 1373,_ 

(Fed. Cir. 2012) 

186 Commission Decision in Personal Data and Mobile Communications Devices USITC Inv. No. 337-TA710, supra note 78, at 81 (noting the immediate exclusion of HTe devices would have a 

"substantial impact on T-Mobile's competitiveness"). 

187 See id. 

188 Id. at 83. 

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C. Bonds and Penalties 

Although the ITe doesn't routinely award stays, it does routinely sanction the continued 

importation of an article even after it has been found infringing. That is because, while the ITe 

cannot award damages, 19 U.s.c. § 1337(j)(3) authorizes it to set a a bond that the respondent 

can post and continue importation under through the 60-day Presidential review period.'89 The 

amount must be "sufficient to protect the complainant from any injury,,,,90 and is typically 

based on the difference in price between complainant's product and the infringing imports.'9' 

Requiring respondents to post a bond to delay implementation of the exclusion order pending 

the Presidential review period is effectively a payment of an ongoing royalty. 

The President essentially never reverses an ITe decision,'92 which means that 

respondents always forfeit the bond. They are paying an ongoing royalty for the privilege of 

continuing to sell their products for another 60 days. And if the bond is set correctly, it will 

mimic the amount of an ongoing royalty in district court: the value of the patent based on the 

number of goods sold.'93 There is no policy reason the ITe shouldn't be allowed to impose a 

delay longer than 60 days in exchange for payment of a comparably higher bond. It could stay 

the order pending appeal, for instance, subject to a bond. 

189 See 19 U.s.c. § 1337(j); Tom Schaumberg, ed. A Lawyer's Guide to Section 337 Investigations Before 

the US International Trade Commission ABA-I P Section (2011). p. 186 n. 41. 

190 19 U.s.c. § 1337U)(3). 

191 Commission Decision in Personal Data and Mobile Communications Devices TA-710-337, supra note 

78, at 85. 

192 The White House has done so only five times ever. See, e.g. Tom Schaumberg, ed. A Lawyer's Guide 

to Section 337 Investigations Before the US International Trade Commission ABA-I P Section (2011). p 187 

fn.45. As of 2005, the White House delegated this power to the u.S. Trade Representative. 70 Fed. 

Reg. 43251 (July 26, 2005). 

193 On the calculation of ongoing royalties in district court, see Mark A. Lemley, The Ongoing Confusion 

Over Ongoing Royalties, 76 Mo. L. REV. 695, 701-02 (2011). 

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The amount of the bond would depend on the equities of the case. In Personal Data 

and Mabile Communications Devices, where implementation of the exclusion order was 

delayed by four months, the ITC entered a bond amount of zero,'94 although in other cases it 

may be more.'9S Combining a delay in the implementation of an exclusion order with a bond 

compensating the patentee for the value ofthe invention during the period of delay would 

allow the ITC to approximate the power a district court has to deny or stay injunctive relief 

while ordering payment of an ongoing royalty.'96 It will often be the best possible remedy, and 

certainly it is preferable to the other apparent options - patent holdup by an immediate 

exclusion order or no remedy at all. 

Implementing bond periods longer than 60 days may require some creativity, however. 

Section 1337(j)(3) seems to contemplate that the bond must terminate at the end of the 

presidential review period when the Commission's order becomes "final," even though that 

194 The opinion suggests that the amount could have been higher had Apple presented better evidence 

of the price differential. Commission Opinion in Personal Data and Mobile Communications Devices, 

supra note 78, at 85 ("Apple failed to satisfy its burden ... "). 

195 The amount of the bond is often set at 100%. (see, e.g., Certain Radio Control Hobby Transmitters 

and Receivers and Products Containing Same, Limited Exclusion Order at 2, USITC. Inv. No. 337-TA-763 

(Sept. 27, 2011); Certain Birthing Simulators and Associated Systems, Limited Exclusion Order at 2, USITC 

Inv. No. 337-TA-759 (Aug. 292011); Certain Toner Cartridges and Components Thereof, Cease and 

Desist Order at 2, USITC Inv. No. 337-TA-740 (Sept. 27, 2011)) though this also seems like in many cases 

this would be far more than "sufficient to protect the complainant from any injury," (as provided in 19 

U.S.C §1337(j)(3)) especially when the invention is a small component of the infringing article. 

One complication for bonding, both under our proposal and in existing practice, arises with the 

growth of NPEs at the ITC If the patentee doesn't sell the patented invention, there is no price 

differential to use as a baseline to measure the value of the patent. But district courts confront the 

valuation problem all the time, and a variety of mechanisms economists use there for apportionment of 

the value of complex products may be used here to set the amount of a bond in an NPE case. 

196 The analogy isn't perfect; a bond is presumably set against the possibility of some contingent future 

event, however unlikely. The power to order payment of a bond might not extend to the power to 

order the payment of money directly to the complainant with no hope of recovery. But conditioning a 

bond on something like an appeal will generally achieve the same result. 

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final order is still subject to appeal 19' One possibility is to change this language to give the ITC 

more flexibility in determining the length of time covered by a bond. Another, simpler, 

possibility is that the Commission not publish its final notice of finding of violation in the 

Federal Register until after the period of delay ends. By making a preliminary holding rather 

than a published "determination," the ITC may be able to delay the beginning of the 60-day 

clock for presidential review198 

The lTC's authority to assess and impose civil penalties for violations of Commission 

orders provide another option for the ITC to provide a monetary component to its remedy, 

even in spite of its inability to award damages. 199 The ITC has been given wide latitude in 

setting penalties, which are reviewed for an abuse of discretion 200 In San Huon Materials High 

Tech, Inc. v. International Trade Commission, the Federal Circuit endorsed the lTC's approach to 

197 19 U.S.c. § 1337(c). 

198 19 U.S.c. § 1337(j)(1) provides that the 60-day review period begins when the Commission publishes 

its determination in the Federal Register and transmits the finding to the President; the order becomes 

final 60 days thereafter. 

199 See 19 U.s.c. § 1337(f)(2): 

Any person who violates an order issued by the Commission under paragraph (1) after it 

has become final shall forfeit and pay to the United States a civil penalty for each day on 

which an importation of articles, or their sale, occurs in violation of the order of not 

more than the greater of $100,000 or twice the domestic value of the articles entered or 

sold on such day in violation of the order. Such penalty shall accrue to the United States 

and may be recovered for the United States in a civil action brought by the Commission 

in the Federal District Court for the District of Columbia or for the district in which the 

violation occurs. 

200 See Ninestar Tech. Co. v. lTC, 667 F.3d 1373, 1377 (Fed. Cir. 2012) ("Assessment of a civil penalty 

under 19 U.s.c. §1337(f) is reviewed on the standard of abuse of discretion"); Genentech, Inc. v. 

International Trade Comm'n, 122 F.3d 1409, 1414 (Fed. Cir. 1997). This means review for whether the 

ruling: "(1) is clearly unreasonable, arbitrary, or fanciful; (2) is based on an erroneous conclusion of law; 

(3) rests on clearly erroneous fact findings; or (4) follows from a record that contains no evidence on 

which the decision-making body could rationally base its decision." Ninestar. at 1379. Commission 

penalties may also trigger constitutional review if due process concerns are raised. See id. at 1382. 

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setting penalties based on: "(1) the good or bad faith of the respondent; (2) any injury due to 

the infringement; (3) the respondent's ability to pay the assessed penalty; (4) the extent to 

which the respondent benefitted from its violations; (5) the need to vindicate the authority of 

the Commission; and (6) the public interest.,,2D! The Commission's approach to determining the 

amount of penalty "[takes] into account the 'three overarching considerations enumerated by 

Congress in the legislative history [of section 337(f)(2)], viz., the desire to deter violations, the 

intentional or unintentional nature of any violations, and the public interest.",2D2 A Commission 

interested in ensuring that patentees were compensated but unwilling to exclude products 

altogether might be able to use this authority to effectively "preannounce" the penalty for 

violating an exclusion order - in effect converting that penalty into a price to be paid for the 

importation of infringing goods. 

D. Exercising Discretion Wisely 

The ITC has broad discretion within the bounds of the statute in setting and conditioning 

the remedy for infringement.2D3 We think the ITC should exercise its remedial flexibility when 

the risk of holdup is substantial. That is likely when the defendant sells a multi-component 

product and the novel feature of the patent covers only a small part of that product. 2D4 

Different remedies might be appropriate in different situations: 

201 Ninestar at 1379, citing San Huan New Materials High Tech, Inc. v. Int'l Trade Comm'n, 161 F.3d 1347, 

1362 (Fed. Cir. 1998). Ninestar also confirms that the lTC, rather than the solely district court, also has 

the authority to determine and enforce civil penalties. See id. at 1384. 

202 San Huon at 1362. 

203 19 U.S.c. § 1337(c) (providing that review of remedial decisions is subject to deference under the 

Administrative Procedures Act, including presumably Chevron deference to reasonable interpretations 

of the statute). 

204 Patent claims will often be written to cover an entire product even though the patentee's 

contribution is limited to a single small feature. The inventor ofthe intermittent windshield wiper, for 

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• Switching costs are high once interoperable products are designed to work together 

(e.g. standards)'>os In this case, grandfathering in of existing models can ameliorate the 

harms. 

• The short-term impact on consumers is high in cases where switching, costly or not, 

imposes significant harm on customers who cannot get support or service for products 

already sold.'o6 In this case, either a stay or an exception allowing service and spare 

parts might help solve these problems.,o7 

• Collateral damage to third parties who make noninfringing products may be high in 

multi-component cases because those third parties have already made irreversible 

investments. Grandfathering can help in some of these cases, but not all; bonding may 

be the best remedy in this circumstance.'o8 

instance, might claim a car with an intermittent windshield wiper. The Commission should focus on 

what the patentee actually contributed to the art, not the form in which the patentee chooses to write 

the claim. See Mark A. Lemley, Point of Novelty, 105 Nw. U. L. REV. 1253 (2011). 

205 See, e.g., Certain Baseband Processors at p. 149 ("As to competitive conditions in the U.S. economy, 

exclusion would likely result in some adverse impact on the development of advanced 

telecommunications technology and on expansion of broadband internet access. These technologies 

are important in their own right, but they also have significant effects on other economic activity in the 

United States. Downstream relief would make it more difficult for telecommunications companies to 

expand 3G cellular telephone services and broadband internet access, and make it more difficult for 

consumers, including businesses, to access these services"). 

206 See Commission Opinion in Personal Data and Mobile Communications Devices 337-TA-710, supra 

note 78, at 72-73. 

207 See id. at 72, 79-84. 

208 See Certain Baseband Processors, p. 153 (''The potential harm to economic actors, in this case 

including handset manufacturers and telecommunications service providers, is properly part of our 

EPROMs analysis, and we have indeed fully weighed potential harm to third parties and to legitimate 

trade in that prior analysis. In fact, under our EPROMs analysis, we found that full downstream relief 

was not permitted in this investigation due to, among other things, the magnitude ofthe impact on third 

parties.") (ultimately concluding "a downstream remedy with a grandfathering exception does not raise 

public interest concerns" because "the relief we propose has a much more limited impact on availability 

of 3G-capable handsets, and thus a lesser impact on the public interest.") (see id. at 153-154). 

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Greg Sidak has developed a detailed taxonomy for applying the public interest factors to holdup 

situations.>o9 

Finally, it may be appropriate to consider three other factors in setting ITC remedies: 

whether the patentee is a PAE, whether the defendant is a willful infringer, and whether the 

patent is standards-essential. While the statutory public interest factors are party-neutral,"O 

the patentee's status as a PAE can influence the impact of an exclusion order to competition 

and consumers, since it affects the patentee's need for an injunction (a competitive condition) 

and, when many defendants are sued, the likelihood that consumers will have access to 

alternative products. 

In a similar vein, we believe that standards-essential patents, in particular those that are 

subject to reasonable and nondiscriminatory (RAND) licensing obligations, should generally not 

be given injunctions by the ITe. The ITC has the power to reject an exclusion order where the 

respondent is licensed to import the product.'ll Whether or not a RAND commitment to a 

standard-setting organization is an executable license,'" we believe that competition and 

consumers would be disserved if patents promised to be available for licensing on fair and 

reasonable terms were the basis of an exclusion order. And ifthe suit is brought late in the 

product life-cycle, after a standard has been adopted,>13 switching costs to consumers and 

209 Sidak, supra note _, at 60·93,170·72 

210 See 19 U.s.c. §1337(c). In contrast, the domestic industry requirement is not, as currently 

interpreted by the lTC, party-neutral. NPEs do not need to prove the so-called technical prong that 

requires "articles protected by the patent." One of us has argued that this is inconsistent with the 

statute and its legislative history. See Chien, Protecting Domestic Industries, supra note 74 at 180·81_; 

19 U.S.c. §1337(a)(3). 

211 Tessera, Inc. v. International Trade Comm'n, 646 F.3d 1357, 1370-71 (Fed. Cir. 2011). 

212 For an argument that it is, see Lemley, Stondard-Setting, supra note 24, at 1925. 

213 Research by Brian Love shows that NPEs tend to assert their patents late in the life of the patent, as 

compared to practicing entities. See Brian Love, An Empirical Study of Patent Litigation: Could 0 Patent 

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competitors will likely be higher. The DOJ has expressed similar concerns about using such 

patents to get injunctions, noting that, "F/RAND requirements have not prevented significant 

disputes from arising in connection with the licensing of [] [standards essesntial patents], 

including actions by patent holders seeking injunctive or exclusionary relief that could alter 

competitive market outcomes ... the division continues to have concerns about the potential 

inappropriate use of SEPs to disrupt competition. u214 There is at least one situation where an 

ITC action and exclusion order on the basis of a RAND patent may be appropriate, however. A 

RAND commitment is essentially a promise that money will be considered adequate 

compensation to patentees for use of their technology. Only district courts can award money 

damages, putting them in the best position for deciding disputes over RAND patents. However, 

in the cases when the district court lacks jurisdiction over a defendant but the in rem 

jurisdiction of the ITC is available,'IS the ITC provides the patentee with its only recourse. In 

such cases, ITC action is appropriate.ln addition, we don't want the absence of injunctive relief 

to encourage companies to copy and take their chances while infringing. That isn't much of a 

problem in the IT industries today; the evidence suggests that virtually all patent cases are filed 

against innocent infringers, not copiers.'16 But proof of deliberate infringement or other 

evidence of bad faith (for example, shirking licensing obligations) should incline the Commission 

Term Reduction Decimate Trolls Without Harming Innovators? (unpublished draft, on file with the 

authors), at 1, available at http://papers.ssrn.com/soI3/papers.cjm ?abstracUd=1917709. 

214 US Department of Justice Statement of the Department of Justice's Antitrust Division on Its Decision 

to Close Its Investigations of Google Inc.'s Acquisition of Motorola Mobility Holdings Inc. and the 

Acquisitions of Certain Patents by Apple Inc., Microsoft Corp. and Research in Motion Ltd., February 13, 

2012, available at www.justice.gov/opa/pr/2012/February/12-at-210.html 

215 65% of ITC cases have a district court counterpart, suggesting that this isn't a problem in the majority 

of cases, where both the ITC and district court have the power to hear the case. See Chien, Patently 

Protectionist, supra note _ at 64. 

216 Christopher A. Cotropia & Mark A. Lemley, Copying in Patent Law, 87 N.C. L. REV. 1421, 1424 (2009). 

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to look askance at claims that the defendant needs an opportunity to design around a patent; 

the intentional infringer presumably has had that opportunity already.217 

We make an additional suggestion related to procedure. One downside of increased 

tailoring of ITC exclusion orders is that it could lead to increased unpredictability as to the 

remedy, at least in the short term. Currently, "Summary Determination" proceedings in the 

ITC218 rarely if ever happen on issues of remedy?19 But there is no reason why such motions 

couldn't be brought. Indeed, the lTC's recent move to allow for earlier briefing on public 

interest issues seems to support just this possibility.22o If a case is not one in which an exclusion 

order is appropriate, it is better for all concerned to make that clear up front, before the parties 

litigate questions of validity and infringement unnecessarily. 

We make one final recommendation, directed not solely at the lTC, but also at the other 

agencies and departments government that the ITC is required to consult when carrying out its 

217 We use the term "deliberate infringement" rather than "willfulness" here because patent law's 

willfulness doctrine varies in significant ways from what an ordinary observer would think of as 

purposeful conduct. Because willfulness is a continuing offense, patent law may designate someone 

willful merely because they didn't stop selling the product once sued. See Mark A. Lemley & Ragesh K. 

Tangri, Ending Patent Law's Willfulness Game, 18 BERKELEVTECH. L.J. 1085, 1089-93 (2003). That is not 

deliberate conduct in any normal sense. On the other hand, willfulness will not be found if the 

defendant's conduct was objectively reasonable, even if the defendant intended to infringe. See In re 

Seagate Tech., 497 F.3d 1360, 1371 (Fed. Cir. 2007) (en banc), ("the standard of 'recklessness' appears 

to ratify intentional disregard") at 1385 (Newman, J., concurring). 

218 19 CFR §210.18 prescribes the procedures that are used for Summary Determination. As subsection 

(b) describes: 

The determination sought by the moving party shall be rendered if pleadings and any 

depositions, answers to interrogatories, and admissions on file, together with the affidavits, if 

any, show that there is no genuine issue as to any material fact and that the moving party is 

entitled to a summary determination as a matter of law. 

219 See Czebiniak, supra note 10, at 107. 

220 Rules of Adjudication and Enforcement, 19 CFR Part 210, 

http://www.lIsitc.gov /sE'cretary/fed ree notices/rulesLfinalrules210. pdf. 

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investigations.>21 On several occasions, the ITC has relied on policies of other parts of the 

government to support its decision-making. In two out of the three cases in which the ITC 

declined to award an exclusion order, it relied upon the policies of the President and Congress 

to explain its position.'" In the Baseband Processor case, where the ITC custom tailored the 

injunction it ordered, the Commission cited the public comments of FEMA and the FCC. 223 In 

the recent Mobile Handsets case, in which the ITC delayed the start of the exclusion order for 

four months, it drew from statements of the DOJ and President Obama to support its decision -

making.224 We found few instances of agencies submitting formal comments to ITC 

investigations,225 but where a proposed exclusion order poses a danger to the public interest, 

other agencies can and should weigh in during the ITC review process. 

221 19 USC 1337 (b)(2) states: 

During the course of each investigation under this section, the Commission shall consult with, 

and seek advice and information from, the Department of Health and Human Services, the 

Department of Justice, the Federal Trade Commission, and such other departments and 

agencies as it considers appropriate. 

222 See Commission Action and Order In re Certain Inclined-Field Acceleration Tubes at 21, USITC Inv. No. 

337-TA-67, (Dec. 29 1980) (citing in support of its decision to not grant an order enjoining Dowlish tubes 

used for research, "the President and the Congress have issued declarations of support for basic science 

research," and" [t]he National Science Foundation Act"); Opinion of Vice Chairman Alberger and 

Commissioners Bedell and Stern In re Certain Automatic Crankpin Grinders at 17-18, USITC Inv. No. 337-

TA-50, 205 U.S.P.Q. 71, 0079 WL 419349 (Dec. 17, 1979)(justifying its decision not to exclude efficient 

crankpin grinders in part by "the fact that Congress and the President have also clearly established a 

policy requiring automotive companies to increase the fuel economy of the automobiles they produce.") 

TA-337-67 and TA-337-70 cases as described and excerpted supra at footnotes _ and __ . 

223 Baseband Processors, supra note ~ at_. 

224 Mobile Handsets, supra note __ , at __ . 

225 Based on a search of EDIS for "comments," in 337 actions, turning up submissions from Congress and 

a few states, but none from public agencies. 

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IV. Conclusion 

The eBay case has had the unintended consequence of driving patentees to the ITC In hopes 

of obtaining an injunction no longer available in district court. Though eBay's flexible fourfactor test doesn't apply at the lTC, the Commission has more power to adjust the remedy it 

grants than commentators have previously recognized. We think it should use this power to 

limit exclusion orders in circumstances where the patentee can hold up defendants. Delays in 

implementing the exclusion order and grandfathering in existing products can avoid holdup 

problems. Bond and penalty provisions can ensure that patentees are compensated for 

ongoing infringement during these transition periods; a few tweaks to the statutory language 

would give the ITC still more freedom to tailor its remedies. The resulting system won't look 

exactly like eBay, but it will accomplish many of the same ends. 

54 
142 


ChienC-1.eps

~"!C'nt. , Sm"nphoo ... and til. Public tntercs1 - NYTim"'.COIl1 

Cb. rIII !lark £b.H~._ 

......... , ... ,)"000...-' __ ... " .... _._ .. _ .... _ _ ... _,_ .. _ ....... _._"'_ ... _ _ ......... -11 ........ _ 

... ,._ ... ~ .. ""'....,.. \1.,,,-"-_ ... __ .... """", __ 0-....._01 ... ..-_ 

-,'''''' 

Patents and the Public Interest 

ay COlUOEtII v. CIl'E"' ... d MARK 01.. It:MLE"Y 

I'oslscripl AplM",dcd 

I'.~ t of) 

Ne>:1 ,,"e~l. in a ~ cl(Mly,mtcln,d both branal)"s ~;,nd relailel"li, Ille Inlernalional Trade Cmn·mi",iom will 

de<:lde wh~lher the lI.nd><:! ",aker liT<: shOlold be allowed to imI'Qrt il~ ptiXlU<:ts iolo Ibe Uniled St~I~. The 

COnlroversy? A daim by '\1'1'1,,11101 !O"(.: infring .... l on h'" <)flhee~imaled ~.so.oo" patenl~oo>·erill8 

sOlanphone IIM:b'~lo gy. Iflherommi ... ion ~rl'CS. il i!; li~cry to L<I;ue an """"lusion order; "..hich wo~ld in 

cfroa say"h .... p ou '(oflh~ United Stal .. ) to liTe·, Anl\nlid phones during tho Christmas season. 

It". rases like this thaI ha'·e "'~ny poopl .. ron""n,ed Ihat oorn, i"did:ll de<:isioll.< ... ll' .... Ih." COI"Yllll:l"ll. will 

deddc what products m~k" il "nto Santa· •• It:igh. While "m."phnnc p~t""t d;'(}laC!< are being WlI!\OO ""mnd 

lhe world, with injunelin"" in play 011 "",..,,,,1 cominem •. the I.T.C. rtlUn& h"" (he poIffitiallo belbe m",,' 

sill-nin."",l "n .. 10 <I.11'.lIi ... " Ih" .i ... of !lUI U"iletl Statl'S ", .. ket. As ""lent law ... peru; ... h" "PPreciOl~ llle 

eCliri~ncyof the I.T.C.·.d"";"""-01"kins.."" b.Il",~ Ihat" s",~1l eh.n)1.c in h"wlh" ro01mi""w" dOC!! i .. job 

<""ld }·;eld hi~ ~ivirlellds fm ... ,n1pctitinn and ,.,"""01.,,,, by re(!"dllg the .1''''''''';011 ~Il ""elusion order o~" 

"T"ak. 

TheAJl!II","TCdi~Jl",e i'n't the oolyolle at Ih. LT.C. ,,;th. poteo\i.llyh"xe ;mp.ct On co"",,,"er •. M.k~,.,. 

of CPS dovitell."d f1~I- screen.~. and mom m"jor~martphone makers •• ,.~1sIl mbroil<:d in di~p"te~ then, ~1! 

of them lIopinJ; IhAt Ih. J.T.e. will nm prevent thtl' prodUClS ftom oon)lon tile Un;ted SIal •• market. 

flO"· did thi. nllce-obs.."re t .. de court i.letnllleoue of the most import"nt bot\l"Snl"nds of ron'''n'''' 

~ch nol ogy~ The un~wer l;c~ In [lIlrt in the SJI'.""\ of the I.T.C.. but ....... n more 110 in Ihe. power 11 h:lS 10 kl.'Cp 

produrts out of tb ~ United Slate,;. 
143 


ChienC-2.eps

Patents, Smartphones and the Public Interest - NYTimes.com Page 2 of3 

In 2006, the BlackBerry manufacturer Research in Motion was almost blocked from making its phones when 

NTP - a "patent troll" whose sole business is profiting from patents - sought to enforce some patents. 

Though ajury had awarded just $23 million in damages, R.LM. agreed to pay NTP what later amounted to 

$613 million in licensing fees to avoid having its phones shut down by the court. 

Later that year the Supreme Court's eBay decision made it harder to impose such "holdup" fees by doing away 

with the practice of automatically awarding an injunction. After eBay, a court must consider the harms to the 

parties and the public that an injunction would present before deciding to grant one. This new case-by-case 

standard has gone a long way to solving the holdup problem that had beset the patent system. 

But in the wake of eBay, both patent trolls and product companies like Apple have flocked to the LT.C., where 

a federal ruling held that eBay's new equitable test does not apply. The commission's caseload has more than 

doubled, from 29 cases in 2005 to 64 and counting this year. And while the injunction grant rate in district 

courts has declined to around 75 percent for companies that make products and much lower than that for 

trolls, the LT.C.'s injunction rate has held steady at 100 percent. The result has been to undo much of the 

desirable effect of eBay. 

Although the LT.C. is supposed to consider an exclusion order's impact on competition and consumers 

relating to the effect of any exclusion order, it hasn't given these so-called "public interest" factors many teeth. 

But it should. The LT .C. has the power to tailor the remedy to fit the crime, for example delaying an 

injunction to allow a defendant to redesign its product, or even refusing to exclude the imports at all. 

Tailoring remedies makes sense. When a patent holder doesn't compete in the market or risk irreparable 

harm, fast-tracking the case to a district court to assess damages may be the better option. But when the 

dispute is between competitors, or involves a start-up or university seeking to commercialize its invention, an 

exclusion order should be the default. 

Even in such cases, shutting out imports of an infringing product is not always the right answer. If the patent 

covers a small part of the product, the defendant could design around it, and if the defendant's infringement 

was inadvertent, the LT.C. could award an exclusion order but delay its start. During the delay period, the 

infringer could pay remuneration through a bond, allowing the patentee to get paid but not holding up a large 

product because of a small patent. 

A delay would allow companies and consumers to adjust to the ruling. The alternatives - for companies to 

change their products every time they are sued, no matter how meritlessly, or to shut dOVVIl productiou 

altogether - would drive up costs unnecessarily. (As is often said: companies can manage bad uews, it's the 

bad surprises that they hate. Just ask Samsung and HTC, which have had to design around patent injunctions 

http://www.nytimes.com/20 lliI2/13/opinionJ patents-smartphones-and-the-pu blic-interest. html? Joo 1 &pa.. 7/1812012 
144 

f 


ChienC-3.eps

Patents, Smartphones and the Public Interest - NYTimes.com Page 3 of3 

in Germany and Australia.) 

Congress could require the LT.C. to consider these options. But it shouldn't have to. The LT.C. has proven to 

be adaptive to changing competitive conditions. The agency has the power to make fair, case-by-case 

decisions on whether and how to block products from entering the country. It should use that power. 

Colleen V. Chien is an assistant professor at Santa Clara University School of Law. Mark A. Lemley is a professor 

at Stanford Luw School and a purtner in the law firm afDurie Tangri. 

Postscript: December 14, 2011 

An earlier version of this article reported that the International Trade Commission's decision would be 

Wednesday; the decision has been postponed, and the urricle was changed to reflect the development. 

http://www.nytimes.com/20 lliI2/13/opinionl patents-smartphones-and-the-pu blic-interest. html? Joo 1 &pa.. 7/1812012 
145 

Material submitted by Bernard J. Cassidy, General Counsel and 

Executive Vice President, Tessera Technologies, Inc. 


75152A-1.eps

< 

INN OVATION 

t I . • , 

, . . . . 

luly9, Z012 

United Slates ntenta ti on~ ' r rad,/! Commission 

sao E Slre~t, S.W. 

Washington. DC 10436 

R~: Th ~ Innovillion Allilln~e's UU(lonse to the Commiu ion'. R,,'1ues! for Written 

Suhmiu ions in Certll;n Wire/e5:r ComMunication Ol'vict!s, Portable Music olld DlJtn 

P,orening I'~luJ, Compultn un(1 CQmpontnl$ Thereof, Inv. No. 337-TA_74S. 

Dear secretary Rarton ~ 

The Innovation Allianc~ ("' A~) respectfully submits these comments in response 

to the NOlice of Commission Decision 10 Review in Pun a FiM] [nitilll Ddenninalion 

Finding II Violalion of Section 3:17; Request for Written Subnunions issucd by the 

United States imemalional Tl1Ide Commission in th"'malLer of Cerloin IYlnle.~s 

CmmnunicUlirm /Jt!vicu, p(/l'U!bl~' MUl'ic uf'l<i Datu PM(;t$~ing [)evictI.8, Com""lers find 

Componenls Th~ l!~/. IllV. No. 33·/·T A·745, on June 25. 20 12 (Ihe "Commission 

Requc5t~) , 

Introduction lo lA 

The IA is II. CIl alilionllf cOlnpanies seeking to enhance America'$ innovlltion 

environm"nl by impN)vinil: Ih~ "ul~i y o f patents and protecting tht! integrity of the U,S. 

p!lteU\ 5YStcm, IA n:presents innoviltors, patenl owners und stakeholders from II divCfSC 

lAnge ofimlustric$ that believc in >the critical importance o[ mainUlining 118tronS palenl 

system, Many oflA 's members a.!Iso ma"u rft~turellndlor stdl products lind servic~"S tl\ol 

utilize- nOl only their own patents, blltlhose of Ihird panies as well. IA's positions un II 

sll'ong palenl system - on the pro-:innovalion and pl'tl'Compet;tive henefits of voluntary 

sumdllrdimtion efforts lind bilaternl negotiation ofliecnses and cl'Olis·liccnses amoog 

StMdardization participllllts - are not new, 

!A', Re.ponse 

Rcque~1s to the rTC for exdusion orders should be decided based on th~ fac ts IlI1d 

cin:umstaoces of t!lIch particular casc. Any proposal to aUlofTUltically deny exclusion 

orders 00 a blanket basis for all holders orslllndard-esscntial patents ("SEiPs") who 

conunilto grant license~ under reasonable and non-discrimlnatory {"'RAND") terms 

would be inconsistent with thc public interest, In this ft'gard, lA ~ concerned that the 
146 


75152A-2.eps

FTC's recent Public Interest Statement in lTC Inv, No, 337-TA-745 and similar 

submissions from others may overslate the prevalence of patent hold-up, does not 

consider factors that may militate in favor of exclusion orders in particular cases, and 

undermines the incentive scheme created by palent law and provisions such as Section 

337. 1 

Indeed, far from supp()rting a hlanket prohibition on exclusion orders as a remedy 

for infringement of an SEP, the Slakmcnl's references to "potential" hann to US 

competition and "the possibility of patent hold up" underscore the need to decide requests 

for exclusion orders on a case-by-case basis, subject to consideration of the particular 

facts and circumstances of each case, The speculative nature of harm identified in the 

FTC's Statcmenllikcwise puts into question the arguments by certain voices that the ITC 

should, automatically refuse to issue import exclusion orders in cases invol ving SEPs, In 

short, proponents of a categorical rule that would effectively deny owners of SEPs a 

remedy in the ITC arc asking the Commission to base sweeping changes of the U,S, trade 

laws only on the possibility of potential harm, and without any actual evidence of harm to 

U,S, consumers, 

The misdirected focus of the proposed prohibition ofthc exclusion order remedy 

for SEPs is confirmed by the record compiled by the FTC in connection with its 2011 

Patent Standards Workshop, as discussed below, In short, the fundamental underpinning 

of the posi.tion to limit remedies available in the nc to SEP owners - i,e" an endemic and 

systematic "hold up" problem - was shown to be unsupported, Moreover, the ITC 

through its public interest inquiry is equally capable as the federal courts to balance the 

interests at stake under the facts and circumstances of each case, and to consider the 

relevant public interest factors in such a light. 

No Evidence '~f (l S~'stemic Patent Hold-Up Problem 

Following publication in 2011 of the FTC Report, the FTC sought public 

comment flnd held the FTC Patents Standards Workshop, According [0 the evidence the 

FTC compiled through these two undertakings, there is no systemic patent hold·,up 

problem, 

In ShOli, the FTC's own record provides strong evidence lhal existing laws and 

processes have been effeclive in balancing the interests of diverse stakeholders in hightechnology illd!lslrie~ so us to stimulate investment across a value chain -- from basic 

research, to product development and manufacturing? The record also demonstrates 

1 1A member company repre~entatlveg were pleased to in the FTC's hearings resulting 

in the Mat'eh 2011 "Evolving IP Marketplace" report (the "FTC and the .iune 2011 Standards 

Patents workshop (the "FTC Workshop"), The IA also submitted written views to the FTC in connection 

with these public events, 

with Professors Epstein, Kieff and Spulber that patent law is desigllcd nUL meTerV 10 molivate 

but also to provide the legal rights 1 remedies and incentlvcs necessm'y to of 

2 
147 


75152A-3.eps

thai standardization activity under existing law has contributed to robust 

cOlmp,etitiOll, diversification of business models and product offerings, creation, 

also bringing consumers the henefits of innovative technologies services at 

cOlnlillu<llly lower Indeed, numerous commentators, including standard setting 

academics, industry analysts, licensors, and other stakeholders 

expressed strong views that hold-up is not a significant or widespread problem in the 

market: 

The Alliance for Telecommunications Industry Solutions ("AIlS") reports that it 

"has not experienced the hold-up problem, nor <lny such problem impeded in 

any way A TTS' standards development efforts", 

TIA reports that it "has never received any complaints regarding such 'patent 

hold-up, and "believes that the FTC is presuming thal 'patent hold,up' is a 

widespread and fundamental without considering the practical 

experiences of SSOs such as 

The American :'Iational Standards Institute ("ANSI") reported Hm( "for a 

relatively small number r of standards 1 have ever been fom1ci.lly 

regarding the ANSI Patent Policy, including relating to improper 'hold 

up'" .~ 

Professor Jay Kean ofthe University of Illinois law school finds that "there is 

little or no evidence indicating thal there is a significant problem with 

Cellular industry analyst Keith Mallinson contends that "there has been no 

evidence of 'windfall gains' patent owners impeding the adoption of any 

technology-based standard, Indeed, Mallinson shows that in the cellular 

industry, imp1emcnlcrs and c,miers already reap the overwhelming majority of 

profits generated by the products enabled by the licensed lp8 

Microsoft, a tl'eqnenl patent defendant as well as plaintiff, also sees "little 

evidence that 'palent hold-up' in the standards context is a real problem,"" 

the whole net\,.vork of private rel,.liol1si1ips required to bring all invention ai I the \-vay from conception Lo the 

conSlmH.~r, See Epstein et 31. (Aug. 5, at ,1-7. 

3 1d Comments ofAllianc(' for Telec.ommunications Indllstt·y Solutions 14,2011) at 1. 

~ fd Comments ofTc!ecommLlnications (June 14, at 4. 

~ /d Comments of Arne ric an N{ltional 10,2011), submission I, at 12, 

(, /d Comments P. KeS811 

7 1d. Comments of Keith 

tel. at J9-2i, 

Id. Comments of 'vliCl'Osoft (June '4,20 I I) at i 6, 
148 


75152A-4.eps

SAP states that it has participated in over 100 SSOs and has never accuseJ a 

company or been accused ofpatcnt hold-up.IO 

Citing cellular market statistics, Epstein et a1. conclude that "the success on the 

ground bcars out the theoretical insight that hold-ups are not a serious threat to 

collaboration over and around standards." I I 

There Should be No Presumption thlll Holli-Up E;>eists G'enel'lt!(v or in Particular Cases 

The evidence to date including the FTC's own record is insumcient to warrant a 

presumption that owners of SEPs are breaching their RAND commitments in every 

instance, or that a public interest need exists to limit existing remedies available to SEP 

owners on a blanket basis, A licensor's success depends on the success of its licensees. 

In addition, since innovators who participate in standard-setting often repeatedly 

contribute their technologies to a standard, a patentee that has failed to comply with its 

RAND commitment risks the exclusion of its technological solutions from future 

standards, Patentees also wish to avoid the expense and uncertainty of litigation. These 

incentives encollrage negotiation which has been the prefen'cd mechanism under most 

SSO polides for establishing license terms. Under a no-exclusion-order policy (and 

analogously a no-injunction however, the has little inccnii vc to 

bargain in good faith because by it can paying royalties until at least the 

litigation is over, ifnot longer, The would be lTlore and longer litigation, with tbe 

inefficiency that litigation entails, and an unjustified shift in bargaining power ii'om 

patent holders to implementers thai would destroy the balance established by Congress in 

the patent system. 

A no-exclusion-order (and analogously llo-h~junction) rule for SEPsIRANDobligated patents would also create a perverse incentive: innovators who participate in 

8DOs (and give RAND commitments) would have fewer rights than innovators (hal do 

not participate. The predictable j'csult would be that fewer innovators would participate in 

SDOs with such IPR rules (or make RAND commiiments if they do participate) or 

engage in R&D for tcc!mologics that may be standardized, Reduced participation in 

SDOs or reduced funding of R&D would likely result in delay, technologically inferior 

standards, and reduced infom1ation about patents implicated by standards, Refusals to 

make RAND commitments would similarly lead (0 delay and technologically inferior 

10 Naomi Abe Voetgli. SAP. Tr. at 20-21 (stating that SAP has pa>1icipated in over 100 SSOs and has never 

a or been accused of patent hold-up); 

ld ("Epstein 5.201 at 14; see also Comments of Association for Competitive 

T echnoJogy (Aug. 5! i) at 2 its members, smal1 "are not convinced that 

there is a wide-spread patent Comments 5, 20J J) ,,12 ("Based on 

om firsthand experience participlJting industry standards, we do not h~~~t:h~:e:o~~~~~~'~I::~ii~~~~e~~~) practices of the various standards organizltlons in the wireles~ 11I 

consumers, or othe·rwjse result in market dislurtiQn.l'); Chamber of Commerce 

2011) at 8 ("[E]mpirical evidence supporting a concem with a widespread risk of holdup is 

Microsoft. 1'1', at 23-24 (staling thal litigation between paten! holders and licensees is 110t 

evideTI{~e Jorge Contreras, Washington University in St. Louis School of Law, Tr. 

(ag,ree,inf: that hold-up "nol happening thal much"), 

4 
149 


75152A-5.eps

standards as SDOs would attempt to "design out" the technologies of companies that 

refuse to make RAND commitments. The results of a restrictive rule could he more and 

longer litigation, lack of deterrents for implementers to negotiate licenses or settlements, 

and the erosion of the existing balance of interests among the various stakeholders. 

For all these reasons, the lTC should not adopt a rule or practice thai 

systematically denies excIusion orders in favor of owners of SEPs based on a 

presumption of hold-up or any other presumption. Rathel', the He shOUld consider the 

propriety of such orders under the particular facts and circumstances of the case. 

Brian Pomper 

Executive Director 

The Innovation Alliance 

5 
150 


75152A-6.eps

. INNOVATION 

• : I • ,. I 

The ITC and Patent Disputes: 

Efforts to Weaken the lTC's Remedial Authority 

Will Hamper Innovation and Export American Jobs 

1. EXECUTIVE SUMMARY 

Thi~ While Paper p!"Qvidc, an asKssmenl of pt'OflOSed modificalioru 10 tcrtain provisior'UI 

or 19 U.S.C. § 1337 (kSection 3lT'), the: S1atute thRI regulates unfair practice! in import tnode and 

that is cnforad by the Inlnnationil Tntdc Commission ("[Te'). The proposal, entitled 

"Modemizin, the ITC Palcnt Proc~ \0 Ensure Consistent Application of US PalCnt Law.~ " '1$ 

p<UpOSCd tn address a perceived pmblem or overuse of the rrc by iIO-<:.llcd non-practicing 

emitl!:1 (MNPEI,,)I and is intended 10 curb the lTC's power under Section 331 10 prevent products 

thaI infringe U.S. n(clL~h lll property righU from being imported into the United Sllles. 

In particular. the proposed chungcs 10 Section )37 would require tht ITC 10 apply. fouf' 

prong cquitu.blc: lInaly£is before issuing an exclusion order prevcnting imPllrtatlon of infringing 

product! into the United SIDles. The pmPIIscd changcs would also limit tilt: statutory definition 

of R "domu tic industry" to e~cludc IIny patent i~cnliing activiti.:s that do not help bring a oon· 

existent new product 10 markct-ll pr"Dposa l that would dfe<:tive!y bar the Ire fl"llm remedying 

unfair trade prac i~es agDin~ man y R&D·centric entities. In sum. the pmpoul weakem the 

lTC', ability 10 admi nister U.S. tnuk remedy laws, is prediclled on crrooeoU5 lS5umptioru, adds 

inappropria1e and W1nccessary requ in:menlS 10 Section 337, Vo'ould lead \0 ab$urd Olltcomes Ind 

inccnlivize perverse behavior. and W(>Uld have I dcirimentll impad on American ;nnoovltion and 

1M American economy. 

, Tho", ~ no qtftd ckr.nilian of ... NPIl. "'1"""'", . lw!dfui oflopl .. hoI ... ...t ocooomistll hhc aIItmj>ICd III 

do jUJ! 1lI.o~ theif lWdi .. omploy <lifJ"mu <I.f .... Ii0005. Suo ' .J .. Fcdt .. i T...t.e C<)mIII!»_, n..: £1GMrw If' 

u..~IpI~ Alip~ " .. '" NOlon and If~ __ • v;/It C"""""II"'''' •. 5 (MaId! 2<lt 1) /"FTC tpOn~) r:-r ..... tilc .. Uy. lito 'mn NPE mrom..- pIII<a1 .......... tM1 pri...;!y""" III dcvdop ... d 1nrISfa-1cduIoIo&Y. _~ It 

"";v.,.,!los .. _Oco.d_ tksip Iot>ou ... "'); PwC, lOll I'<»tlll 1.itipI;{Jff St~ ;M (0eI00ber 1011 ) ('"'PwC 

Sludy") I· ... _.ptJoCtici"J '.Iity ("NPE"") .. ddiftCd .... "";ty rlIM doQ Mt "" .... the o:apab!Lity 10 de!op, 

........ raa.w,1I<" dinri\lOlIC prod_ ",illl fc:uul"tJ PfOIC"CIC<I by the .....,..c . ), 
151 


75152A-7.eps

A. The Proposed Amendments Are Predicated 011 False Assumptions 

The proposed amendments are premised on the notion that the ITC must be 

"modernized" in view of the Supreme Court's decision in eBay Inc. v. MenExchange, L.L.C., 

547 U.S. 388 (2006), which directed federal courts La apply a four-prong equitable test when 

determining whether to grant permane.nt injunctive relief for infringing acts. Although the ITC 

and the federal courts both make patent-related determinations, the Irc and the federal courts are 

not (and should not be treated as) identical adjudicatory bodies. To the contrary, unlike the 

federal courts, the lTC's sole purpose is to protect domestic industries from unfair practices in 

import trade. As such, the ITC was specifically designed and intended by Congress to operate 

under a different set of statutes and mandates than the federal courts. Tn fact. the U.S. Court of 

Appeals for the Federal Circuit ("the Federal Circuit") has recognized the distinction between 

ITC exclusion orders and district court injunctions based on "the longstanding principle that 

importation is treated differently tban domestic activity." For this reason, the Federal Circuit has 

held that allay does not apply to lTC remedy determinations under Section 337.2 Accordingly, 

legal principals devdoped in the federal courts do not necessarily apply to the ITC. 

The proposal also incorrectly notes that NPEs "have been the most aggressive in using 

the lTC in recent years to avoid application of eBay's equitable test." The data does not support 

such an asseliion, Indeed, careful analyses of the data reveals that such conclusions rest upon 

unstated, undefined, and inaccurate assumptions. In fact, studies show thaliicensillg companies 

represent only a fraction of the cases Iiled at tht: ITC. Morcover, while the total number of 

infringement cases brought to the ITC may be increasing, so too are the number of imported 

products manufactured in countries with cheap labor and weak, or even non-existent, intellcctual 

property laws. And, there arc factors othcr than the Supreme Court's decision in eBay that 

explain the recent increase in the number of Section 337 cases filed at the ITC. 

D. The Pm posed Amendments Add Inappropriate and Unnecessary 

Requiremeuts to Section 337 

Importing an eBay analysis into Section 337 is inappropriate and unnecessary. Under 

eBav, a patentee mList establish, inter alia, that it has suffered an irreparable injury and that the 

public interest would not be disserved by a permanent injunction. However, Congress already 

carefully considered and specifically eliminated the injUl)' requirement as part of the Omnibus 

Trade and Competitiveness Act of 1988 ("the 1988 Amendment"), noting that the importation of 

goods that infringe a U.S. patent is an injury per se. Furthermore, the iTC is already required, hy 

statute, to consider the effect of an exclusion order upon the public health and welfare, 

competitive conditions in the United Stales economy, the production of like or directly 

competitive articles in the United States, and United States consumers before issuing any such 

exclusion. 

Likewise, narrowing the definition of domestic industry to exclude any licensing activity 

that does not result in a non-existent new product being brought to market would undermine one 

of the primary ohjectives of the 1988 Amcndment, namely, providing a remedy "for those who 

2 Spansion. Inc. v. international Trade Com 'n, 629 F.3d 1331 (Fed. Cir. 2010). 

2 
152 


75152A-8.eps

make substantial investments in the creation of intellectual property and then license creations.") 

Congress did not intend to limit the types of licensing activities that the IIC can consider.' As 

such, there is simply no legitimate basis to impose a sliding scale of patents rights based solely 

on a patentee's status as a manufacturer, technology transfer entity or on any other whollyarbitrary basis. The proposed provision also ignores the reality of the technology marketplace 

where the development of advanced technologies and products that use them almost always 

outpaces the speed with which the United States Patent and Trademark Office ("PTO") can issue 

new patents. Indeed, the proposed legislation will actually encourage foreign manufactures to 

import infringing goods into the United States more quickly ill an effort to undermine patentees' 

ability to block the importation of the infringing goods at the ITC. 

C. The Proposed Amendments Would Lead to Absurd Results and Encourage 

Perverse Behavior 

The proposed changes, if enacted. would lead to absurd outcomes and incentivize 

implementers to engage in perverse behavior. For example, patentees who are unable to satisfy 

the four-prong test under eBay, or who are unable to prove that they are engaged in a domestic 

industry because infringing goods have already entered the U.S. market, may be precluded from 

blocking the infringing imports at the ITC. The patenlees may also be precluded from obtaining 

relief in the federal courts if the foreign manufacturer(s) of the infringing goods do 1101 have a 

physical presence in the C.S. and, thus, are outside of the courts' jurisdiction. Thus, the proposal 

may leave many patentees with a right and no remedy. 

Moreover, limiting patentees' access to the HC will also harm their existing licensees, 

who may he undercut on price hy unlicensed foreign manufacturers that refuse to pay fair 

licensing fees or royalties. As a result, c.ompanies that respec.( and value others' intellectual 

property rights will be penalized and put at a competitive disadvantage compared to those who 

show no regard for the U.S. intellectuul property system. This perverse result reduces Ihe 

incentives for all manufacturers (hoth domestic and foreign) to obtain patent licenses. 

, See 133 Cong Ree. 1794 (Statement of Sen. Lautenberg). 

4 Certain Coaxial Cable Connectors and Components Thereofand Products Containing Same, Inv. No. 337-TA650. Commission Opinion at 49·50 (April 14, 2010) ("[T]he plain language of the 5tatute does not limit the types of 

licensing activities that the Commission can consider.''). 
153 


75152A-9.eps

D. Tlie Proposed Amendments Would Negatively Impact American Innovation 

and tlie American Economy 

Patent royalties are a critical source of funding for new research and development Thus, 

any attempt to limit patentees' ability (0 enforce their patent rights (and recoup their investment) 

will necessarily reduce their ability and incentive to invest in future research and development. 

Such a state of affairs will retard future technological innovation and reduce future U.S. licensing 

revenue, which has become a significant part of the U.S. economy and one of the United States' 

only international trade surpluses. 

U. THE PROPOSED AMENDMENTS ARE PREMISED ON SEVERAL FALSE 

ASSUMPTIONS 

A fundamental problem with the proposal is that it incorrectly assumes that the lTC and 

federal courts arc similar juridical entities that should be administered with identical procedures. 

The first subsection below examines the history of tht) lTC and demonstrates the fundamental 

differences in scope, purpose, and history between the ITC and its federal court counterpalis. 

The second subsectinn below addresses another erroneous premise of the proposal, namely, that 

NPEs "have been the most aggressive in using the ITC in recent years to avoid application of 

eBay's equitable lest" There is no data to support such an assertion. In fact, studies show that 

licensing companies continue to represent only a fraction of Section 337 cases. 

A. There is a fundamental distinction between the ITC and ~Federal District 

Courts 

1. History of the ITC and the Tariff Act 

Section 337 forbids unfair methods of competition and unfair acts in the importation of 

articles into the United States. The history nf this statute and the ITC demonstrates the original 

purpose ofthe statute, and highlights the fundamental distinctions between the federal courts and 

the lTC. This history and these distinctions arc ptui of what make the proposed changes not only 

unnecessary but unwise. 

The roots of Sectiol1 337 lie in section 316 of the Tariff Act of 1922 ("Section 316,,). 5 

Section 316 empowered the Tariff Commission to investigate unfair competition complaints and 

to make recommendations to the President.6 When unfair competition was found, the President 

had statutory authority either to increase the tax on violative articles or to han the articles' 

impOliation.~ Thus, from its inception, Section 337 was foclised on unfair competition and was 

intended to protect American innovation and industry through the nation's trade laws. 

The Tariff Act of 1930, Pub.L. No. 71-361, 46 Stat. 590. created Section 337 by 

incorporating much of Section 316, although il eliminated the President's power to increase taxes 

5 Robert Krupka, Philip C. Swain. and Russell E. Levine, Section 337 and the GAIT: The Problem oFfhe Solution. 

42 Am. U, L. Rev. 779, 786 (1993). 

o Id, at 787, 

7Id, 

4 
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on violative articies. R Congress also eliminated the monetary remedy for import violations, 

ensuring that the President's exclusion power was the sole available remedy for violations of 

Section 337. 

For forty years after its enactment in 1930, Section 337 was largely ignored as a means of 

protecting trade rights by excluding goods that infringe U.S. intellectual property9 However, in 

1974, Congress amended Section 337 to strengthen the nation's trade position by transferring the 

President's exclusion power to the lTC. 10 Since that time Section 337 has also hecn utilized to 

halt the importation of articles that infringe u.s. patents as unfair trade acts. I I However, 

although the ITC obtained the power to assess whether an article was infringing a valid U.S. 

patent, the focus of the statute remained on trade and protecting the American economy from 

unfair trade practices. 

Among the most critical changes to Section 337 occurred when Congress amended the 

statute in 1988. The precipitating events were a series oflTe decisions in which the ITC denied 

relief to intellectual property owners that had demonstraled infringement of their intellectual 

property rights and had made significant investment in their industries but did not manufacture in 

the United States or could not show substantial injury due to infringing imports. Prior to 1988, 

the JTC interpreted the domestic industry provision to require manufacturing and related 

activities in the United States. The lTe had determined that, under the then-existing statutory 

language, licensing alone did not constitute a "domestic industry" sumcient to support 

jurisdiction. 12 

The lTC's decision in Certain Products with Gremlins Characters, Inv. No. 337-1'A-201, 

(1986) was particularly controversial. In Gremlins. Warner Brothers filed a complaint with the 

tTC to forestall the flood of infringing Gremlins merchandise. iJ Warner Brothers had an 

extensive licensing division that included market research, sales, sales promotions, graphics 

services, financial control, and business affairs departments. Warner Brothers contended that 

this licensing division constituted a domestic industry. However, the ITC con.cluded that Section 

337'5 legislative history indicated that licensing activity, by itself, did not constitute a domestic 

industry. Thus, [he lTe refused to exclude the infringing imports. 

, Jd 

9 Harvey Kuye & Paul Plaia, Jr., The Filing and Defending of Section 337 ActiOns, 6 N.C. J. Int'I L. & Com. Reg. 

464-65 (1981) (discussing development of § 337). 

See Trade Act of 1974, Pub. L. No. 93-618, § 341(.), SR Stat. 1978,2054 (1975) (codified as amended at 19 

U.S.c. §§ 1337(d)-(e) (1988)) (permitting ITC to investigate unfair trade practices and to issue orders pursuant to 

investigations). 

II See iJonald K. Duvall, Federal Unfair Competition Actions: Practice and Procedure Under Section 337 

Tariff Act of'1930, at 603 (1991) (describing § 337 as providing "an effective, expeditious, and reasonably 

quasi-judicial administrative process for the adjudication ofpctitiollS of domestic industries, as defined in the statute 

for protection of their claimed intellectua! property rights from allegedly infringing imports or other unfair 

competition from abroad"), 

12 Cerla;n Products with Gremlins Characters, Inv. No. 337-TA-201, Comm'n Op. at 5 (Jan. 16, 1986); Cerlain 

Limited-Charge Cell Culture Micrumrr;ers, loy. No. 337-TA129, Comm'n 01'. at :;8-41 (NllV. 18, 1983) 

("[C]ompJainants' [licensingJ operations in the United States are insutlicient to constitute an 'industry in the 

United States.""). 

13 1 In!'! Trade Rep. (BNA) 238 (1984). 
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In response, Congress passed the Omnibus Trade and Competitiveness Act of 1988 ("the 

1988 Amendment") to amend Section 337 to make clear that the licensing of intellectual 

property is an independent and sufficient "domestic industry.,,14 As such, the 1988 Amendment 

permitted U.S. patent holders who do not manufacture a product protected by an asserted patent 

to bring Section 337 complaints at the ITC, 

Importantly, as noted by Senator Frank Lautenberg, the domestic industry amendments 

were supported hy the U.S. Chamber of Commerce "and some OfOllf most innovative industries" 

including "the Semiconductor Industry Association, the Electronics Industry Associations, the 

Intellectual Property Owners Association, the Motion Pictures Association of America, the 

Intellectual Property Allianc", which includes trade groups from compuler equipment and 

software industries, the publishing industry, and the recording industry:,!5 

The 1988 Amendment was also notable hecause Congress eliminated the injury 

requirement for patents and other ellumerated intellectual property rights, such as copyrights. 16 

This change was made directly in response to the lTC's decision in In the J'vfaller of' Certain 

Optical Waveguide Fibers, 337-TA-189, (1985), where Coming proved infringement and a 

domestic industry but could not show injury.17 

Accordingly, the history and evolution of Section 337 clearly demonstrate that its 

purpose and intent is to protect domestic industries (including those based exclusively on 

substantial licensing activities) from unfair acts in contlCetioll with import trade. Indeed, the ITC 

continues to recognize that its purpose is to manage the country's international trade laws, 

including promoting the country's competitiveness in the global marketplace,18 Because of this 

focus, Section 337 has a vastly different-and broader-purpose than the patent statutes. 

2. Current Section 337 

In its curren! form, Section 337 enables the ITC to investigate "unfair acts in the 

importation of alticles ". into the United States, or in the sale of such articks by the owner, 

importer, or consignee. the threat or effect of which is ... to destroy or substantially injure an 

14 See Certain Digital Processors and Digital Processing Systems, Components Thereof. and Products Containing 

Same, Iny, ~o. 337-TA-559, Order No. 24 at 88, 93 (June 21,2007) ("It is clear that the jntent of Congress was to 

aHow entities that were actively licensing their patents in the United States to be able to meet the domestic industry 

requirement under tho statute."); see also 133 Congo Rec. 2904 (1937) (Statement of Scn, Lautenberg) ("For those 

who make substantial Investments in the creation of inteUectual property and then license creations, there shou1d be 

" remedy,"), 

15 133 Congo Rec. S 174 (Feb 4, 1987). 

16 H.R Rep. No. 100-40, at 155-56; S. Rep. No. 100-71, at 129. 

17 In the Maller o(Certain Optical Waveguide Fihers.lnv. No. 337-TA-189, Order at 19 (1985), 

18 See About the USITC, U,S, INT'L TRADE COMM'N, http://wwW.llSitc:.gov/prcss_room/about_usitc.htm (last 

visited Feb. 1,2012) ("The mission of the Commission i, to (I) administer U.S, trade remedy laws within its 

mandate in a fair and objective manner; (2) provide the President, USTR, and Congress with independent analysis. 

information, and support on matters of tariffs, international trade. and u.s. competitiveness; and (3) maintain the 

Harmonized Tariff Schedule ofthc Cnitcd States (HTS)."J. 

6 
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industry in the United States.,,19 Section 337 furtber makes it unlawful to import articles 

infringing a valid and enforceable patent "if an industry in the United States, relating to the 

articles protected by the patent . ., exists Of is in the pro(;css of being established.,,2o 

a. Requirements of Proof 

A complainant in the lIe must establish, inter alia, ownership of a U.S. patent right that 

is being infringed by an at1icle. f3ecause the ITC is responsible for enforcing trade laws, 

however, a complainant must also show that the infringing articles are being imported. 

Therefore, infringement actions involving 3lticles produced domestically, or dec lara lory actions 

by alleged infringers to challenge the validity of a U.S. patent, may not be brought in the ITC. 

These distinct features fUl1her underscore thal the ITC's purpose under Section 337 is to provide 

trade remedies and to protect domestic industries from unfair competition, including the 

importation of infringing goods made abroad. 

Accordingly, a complainant at the ITe must also establish that it is engaged in a domestic 

industry that "exists or is in the process of being cstablished.,,21 An industry is considered to 

exist "if there is in the United States, with respect to articles protected by the patent ... concerned 

(A) significant investment in plant and equipment; (n) significant employment of labor or 

capital; or (C) substantial investment in its exploitation, including engineering, research and 

development, or Iicensing.,,21 The LTC has generally divided this requirement into an economic 

prong that requires certain activities and a technical prong that requires that the activities relate 

to the intellectual property being asserted. 23 An industry is in the process of being established if 

a complainant can demonstrate that it is taking the necessary tangible steps to establish such an 

industry in the United States,VI and there is a significant likelihood that the industry requirement 

will be satisfied in the future. 25 

Finally, a complainant must establish that the imported article infringes a valid U.S. 

patent. 

b. Remedies 

Complainants may obtain relief in the lTC in three forms: general exclusion orders, 

limited exclusion orders, and cease and desist orders. General exclusion orders block the 

19 19 U.S.C. § 13J7(a)(l)(A) (2006). 

20 19 U.S.c. § 1337(a)(2). 

21 19 U.S.c. §1337(a)(2). 

22 19 U.S.C. § 1337(a)(3) (emphasis added). 

Certain Variable Speed Wind lill'bines and Components ThereQf, l!lv. No. 337-TA-376, Comm'n Op. at 

24 S. Rep. /00-71 at 130. 

25 H. Rep. 100-40 at 157. 

7 
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importation of an infringing products regardless of their sourcC?6 Limited exclusion orders 

block imports that are directly associated with the named respondents in an ITC complaint.D 

Cease and desist orders arc issued when the ITC tlnds that a respondent possesses a 

commercially significant amount of infringing products within U,S. borders?B Critically, there 

arc no monetary damages available in an ITC case as the focus of an ITC investigation is to 

remedy unfair acts in import trade-not to provide monetary compensation to resolve a 

commercial dispute between two parties, 

3, Differences between the He and the Federal Courts 

As noted above, the ITe was specifically designed by Congress to operate under a 

different set of statutes and mandates than the federal courts. Likewise, Section 337 is an 

entirely different statute than the Patent Act with a different purpose, different rights, and 

different remedies, Critically, Section 337 specifically states at the outset that certain unfair 

methods of competition and unfair acts "are unlawful and when found by the Commission to 

exist shall be dealt with, addition 10 any other provision of law, as provided for in other 

provisions in section 337, Thus, Congress long ago recognized that Section 337 addresses 

issues and concerns that are different from those addressed by the Patent Act and preserved 

Section 337 as an additional and distinct source of redress for unfair tradc practices related to the 

importation of infringing goods. These differences are critical to an understanding of why the 

proposed changes to "harmonize" Section 337 with the federal comts are inappropriate and may 

have serious unintended consequences with regard to the ITC's ability to carry out its mandate, 

First, the jurisdictional foundations of the ITC and the federal courts arc different. The 

jurisdictional foundation for federal court cases is personal jurisdiction pursuant to 28 V.S.c. § 

1338, Generally, a federal district court can only obtain personal jurisdiction over an allegedly 

infringing foreign company througb a domestic affiliate, Therefore. in cases involving a foreign 

manufacturer that does nol have a domestic affiliate, it may be impossible to establish federal 

district court jurisdiction, 

By contrast, jurisdiction for complainants seeking exclusion in the lTC, which enforces a 

trade statute, is in rem'" (rather than in personam) and derives from the importation of infringing 

goods into the United Slales, ITC jurisdiction therefore attaches tn all allegedly imported 

infringing goods, This jurisdictional characteristic underscores that Section 337 is not a "patent 

statute" for adjudicating intellectual property rights between parties, but a trade statute designed 

to protect domestic industries from unfair competition resulting from the importation of 

infringing goods, Furthermore, by attaching jurisdiction to the allegedly infringing articles 

26 19 U,S,c' § 1337(d)(2)(A) (3 general exclusion may be ordered if it is "necessary to prevent circumvention of an 

exclusion order limited to produc.ts of named persons"). 

" See 19 U,S,c' § 1337(d)(2) (exclusion orders "limited to persons determined by the Commission to be violating 

this section"), 

28 19 U,S,c' § 1337(d)(2)(A) (allowing ior the issuance of cease and desist orders on any person violating or 

believed to be violating § 1337), 

z; 19 U,S.c. §1337(.)(1), 

30 This means that tbe ITe has jurisdiction and power over property and not a person 0" entity, 

8 
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themselves, the ITC is able to remedy unfair trade practices of foreign manufacturers who may 

otherwise be outside of the federal courts' jurisdiction. 

Second, complaints filed before the ITC and in federal court differ in both procedure and 

substance. These differences include the level of specificity required and mechanical differences 

in the filing process. 

Third, the precedential posture is different. Section 337 is administered as a trade statute 

and determinations by the TTC in connection with patent-based matters are not enforcements of 

the nation's patent laws. For this reason, the [TC determinations as they relate to patenl issues 

do not have collateral estoppel effect in the district courts.'! 

Finally, as mentioned above, the principle remedial instrument of the lTC is an exclusion 

order. An exclusion order is not an injullction, i.e., a court order requiring a party to refl'ain from 

engaging in certain activity. Rather, it is an order from one O.S, government agency (the HC) to 

anothel' (U.S. Customs and Border Protection ("CBP"» to exclude from entry into the country 

goods that infringe certain claims of patents at issue in a Section 337 investigation. This unique 

remedy, like the lTC's jurisdictional characteristics, further highlights the lTC's distinct role in 

the administration of U.S. trade remedy laws. 

B, The Proposed Changes Are Based On the Unsupported Premise Thai :'I1l'Es 

Are Abusing the ITC 

The notion that NPEs "have been the most aggressive in using the HC in reGent years to 

avoid application of eBay's equitable test" is wrong. The data simply does not support such an 

assertion. Indeed, studies show that NPEs represent a mere fraction of the Section 337 cases 

filed at the ITC. Finally, although there has been an overall increase in the ITC caseload, there 

are numerous reasons why the HC is a more favorable venue than federal district courts that 

have nothing to do with the eBay decision, undefined NPEs, or the lTC's treatment of licensing 

activities. 

An entity called the IIC Working Group has recently circulated a paper entitled, "The 

Impact of Non-Practicing Entities at the HC: The Numbers Speak for Themselves," The paper 

purports to demonstrate that a disproportionate number of suits filed in the ITC since 2006 have 

been brought by "NPEs"-though the paper neither precisely defines that term nor identifies its 

methodology for determining which filing entities constitute NPEs. The paper's allegations are 

wrong, woefully unsupported, and rest on flawed assumptions. 

The paper asserts that "[p]rior to the 2006 Supreme Court decision in eBay v. 

MercExchange, 110 cases were filed by NPEs at the lTC." This assertion is demonstrably false. 

In fact, a review ofthe lTC dockel reveals at least four entities that filed in the ITC prior to 2006 

and that claimed a domestic industry based solely on licensing activity.12 

The paper further asserts that the number of cases filed by NPEs has increased as both a 

percentage share of the total number of cases filed and in actual numbers. The paper states that 

31 Texas instruments v. Cypress Semiconductors, 90 F.3d 1558 (Fed. Cir. 1996). 

9 
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NPE cases have risen from 0% in 2005 to 26% in 2011. This is allegedly based on the increase 

in NPE cases from 2 in 2006 to 16 in 20 Il . 

These numbers do not match with numbers calculated by other studies, For example, 

according to one sludy. NPEs filed 45 complaints, or approximately 19% of the total number of 

complaints, in the LTC since the Supreme Court's decision in eBay3) According to another 

study, NPEs filed 27 complaints, or approximately 11% of the total number of complaints, 

during this period.14 And many of these NPEs comprised inventors, R&D companies, university 

affiliates, and manufucturers that, for various business reasons, did not produce products that 

practiced the particular patents asserted in the lTC complaints. 

Moreover, of the 45 1':PE complainants identified in the tirst study, only 7 were found by 

the ITC to have satisfied the domestic industry requirement. Similarly, of the 27 NPE 

complainants identified in the other study. only 5 were successfully able to demonstrate the 

existence of a domestic industry under Section 337. 

The paper also bemoans the fact that the technology industry is disproportionately 

impacted by the increasing number of cases filed in the TTC. But this is simply a by-product of 

the technology age and is not related to NPEs. Indeed, among (he largesl, most intractable, and 

best known patent disputes in the country arc the ceaseless battles between suppliers of wireless 

telecommunications devices.)5 

In addition, while the paper accurately states that the ITC "has recently experienced an 

increase ill cases filed under Section 337 of the Tariff Act," it makes no attempt to support its 

assertion that the increase has been directly caused by either the so-called licensing loophole or 

the Supreme Court's decision in eBay. The paper simply states, without citation or support, that 

such a connection exists. But this ignores a number of reasons that the ITC is viewed as a more 

32 See Certain Synchronous Dynamic Random /1ccess A.femory Devices, A1icroprocessors. and Products Containing 

Same) 337-TA-431 (2000); In the ,Ualler qj Certain Synchronous Dynmnic Random Access Alemory Devices and 

Modules and Products Containing Same, 337·TA-437 (20GO); in/he Ma/ler a/Certain Digital Salellile System 

(DSS) Receivers Thereo); 3J7-TA-392 (1996); In the Matter ~/Certain Memot~v Devices with 

Increased Capacitance Containing Same, 337-TA-371 (1994). 

Jl RPX, International Trade Commission: The Second Theater (October 3, 2011). 

J4 Sterne Kessler Goldstein Fox, Patent Enforcement linder Seclion 337 Before the USITC (2010), 

hHp ://6423 7 .99.107 hnedia/pnci9/meuia.1249 J?~1f. 

:!s See, e.g., Certain Electronic j)el'ices, lnc:luding Afobile Phones, Portable Afusic Players, and Computers, lnv. No. 

337-TA-701; Cerlain Wireless Communications System Ser"er Sof/ware, Wireless [[andheld Devices and Ballel~v 

Packs, In\,. No, 337-TA-706; Cerwin Personal Data and il10bile Communications Devices and Related Sqjtw..'are, 

lnv. No. 337-TA-710; Cerlair; IllV. No. 317-TA-721; Cerlain 

JVireless Communication Devices, Portable !\lusic and Data Cornputers and Comporu?nts 

Thereof, loy. No. 337-TA-745; Certain Mohile Inv. No. 337-TA-750; Cerlain 

Electronic Devices, including A40bile Phones, Mobile Tablets, Players, and 

Comp0fl<mls Thereof.lnv. 1'0. 337-TA-771; Cerlain .Habite Eleelro";,, Dev;ces. Including CO.m"""",;ca::i"n 

Portable Afusic and Data Processing Devices, and Tablet Computer, lnv. No. 337-TA-794; Certain 

Electronic Devices with Communication Capabilities, Components Thereof. and Related SqjtlJlare, Inv. No, 337-

TA-808; Certain Electronic Devices, Including A10bile Phones and Tablet Computers, and Components Thereof; 

lnv. No. 337-TA-847. 

10 
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favorable forum than district courts and that explain the uptick in Section 337 filings in recent 

years. 

First, ITC actions mllst, pursuant to statute, be adjudicated expeditiously36 This means 

that ITC matters move on average far more swiftly than cases pending in district court. In fact, 

statistics show that "'on average a district court case t[ akes 1 ab0ut twice as long as an HC case to 

fully litigate."n 

Second, the ITC gains jurisdiction over importers via the "mere act of importation.,,)8 

This makes obtaining jurisdiction over infringing products of foreign companies much easier, 

and less complex, than in United States district court wbere venue and personal jurisdiction rules 

can deny jurisdictional coverage over such defendants. 

Third, given the exclusive jurisdiction over Section 337 cases, the Administrative Law 

Judges ("AUs") who preside over tbese cases are extremely experienced with patent and other 

intellectual property litigation39 The AUs' expertise on intellectual property issues and 

complex technology makes the lTC a favorable venue as well. 

IU. THE PROPOSED CHANGES ADD INAPPROPRIATE AND UNNECESSARY 

REQUIREMENTS TO SECTION 337 

A. Proposed Changes to Section 337 

The proposed changes to Section 337 can generally be grouped into two categories. The 

first category of proposed changes .vould require the IrC to utilize the traditional, four-prong 

equitable analysis utilized by federal courts sitting in equity to assess whether to issue permanent 

injunctive relief. The second category of proposed cbanges would limit the statutory definition 

of a domestic industry to exclude certain patent licensing activity. Both categories, however, 

would add inappropriate and unnecessary requirements into Section 337. 

1. Adding an eBuy analysis to the ITC 

The purported impetus for importing a fouT-prong equitable analysis into Section 337 is 

the Supreme Court's decision in eBay. In eBay, the Supreme Court considered whether federal 

courts sitting in equity may automatically issue a permanent injunction in a patent infringement 

action after infringement is proven or whether, even after infringement is proven, the district 

courts are required to analyze a four factor test. That test requires a plaintiff to demonstrate: (I) 

16 19 u.s.c. § 1337(b) (2006) (requiring the ITC to compiete an investigation "at the earliest practicable time after 

the date of publication oftfle notice of such investigation") 

J7 Colleen Chien, Pmently Protectionist? A n Empirical Analysis of Patent Case" at the International Trade 

Commission, 50 Wm, & Mary L. Rev, 63,101-102 (2008). 

" 19 U.S.c. § 1337(0)(1). 

]<) Virginia L. Carron, InteJIectual Property Litigation at the u.s. International Trad(~ Commission, in PATENT 

LITIGATION 2007, at 1025, 1033 (PU Pats., Copyrights, Trademarks, & Literary Prop., Course Handhook Ser. 

Ko. 910,2007), available at WL, 910 PLI/Pat 1025 (indicating that one of the benefits orlTe litigation is that 

A,LJ,s are generally more familiar with technology than district court judges). 

11 
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that it has suffered an irreparable injury; (2) that remedies available at law are inadequate to 

compensate for that injury; (3) that considering the balance of hardships between the plaintiff 

and defendant, a remedy in equity is warranted; and (4) that the public interest would not be 

disservcd by a permanent injunction.40 

The Patent Act permits federal courts to issue injunctive relief against a patent infringer.41 

Prior to the Supreme Court's decision in eBay, the Federal Circuit had established a practice 

whereby the general rule in patent disputes had been that the court would enter a pcnnanent 

injunction against an alleged infringer once p(I!em validity and infringement llild been established 

by a patentee:2 The Supreme Court determined that 11 fedeml court sitting in equitjY must apply 

the traditional, equitable, four-part test evell aft"r patci1! infringement is l'tnven.4 The Court 

noted that the decision to grant or deny permanent injunctive relief is an act of equitable 

discretion by federal courts,44 and in rejecting a categorical rule wherein an injunction 

automatically follows a tinding of patent infringement, th" Court sided with traditional equitable 

principies:tS 

In a concurring opinion. Chief Justice Roberts, joined by Justices Scalia and Ginsburg, 

reviewed the "long tradition of equity practice" of "grant[ing] injunctive relief upon a finding of 

infringement in the vast majority of patent cases.,,46 The Chief recognized however a distinction 

between "exercising equitable discretion pursuant to the established four-factor test and writing 

on an entirely clean slate.,,47 

Following eRay, the Federal Circuit considered whether the traditional equitable test for 

permanent injunctive relief should also be applied to exclusion orders issued by the [TC. [n 

Spansion, Inc. v. International Trade Com 'n, 629 F.]d 1331 (Fed. Cir. 2010), the Federal Circuit 

correctly held that the HC was not required to apply the traditional four-factor test for injunctive 

relief used by the federal courts. The Federal Circuit noted that the only remedies availahle 

under Section 337 are exclusion orders and cease and desist orders. Given "the longstanding 

principle that importation is treated differently than domestic activity" and the different statutory 

underpinnings for relief before the ITC in Seclion 337 actions and before the federal COllrts in 

suits [or patent infringement, the Federal Circuil held that eRay does not apply to HC remedy 

determinations under Section 337. 

"eBay, 547lI.S. at 391. 

41 35 lJ,S,c. § 283 (2000). 

42 }vfercExchange, LLC v. e!Jay. Inc" 401 F.3d 1323, 1338 (Fed, Cir. 2005), vacated, 5471).S. 388 (2006). 

43 eBay, 547 U.S. at 390. },'Bay \vas a controversial decision at the time it was issued and the appropriateness of the 

decision remains a source of serious debate, 

44 cBay. 547 U.S. at 390-391 

45 fd at 393 (citing New York Times Co, v Tasini. 533 U.S. 483. 505 (2001); Campbell v. Acuff-Rose Music. fnc, 

510 U.S. 569, 578 (1994)). This argument is found in the Petitioner's Brief Brief for Petitioner at 17-18, e!Jay. lllc. 

v McrcF'xchange, U .. C, 126 S. CI. 1837 (2006) (No. 05-130). 

4G eBay, 547 U.S. at 395 

" Id at 395, 

12 
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2. Narrowly Defining Domestic industries to Exclude Certain Licensing 

Activities 

The proposed changes would also add a temporal limitation such that licensing activities 

that occur after the adoption of the relevant technology would not he considered when 

determining whether a complainant has established a domestic industry. For example. under the 

proposal, a patentee's efforts to license its U.S. patents (no matter how substantial) could not be 

relied upon to establish a domestic industry if the products embodying those patents have already 

been imported into the United States. Oddly, such a change would turn evidence that normally 

establishes a complainant's Section 337 claim into a fact that defeats it. 

B. Amending Section 337 to Import an eJJay Analysis is Inappropriate and 

1J nnecessary 

The proposed changes to require the ITC to engage in an eBay analysis before issuing an 

exclusion order preventing infringing products from entering the United Stales is inappropriate 

and unnecessary for at least four independent reasons: I) monetary damages are unavailable 

under Section 337; 2) Congress has already explicitly determined that in the He irreparable 

harm is demonstrated through the importation of infringing goods; 3) the ITC already has the 

statutory authority and obligation to consider the public interest before issuing an exclusion 

order; and 4) the fTC has recently reaffirmed its focus on the impact of its exclusion orders on 

the public interest. 

First, Section 337 does not provide for monetary damages. As detailed ahove. Section 

337 of the Tariff Act of 1930 replaced the monetary remedy availahle under its predecessor 

statute. This choice represents the long-held legislative recognition that there is inherently an 

inadequate remedy at law for infringing goods imported into the United States. Moreover, the 

proposed amendments presume that a complainant would be able to forgo ITC exclusion and 

seek monetary damages in federal court. This ignores a large class of potential actions involving 

foreign manufactures over which it may be difficult or impossible to establish personal 

jurisdiction in the federal courts, or against whom it would he dimcult (and often impossible) to 

enforce a federal court judgment. As a result, requiring a complainant to demonstrate the 

unavailability and inadequacy of damages a( law is nonsensical and would undermine the lTC's 

mandate to remedy unfair trade practices that are harming domestic industries. 

Second, importing an eBay analysis into the ITC would include a requirement that the 

complainant cs(~blish irreparable harm beFore the ITC may issue an exclusion order. However, 

such a change to Section 337 is entirely inappropriate because Congress has already carefully 

considered this issue as Palt of the 1988 Amendment and determined that irreparable injury 

exists when infringing goods are being imported into the United States. Indeed, the House 

Finance Committee and House Ways and Means Committee-both of which are charged with 

oversight of the lTC-definitively and correctly concluded that "[t]he importation of any 

infringing merchandise derogates from the statutory right, diminishes the value of the intellectual 

properly, and thus indirectly hamls the public interest. Under suc.h circumstances, the 

13 
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Committee believes that requiring proof of injury, beyond that shown by proof' of the 

infringement of' a valid intellectual property righi, should not be l1ecessary,"4~ 

Third, the proposed changes would require the HC to determine that the public interest 

would not be disserved by an exclusion order. But Section 337 already authori7,es and obligates 

the ITC to assess the public interest prior to issuing any exclusionary orders, Specifically, 

Section 337 provides that if the Commission finds a violation it shall exclude the articles 

cOllcerned from the United Slates "unless qtier considering the effect of such exclusion upon the 

public health and welfare, competition conditions in the United States economy, the production 

of like or directly competitive articles in the United States consumer, it finds that such a!1icles 

should not be excluded from entry,',49 Tn addition, pursuant to its statutory authority, the ITC 

may hold public hearings to take and consider comments and testimony from interested parties 

when an exclusion order may have far reaching effects 50 Even in cases where no public hearing 

is held, the entire panel of Commissioners reviews any remedial order issued by an AU to 

ensure that the relid granted does not conflict with the public interest5

] And, following this 

review, the office of the U.S. Trade Representative [lerforms a "presidential review" to ensure, 

that the decision is compliant with the public interest.'2 Thus, amending the statute to require the 

rrc to consider the impact of an exclusion order on the public interest would be entirely 

superfluous because the statute already requires it to do so. 

Fourth, the ITC has recently demonstrated a renewed vigor in its consideration of tbe 

impaci of its actions on the publie interest. For example, effective November 7, 201l, aftlT 

considering comments received from over 90 different companies, including many non-parties, 

the Commission amended its rules to enhance its consideration of the public interest. The 

following describes some of the more relevant rule changes that demonstrate the ITC's focus on 

the public interest: 

The Commission added final rule 210,8(b) to require complainants to file a 

separate statement of public interest concurrently with the complaint 

The Commission added final rule 210.14(0 to require respondents to submit a 

statement of public interest in response to complainants' tllillgs under 21 0,8(b) 

and (c )(2) when the Commission has delegated the matter of public interest to the 

presid ing administrative law judge ("AU"), 

The Commission amended rule 21050(a)(4) to request the parties to file 

comments 011 the public interest thirty (30) days after issuance of the presiding 

ALl's recommended determination ("RD") on remedy, bonding., and where 

ordered, the public interest 

" HK Rep. No. 100-40, at 156 (1987) (emphasis added), 

49 19 l),S.c. § 1337(d)(l) (emphasis added). The statute contains a similar provision related to cease and desist 

orders, 19 U,S,c' § l337(1)(1). 

50 See 19 c'F.R, § 21050 (2007) 

51 See 19 C.F,R, § 210,50, 

52 See 19lJ,S,C. § 1337(c), (j). 

14 
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The Commission amended rule 210JO(b) to indicate that the comments received 

during the pre-institution pcriod·-·under final niles 210.8(b) and (c)-are the 

general basis for the Commission's determination as to whether to delegate the 

issue of public interest to the AU. 

The Commission added rule 210.42(a)(I)(ii)(C) to clarify that, when ordered to 

take evidence on the public interest, the AU shall include analysis of the public 

interest in his RD. 

These rule changes demonstrate that the ITC is increasing its focus on the public interest 

by seeking information about the public interest from numerous sources with potentially many 

different views. The Commission is thus equipped and able to evaluate the public interest and 

tailor its remedies according to the facts of each specific casco 

In addition to the TTC's mle changes, the lIe has also demonstrated an increased focus 

on the public interest in its Section 337 invesligations. Of particular note was the lTC's decision 

in the 543 Investi~ation. There, the IIC initiated an investigation hased on a complaint filed by 

Broadcom Corp.' Broadcom's complaint sought a limited exclusion order directed to certain 

processor chips as well as downstream products that incorporated the chips, including cel! 

phones, PDAs, and smart phones. After conducting an investigation, the rTC found a violation 

of Section 337. However, before issuing an exclusion order, the HC held a two-day hearing on 

thll puplic interest. The I1'C heard from a large sample of wireless industry members and users 

on public interest issues ranging from the economic impact of an exclusion order to issues of 

puhlic safety. The ITC subsequently issued a limited exclusion order barring entry of the 

accused chips and downstream products containing those chips. However, the lIC exempted 

from the exclusion order certain models that had already been imported into the U.S. for public 

interest reasons. The lIC's decision expressly discussed issues relating to the public health and 

welfare, the interest of U.S. consumers, and competitive conditions in the United States 

economy. 

In another, more recent, example of the lTC's focus on the public interest, in Certain 

Personal Data and Mubile Cummunications Devices and Related Software, Tnv. No. 337-TA710, the IrC engaged in a lengthy analysis of the statutory publ ic interest factors in determining 

whether to award Apple a limited exclusion order that would prohibit certain Android phones 

from being impOlied into the United States54 The ITC considered concerns about the etfect on 

U.S. customers of such an order, and consequently provided an exemption to the scope of the 

exclusion order. Moreover, it also recognized that the case raised "some important 

competitiveness concerns." Given those concerns, the ITC determined lhat, under the factual 

circumstances ofthat case, an immediate exclusion order would not be in the public interest and, 

therefore, permitted a 4-month transition period prior to the exclusion of the subject phones. 

53 Certain Baseband Processor Chips and rhipsets, Transmitter and Receiver (Radio) Chips, P(fwer Control Chips, 

and Products Containing Same. Including Cellular Telephone Handsets, loy. No. 337·TA-543 

54 Certain Personal Data and :Hohile Communications Devices and Rerated Softltare, In\'. No. 3J7-TA-71O, Order 

at 66-80. 

15 
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C. There is No Need To Amend Section 337 To Change The Definition Or 

Understanding Of What Constitutes A "Domestic Industry." 

Just as there is no need to amend Section 337 to import the eBay analysis into the lTC's 

investigations, neither is there a necessity to amend the statute to limit the definition of a 

domestic industry. Narrowing the definition of domestic industry to exclude any licensing 

activity that does not result in a non-existent new product being brought to market would 

effectively negate the 198R Amendment, which was enacted to provide a remedy "for those who 

make substantial investments in the creation of intellectual property and then license creations." 

As evidenced by the legislative history of the 1988 Amendment, Congress did nol intend to limit 

the types of licensing activities tllat the ITC can consider, 

In addition, the ITC tahs its jurisdictional requirements with the utmost seriousness and 

already demands evidence of genuine and demonstrable licensing activities, as well as a definite 

nexus between the domestic industry activities and the asserted patents. In short, the ITC is 

currently exercising its jurisdiction and denying relief to entities that cannot demonstrate a 

domestic industry. There is no need to restrict the definition of domestic industry furtherparticularly in the vague and unpredictable manner proposed-when the ITC has amply 

demonstrated its own ability to parse the jurisdictional requirement in the context of each 

specific case, The agency is best prepared, positioned, and expericnced, to determine which 

complainants are deserving of a remedy under Section 337 based on the particular facts and 

circumstances of individual cases, There is no reason to exclude by the blunt instrument of 

legislative fiat whole classifications of complainants based on ill-defined judgments about their 

merits. 

For example, in Certain Coaxial Cable Connectors and Components Thereof and 

Products Containing the Same, Tnv, No, 337-TA-650 (2011), the ITC held that the complainant 

had failed to estahlish a domestic industry based on licensing investments. The AU had found a 

domestic industry based on evidence relating to litigation expenses directed to enti,rcing the 

patents 55 On review by the Commission, the complainant relied solely on its activities relatcd to 

the expenses associated with the litigatk1n as evidence of the substantial exploitation of the 

patent at issue. The ITC rejected the argument that litigation activities alone (unrelated to 

engineering, research and development, or licensing) can constitute exploitation under Section 

337,56 The ITC explained that its decision was supported by the plain language of the statute 

because in listing what can constitute "exploitation" but not including patent infringement 

litigation, Congress made a determination that it was not to be included 57 Furthermore, the nc 

noted that a holding that patent infringement litigation activities taken alone constitute 

"exploitation" would render the domestic industry requirement a nul!ity.5H The ITC noted that 

"licensing is an activity that is clearly within the realm of "exploitation" as contemplated by 

Section 337(a)(3)(C). The lTC specifically left open the possibility that litigation activities may 

55 Certain Coaxial Cable Connectors and Components Thereof and Products Containing the Same, lnv. No. 337-

TA-650 (2011), Order at 42. 

"Id. 0143, 

57 ld. at 44, 

ssld ot45, 

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75152A-22.eps

satisfy the domestic industry requirements as long as a complainant can prove that these 

activities are related to licensing and pertain to the patent at issue, and can document the 

asslldated costs 59 Thus, the ITC demonstrated that it is perfectly capable of parsing the 

statutory language and determining when a complainant has properly satisfied the domestic 

industry requirement. 

Likewise, in Certain ,,",'Iringed instruments, :l. sole proprietor and inventor filed a 

complaint about an invention that related to improved stringed instruments which contained 

components that a!low a musician to optimally tune the strings. In attempting to meet the 

domestic industry requirement, he established that he spent $8.500 to make five product 

prototypes over a period of fOUlteen years and that he participated in unsuccessful pre-suit 

licensing discussions.60 The complainant also established that he had engaged in research and 

development activities, and that he had successfully entered into two licenses after the complaint 

had been filed. These efforts, the ITC determined, failed to meet the economic prong of the 

domestic industry requirement." I The fTC noted that the requirement for showing the existence 

of a domestic industry will depend on the industry in question, and the complainant's relative 

size. Despite the complainant's arguments that his activities had included initial research and 

deVelopment, engineering. initial designs, creating a prototype, testing, final design, marketing, 

distribution, sales, and licensing, the ITC held that these efforts were insufficiently documented 

and would have had to have been sufficiently focused or concentrated to find a substantial 

investment. And the complainant's pre-complaint efforts to obtain licenses did not constitute a 

substantial investment. The fTC specifically noted the ahsence of any actualliccnses prior lo the 

complaint and the fact that the only consummated licenses were acquired as a product of 

settlements with respondents in the investigation. This was all insufficient to establish a 

domestic industry. 

As another example. in Certain Alultimedia Display and Navigation Devices and 

Systems, Components Thereof, And Products Containing Same, Inv. No. 337-TA-694, the 

complainant, Pioneer, relied on its investments in licensing the asserted patents to demonstrate 

its domestic industry. Pioneer owns hundreds of GPS and navigation patents in the U.S. and 

world-wide. The primary issue presented for the lTC's consideration was whether Pioneer had 

satisfied the statutory standard based on its investment in licensing a large portfolio of patents. 

Because Pioneer's activities were associated both with the asserted patents and the unasserted 

patents, a key issue presented was the strength of the nexus between the activities and the 

asserted patents.62 The HC stated that where the complainant's licensing activities and 

investmcnts involve a group of patents or a patent portfolio, the complainant must present 

evidence that demonstrates the extent of the nexus hetween the asserted patent and the 

complainant's licensing activities and investments. This may be done by showing that the 

licensing activities are particularly foeu&ed on the asserted patent among the group of patents in 

the portfolio or through other evidence that demonstrates the relative importance or value of the 

" 1d at 47-48. 

60 Certain Stringed .'vf",i""llns!rumenls and Componenls Thereof, lnv. No. 337-TA-5R6, Comm'n Or. a( 14 (2008). 

61 Jd 

62 Certain A4ultimedia Display and Navigation Device'S and Systems, Components Thereof, And Products Containing 

Same,lnv. No. 337-TA-694. Order at 8 (2010) 

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asserted patent ill the portfolio.6J In that case, the ITC determined that Pioneer could not 

establish the domestic industry requirement because of an insuflkient nexus between its in-housc 

activities and the asserted patents. Moreover, the lTC also determined that Pioneer's activities 

were too limited in light of its resources, the scope of its portfolio of patents, and the relevant 

market to be a substantial investment under the economic prong64 

It is clear from the above discussed investigations that the ITe is fully capable of ... -and 

indeed has becn actively engaged in--drawing the necessary lines to determine when the 

complainant is a genuine domestic industry and when it is not. 

Moreover, the ITC has recognized that Congress has determined that licensing activity, 

without more, constitutes a beneficial U.S. industry that the lTC should protect. See Certain 

Variable Speed Wind Turbines and Components Thereof Inv. No. 337-TA-376, Comm'n Or. at 

14-15 (Sept. 23,1996). Thus, the lTC understands that Congress expressly intended to extend 

HC relief to companies that invest heavily in research and development financed by licensing 

revenues, like Qualcomm, Tcsscra, IntcrDigital, and Dolby Laboratories; universities; small 

companies and startups that lack the resources to manufacture products based on their 

intellectual property: and individual inventors without the capital or inclination to build a factory. 

These entities serve valuable innovative functions. Given the lTC's commitment (0 rigorously 

enforce the domestic industry requirement, there is no need It)!" Congress to amend the statute as 

it relates to licensing activity. 

IV. THE PROPOSED WOUI.,D LEAD TO ABSURD RESULTS AND ENCOURAGE 

PERVERSE llEHA VIOR 

The proposal, if enacted, would lead to absurd outcomes and incentivize implementers to 

engage in perverse behavior. 

First, importing the eBa), analysis into the ITC in Section 337 cases would leave valid 

patent holders with a right but with no remedy.65 The ITC cannot award monetary damages 

upon a finding of infringement. By contrast, if a district court has jurisdiction over a defendant 

and infringement is proven, it can award a monetary damage award as a first step toward 

compensating the plaintiff. If eRay were applicable to Sectiotl 337 proceedings and the ITC 

determined that the complainant had not shown that monetary remedies are inadequate to 

compensate it, the ITC would be forced to forego its remedial authority but without any 

guarantee that a district court would assert its jurisdiction or award monetary damages or fix a 

royalty. In these circumstances, there would be no res judicata effect to the ITC's determination 

of violation, and the complainant could be left without any remedy. In other words, in any 

investigation in which the traditional four-factor test would weigh against issuance of both an 

exclusion order and a cease and desist order, the Commission would not be able to issue any 

63 fd. at 9. 

54 Jd. at 20. 

65 William Blackstone. Commentaries on the Laws of i'.nglal1d 23 ("It is • settled and invariable princ.iple "" that 

every right when wjth~hetd must have a remedy, and every injury it's [sic] proper redress."); see also lvfal'hut~y v 

Madison, 5 U,S. (1 Cranch) 137. 162-163 (1803). 

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relicf at all, thus effectively creating a right (a prohibition on unfair practices in the import trade) 

without a remedyM 

The injustice o[ hmving an He complainant to the uncel1ainties of a distdct court action 

[or monetary damages is perhaps best illustrated in the context of respondents from the Peoples 

Republic of China. A crucial issue in American trade today is lhe influx of infringing goods 

from China, where low lahor costs have attracted a large portion of the world's manufacturing 

jobs. Monetary damages may well be determined theoretically adequate to compensate a nonpracticing American innovator and patentee, and its right under Section 337 would be denied 

under the proposed legislation. But even if the U.S, patentee prevailed in the district courts and 

obtained a damages award, it is not likely to collect its judgment amount within a reasonable 

time period, if ever. Meanwhile, the Chinese infringer, having heen encouraged by the 

unavailability of an ITC exclusion remedy for the non-practicing U.S. patent holder, would be 

permitted to continue its infringement indefinitely. This would be the practical effect of the 

proposed amendments on U.S. innovators and patentees. 

Second, limiting the definition of a domestic industry would have a number of absurd 

consequences. For example, requiring a temporal limitation on licensing activity would prevent 

a holder of valid intellectual property rights il'om bringing a Section 337 action when an 

infringer has already successfully imported the infringing product into the United States.67 The 

proposal ignores the reality that technology evolves and is "adopted" faster than the PTO can 

consider patent applications and issue patents. This proposal would thus leave without a remedy 

most high-tech patent owners seeking to license their patents. Moreover, the proposed changes 

perversely inccntivizc infringing foreign manufacturers to import infringing products instead of 

first seeking a license from a valid patent holder because, by doing so, it could defeat an 

otherwise valid Section 337 claim. In other words. companies would be better off "adopting" the 

patented technology without taking a liccnse. The changes would turn proof of an infringing 

importation into a fact thai defeats a Section 337 claim. The patentee would be unahle to avail 

itself of Section 337 to obtain expeditious relief because il would have no licenses "prior to" the 

"adoption" of the IP right by the infringers. Such an outcome defeats the entire purpose of the 

TTe and Section 337, which is to protect American industries against infringing foreign imports. 

No amendments to Section 337 that actively incentivize foreign manufacturers to import 

infringing goods can possibly be in the best interests of American trade. 

Third, the limited definition of domestic industry would also penalize holders of 

American intellectual property rights for attempting to commercialize a product. This is because 

the changes may be interpreted to preclude ~ patentee from relying on licensing to satisfy the 

66 See, e.g., Doc v. County of Centre, 242 F.3d 437, 456 (3d CiL 2001) (noting "the common law principle, 

recognized by the Supreme Court as early as lUarbury v. lWadison. that a right without a remedy is not a right at 

all"). 

G7 For example, under the proposed amendment, IBM would not have been able to establish a domestic industry 

based on licensing activities in Inv. No. 337-TA-628, despite evidence showing that it had spent many months 

conducting technical analyses of products, putting together "proof packages" designed 10 show that the products 

infringed IBM patents, and successfully negotiating Hcensc5 resulting in hundreds of millions of dollars of revenue. 

S'ee Certain Computer Products, Computer Components, and Products Containing Same, Inv. No. 337-TA-628, ID 

(tlnreviewed) at 163-64. Ultimately, a domestic industry was found, but" finding of no violation was reac.hod on 

other grounds in this investigation. 

19 
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75152A-25.eps

domestic industry requirement if the patentee develops a prototype or model embodying the 

invention before approaching potential licensees. In this way. the patentee's elforts 10 

commercialize a product protected by his patent may doom his right to bring an action in the 

ITC. 

Fourth. a patentee might not meet the new domestic industry tcst because investments 

after the first license do not count. Under the proposed changes, a company might be unable to 

rely on any licensing activities that occur afler the first licenses were entered into. ror example, 

once a licensee adopts the technology, any latcr investments by the patentee would not be "prior 

to" and "promote[], the adoption of" the technology, and therefore would not count toward 

proving the requisite substantial investment in licensing to establish the cxistence of a domestic 

industry under Section 337(a)(3)(C). Thus, licenses occurring after the execution of the first 

license may not ,.ount toward the patentee's investments in a domestic licensing industry. 

Fifih, the proposed changes to the domestic industry requirement would impact all 

different typcs of NPEs, including those that Congress has already considered worthy of 

protecting in the 1988 Amendment. These include universities, inventors. start-ups, R&D 

enterprises, holders of well-established trademarks and patents. and large and small businesses of 

all types and sizes. 

Sixth, along the same lines, the proposed changes do not differentiate between types of 

intellectual property. Trademark owners with well established marks may be barred from the 

ITC as well. Although the cited problem in the Proposal is directed to patents, the proposed 

language is not limited to patents. By including the additional statutory IP rights currently 

protected under Section 337 (trademarks, copyrights, mask works and designs) within the 

proposed amendment, there may be unintended consequences with respect to those other 

enumerated II' rights. For example, the proposed language could result in a company with a 

long-established trademark, whose business it is to license authorized trademarked goods, being 

unable to satisfy the domestic industry requirement (and thus preclude the company's use of 

Section 337) when it is faced with a proliferation of imported counterfeit goods that are being 

sold in the U.S. because the timing of its investments in that business may not meet the proposed 

"prior to, and that promotes, the adoption of' language, This issue may also apply to the other 

enumerated statutory IP rights such as copyrights. 

Seventh, the proposed legislation would inccntivize infringement and discourage respect 

for valid intellectual property rights. For example. a U.S. manufacturer that recognizes the 

innovative contribution of a valid U.S. patent to a particular technology may elect to respect that 

patent and pay a reasonable royalty for the right to use it in its products. A foreign manufacturer 

of competing goods, however, would be emboldened by the proposed amendments to resist 

taking such a license and paying fair royalties. The foreign manufacturer will resist paying ajust 

royalty because it knows that a non-practicing U.S. patentee will be denied an exclusion order in 

the He and will be forced to sC'ck damages in district court and subsequently navigate the 

uncertain shoals of judgment execution and collection in a foreign country. This bizarre set of 

negative incentives will harm not only the U,S. patentee by denying it the value of its valid 

intellectual property, but it will also hann the licensee, which will be punished for respecting 

intellectual property and paying a royalty that Congress will have effectively immunized forcign 

20 
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75152A-26.eps

competitors from having to pay. This is precisely the kind of unfair competition that Section 337 

is, and has always been, aimed at remedying. 

V, THE PROPOSED CHANGES WOULD ADVERSELY IMPACT AIV[ERICAN 

INNOVATION AND THE AMERICAN ECONOMY 

A. Patents Are Critical to the American Economy 

The patent system has played an enormously positive ro le in the evolution ofthe LJ nited 

States becoming the paramount technological innovator in the world68 Economists draw a 

distinction between innovation and invention: innovation involves a multifaceted effort that 

includes the discovery, development, improvement and commercialization of new processes and 

products while invention is the first critical step in that process. Economists generally concur 

that innovation is the most important factor in the growth of the economy. The patent system's 

principal purpose is to promote innovation by giving incentives to inventors.69 Section 337's 

complementary purpose is to remedy acts of unfair competition related to the importation of 

infringing goods. 

At bottom, the proposed changes to Section 337 would weaken the ITC's ability to 

protect American industries against foreign-manufactured articles and would adversely impact 

the Unitcd States economy in several ways. 

Protecting American intellectual property rights is vitally important to our national 

economv. The President has recently spoken about the importance of encouraging American 

irmovalion70 The best way to encourage such innovation is to demonstrate a continued focus on 

protecting and valuing valid intellectual property rights-particularly as against j(weign-bascd 

manufacturers. Some foreign businesses lake advantage of delays and limitations inherent in the 

U.S, court system to infringe on the intellectual properly rights of American competitors. 

Foreign businesses acquire market share by selling infringing imported products, while 

infringement cases against them languish in federal courts. Providing the ITC with a meaningful 

method of excluding such articles is essential to combat this conduct. 

"See Marsh.lIle.ITer, Palent Misuse and Innovation, 10 J. High Tech. L. 142, 143 (2010). 

69 lei. at 144. 

'C Office of the Press Secretary, White House, Remarks by the President in State of the Union Address (Jan. 25, 

2011 l. available at http://www.whitchousc.gov/thepress-office!2011 iOl /25!remarks-president-state-union-address 

("The first step in winning the future is encouraging American innovation. ~one of us can predict with certainty 

what the next big industry will be or where the new johs will come from. \Vhat we can do-what America does 

better than anyone else--is spark the creativity and imagination of our people. In America, innovation doesn't 

just change our jives. It is how we make our living.)"); President Ronald Reagan, Statement on Establishment of the 

Presidenr, Commission on Industrial Competitiveness (Aug. 4, 1983), available at 

http://www.presidency .ucsb,eduiws/indcx. php?pid=41678&st-=&st 1 =#axzz 1 h8aD ljNv ("ThIs nation's greatest 

competitive advantage in the past were ideas that helped America grow. We need to put the power of ideas to use 

again. for the good of our future., To sustain high rates of real economic growth, we must continue to create new 

'miracles' of high technology-miracles both for innovation and tor modernization of the major areas of our 

economy in manufacturing, agriculture, and services,"). 

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f 


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This is particularly the case because some of the country's most formidable and 

aggressive trading partners, such as China, do not have an established intellectual property 

culture. Some countries simply have litlle to no recent experience with and understanding of the 

destructive power of rampant infringement. Rather, they only see the short-term trade 

opP0l1unities and resent any obstacles to that trade, including American protection of intellectual 

property. In an exporting country that has no longstanding and ingrained culture of respect for 

intellectual property rights, weakening V.S. protections against inti'inging imports will likely 

have serious detrimental effects. Continued respect for and support of intellectual property rights 

against infringing imports will ensure that American industry is not undercut by foreign-based 

manufacturers. 

B. Licensing is an Important Part of the American Economy 

The notion that patent licensing in general, and patent licensing cnlities in particular, 

have no inherent value is simply wrong. Rather, they provide important economic benefits.7

] 

U.S. licensing revenue has exceeded $500 billion per year in recent years-an increase of more 

than 3000 percent over the last two decades. Furthermore, the U.S. economy relies heavily on 

the licensing of intellectual property to entities that manufacture products in foreign nations. 

Licensing has become one of the United States' only international trade surpluses, increasing by 

nearly 18 percent each year since 2003, and recently reaching $64.6 billion. 

In addition to stimulating the U.S. economy, the revenue from palent licenses is critical to 

encouraging efforts for future innovation because the royalties obtained from patent licenses are 

often used 10 finance innovators' future research and development. 

As noted above, weakening the fTC's ability to exclude infringing articles from 

importation would also exacerbate the patent holdout problem wherein American-based industry 

members play by the rules of our intellectual properly regime and obtain licenses from valid 

patent holders while foreign-based manufacturers that compete with the American companies 

refuse to obtain licenses and simply import infringing goods. Tfthe ITC's ability to exclude such 

products is weakened or if complainants must jump through additional hurdles to keep such 

infringing products out of the country, the industry members who play by the rules will suiTer 

economically because they will be under,.ut on the margins by manufactllrers of infringing 

products that do not pay license fees or royalties. Not only does this system disrespect the 

intellectual properry at issue but it leads to unfair price undercutting and market distortion. 

71 See John C. Paul, Brian D. Kacedon & Michael V. O'Shaughnessy, Palent Trolls: A Stereotype Causes a Backlash 

Against Patents and Licensing. 41 Les Nouvelles 224 (2006) (explaining that patent licensing alone provides a good 

source of revenue). 

22 
172 

Material submitted by the Honorable Melvin L. Watt, a Representative in 

Congress from the State of North Carolina, and Ranking Member, Subcommittee on Intellectual Property, Competition, and the Internet 


75152B1-1.eps
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75152B1-2.eps

This paper addresses two questions: First, what explains the reversal offommes-the 

decline of antitrust, the elevation ofIPRs to primary importance, and, in consequence, a 

weakened commitment to free competition~ Second, how can the benefits of free competition 

be re-introduced into the policy debates conceming IPRs, debates conceming the public benefits 

from advancing economic growth AND promoting fair distribution of its benefits~ Of course 

these are large questions that deserve more attention than I can give today. This paper is an 

introduction to the issues; their development is left to another day. 

And so the first question: Given the powerful rhetoric of free competition in the United 

States, what can explain the 30-year decline of antitrust and, at the same time, the expansion of 

IPRs despite their clear character as state-initiated restraints of competition? 

The place to begin is the rhetoric of 'free competition'. What exactly do we mean by 

'free competition'~ 

The answer becomes clear once we restate the question as follows: What is it we want to 

free competition from? 

In the United States, this question has long summoned two responses. First, we want to 

free competition from political control, from oppressive govermnent intervention. In this sense, 

free competition expresses a conunitment to individual liberty. Second, we want to free 

competition from private economic control, from the oppressive power of accumulated private 

capital. In this second sense, free competition expresses a conunitment to rough equality. In 

SUlIl, free competition reflects conunitments to both liberty and equality, and concems about 

oppressive power, both political and economic. 

But these commitments to equality and liberty produce a fLll1damental tension in the idea 

offTee competition. When free competition's commitment to economic equality calls for 

govermnent intervention to curb private econOinic power, that very govemment intervention 

infringes on free competition's commitment to liberty. The growing distrust of govemment 

intervention in the United States since the Nixon presidency has surpassed progressive concems 

for economic and commercial inequality. In consequence, the dominant ideolob'Y in the U.S. 

now favors free markets in the belief that they are better left alone than supervised by distrusted 

govermnent, whether the supervision is by antitrust enforcement or direct goverrunent 

regulation. 

Despite this distrust of government, the same forces have driven the simultaneous rise of 

intellectual property rights, even though they are undoubtedly state-initiated restraints offree 

competition. First, IPRs infringe on free competition's conunitment to eguality insofar as they 

grant IP owners the private power to pursue economic monopoly. Second, IPRs infTinge on fTee 

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competition's commitment to liberty since they result from direct govemment intervention. But 

here, the distrust of govemment intervention has not taken hold. 

So, what has led modem u.S. policy makers to expand LPRs despite general distrust of 

government intervention into commercial markets? 

Two ditJerent conceptions ofIPRs have justified the expansion despite their character as 

government-initiated restraints of free competition. First, some have viewed IPRs generally as 

natural rights. Second, others have viewed patent and copyright in particular as constitutional 

entitlements, as pre-govenmlental rights to encourage innovation. In both views, the 

govemment's active role has fallen out ofthe picture. 

First, TPRs are broadly understood as a compell ing form of natuml property rights. Their 

moml foundation is especially appealing because they not only evoke John Locke's labor theory 

of property rights but also purport to reward the Romantic genius of individual imagination. In 

this light, the government is seen not as the source but mther the protector of momlly ex ante IP 

rights. Thus expansion of IPRs is seen as fuller protection of perfectly natural rights, while their 

nanowing is seen as oppressive govermnent restraint of the natural workings of competitive 

markets. 

Second, there is the dominant scholarly and jurisprudential view of patent and copyright 

as constitutional rights, ex ante rights enacted but not created by government. In fact, the U.S. 

Constitution does empower Congress to enact patent and copyright protection for the specific 

purpose of advancing knowledge and industrial technology. And so patent and copyright are 

properly understood as the private means to produce the public benefits of inventive activity. 

This constitutional conception is supported by an intuitively attractive economic view that 

patent and copyright provide the necessary financial incentive for inventors to invent and for 

investors to invest in research and development. And when they do, all of society benefits from 

the economic progress that results. 

Though the natural rights view is more popular, it is the constitutional rights view that 

dominates scholarly and policy debates in the U.S., the view that patent and copyright are the 

private means to promote the public benefits of innovation and economic growth. So it is 

worthwhile for us to investigate the economic incentive logic that has come to dominate the 

constitutional rights view of patent and copyright as the private means to produce the public 

benefits of economic progress. 

Although the economic incentive rationale for patents and copyrights is intuitively 

attractive, the fact is that it simply does not hold because there are deep problems with the logic: 

First, there are theoretical criticisms that go back almost a century. In addition to questions 

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about the social costs of IP monopoly and whether market success provides sufficient incentive, 

there is the criticism that incentive theory does not take into account economic opportunity 

costs: That is, it does not account for the lost benefits of alternative investments, benefits that 

would have resulted from investment in, for example, more production or better infrastmcture. 

Second, in addition to theoretical criticism, over fifty years of economic studies have 

failed to find empirical support for an incentive theory of patent and copyright. Let me be clear 

about this: Despite fifty years of trying, there is no empirical evidence to support the view that 

the public benefits of intellectual property rights are worth their economic costs, nothing to 

support the belief that IPRs are superior to free competition in the production of innovation or 

the advancement of economic growth. There have been a smaller number of studies suggesting 

that patents are seen as important to business models in a few industries - pharmaceuticals and 

chemicals. In other sectors, patents were seen as having importance of the third or fourth order. 

Still, these studies address the question of patents as incentives to engage in research and 

development to pursue private profit. So it is crucial to remember that the private benefits of 

patents to phannaceuticalmakers or chemical companies tell us nothing about effect of patents 

on the public good. 

Still, the economic incentive story continues to dominate political and scholarly debates. 

There are at least two reasons for this unearned success. First, there is a neo-mercantilism that 

runs through the political debates, a belief that IP protection is the last great hope of the United 

States for competitive advantage against the onslaught of globalization. Of course, even ifthis 

is the case, it is not clear how long the current balance of trade in IPRs will continue to beneiit 

the United States. Moreover, Adam Smith taught us long ago that maximizing private profits, 

including those from copyright monopolies, does not maximize a nation's wealth. 

[this '\I is repetitious] The second reason is related to the first: There is the persistent 

category error of equating means and ends, of equating private profit with public benefit. And 

so despite a century of scholarly criticism, too many scholars and judges in the United States 

still proceed as if maximizing patent rights serves to maximize innovation and, with it, 

economic progress. But they do not, so far as we can detennine. 

While the U.S. IP debates have only begun to include arguments about fair distribution 

voiced by the hwnan rights community, criticisms of the incentive story have begLm to take 

hold in mainstream I P literature and to reverberate in recent Supreme Court decisions. 

These developments open the door to my second question: How can the benefits of free 

competition be re-introduced into the policy debates concerning IPRs, debates addressing the 

public interests of advancing economic growth and promoting fair distribution of its benefits? I 

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believe there are competition policies waiting to be applied, neglected competition policies that 

are already at hand. 

The surprising source for these neglected competition policies lies within the IP domain 

itself As I have shown in a series of papers, while patents are state-initiated restraints of 

competition, patent policy is shaped by its own fundamental commitment to free competition. 

The same can be said of copyright, trademark, and trade secret policies. 

My paper today concludes with an example of patent policy's fundamental commitment 

to free competition. The exanlple serves two purposes. First, it illustrates one important way 

competition policy shapes patent rights. Second, it shows how antitrust courts should apply 

patent's competition policy and, in consequence, refoTInulate their Lmderstanding of patent 

rights, a misunderstanding that excessively restrains free competition. 

My example describes how attention to a recent and highly influential patent decision by 

the Supreme Court would correct one widespread mistake that has resulted from antitrust 

policy's overly deferential attitude toward patent rights. Antitmst courts have consistently and 

mistakenly concluded that as a general matter, patent ownership automatically justifies a 

dominant finn's refusal to deal so long as the refusal lies within the scope ofa valid patent. 

Why? Because it is the patent owner's fundamental right to deny access to the patented 

invention. 

But these antitmst decisions have failed to separate the question of a patent's validity 

from its power to exclude. They have failed to distinguish the patent right from the patent 

remedy. It is this very distinction that provides the logic for the Supreme Court's patent 

decision in the landmark eBay case. 

The Supreme Court made it clear that ownership of a valid patent does not automatically 

justify an il1iunction to halt me infringing conduct. Rather, in determining whemer to issue an 

injunction, judges must apply traditional principles of equity to balance the private and public 

effects of halting me infringing conduct. Since the eBay decision, patent holders have found it 

much more difficult to persuade courts to restrain infringing competitors from selling their 

patented inventions. As a result, more infringers continue to compete against the patent owner 

with the owner's patented invention. Of course the infringer does not get away free; they must 

pay damages and reasonable royalties. But they are pennitted to compete. 2 

fonn of compnlso1"\ 01 statutoI). hcense Cal1bresl's habihn mle of lemed, More effiClent hele tl1.:111 propert\' mle) flrglwbh "es 

since post-injunction bargaining is single-sided monopoly, etc. IDocs iI~illllc1ion aml~'sis coincide "ith efficiency analysis? I 

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While the Supreme Court's el3ay opinion has widely influenced lower courts in patent 

infringement cases, the decision has not been Lmderstood in competition terms and, in 

consequence, it has had no influence on antitrust decisions involving the competitive effects of 

patent ownership. 

Yet it makes perfect sense that patent law's approach to injunctions should be imported 

into the antitrust analysis of refusals to deal by dominant finms because the legal questions and 

economic stakes are precisely the same 3 In both, patent owners seek judicial authorization to 

restrain competition on the logic of patent rights to exclude. 

So, what would patent law's competition logic look like in an antitrust case involving a 

dominant finn's refusal to deal? 

In a well-known case, Xerox persuaded the court that its patent ownership justified its 

refusal to sell its patented replacement parts to competitors who service and repair Xerox 

copiers. If the equitable approach taken in the Supreme Court's recent patent decision were 

imported into this antitrust case, then patent ownership would not automatically excuse the 

refusal. Rather, Xerox would have the burden of persuading the court that its refusal to sell 

replacement parts to independent service companies should be permitted in the circumstances. 

To determine whether the refusal should be pemritted, the court would apply patent law's 

competition logic of equitable balancing. This traditional equity approach requires the court to 

evaluate and then balance four factors to detennine whether the restraint would be fair in the 

circLUnstances. 

First, Xerox would have to persuade the court that it would suffer irreparable harm if 

required to sell its patented replacement parts to a competitor. In this case, irreparable harm was 

not likely. First, there was no foreseeable harm to Xerox's reputation for making copiers. But 

what ofloss of market share for repair service? Xerox would lose market share only if its 

services were inferior or if its prices were higher. And that hann results from competition on the 

merits, not from free riding on the Xerox's accomplishments. 

What of Xerox's lost monopoly profits for replacement parts? Applying the second 

factor, Xerox would be pemlitted the refusal to sell only if damages would not provide adequate 

compensation. But generally, damages are viewed as adequate compensation for lost profits. 

And here profits would be lost only if Xerox sold replacement parts to independents at 

wholesale, something they would not be required to do. Moreover, profits nright actually 

increase if better quality or lower prices increased demand for services and, with it, resulted in 

greater sales of replacement parts. 

3 thc~' .'Ire institutional and fuudioml equivalents· injullc1ion=rcIusal=rcvcrsc pa~'mcnts == judici.'ll.'lulhoriallion to rcstraincomp 

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The third factor requires the court to balance the hardships on the parties: Would 

requiring Xerox to deal with competitors impose greater hardships on Xerox than allowing 

Xerox's refusal would impose on the independent service companies? Here, requiring Xerox to 

deal would impose hardship on Xerox only if production of replacement parts could not meet 

demand, an unlikely event especially ifparts manufacture is outsourced, as it usually is. On the 

other side, given the typical lack of interchangeability-for example, Kodak parts don't fit 

Xerox machines-permitting Xerox's refusal to deal would cause great hardship on all 

independent service companies and thus on competition in the repair market for Xerox copiers. 

Fourth and finally. what would be the effect on the public interest of permitting Xerox's 

refusal to deal? Given u.s. antitrust's identification of public interest with conSLl1ners, the 

inquiry would address the narrower question of the impact on consumers. Tn the short run, 

antitrust's traditional static efficiency analysis would likely conclude that pennitting the refusal 

to deal would harm consumers by leading to higher prices and lower quality in the market for 

repair of Xerox copiers. 

In the long nm, the dynamic etliciency analysis associated with more recent antitrust 

policy would inquire into the impact on innovation. The traditional answer is that a loss of 

monopoly profits would lower Xerox's incentive to innovate and, in consequence. social 

welfare would be harmed. But economic analysis has shown the traditional incentive theory to 

be unsupported in theory or in fact. So, even if Xerox might be worse off, that does not mean 

there will be less innovation or less progress overall. Indeed, society might be better otl Why? 

Because competition provides its own incentive to innovate, but without the social costs of 

monopoly profits. 

So, an equitable balancing ofthe four factors derived from patent law's competition 

policy, when applied to antitrust analysis of whether to pennit Xerox's refusal to deal. imposes 

a burden on Xerox to show that the factors clearly weigh in its favor But they don't. There is 

no foreseeable haml to its reputation. Lost profits, ifnot the result of competition on the merits. 

are compensable by damages. The balance of hardships clearly falls not on Xerox but on the 

independent service companies, who have no alternative source of supply for replacement parts. 

And finally, the public interest. here defined in temlS of consumer benefits oflower prices, 

better service, and continued innovation, all weigh on the side of requiring Xerox to sell repair 

parts to independent service companies. In sum, the competition analysis imported from the 

patent regime calls for a rejection of Xerox's claim that its patent rights should justify its renlsal 

to deal. 

Recall that the court in the actual antitrust case viewed patent oWllership as an automatic 

business justification for Xerox's refusal to sell replacement parts to independent repair 

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companies. The result was no competition on the market. This mistaken view of patent rights 

and their relationship to antitrust policy underlines the importance of taking antitrust to the 

patent school of free competition: 

We started the analysis with a patent, a state-initiated restraint on competition, and then 

applied its logic to an antitrust case, with the effect being state initiated-cooperation between a 

dominant finn and its rivals, and with the patent logic's ultimate result being state-initiated 

competition. 

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FTCWATCII, June 18, 2012, No. 809, P. 11 

Patents and Payoffs 

or How Generics are Kept Offthe Market 

A federal appeals court recently dismissed a case that could have saved consumers 

hundreds of millions of dollars. Solvay Pharmaceutical, the maker of a synthetic 

form of testosterone called Androgel, had sued several generic drug companies for 

patent infringement but agreed to settle the case if those companies would accept 

up to $200 million dollars to stay offthe Androgel market. Seeing this settlement as 

an agreement in restraint of trade, the Federal Trade Commission filed an antitrust 

suit to bar the settlement and, in their brief, noted that such settlement agreements 

are costing drug consumers $3.5 billion dollars annually. 

The federal appeals court rejected the FTC's claim that the settlement is a violation 

ofthe antitrust laws, concluding that agreements like the one in Solvay are shielded 

from antitrust scrutiny as long as they "fall within the scope ofthe patent." In short, 

the court decided that Solvay's patent rights in Androgel trump the antitrust 

prohibition against agreements that restrain competition. But this decision and the 

unbroken line of others like it since 2003 are wrong as a matter of law. 

Although Solvay does have a right to stop the production and sale of generics that 

fall within the scope of its Androgel patent, the appeals court neglected the Supreme 

Court's teaching in a landmark 2006 patent decision. According to that eBay opinion, 

there is nothing automatic or absolute about a patent holder's remedies. Obtaining 

injunctions to stop others from making and selling their inventions requires patent 

holders to persuade the court that the specific circumstances of each case justify the 

exclusion. 

The Supreme Court's unanimous eBay decision has widely influenced lower courts 

in patent infringement cases to issue fewer injunctions. The result has been more 

competition. But since the decision has not been understood in terms of 

competition, its mandate has gone unrecognized in antitrust cases. 

It makes perfect sense to apply eBay's patent logic to antitrust cases like the Solvay 

suit because the legal questions and economic stakes are the same. In both, patent 

owners seek judicial enforcement of efforts to restrain competition on the grounds 

that a patent justifies the restraint. But rightly understood, the eBay decision would 

require the branded drug maker in Solvay to persuade the court that the settlement 

agreement, particularly the pay-for-delay provision, meets patent law's test to 

enjoin competitors - that on balance, the benefits and harms, public and private, tip 

in favor of keeping the generic drug makers off the market. Only then would the 

settlement "fall within the scope of the patent," as prescribed by the Supreme Court 

in its eBay decision. 
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In antitrust cases like Solvay, this balancing test would call for courts to reject the 

settlement agreements. Rejecting them would not cause irreparable harm to the 

drug companies; they would still have their lawsuits and the full range of private 

legal remedies. The remaining issue would be whether it is in the public interest to 

reject them. Here too there is no doubt: The public would benefit from rejecting 

settlements that keep generics off the market. In short, the balance would clearly tip 

in favor of rejecting pay-for-delay settlement agreements. The result of applying 

e8ay's patent logic to cases like Solvay would be more trials on the merits in drug 

patent infringement suits, trials that so far have invalidated patent claims more than 

seventy percent ofthe time. 

Seventy percent more competition in the drug market would lower health care costs 

by as much as $3.5 billion dollars annually. That is precisely what Congress intended 

when it expedited the FDA approval process for generic drugs. It is time to make 

antitrust and patent law work together, time to stop the drug companies from 

subverting the competitive process. 

Rudolph J.R. Peritz 

Professor of Law, New York Law School 

Senior Fellow, American Antitrust Institute 

Author, Competition Policy in America: History, Rhetoric, Law (Oxford U. P. 2001) 

Contact number: 212 431 2159 
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INTELLECTUAL PROPERTY AND CO'vIPETITION LAW: "IE\X' FRONTIERS, Arid Ezrahi & 

Steven D. Andcrmcm, cds. (Oxford Univ. Press 2011) 

Copyright © 2011 by RudolphJ.R.Pcritz & Oxford Univ. Press 

2 

Competition ,jJithin Intellectual Property Regimes -

The Instance of Patent Rights 

Rudolph lR. Pentz· 

Introduction 

This chapter describes an emergent jurisprudence and a residual economics that 

converge to support the reconceptualization of U.S. patent policy as a competition 

regime. Its approach is inspired by an opinion that Justice Sandra Day O'Connor wrote 

for a unanimous Supreme Court some twenty years ago. The Court's recent patent 

jurisprudence sounds an echo of the opinion, which described the foundation of patent 

policy this way: "[FJree exploitation of ideas will be the rule, to which the protection of a 

federal patent is the exception." There is, Justice O'Connor explained, a "baseline of free 

competition upon which the patent system's incentive to creative effort depends." 

The chapter develops this proposition in three sections. The first explicates the 

economics of incentive theory, both its limits and its residual value. The second analyzes 

the jurisprudence of recent decisions by the Supreme Court and Federal Circuit Court of 

Appeals - the speciality court for patent and trademark. The third section presents some 

• Professor and Director, IProgress Project, New York Law School, Visiting Professor, Economics and Law 

Departments. LUISS University. Rome. Italy. Earlier versions ofthis chapter were presented as the 2010 

Guido Carli Lecture in Law and Economics. (12 April 2010) LUTSS University, and 81 the 2010 ATRTP 

Annual Conference. (24 May 2010) University of Stockholm 
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instances of progressive change that would come of extending the re-conception of the 

patent system as fundamentally a competition regime, an extension inspired by Justice 

O'Connor's image but informed by the failure of incentive theory as the economic logic 

for patent protection. 

A. Crisis, Stalemate, and Progress 

Intellectual propertyl protection and free competition have long been viewed as 

alternative means to encourage inventive activity and, through it, promote progress in the 

form of economic growth. Their relationship as means has sometimes been characterized 

as conflicting and other times as congruent. The same can be said about the progress they 

are intended to promote. In the United States, mainstream policy cabins these tensions of 

means and ends by treating IP protection as a domain of exclusionary rights and by 

removing free competition to a separate domain, to the domain of antitrust. With this 

bifurcation, the problem has been largely transformed into a question of adjudicating the 

relationship between two separate bodies of public policy. 

Nonetheless, some competition doctrines linger within the IP realm. These doctrines, 

such as patent misuse and copyright fair use, have been characterized as intruders in the 

domain of exclusionary rights. Patent misuse is labeled an historical anomaly that 

properly belongs in antitrust, if anywhere at all, while copyright fair use is described as 

an interloper - either an alien article of political faith in First Amendment Speech Rights 

or a commercial artifact of market failures that temporarily limit the author's fundamental 

right to exclude 2 Since the 1980s, IP policy makers have settled the problem of 

1 Unless othemise specified, intellectual property refers only to the patent and copyright statutes enacted by 

Congress in accord with the Constitntion' s call to promote progress, thongh the term can plansibly be 

nnderstood as referring as well to tradc secret and trademark protection insofar as thcy have becn 

increasingly justified in similar instrumenlalisttenns. The distinction is made in this chapter because the 

analysis of the patent domain takes account of Constitutional origin. 

2 See e.f!, .. DJ Gifford, 'Antitmst's Troubled Relations with Intellectual Property'(2003) 87 MiImesota Law 

Review 1695 (patent): WJ Gordon, 'Fair Use as Market Failure: A Structural and Economic A'k11ysis of the 

Bctamax case and its Predecessors' (1982) 82 Colml1bia Law Review (copyright). 

2 
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malingering doctrine by favoring exclusionary rights over free competition and by 

propertizing and othenvise extending IP rights. 

This dynamic of bifurcation, preference, and expansion rests on the asserted superiority 

of exclusionary rights over open access in encouraging invention, a superiority that 

derives from reliance on an IP economics that holds neither in theory nor in practice. 

There has long been trouble brewing in the IP economics that prevails in the United 

States. The trouble with IP economics recently reached the boiling point with an 

admission by William Landes and Richard Posner, the Chicago School's dynamic duo of 

law and economics, the admission that there is no ground for the dominant view of IP 

economics, no ground for the view that incentive theory can justify, explain, or 

rationalize TP rights. They made this confession in their book entitled The J\cof1omic 

Structure oj 11' Lmv 3 The book has received wide attention and much praise. But the 

public confession of incentive theory's failure has been largely ignored. 

At virtually the same moment, a related but separate development was bubbling to the 

surface of TP jurisprudence: Tn a recent series of surprising opinions, the U.S. Supreme 

Court weakened patent protection and in the process expanded the role of free 

competition as an internal engine for promoting economic progress. The opinions were 

surprising because they run against the dominant view that pits an IP domain of 

exclusionary rights against an exogenous antitrust domain of free access. The recent 

opinions have destabilized this binary opposition between TP rights and free competition 4 

3 WM Landes & RA Posner, The Economic Structure oj1ntellectual Propertv Law (2003). 

4 This chapter takes up patent law as a competition regime. a theme that with respect to copyright. Wille 

secret, and trademark as well is explored in my earlier writing. beginning with Reporl to Ihe IP Academy of 

Singapore (2002-2003) (revised and published sub nom 'Competition Policy and its Implications for 

Intellectual Property RigiIts in the United States' in SD Andcm13n (cd) The Interface BetH'eenIntellectual 

Properly Righls and Compel Ilion Policy (2006) and variously investigated in other writing. The theme is a 

special case of the complex relationship between property rights and competition policy in American 

political economy, which I first developed in the don13in of antitmst; sec, e.g ... A Counter-History of 

Antitmst Law' in Symposium: The Frontiers of regal Thought (1990) Duke Law Journal 26]; 'The "Rule 

of Reason" in Antitmst Law: Property Logie in Restraint of Competition'(1989) 40 Hastings Law JOlmml 

3 
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In tandem, the failed economics and unstable jurisprudence have thrown the dominant 

approach to TP rights into crisis. The crisis is an emergent form of a long-term problem at 

the heart of both the economics and the jurisprudence, and it cannot be easily resolved. 

On the economics side, informed policy makers have long recognized that economIC 

progress is driven by the twin engines of IP monopoly and free competition. As 

economist Kenneth Arrow wrote in his landmark 1962 paper, the great difficulty lies in 

determining an optimal balance between them. Economist Joseph Schumpeter had earlier 

sought to merge the two engines in his vision of competition as serial monopoly, his 

perennial gale of creative destruction. 5 

As for the jurisprudence, the U.S. Constitution presents a corresponding legal challenge 

to balance the exclusionary rights of IP protection and the open access of free 

competition. 6 The Constitution empowers Congress to enact copyright and patent 

protection for the explicit purpose of promoting "the Progress of Science and useful 

Arts." So copyright and patent are not rewards, not natural rights. They are incentives -

private means to a public end. But when does the private incentive of property protection 

promote the public benefits of progress? In both economic and jurisprudential terms, 

when does such protection produce more progress than would otherwise accrue with free 

285. excerpted inET Sullivan (cd) The Political Economy of the ShermaJLlct: The First Hundred Years 

116 (1990) 116, reprinted inR Graves (ed) Compelilion Law (2003), reprinted in Compelilion Law (2004). 

The theme was extended to other domains in Competition Policy in America: Historv, Rhetoric, Law (1996, 

2001). Tins chapter on patent policy is part of a larger project. whose working title is The Political 

Economy of Progress: IP Righls and Compeliliol1. 

5 Sclmmpeter, Capitalism, Socialism and Democracy ([19421 3d ed 1950): KJ Arrow, 'Economic Welfare 

and the Allocation of Resources for Invention' in R. Nelson (cd) The Rate and Direction ofIn\'enti\'e 

Aclivily: Economic and Social Facior." (1962) 609. It should be noted that Arrow wrote about invention 

willie Sehumpeter emphasized iImovation- tlmt is, the commercialization of invention. 

6 United States Constitution, Art. I. Sec. 8. d. 8 states: "Congress slmll have Power: ... To promote the 

Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive 

Right to their respective Writings and Discoveries." 

4 
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competition? The answer to this question has proved elusive to both theorists and 

empirical researchers 7 

Despite this indeterminacy, mainstream IP economics still rests on incentive theory, 

which holds that the scale and scope of IP rights should be determined by the degree to 

which they promote economic progress. Incentive theory's incapacity to guide such 

determinations results in an analytical stalemate between the exclusionary rights of IP 

protection and the open access of free competition, a stalemate because both produce 

economic growth but to indeterminable degrees. In this light, neither alternative deserves 

priority as the better means to promote economic progress. 

This stalemate, this open question at the very core of lP policy, has put analysts and 

decision makers, including federal judges, between a rock and a hard place: On the one 

side, policy makers are pressed to make decisions; on the other, they are blocked from 

making reasoned decisions because there is no analytical methodology at hand. Policy 

makers have sought to extricate themselves from this predicament by taking a fall-back 

position, the position that maximizing the means maximizes the ends, that greater lP 

protection naturally leads to more invention and thus to more progress. In my view, this 

fall-back position explains the so-called propertization ofIP rights, the normative shift to 

a Lockean entitlement from an instrumentalist (or means-ends) evaluation. 

This fall-back into natural rights is not surprising, given the powerful ideology of private 

property rights in the United States. But it makes no logical sense. Nor is it supported in 

theory or fact. Indeed, it is well-known that too much IP protection as well as too little 

can stifle invention and impede economic progress. So both the economics and the law 

present IP policy makers with a Goldilocks problem. But there is no calculus for 

determining what amount of IP rights is 'just right.' particularly in a unitary system that 

does not discriminate among different kinds of inventions. And, of course, there is the 

'For close analysis of these issues. see my Fssav. 'Thinking about Economic Progress: Arrow and 

Schumpctcr in Time and Spacc' in J Drcxl (cd) Liber ,1I11icorum:for Hanns Ullrich (2009). 

5 
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other side of the indeterminacy coin: Economic justification is equally lacking for simply 

eliminating IP rights entirely as a means for encouraging invention and thus promoting 

economic progress. 

So, what's to be done? In my view, the answer is clear: Change the fall-back position. 

Reverse the presumption. When confronted with jurisprudential or economic 

indeterminacy, adopt the presumption that free competition better promotes the progress 

called for by constitutional directive. Given the indeterminate economic value of both 

free competition and IP rights in encouraging invention, policy analysis should begin 

with the presumption offree competition. In choosing between two rules or standards, 

policy makers should adopt the one that better expresses the policy of free competition. 

Why adopt the presumption of free competition? Tn economic terms, because competition 

produces a tie-breaker for its indeterminacy stalemate with IP rights. The tie-breaker is 

competition's superior distributional outcome. When patents and other W rights produce 

monopoly prices, they create welfare losses in both static and dynamic terms. In the short 

run, consumers pay higher prices or go to second best substitutes. In the longer run, 

subsequent inventors also pay higher prices or tum to second best substitutes, causing 

some combination of decline and path-diversion in follow-on inventive activity. R In this 

light, a rule or policy that would strengthen W rights should first be shown to 

promote greater progress than would otherwise occur. 

B. Patent Economics: Incentive Gap, Stalemate, Presumption of Free Competition 

This part begins by examining the state of mainstream W economics in the United States, 

particularly the failure of incentive theory as the economic justification for IP protection, 

8 The dynamic effects are a decrease in inventor welfare that results from the increased cost of new 

information or the denial of access at any priec. Sec Peritz (n 67 below). 

6 
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and proceeds by sketching the IP economics that remains viable. The section closes with 

discussion of the IP economics of competition. 

incentive them)! and its critiques 

In the United States, the current economics of progress has adopted a mythical origin not 

unlike that of Athena, the Greek goddess of wisdom and culture who sprang full y formed 

from the head of Zeus. Like Athena, the economic logic of progress is seen as springing 

fully formed from the divine thinking of Kenneth Arrow, whose eminence was 

established even before his award in 1972 of a Nobel Prize in Economics. His eminence 

stems from his canonical 1962 paper entitled Economic Welfare and the Allocation of 

Resourcesfor im'ention. 9 

Of course despite such mythology, there is a substantial pre-history that posed 

fundamental questions and deep criticism of lP protection, much of it still pertinent 

today. Virtually all the questions emerged in the widespread European debates of the 19th 

century over patent protection; many of the criticisms were sharpened in the trenchant 

analysis of Sir Arnold Plant in his 1934 article entitled The J\conomic Theory Concerning 

Patentsjor inventionslD and in a companion piece on copyright. Plant raised many of the 

searching questions later addressed by American economists. The most difficult question 

concerned the opportunity cost of invention. Plant asked, when is use of society's 

resources to invent "superior to alternative uses from which they are diverted[?]" 

The opportunity cost of invention opens a wide gap in the incentive logic of IP rights, a 

gap between the private value and the public benefits of IP rights. There is little doubt 

that IP rights create a private incentive to invent: indeed, few could afford simply to give 

9 Arrow (n 5 above). 

10 Plant. Selected Economic Essays and.lddresses (1974 [1934]) 35. Cf. F Machlup and E Penrosc. 'The 

Patent Controversy in the Nineteenth Century', (1950) 10 Journal ofEeonomic History 1 (chronicling the 

Enropean debates). 

7 
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time to the enterprise of invention without remuneration. Yet the private value of IP 

rights has no necessary logical or economic relationship with their public benefits, 

benefits that depend on a wide array of factors. The opportunity cost of invention is but 

one powerful admonition to take account of what can be called the Incentive Gap. 

Ignoring it produces the category error of equating IP rights' private value with their 

public benefits. Taking the Incentive Gap into account transforms the question into an 

empirical inquiry. 

None of this had noticeable impact in the United States before economist Fritz Machlup 

authored his 1958 Report to Congress, entitled An F;collomic Review of Ihe Pa/elll 

S)Jstem. His was the most in±1uential of 15 reports commissioned by a Congress 

concerned whether the costs of the patent system were justified. Here is Machlup's 

summary of the economic literature: 

None of the empirical evidence at our disposal and none of the theoretical 

arguments presented either confirms or confutes the belief that the patent system 

has promoted the progress of the technical arts and the productivity of the 

economy.!! 

What's to be done0 "Muddle through," wrote Machlup. Why0 Because there has been "a 

patent system for a long time," he declared, "it would be irresponsible, on the basis of our 

11 Study of the Subcommittee on Patents. Trademarks. and Copyrights of the Senate Judiciary Connnittee. 

85th Cong., 2d Sess., An Economic Review of the Patent System, Study no. 15 (Comm. Print 1958) 

(written by Fritz Machlup) (hereinafter ""MachJup Report") 79. The MaehJup Report observes that "there is 

no functional relation between the eamings under a patent ... and the 'social usefulness' of the invention 

which it covers." Machlup Report at 30. In tlris line of analysis, the Machlup Report observes that "The 

question is no longer whether tile patent system stimulates inventive talents to usc morc of tIleir time and 

energy than they othen,ise would for the development of new technology, but rather whether it stimulates 

business corporations to lUre more of these talents than they otllerwise would fortlris task. Iffuis is 

affirmatively answered. the second question arises whether tlris usc of the talents is superior to the 

altemative uses from which they are diverted." Ibid 36. Note Ulat tins is a modem fonn of the question 

posed in tile 19"' century European debates about what we would term the opportuJrity costs of diverting 

scarce resources. Cf. Peritz, 'Patents and Progress: The Incentive COlllmdmm.' in A Kur (cd) Intellectual 

Propertv Righ!.,: Does one Size Pit .~Il? (2009) (2008,~ TRTP ,~nnllal Conjerence. Max-Planck Institute, 

Mtmieh. Genllany. 21 July 2008). 

8 
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present knowledge, to abolish it.,,12 There could be no weaker rationale for keeping 

patent protecti on. 

It was under this cloud of indetenninacy that Kenneth Arrow published his landmark 

paper four years later. Like so many other sacred texts, Arrow's paper has become the 

touchstone for theorists and others who identify themselves with the orthodox approach 

as well as those who oppose it. 

Arrow questioned the impact of competition on incentives to invent. For economists, 

perfect competition is the Holy Grail. Its miraculous power produces allocative efficiency 

by taking society's resources and putting them to their highest and best uses. But Arrow 

argued that perfectly competitive markets fail. They fail by discouraging inventors from 

inventing. 

Arrow's story has become a commonplace: Without patent protection, inventions are 

easily copied or imitated. Free access to their ideas discourages inventors from inventing 

and, thus, harms society. Patent rights correct this market failure by allowing inventors to 

profit and society to benefit from increased invention. Patent protection and the profits it 

generates are the means to an end. Patents are private rights that produce the public 

benefits of technological advancement and economic progress. 

The dominant camp relies on the following quotation to support their call for stronger 

patent protecti on: 

[Invention that is] available free of charge provides no incentive for 

investment in research. 13 

Those who call for more access and thus more competition rely on this quotation: 

12 M8Ch11lp Report (n 11 8bove) 80. 

11 Arrow (n 5 above) 609. 

9 
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the incentive to invent IS less under monopolistic than under competitive 

conditions. 14 

Both statements are accurate quotations from Arrow's landmark article. So it turns out 

both camps are right; and both are wrong. Why? Because reliance on one or the other 

quotation ignores Arrow's recognition that an incentive theory of patent protection 

creates a dilemma for welfare economics. The dilemma is that both patent rights and 

competition promote economic progress. And both impede it. Here is how Arrow 

described the dilemma: 

In a free enterprise economy, inventive activity is supported by using the 

invention to create property rights; precisely to the extent that it is successful, 

there is an underutilization of the information. 15 

In short, patent protection is the private incentive necessary to spur invention and at the 

same time the social cost that prevents its optimal use. Arrow transformed this dilemma 

of IP rights and competition into a trade-otf over time: Pay more now for better products 

in the future. 16 

Let's call this Arrow's Trade-Off. Arrow posed the social welfare question as a trade-otf 

over time insofar as the current costs of patent monopoly pay for the future benefits of 

increased invention. 

11 Ibid 619. 

1< Ibid 617. 

16 "[A]n incentive to inveni can exist even under perfect competition in the product markets. though not. of 

course in the 'market' for the information contained in the inventiOl~" Arrow at 619. In his hypothetical 

world. Arrow does even better than tnmsfonn a dilemma into a trade-off. He creates a model that neatly 

eliminates the present cost of the trade-off. He posits perfectly monopolistic markets for invention that 

provide inventors tlle greatest profit incentive and buyers in perfectly competitive markets for goods 

provide consumcrs the widest distribution at the lowest price. It's tlle best of all possible worlds though it is 

not the real world. In the real world. monopoly prices do not dissolve into the thin air of economic models. 

The hypothetical is perfected by Arrow's assmuption tlMt the invention is a new process that provides cost 

savings in the goods market tllat equal the monopoly priccs paid for tlle new invention. Thus price and 

output in the goods market are not affected. Neat and tidy. But unlikely and perhaps economically illogical. 

Sec Peritz. ",lrro>l' and Schult/peter in l1me and Space (n 7 above). 

10 
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But in the end, Arrow's Trade-Off encompassed only part of the problem of IP' s social 

value. It addressed the narrow question of IP's private value and its relationship to direct 

public costs and benefits but not its indirect effects, including opportunity costs. In 

consequence, the analysis did not speak to the Incentive Gap between the private value 

and the overall public costs and benefits of IP protection. The subsequent economic 

literature continued to pursue the broader question. But the theoretical scholarship largely 

rehearsed the European debates and Arnold Plant's economic analysis. 

£mpirical investigation 

Ultimately the theoretical impasse resolved into empirical inquiry. What of the empirical 

literature that followed? 17 

A wide array of studies, almost all involving patents, developed various data sets to 

investigate different proxies for economic progress. Researchers have interviewed 

corporate decision makers; they have measured research and development expenditures 

and patenting activity on the input side, and productivity gains and economic growth on 

the output side. Studies have looked at single sectors, individual countries, and across 

countries. 

The longest senes of studies developed interview data from senior executives in the 

research and development departments of commercial firms. Five studies between 1959 

and 2001 all reached the same conclusion: The prospect of patent protection was 

typically a factor of third or fourth order importance to research and development 

decisions, with the exception of the drug industry and perhaps chemicals. Still, it must be 

understood that these studies investigated only the private value of patents; neither public 

benefits nor public costs were addressed. 

l' A working paper that takes a closer look at the literature is available from the author: 'Patents and 

Progress: The Incclrtive Commduuu' (2008). 

11 
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Other recent studies hm'e inquired into the public benefits by looking at the relationship 

between changes in patent protection and changes in research and development 

expenditures. Japanese and US. studies found the data inconclusive. One study across 29 

countries found a mild positive correlation and another across 60 countries found a weak 

negative one. Moreover, the fmdings have been mixed in studies of statistical correlation 

between patent protection and the ultimate economic goal of increasing growth. 

A rare statistical study of copyright protection has just been published. Relying on data 

from 1870 to 2006, the authors conclude "Despite the logic of the theory that increasing 

copyright protection will increase the number of copyrighted works, the data do not 

support it." 18 

In sum, the empirical literature on the public benefIts of patent and copyright is at best 

inconclusive. 19 This brings us full circle back to the theoretical impasse that preceded it. 

Small wonder, then, that so many policy makers in the United States have taken the fallback position, the mistal(en focus on the means itself - on maximizing IP protection in 

the erroneous belief that progress will be maximized as a natural result. 

Parent eeonomies: the residue 

1< RSR Ku, J Sun, Y FaI~ 'Does Copyright Law Promote Creativity? An Empirical Analysis of Copyright's 

Bounty' (2009) 62 Vanderbilt Law Review 1669. 

19 Regardless of findings, all the empirical work confronts methodological difficulties. Here are two. First. 

the v8riables used are controversial. The uses of patent counts, citations, or relle"Y81 rotes as rne8sures of 

teelmological progrcss havc all been criticized. as has thc usc of rcsearch and dcvelopmcnt e"'pcnditurc 

data. Simply counting patents. or copyright registrations for that matter. does not take into account 

differences in their importance and social value. And more R&D spending does not necessary lead to more 

or bctter iill'cntions. 

There is a second methodological difficulty -the intractable problem of disentangling patenl or R&D data 

from other sources of economic growth, sources including trade secrets, improved technical education, or 

incrcascd production, to llaIllC a fcw. A noted AmcriCaIllcgal scholar put thc general methodological 

problem tlris way: "If a state of affairs is the product ofn variables. and you have knowledge of or conlrol 

over less thaIl n variables, if you think you know what's going to happen when you vary 'your' variables. 

you'rc a booby." A Left 'Economic Analysis of Law' (1974) 60 Virginia Law Revicw 451 (comparing thc 

first edition of Richard Posner's l'conolllic .~nalysis ojIaw to Cervantes' Don Quixote). "Booby" denotes a 

stupid pcrson. 

12 
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Where does that leave IP economics? Some alternatives to the mainstream approach have 

emerged, alternatives ranging from conservative incrementalism to radical repeal. Landes 

and Posner sit at the conservative end of the spectrum, where they argue that we should 

try to optimize the system and do the best we can with what we have. Economists 

Michele Boldrin and David Levine have been the latest to lay claim to the radical end, 

where they argue that lP rights are not necessary because free competition produces 

adequate profits to attract the invention necessary to promote economic progress. Of 

course these positions as well as those between them are not new. 20 

A moment's tarry at the Landes and Posner position is worthwhile, in my view, because 

it is likely to become the mainstream position, once the shock of incentive theory's 

demise has subsided. Landes and Posner take up the view espoused in Machlup's 1958 

Report to Congress, the view that while the patent regime per se cannot be rationalized, 

changes can be evaluated for their effectiveness 21 For this, Machlup developed a ninestep analysis and provided an example. The example is an increase in the patent term. As 

the author pointed out, the analysis requires quantitative and qualitative assumptions at 

every step and, even then, it cannot take into account the opportunity cost of more 

investment in research and development. In short, even though the more confined 

analysis of changes in rules or standards benefits from having a defined baseline of 

current invention levels that is lacking in an analysis of the patent regime per se, other 

problems of experimental design and measurement remain. Machlup concluded that the 

analysis of whether an increase in the patent term increases economic growth depends on 

"a complex set of probabilities, the magnitudes of which depend [on 1 ... many unknown 

variables." 22 

20 Cf. Peritz (n 11 above). 

21 M8Ch1up (11 11 8bove) 64-67. discussed in Peritz (11 11 & 16 8bove). 

22 1bid. 

13 
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75152B3-14.eps

Following Plant and Machlup, Landes and Posner reject incentive theory. In its place 

they adopt a series of more specific goals emphasizing reductions in, for example, 

transaction costs, rent seeking, and congestion extemalitiesn In their chapter on patent 

law, the authors proceed from the general point that patent protection "makes economic 

sense because it curbs certain inefficiencies unavoidably created by trade secrecy.,,24 In 

their view, those inefficiencies derive from a number of sources, including the following: 

First, from the very nature of trade secrecy, which keeps information out of the market. 

Second, from the higher costs of trade secret licensing. But these assertions tum out to be 

controversial. As to the first, Landes and Posner themselves develop an elegant analysis 

of the relationship between patent and trade secret that belies the impact on information. 

In the chapter on trade secrets, they assert patents are preferable only to the extent an 

invention is self-disclosing or likely to be invented independently.25 That is, patents tend 

to disclose information that has lowest public value. As to the higher cost of trade secret 

licensing, the authors identify a number of higher costs associated with patents that seem 

to onset the advantage in licensing costs. Most telling, patent disclosure may lower the 

time to invent around or, perhaps worse, enable infringement that triggers expensive 

litigation with a substantial risk of finding patent invalidity26 

Landes and Posner take the substantive patent regime as a given and seek to optimize its 

implementation, an enterprise that seems likely to become the mainstream approach even 

though it is rife with the indeterminacy that devastates incentive theory. In my view, 

sound economics calls for change in patent policy more severe than fine-tuning. 

2, Congestion e:l.1emalities reflect a questionable reintroduction of tragedy-of-the-commons logic to public 

goods. The issue is of questionable importance for two reasons. First. because use of infonnation (or 

invention as Arrow called it) does not deplete its supply or quality; in that sense, there carulOt be over-use. 

Second. because privatization presents an analogous problem. if there is one at all, in the form of the antieOlmnollS - often called patent thickets. In sum. congestion is either a two-sided problem that does not 

resolve the qnestion of propertization or it is no problem at all. 

24 Landes and Posner (n 3 above) 29-l. 

25 Ibid ]55-56. 

20 Ibid 357. 

14 
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75152B3-15.eps

Surprisingly, there might be a place in patent policy for a more limited conception of 

incentive theory, a conception that takes account of its limitations as well as the primacy 

of the free competition baseline. In this view, incentive theory becomes a sharp 

instrument of focused industrial policy, one applied to target particular goals. Patent rules 

might be changed to channel specific inventive activity toward green technology, cancer 

research, equality-inducing business methods, or other specific goals. Such targeting 

would introduce a qualitative dimension to economic progress. These judgments would 

place bets on particular social welfare consequences, political economic judgments that 

do not purport to serve the quantitative goal of economic growth. Thus, neither large 

scale nor narrow gauge cost-benefit analysis would ensue. The question would be 

whether the added incentive would increase the targeted inventive activity beyond the 

current rate. But targeted incentives would be bets and would raise difficulties of 

evaluation discussed above. Still, as Arrow recognized in his landmark paper, 

governments both here and abroad have long made these sorts of bets. 

In addition to the risks of unsuccessful research and development, such judgments bring 

the danger of unintended consequences. One current example is the unintended anticompetitive impact of the Hatch-Waxman Act, the 1984 amendment to the Food & Drug 

Act that was intended to increase the incentive to produce patented drugs by extending 

the patent term and at the same time increase competition by opening the door to early 

market entry by generics manufacturers who claimed their generics did not infringe valid 

patents. In actual experience, such generic filings are quickly answered with patent 

infringement cases filed by branded manufacturers. These cases have often produced 

settlements that include reverse payments of large sums from plaintiff branded 

pharmaceutical companies to defendant generics manufacturers in exchange for promises 

to keep their generic drugs off the market. Courts have approved the settlements and 

rejected antitrust claims of agreements in restraint of competition, finding them not only 

consistent with the general law that encourages settlements but also within the 

exclusionary rights of the contested patents. In consequence, consumers pay billions of 

dollars in higher prices and follow-on inventors are given the perverse incentive to invest 

15 
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75152B3-16.eps

resources that position them to litigate and settle rather than develop and commercialize 

generic drugs. 27 

Certainly, patents can serve as a more focused instrument for targeted industrial policy. 

But even there, risks of failure and unintended consequences call for careful analysis to 

overcome the presumption that free competition better serves the goal of promoting 

progress. 28 While the dynamic efficiency effects of both free competition and patent 

rights are indeterminate, distributional effects provide a tie-breaker. Patents that actually 

have economic value produce monopoly prices and, with them, welfare losses in both 

static and dynamic tenns. Not only consumers but subsequent inventors are worse off. In 

this light, a rule or policy that would strengthen patent rights should first be shown to 

promote greater progress than would otherwise occur. 

C. Patent Jurisprudence: Ends, Means, Emergent Emphasis on Competition 

The frailties of patent economics leave policy makers in a quandary. On the one hand, 

there is no economic justification for patent protection as the primary means for 

promoting economic growth. Indeed, the residual economics points to free competition as 

the presumptive means. On the other hand, the constitutional instruction remains: 

Congress and the judiciary must fonnulate patent policy to promote progress. How can 

policy makers advance the constitutional purpose of patent protection in light of the 

economics? 

2~ See. e.g .. Peritz, ;Three Statutory Regilues at Irnpasse: "Reverse PaYluents" in ';Pay-for-Delay" 

Settlement Agreements between Brand-Name and Generic Dmg Companies' in J Drexi, W Grimes, RJR 

Pcritz. and E Swainc (cds) "fore Comlllon Ground/or International Competition Law? (forthcoming 

2010): CS Hemphill. 'Paying [or Delay' (2006) 81 New York Universily Law Review 1553 : 

C Shapiro, 'Antitmst Limits to Patent Settlements' (2003) 34 RAND Journal of Economics 31; M O'Rourke 

& JF Brodley. 'AnInccntivcs Approach to Patcnt Scttlcmcnts' (2003) 87 Mil1llcsotaLaw Rcvicw 1767. 

28 In some circumst1nces. including the FDA example, there is no free competition to presume: there. the 

qucstion bccomcs onc ofbctting tlmt onc targctcd inccntivc is bcttcr tlmn its alternativcs. 

16 
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This section takes up patent jurisprudence, whose constitutional quandary is reflected in a 

pair of tensions in means and ends. The tension in means has been expressed in dominant 

and emergent strains of the jurisprudence. While the dominant strain continues to treat 

patents as the primary engine for promoting progress, an emergent alternative has 

recognized competition as the primary engine or, at the very least, an instrumentality that 

deserves more recognition for its value in promoting progress. These strains parallel the 

tension in means earlier seen in Arrow's Trade-Off. At the same time, a second tension, 

this one in ends, lies entirely within the dominant approach. It is a tension between the 

goals of more public knowledge or more material beneiits. After unravelling these 

tensions, the section closes by organizing the jurisprudence according to what can be 

called the patent life cycle. Patents are shown to move through a life cycle in three stages, 

each one characterized by its own mix of means and ends, and all of them driven by a 

fundamental commitment to competition. 

The dominant approach: an internal tension in ends 

The Supreme Court has long declared that patent policy is founded on an incentive 

theory: "Since the primary aim of the patent laws is to promote the progress of science 

and useful arts, an arrangement which diminishes the incentive is said to be against the 

public interest.,,29 Last year the Federal Circuit Court of Appeals characterized an 

amendment to the Patent Act as a "legislative eifort to reinforce the value of the patent 

statute as an innovation incentive.,,30 Although these pronouncements might seem to be 

synonymous statements of patent policy, they are not. There is a subtle but significant 

difference between them 31 While the Supreme Court addressed the general enterprise of 

promoting progress, the Federal Circuit focused on innovation, which reflects only one 

aspect of progress. Innovation is not invention but rather its commercialization. The 

29 Transparent-Wrap Mach. Corp. v Stokes & Smith Co" 329 U.S. 637,646 (1947) (Douglas. J.) 

30 Cardiac Pacemakers, Inc. v SI. Jude lv!edical, Inc., 576 F.3d 1348, 1371 (Fed. Cir. 2009). 

31 There is a second subtle difference as well: note that the Supreme Court writes that "an arrangement 

which diminishes tlle incentive is said to be against the public interest." The Court is careful to avoid the 

implication that it adopted this view. This is consistent with the skepticism expressed in the text 

accompanying the ne:\.1 footnote. 

17 
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75152B3-18.eps

distinction between invention and innovation is important in two respects. First, because 

attracting investment to innovation can draw investment away from invention. Second, 

because a focus on innovation defines the primary form of progress as material 

advancement of day-to-day life through commercial development of extant invention. 

Indeed, the Federal Circuit's focus on material advancement diverges from numerous 

statements by the Supreme Court that "[t]he primary purpose of our patent system. . IS 

directed to disclosure of advances in knowledge which will be beneficial to society; it is . 

an incentive to disclosure.,,32 In other words, patents make public new knowledge 

which would otherwise be hidden under the blanket of trade secrecy. The public value of 

new knowledge goes beyond the Enlightenment virtue of edification. It has use value for 

follow-on inventors: Disclosure reduces the costs of competition by invention. Moreover, 

it accelerates the learning curve. In short, the public benefit of disclosure is the free 

competition that results from free riding on the patented efforts of prior inventors. 33 

This divergence is embedded in the Constitution's language of promoting the "Progress 

of Science and Iisefit! Arts." A twenty-first century restatement of the constitutional 

32 "The primary purpose of our patent system is not reward of the individual but the advancement of the 

arts and sciences. lts inducement is directed to disclosure of advances in knowledge which will be 

bcneficial to society: it is not a ccrtificatc of mcrit. bnt an inccntive to disc1osnrc." Sinclair & Carroll Co. v' 

Inlerchemical Corp., 325 U.S. 327. 330 (1945). "The basic quid pro quo contemplated by the Constitution 

and the Congress for granting a patent monopoly is the benefit derived by the public from an invention with 

substantial utility." Brenner v Manson, 383 U.S. 519, 534 (1966). " ... thc public may have thc full benefit 

thereof, after the expiration of the patent teITn." Bonilo Boals, Inc. v Thunder Crafl Boals, Inc., 489 U.S. 

141, 147 (1989). 

Yet the Supreme Court has long expressed some skepticism about the incentive value of IP rights. For 

example. in the Marconi Wireless case of 1943. the Chief Justice remarked: "For all T know the basic 

asslmlption of our patent law may be false. and invcntors and their financial backcrs do not necd thc 

incentive of a limited monopoly to stimulate inven1ion. But whatever revamping our patent laws may need. 

it is the bnsiness of Congress to do the revamping." Marconi Wireless T Co. o.fArnerica v US., 320 U.S. 1. 

63-4 (1943). 

Economic analysis of disclosure: Patent right and disclosure obligation is the right strategy for those 

inventions not adequately protected as trade secrets. In this light. patented im,entions are those most likely 

to be discloscd anyway and so public rcally gains very little if anything. Note tension betwccn tins account 

and traditionalnoITns and incentives to disclose in scientific c01mnunity. tensions increased with increased 

propertization and thus incentive to withhold disclosnre until patent application flied. Note also patent 

doetrinc's disinecntivcs to rcad patents. cspecially intentional infringcment liability for multiple damagcs. 

33 Of course the incentive problem re-emerges. Should patent rights be shaped to encourage publication of 

new knowledge or cncourage intcmalization of pccUinary bcncfits? 

18 
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language calls for promoting the progress of knowledge and industrial technology. Yet 

courts have seldom been asked to adjudicate the relationship between advancing 

knowledge and advancing the material conditions of every day life. Here are two 

examples of court decisions whose outcomes turn on the choice of primary public benefit. 

The first example involves a dispute between two researchers who filed patent 

applications for the same pharmaceutical compound. The first to tile was a biochemist for 

a Japanese company but the first to invent was a professor at Cornell Medical School. As 

a general rule, patents in the United States are awarded to the first to invent. The time of 

invention dates back to the moment of conception. In the U.S. patent system, the first to 

conceive the idea is supposed to win. It matters not who tiles first. 

The professor should have won. But he lost. Why? The court refused to apply the 

standard U.S. rule because it determined the professor did not proceed with "reasonable 

diligence" from the time he conceived the new idea to the time he reduced it to a practical 

invention. In the court's view, there was unreasonable delay in his waiting for outside 

research funding and for his chosen graduate student to enter the program. Confronted by 

a contlict between "the interest in rewarding and encouraging invention [and] the public's 

interest in the earliest possible disclosure,,,34 the court chose "earlier disclosure over 

earlier invention" because it saw "early public disclosure [as] the '''linchpin of the patent 

system.",35 The outcome appears very European or very Japanese insofar as the tirst to 

file was awarded the patent. But the rationale refiects a uniquely American issue 

34 GrifJilh l' Kal1amaru, 816 F.2d 624 (Fed. Cir. 1987). More specifically. the dale ofinvenlion generally 

relates back to the date of conception. The first inventor is the first to conceive the idea. Bnt here, there was 

the unacceptable delay between the professor's conceiving the idea and his reducing it to pmetiee. And so 

lhe reduelion dale was lrealed as the dale of invenlion. As for Ule connnercial researcher, lhere was no 

evidence to support either a date of conception or a date of reduction- both of them irrelevant in the 

Japanese as well as EU patent regimes. And so the patent filing date was used as the date of invention The 

filing d.~te preceded the professor's reduction date. each of them proxies forthe date of invention. 

" Horwath v Lee, 564 F.2d 948, 950 (Crt Customs & Patent App. 1977). 

19 
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characterized as a conflict between the goals of advancing knowledge and advancing 

industrial technology.3G 

The second example of patent jurisprudence that seeks to adjudicate this conflict of ends 

is even more dramatic. It is more dramatic because it involves the entire relationship 

between the patent and trade secret regimes, between the federal requirement of patent 

disclosure and the state trade secret requirement of secrecy. In the United States, the 

Constitution expresses a general principle of harmonization in what is called the 

Supremacy Clause. When a state law conflicts with federal law, the federal law prevails; 

the state law is unconstitutional and thus unenforceable. 

In practical terms, the Supreme Court had to find a way to hannonize two regimes that 

had co-existed for more than 100 years; throwing out the trade secret laws of 50 states 

was unacceptable. 37 What to do? The Court characterized patent and trade secret 

protection as harmonious because they both encourage technological advancement. Tn 

this view, they share the same goal As for the conflict in disclosure, the Court reduced its 

importance to triviality by asserting without foundation that an inventor would always 

choose stronger patent over weaker trade secret protection. But in some circumstances 

trade secrecy can provide stronger protection. Indeed, market studies have found that 

many inventors prefer trade secret protection for reasons TP economics, including the 

work of Landes and Posner, has made clear. 38 

,6 Before going to my second example of the conflict between encouraging invention and eneoumging its 

disclosure. between advancing technology and advancing knowledge. I want to take a quick look at the 

court's treatment of reasonable diligence. The professor's seeking necessary outside funding and waiting 

the retum of his gmduate student docs not seemlUucasonable per se. Still, the court refused these typical 

academic reasons. stating that only personal reasons such as family illness. personal finances. or vacation 

time would excuse delay. even though arguments were made that outside funding was a lUriversity research 

policy to validate projects through outside competitions for ftmds. In that sense. there was no delay but 

raUler another kind of evaluation or even competition that was going on. Without explanatiolt the court 

seemed much more approving of the cOllllllerciaI research environment. 

,; Kewanee Oil Co. v Bieron Corp .. 416 U.S. 470 (1974). 

38 See discussion accompanying (n 58 below) forthe economic analysis of Landes and Posner on strategic 

ehoiccs betwcen Wille secrecy and patent protcetion. 

20 
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And so the orthodox patent jurisprudence has sought to mediate a tension within the 

constitutional incentive logic of promoting progress, the tension in ends between 

advancing knowledge and improving the material conditions of life. The mediation has 

atIected adjudication of questions both narrow and broad - our two examples, the narrow 

question of whom to deem the inventor of a particular product and the broad question of 

how to characterize the relationship between the patent and trade secret regimes. In each 

case, the choice of end affected the outcome, changed the circumstances of inventive 

enterprise, and defined the conditions of competitive activity - first in prosecuting patent 

applications and second in mal(ing strategic choices between patent or trade secret 

protection. 

The emergen! approach: three recen! palent cases alld their countenance 

While the dominant approach has grappled with a cont1ict in ends, the constitutional logic 

for promoting progress has produced a second tension as well. Recent Supreme Court 

jurisprudence has shown signs of an approach different from the orthodoxy, an emergent 

approach that raises questions about patent protection as the presumptive means for 

promoting progress, questions that parallel those raised in IP economics. This emergent 

approach is more properly termed a re-emergent strain of IP jurisprudence insofar as the 

recent decisions summon the policy stated in Justice O'Connor's opinion some thirty 

years ago for a unanimous Court, the statement that there is a "baseline of free 

competition upon which the patent system's incentive to creative effort depends." In 

short, "tree exploitation of ideas will be the rule, to which the protection of a federal 

patent is the exception.,,39 

This line between patent monopoly and free competition IS drawn by the statutory 

requirements for patentability, most notably the requirement that a patented invention be 

W Bonito Boats, Inc. v Thunder Craft Boats, Inc., 489 U.S. 141. 145-7 (1989). Note that Justice O'Connor 

poses the baseline imagery within the orthodox view of incentive theory. But, as the first section 

demonstrates. the baseline metaphor itself has an economic logic that docs not depend on the orthodoxy. 

21 
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nonobvious in light of prior art4U Beginning in the 1980s, the nonobviousness 

requirement was increasingly trivialized. For example, in 1999, the Federal Circuit Court 

ordered that the u.s. Patent Office issue a patent to an applicant who decorated large 

black plastic garbage bags with orange pumpkin faces. The Federal Circuit declared that 

this combination of garbage bags and Halloween decoration, each element itself obvious, 

was a nonobvious combination that merited a patent. "1 In 2003, the Federal Trade 

Commission issued a widely praised Report criticizing patent protection's descent into 

triviality. 42 

Then, in 2007, the Supreme Court published the KSR decision, which elevated the 

nonobviousness requirement for the largest category of patents, those like the Halloween 

garbage bag that involve combinations of prior art. The decision instructed the Patent 

Office to reject applications for combination that show only "ordinary creativity.,,43 The 

Patent Office has since rejected on the ground of obviousness a number of applications 

for combination patents, and the courts have regularly upheld those rejections. 

The Court in KSR took issue with the Federal Circuit's "transfonn[ation of a] general 

principle into a rigid rule that limits the obviousness inquiry." The patent principle holds 

that a combination is obvious to "a person of ordinary skill in the relevant field" when the 

prior art "demonstrate[es] a teaching, suggestion, or motivation to combine known 

elements" into that combination44 The Federal Circuit rigidified the principle "by 

overemphasis on the importance of published articles and the explicit content of issued 

patents." This approach failed to take account of "common knowledge and common 

40 Patent Act § 103(a). 

11 In re Dell1biczak, 175 F.3d 994 (Fed. Cir. 1999). 

42 See F edcra1 Tradc Commission, 'To Promote limovation: Thc Proper Balance of Competition and Patcnt 

Law and Policy' (Oct.2003) <http://wwwJtc.gov/os/2003/IO/iImovationrpt.pdf> accessed -I December 

2007): see also, JH BartOIL 'Non-Obviousness' (2003) 43 IDEA: The Journal of Law and Tecllllology 475: 

Working Group on thc New Economy, American Antitmst Institutc, clntitrust and the New Economy: 

Commenls 10 lhe AnUlrusl Afodernizalion Commission, Washinglon, D. C. (July 2005). 

<http://govinfo.library.UIlt.edu/amc/public_studiesjr28902/new _ economy ~df/050715 _ AAINcw_Economy.pdf> acccssed on 31 May 2010. 

13 KSR Inn. Co. v Telejlex Inc., 127 S.O. 1727,1743 (2007). 

44127 S.O. at 1741. 17-12. 

22 
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sense," which consider a larger body of public knowledge, including "design need and 

market pressure," knowledge which seldom finds its way into the literature of prior art. 

Justice Kennedy observed that a "person of ordinary skill is also a person of ordinary 

creativity, not an automaton." 45 This observation brings to the fore the difficulty of 

separating ordinary creativity from the non-obvious type because "inventions in most, if 

not all, instances rely upon building blocks long since uncovered, and claimed 

discoveries almost of necessity will be combinations of what, in some sense, is already 

known. ,,46 

The practical question, then, is what to do about the great bulk of inventions that lie in the 

bandwidth between the obviously ordinary and the obviously non-obvious. In expanding 

the range of references for detennining prior art, the Court in KSR raised the level of nonobviousness required for patentability. Now, a combination may be found obvious even 

without a reference in the prior art to "teaching, suggestion or motivation to combine 

known elements." 

It should be noted that the very process of detennining non-obviousness in the course of 

patent application is in effect a contest in ideas, a competition between prior art and the 

prosecuted invention. The standard is whether the invention embodies an advance in 

ideas that is not obvious in the light of prior art. KSR raises the level of difficulty for the 

new arrival to win this competition in ideas. 47 

Given that the heightened standard will exclude a class of combination inventions that 

met the old standard for non-obviousness but fail the new one, what are the likely effects? 

Some of the newly obvious combinations, especially those involving processes, can be 

hidden from public view and, thus, their owners can seek trade secret protection. In this 

45 Ibid 1743 (eiling DySlar Texlilfarben GmbII & Co. Deulsch/and KG l' elI. Pa/rick Co. 464 F.3d 1356, 

1367 (Fed. Cir. 2006)) (internal quotation marks omitted). 

46 Ibid 1741. 

l' The statutory requirement of usefulness assures that the invention is not a disembodied idea. 35 USC § 

101. Forflllther discussion of this point, sec Peritz. "Patents and Progress" (n II above). 

23 
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instance, public information about such combinations will be lost until the secrets are 

discovered. Owners of newly obvious combinations which are self-disclosing on sale or 

use will proceed in reliance on licensing provisions, first-mover advantages, or simply the 

benefits of the new combination when they outweigh the competitive costs of imitation 

by others. The resulting mix of secret and public combinations is an empirical question. 

Moreover, there is a strategic question that sheds some light on the matter. As Landes and 

Posner have observed, the choice between patent and trade secret protection depends on 

their relative value 4R On the cost side, patents are more expensive to obtain. And patent 

disclosure provides the very infonnation rivals need to invent around more cheaply or 

simply infringe when that makes strategic sense. On the benefit side, a patent becomes 

more valuable than trade secret protection as the risk of disclosure, reverse engineering, 

or independent invention increases. As a general matter, the inventor is more likely to 

seek patent protection for inventions that are more likely to become public knowledge or 

otherwise legally available to rivals. Inventions whose secrecy is more readily maintained 

are less likely to be patented. 49 

In sum, KSR's heightened standard for non-obviousness increases the play of 

competition, either immediately by direct imitation or eventually by investigation, 

independent discovery, or reverse engineering. The Court has denied patent protection for 

inventions that reflect only "ordinary creativity" and, in consequence, expanded access to 

inventions that were protected under the old rule. 50 The result is that competitors now 

4R Landes and Posner (n 3 above) 35~-71. Note as well that patents arc less expensive to maintain and 

license. 

19 In tlus light, tile loss of public knowledge from patent publication should not be overestimated. Nor 

should a decline in public knowledge resulting from tile heightcned standard of patcntability. 

50 The extent o[ access to competitors under the new approach deserves [urther eOimnent insofar as it 

depends on the character of prior art embodied in tile combined elements. If no elements are protected by 

patcnts still in forec. tllen access to tile new combination is entirely frec and competition is simply 

extended. If. however, any element is still protected. then use o[ the new combination requires a license 

from each patent holder. But no patent license is required to practice the combination. The net effect in 

eithcr case is free access to the combination and, Witll it. lower bargaiuing and licensing costs. In all 

circlllIlstances. however, the intervention of trade secret protection must be taken into account. with 

eonscqucnees as dcscribed in thc discussion accompanying this footnote. 

24 
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75152B3-25.eps

have free access to make, use, and sell inventions that would have been protected by 

combination patents under the lower level of creativity. 

In a second recent patent decision, a unanimous Supreme Court in eBay tightened the 

requirement for obtaining an injunction against a patent infringer. A more stringent 

requirement means that infringing competitors are not so easily restrained from making, 

using, or selling patented inventions; instead, the remedy of compulsory licenses opens 

competition to patent infringers who would otherwise have been excluded from the 

market. 51 

The unified Court in eBay once again rejected an instance of the Federal Circuit's rigid 

jurisprudence of expansive patent rights, this time its "general rule that courts will issue 

permanent injunctions against patent infringement absent exceptional circumstances." Tn 

rejecting this general rule, the Court held that issuance of permanent injunctions 

summons "familiar principles [of equity that] apply with equal force to disputes arising 

under the Patent Act."s2 Justice Thomas' opinion for the Court provides a clear and 

unembellished basis for a more flexible approach: 

As this Court has long recognized, "a major departure from the long tradition of 

equity practice should not be lightly implied." Nothing in the Patent Act indicates 

that Congress intended such a departure. To the contrary, the Patent Act 

expressly provides that injunctions "may" issue "in accordance with the principles 

of equity.,,53 

While the opinion for the Court does not venture beyond the statutory text and equity 

doctrine to make plain the outcome, two concurring opinions oiTer diiTering policy 

51 eBaylnc. vAlercExchange. LLC, 126 S.C!. 1837 (2006). Ofcollrse the infringing lIsermllst be a 

reasonable royalty as determined by the court. Tlus can be understood as shifting from the patent holder to 

the comt the power to detemunc royalties. In consequcnce, thc patent holder earumt hold up would-be 

competitors in what is typically a one-sided monopoly bargaining scenario that does not promise the 

efficient solution generally artributed to settlements and bargain contracts more generally, per tile Coase 

ThcofCm 

52 126 S.O. at 1839 (both quotations in the paragraph). 

" Ibid (citations onutted). 

25 
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75152B3-26.eps

analysis for support. Both address an issue raised in the opinion by Justice Thomas, 

particularly in a passage that rejected the Federal Circuit's reasoning for its general rule 

for issuing permanent injunctions. The Federal Circuit had concluded that the Patent 

Act's explicit definition of a patent as "having the attributes of personal property," 

particularly "the right to exclude others from making, using, offering for sale, or selling 

the invention ... alone justifies its general rule." Justice Thomas quoted specific statutory 

language that provides for the judicial discretion associated with traditional equity 

practice, observing that "the creation of a right is distinct from the provision of remedies 

for violations of that right.,,54 The two concurring opinions assert sharply different 

rationales for treating the distinction between the exclusionary nature of property rights 

and the exclusionary remedy of injunction. 

Chief Justice Roberts understood the relationship between right and remedy reflected in 

the statutory provisions to be reflected in a "long tradition of equity practice" to grant 

injunctions "upon a finding of infringement in the vast majority of patent cases" on 

account of "the difficulty of protecting a right to exelude through monetary damages that 

allow an infringer to use the invention against the patentee's wishes.,,55 Tn sum, Justice 

Roberts was instructing federal judges not to stray from that "long tradition" of 

recognizing patents as fundamentally property rights to exclude, rights to empower 

individual choice about how to practice the invention, or whether to practice it at all. 

Justice Kennedy in his concurring opinion gave a diametrically opposed rationale for the 

Court's declaration that the statutory definition of patent as property right does not 

necessarily define the remedy for its violation. At the outset, Justice Kennedy rejected the 

Chief Justice's view that the difficulty of fully protecting patent rights with monetary 

damages underlies a "long tradition" that calls for judges to conserve the property rights 

in patents. Tn sharp contrast, Kennedy's opinion looks forward rather than back. It invests 

the equitable nature of injunctive relief with a progressive ability to adjust to change: 

51 Ibid 1840 (citing 35 V.S.c. §§ 261, 154(a)(1). 

" Ibid (joincd by Justiccs Ruth Badcr Ginsbcrg and Antonin ScaJia) (cmphasis in originaJ). 

26 
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"[I]n many instances the nature of the patent being enforced and the economic function of 

the patent holder present considerations quite unlike earlier cases." Two examples are 

given: first, "industries in which firms use patents not as a basis for producing and selling 

goods but, instead, primarily for obtaining licensing fees;" second, "patents over business 

methods," which raise significant questions of "vagueness and suspect validity.,,56 Both 

examples reflect concerns that patent rights to exclude can be questionable barriers to the 

market entry needed for competition to flourish. 

It is no accident that Justice Kennedy's source for both examples is the Federal Trade 

Commission report entitled "To Promote Innovation: The Proper Balance of Competition 

and Patent Law and Policy." A balance between access and exclusion is required because 

experience and economics tell us that both competition and patent rights can promote 

innovation as well as the invention that precedes it. In this light, injunctive relief for 

patent infringement should not be granted, particularly to patent trolls or business patent 

holders, when it results in less progress than competition or compulsory licensing57 

Justice Kennedy cautions against the dangers of excessive patent protection and, with it, 

inadequate regard for competition as a powerful means to promote progress through 

innovation. 

Tn the third recent case, the competition logic driving Justice Kennedy's concurrence 

emerges even more emphatically in Justice Stephen Breyer's dissent from the Metabolite 

decision. Justice Breyer's opinion questions the wisdom of dismissing the writ earlier 

granted in a case that addresses the fundamental patent imperative to "[e]xclude from. 

patent protection ... laws of nature. natural phenomena. and abstract ideas.,,58 

<0 Ibid 1842 (Justice Kennedy joined by Justices Stevens. Souter & Breyer) (for all quotations in the 

paragraph). 

5' Ibid (FTC Report). 

<R Lab. Corp. 0[,1111. Holdings v Metabolite Labs., Inc .. 126 S.C!. 2921. 2922 (2006) (Justice Breyer. joined 

by Justices John Paul Stevens & David Souter. dissenting from opinion to dismiss writ of certiorari as 

improvidently granted). 

27 
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75152B3-28.eps

What is so important about this issue? In Justice Breyer's view, granting a "monopoly 

over a basic scientiiic relationship" upsets a careful balance embodied in patent rights: 

"[S]ometimes too much patent protection can impede rather than 'promote the Progress 

of Science and useful Arts,' the constitutional objective of patent and copyright 

protection."s9 

Justice Breyer was concerned about public access to "the basic tools of scientific and 

technological work" and, as such, to "part of the storehouse of knowledge and 

manifestations oflaws of nature as free to all men and reserved exclusively to none." The 

rationale for free access lies in the public policy to promote progress by encouraging 

"development and the further spread of useful knowledge itself.,,60 

What exactly is this careful balance embodied in patent rights? Justice Breyer 

incorporates it by reference to Justice O'Connor's Bonito Boats opinion for a unanimous 

Court: 

The Patent Clause itself reflects a balance between the need to encourage 

innovation and the avoidance of monopolies which stifle competition without any 

concomitant advance in the "Progress of Science and useful Arts." [T]he 

stringent. . novelty and non obviousness requirements express a congressional 

determination that the purposes behind the Patent Clause are best served by free 

competition and exploitation of either that which is already available to the public 

or that which may be readily discerned from publicly available materiaL 61 

Justice Breyer was reminding readers that the patent regime begins, as Justice O'Connor 

put it, with "the baseline of free competition ... [from] which the protection of a federal 

patent is the exception.,,62 And so Justice Breyer concluded his opinion in Metabolite 

with references to competition policy - not only the Bonito Boats decision but also the 

59 Ibid 2925 (citations omitted). 

60 Ibid 2923 (citations and internal quotation marks omitted). 

61 Bonito Boats, Inc. v Thunder Craft Boats, Inc., 489 U.S. 141. 146, 150 (1989): Metabolite, 126 S.Ct. at 

2926 (citing 489 U.S. at 146). 

60 489 U.S. at 156, 151. 

28 
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75152B3-29.eps

FTC Report and former FTC Commissioner Robert Pitofsky's article on antitrust and 

intellectual property rights. 63 

Each of these patent cases expresses an aspect of an emergent jurisprudence: first, 

granting rights to exclude competitors only with respect non-obvious inventions; second, 

determining the propriety of exclusionary remedies by equitable principles rather than by 

the property logic of patent ownership; and finally, maintaining public access to "laws of 

nature, natural phenomena, and abstract ideas." Every one of these propositions limits the 

exclusionary power of patent protection. Each one widens public access to inventions or 

to the knowledge embodied in those inventions. The result is increased weight attributed 

to the patent regime's internal policy of free competition as an engine to promote 

progress. 

These recent calls to competition are not exceptional. 64 Patent monopoly has long been 

disfavored in the United States. As Thomas Jefferson put it over 200 years ago, the patent 

system must draw "a line between the things which are worth to the public the 

embarrassment of an exclusive patent, and those which are not."G5 Indeed, the Supreme 

Court is currently considering a closely-watched case that presents questions posed by 

Justices O'Connor, Kennedy, and Breyer, questions about the scale and scope of 

patentable subject matter and thus the reach of exclusionary rights in information 

technology. 66 

The paten! life cycle: three stages of competition 

6, 126 S.O. at 2929. 

64 For a recen! trade dress decision that echoes Justice O'COIlIlor's call to a baseline of competition. see 

Wal-Marl v Samara. 529 U.S. 205, 213-14 (2000). The opinion was written by Justice Antonin Scalia, 

usually thc Court champion of propcrty rights and frccdolll of contmct 65 13 Writings of Thomas Jefferson (Memorial ed 1904) 335. cited in. e.g .. Bonilo Boals. 489 U.S. 141, 148 

(1989). This passage and others suggest the possibility that for the 18th century founding fathers. property 

rights had a natural inccntivc cffcct. In tins vicw. thcrc was no fundamcntal distinction bctwccn propcrty as 

natura1 rights and as incentives. 

66 1n re Bilski. 545 F3d 943 (Fcd. CiT. 2008). cert. granted sub nom Bilski v Doll, 129 S.Ct. 2735 (2009). 

29 
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The twin tensions reflected in the patent jurisprudence, the tensions in means and ends, 

resolve differently in the course of what can be called the patent life cycle. Patents move 

through three stages, each one comprising a technological and a legal component. 

Schumpeter, F.M. Scherer, and other economists have characterized technological change 

as the well-known steps of invention, innovation, and imitation or diffusion67 The legal 

component of the patent life cycle runs through the stages of patent prosecution, patent 

term, and patent expiry. 

During the patent prosecution stage, the claimant must persuade the patent examiner that 

there is an invention and that it merits protection 6R The applicant is free to engage in 

innovation and further invention during prosecution. The process is confidential 69 

Diffusion of knowledge is delayed until the application and file folder are published by 

the Patent Office - when the a patent is issued though even sooner in many cases. 70 

Patent prosecution can be understood as a competition in ideas pitting the invention 

against the body of pri or art in a contest refereed by a patent examiner according to a 

strict set of rules and guidelines. If the invention is useful and proper subject matter, if it 

0' "Invcntion to [Schumpctcr] was thc act of concciving a ncw product or proccss and solving thc purcly 

teclmical problems associated with its application. I1I1Iovation involved the enlrepreneurial functions 

required to carry a new teciUlical possibility into economic practice for the first time - identifying the 

markct. raising thc ncccssary flUlds. building a ncw organization. cultivating thc markct. ctc. Imitation or 

diffusion is the stage at wInch a new product or process comes into widespread use as one producer after 

another follows the i1l1l0vating firm's lead." F Scherer, industrial Market Strucrure and Market 

Performance (1970) 350 . Thc thrcc stcps arc not mutually cxclusivc. Indccd, thcy arc bcst lllldcrstood as 

overlapping and intertwined. Cf. PeritL. 'Freedom to Experiment: Toward a Concept of Inventor Welfare' 

(2008) 90 Journal of the Patent & Trademark Office Society 245. 

6< Though the statute states that patent "will be granted unless ... ", in practical tenus the vastlnajority of 

applications are rejected and thus the burden falls on the applicant. 

m In somc circumstanccs. provisional rights to damagcs arc available for third party usc during thc 

prosecution stage, but only after the patent has been issued. Patent Act § 154(d). 

'0 "Publication of patent applications is required by the American Inventors Protection Act of 1999 for Ulost 

plant and utility patcnt applications filed on or after Novcmbcr 29.2000. On filing of a plant or utility 

application on or after November 29.2000. an applicant may request that the application not be published, 

but only if the im·ention has not been and will not be the subject of an application filed in a foreign country 

that rcquircs publication 18 months after filing (or carlicr c1aimcd priority datc) or lllldcr thc Patcnt 

Cooperation Treaty. Publication occurs after the expiration of anl8-month period following the earliest 

effective filing date or priority date claimed by an application. Following publication. the application for 

patcnt is no longcr hcld in confidcncc by thc Officc and any mcmbcr of thc public may requcst acccss to 

the entire file history of the application. <http://www.uspto.gov/web/offices/pac/doc/general/#pub> 

acccsscd 1 Junc 2010. Patcnt Act § 122. 

30 
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75152B3-31.eps

is clearly described and, finally, if it is not anticipated by the prior art, if it is not obvious, 

then it embodies new knowledge whose embodiment is worthy of patent protection71 

The competition in this phase of the life cycle produces the private right to exclude and 

what can be called the patent's public knowledge beneiit. 

The knowledge benefit's crucial importance to the prosecution stage can be seen in the 

strict requirement that the description of the invention in the patent application be clear 

and complete, and that it enable those reasonably skilled in the art to make and use it. The 

applicant must also include any additional knowledge concerning a "best mode" of 

making and using the invention. The description and enablement requirements provide 

two kinds of public knowledge benefit. First, the description requirement separates the 

idea from its embodiment, the public benefit from the private property by assuring that 

the applicant has reduced the idea to practice. Without a strict description requirement, 

there would be the danger of patenting the idea, of turning the public beneiit into private 

property. Second, as the Supreme Court stated long ago, "If the description be so vague 

and uncertain that no one can tell, except by independent experiments, how to construct 

the patented device, the patent is void."n In other words, the information must be 

sufficient to enable subsequent inventors to learn from the description. With less stringent 

requirements of description and enablement, the patent prosecution phase would produce 

the worst of all possible outcomes: private commercial rights to an idea and public 

knowledge without use value. The domain of ideas would shrivel while monopoly in 

commercial markets would expand. 

The life cycle's second stage begins when the patent is issued. During the patent term, the 

owner holds a right to exclude others from using the invention for any purpose including 

'1 Of course. in addition to nonobviousness. requirements of utility. novelty. and proper subject matter must 

be met. 

'2 The Incandescent Lamp Patent. 159 US 465 (1895). The patenting of computer software raises important 

questions about the knowledge benefit. The description element is satisfied by language of generaimeans 

that does not require publication of source code. The result is patents that are too broad and information 

that is too vague to be useful. My approach would not pennit the current approach to software patents. 

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innovation and further invention73 This right to exclude is seen as the condition 

underlying the patent holder's power to license the technology and in consequence take 

advantage of downstream efficiencies of development, production, and distribution. 

Licensing the technology or otherwise using the invention is of course subject to general 

legal requirements and restrictions. A private right to the commercial benefits of the 

invention promises a public benefit - the material benefit of improved conditions of 

every day life. In this stage of the life cycle, two kinds of competition are anticipated. 

First, the patent holder is encouraged to commercialize the invention and otTer it on the 

market. Nonetheless, a material benefit from commercial competition is not guaranteed 

because the patent holder has no obligation to work the patent and even if she does, 

consumers might not buy it. Second, competitors have access to the new knowledge and 

often the invention itself, and can make practical use of it by improving or inventing 

around it. However, this competition by experimental use is severely restrained in the 

United States74 

The third stage of the patent life cycle begins with the grant's expiry. The patent's limited 

term creates a further material benefit when, after 20 years in the case of a utility patent, 

the invention itself falls into the public domain. This reversion to public use 75 triggers a 

general privilege to use the invention and, in so doing, invites commercial competition by 

imitation that promises to lower prices and, thus, to disseminate more widely the 

invention's material benefits. Moreover, to the extent invention follows imitation, there is 

further competition in both ideas and commerce. 

Each stage of the patent life cycle reflects a different sort of competition, each one 

conditioned by the regime's rules and policies, which express resolutions of the tensions 

in means and ends. As discussion of the Griffilh and Kewanee Oil decisions has shown, 

" In the United States. there is virtually an absolute ban on unlicensed eAllerimental use. Pc ritz, (n 68 

above). 

'1 Ibid. 

" The pub lie' s future interest is a reversion to the trdnsferor in the constitutional sense that patents are not 

common law property rights but rather stahltory grants for a term of years that reserve a reversionary 

interest in the public. 

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75152B3-33.eps

resolving the tension in ends by (not) privileging the knowledge benefit over the material 

beneiit can have dramatic consequences. In similar fashion, taking competition as the 

presumptive starting point for adjudication of patent rights can also have powerful 

eifects. For instance, in making it more dimcuIt to obtain an injunction remedy for patent 

infringement, the Supreme Court in eRay weakened the patent holder's property right to 

exclude and thereby opened the market to increased competition in the second stage of 

the patent life cycle. Similarly, when the KSR decision raised the standard of 

nonobviousness for combination patents in the patent prosecution phase to change the 

conditions of competition in ideas, it etJectively cut back the scope of exclusionary rights 

and increased commercial competition in the second stage. And when Justice Breyer in 

his Metabolite dissent explicitly called for protection of the public knowledge benefit by 

limiting the subject matter of patent rights, the intended effect was to change the 

prosecution stage's conditions for competition in ideas and thereby extend the reach of 

public access to subject matter that would otherwise fall under the private control of 

patent holders. 

These recent cases present not only a common dynamic of tensions, but a common 

resolution. They reflect an underlying commitment to competition policy expressed in the 

patent regime. Their approach resonates with the political economy described in Justice 

O'Connor's Bonito Boats opinion for a unanimous Court. That is not to say this sample 

of opinions provides enough data to infer a new orthodoxy in patent jurisprudence, one 

that recognizes the illogic of an IP economics founded on incentive theory. Indeed, 

Justice O'Connor's opinion itself presents the baseline of free competition as the 

necessary condition for an incentive theory of patents. But the sample is enough to say 

there is an emergent strain of patent jurisprudence that reveals a preference for 

competition policy, an emergent strain of patent jurisprudence that converges with a 

residual IP economics of competition, an economics that does not depend on an 

unfounded incentive theory as the logic for privileging exclusionary rights to promote 

economic progress. 

33 
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D. Patents as a Competition Regime: Some Consequences 

This section concludes the chapter by suggesting some additional changes that would 

result from extending the patent regime's emergent jurisprudence and the residual 

economics of competition. 

The recent Supreme Court decisions discussed offer examples of what Complexity 

theorists call the 'butterfly effect' - a small change in initial conditions that produces a 

radical change in system behavior. It takes its name from the familiar image of a butterfly 

in New York City's Central Park, a butterfly whose fluttering wings alter the course of an 

entire weather system in the Amazon rain forest 76 A presumptive shift in patent 

jurisprudence to competition policy is a small change, a change well within the traditional 

view that both exclusionary rights and free competition drive economic progress. The 

same can be said for privileging the public knowledge benefit over the material benefits 

anticipated from the patent regime. These changes in initial conditions are incremental, 

not radical. They are small but, as recent decisions demonstrate, they can effect sharp and 

surprising turns in patent policy. 77 

Further changes, large and small, could come of this shift in initial conditions, a 

procedural shift in patent jurisprudence to the presumption that free competition 

promotes progress, a shift supported by the residual economics. Each stage of the patent 

life cycle would understood as reflecting a baseline of competition, a primary 

'0 This cffcct can bc called radical incremcntalism, mcaning that small diffcrcnccs in thc initial condition of 

a dynamic system may produce large variations in its long term behavior. The concept of sensitive 

dependence on initial conditions was developed by French mathematician R Thom, Structural Stability and 

Morphogenesis: .In Essay on the General Theory of Models (1972) and was popularized latcr as 

Catastrophe Theory inEC Zeeman. Catastrophe Theorv, (Apr. 1976) Scientific American 65. It was a 

precursorto Chaos Theory and Complexity Theory. On Complexity Theory and dynamic efficiency, see 

Pcritz, Dynamic Efficiency' in A Cnccinota, R Pardolesi, & R Van dcnBcrgh (cds) (2002) 108 fn 30 and 

accompanying text. 

" The shift in IP economics, however, would not be perceived as small. This effect is an extreme form of 

thc tipping phcnomcnon dcrivcd from mathcmatician Rcne Thom's Catastrophc Thcory: a suddcn and 

irreversible change in direction from a preceding course that appeared steady and reversible. Examples 

includc stock markct volatility. fight and flight rcactions to e!angcr. and thc last straw. 

34 
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75152B3-35.eps

commitment to the public knowledge benefit, n a narrowly targeted version of incentive 

theory, and in sum a patent policy that serves the constitutional purpose of promoting 

progress. Here are a three further instances of such changes, the last one extended into a 

specific example derived from the E.D. Microsuft case .. 

The first involves the experimental use defense to patent infringement. Almost twentyfive years ago, the Federal Circuit transformed unauthorized experimental use of 

another's patented invention into patent infringement. The rationale lay in a questionable 

extension of the already questionable logic of incentive theory. The court determined that 

a patent holder's power over the invention should extend beyond commercial profit to 

control of its every use. Why? The court began by attributing a "business interest" to 

everyone from garage tinkerers to research scientists, a business interest that was itself 

seen as endangering the incentive value of patents. An unlicensed researcher could 

overcome this powerful presumption of a business interest only when the purpose was 

literally the "idle curiosity" of a "dilettante affair.,,79 Since the doctrine's announcement, 

not one published decision has reported a successful experimental use defense to patent 

infringement. 

The demise of the traditional privilege to engage in unauthorized experimental use of a 

patented invention is another instance of the propertization trend that has been expanding 

IP protection in the United States. It is a particularly harmful instance because 

experimental use is perhaps the most important form of competition during the patent 

term. If unauthorized experimentation were seen instead as presumptively competitive 

conduct, then the patent holder would be required to prove actual commercial injury and 

public harm, all of which results not from imagined intentions but from actual 

'8 Of course a primary conunitment to the public knowledge benefit would call for reconsideration of the 

Kelranee Oil decision For diseussiolL sec Peritz. 'Patents and Competition: Toward a Knowledge Theory 

of Progress' inLM Genovesi (ed) Inlel/eelual Properlv Righls and Afarkel Power (2009) (selected papers 

from ATRIP lliumal conference, Parma, Italy, September 2006). 

'9 Roche Prods. v Bolar Pharma. Co., 733 F.2d 858 (Fed. Cir. 198~) (citing as most pcrsuasive precedent 

Pitcairn v Us.. 547 F2d 1106 (C1. CI. 1976)). This expanded view of patent rights is a natum1 result of 

viewing them through thc prism of propcrty logic. 

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commercial conduct, from making, using, and selling. In short, a viable experimental use 

defense would not harm patent holders' legitimate interests in exclusive rights to 

commercial profit during the patent term. 

Moreover, the current stranglehold on unlicensed experiment disserves the public interest 

in three ways. First, it in effect extends the twenty-year patent monopoly by the time 

necessary for rivals to engage in research and development of products for otTer on the 

market. gO Second, the current regime empowers patent holders to control too much of 

follow-on research, a power inconsistent with the unlimited availability of improvement 

patents to all who meet the statutory requirements. Patent's open door policy for followon research is in sharp contrast to the Copyright Act's treatment of derivative works, 

whose protection is available only to the holder of the underlying copyright8 ! Third, the 

patent holder's control over research also channels and restrains the production of new 

knowledge intended to replenish the public domain. More widespread competition and 

cooperation in research during the patent term would produce public benefits by lowering 

the costs, expanding the field of improvement patents, opening the production of new 

knowledge, limiting the patent term to its statutory boundary, and, if relevant, serving the 

national interest by bringing the United States in line with most of the rest of the world, 

to which unlicensed research activities likely immigrate to escape the harsh U.S. regime. 

My second example involves purified forms of naturally occurring substances. Product 

patents have been granted for them regularly since an early 20th century decision, which 

affirmed a grant for the purified hormone Adrenalin on the ground that it was "a new 

thing commercially and therapeutically.,,82 While this rationale emerged from a focus on 

commercial markets, the actual effects were much broader because of the standard scope 

of protection afforded product patents in the United States: The product patent practically 

encompassed the very idea of purified Adrenalin insofar as it included not only the 

80 Cf. Brulolle v Thvs Co., 379 U.S. 29, 32 (1964) (licensing agreement e"tendingbeyond patent term per 

sc violation offcdcral patcntlaw): Pitney Bowes, Inc. v Mestre. 701 F.2d 1365 (11th Cif. 1983) (samc). 

81 The current treatment of derivative works also reflects overprotection, in this author's view. 

RO Parke-Davis diu/ford, 189 F.2d 95 (S.D.N. Y. 1911). 

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product but its equivalents for all uses not only known at the time but also discovered 

later. 83 

An approach beginning with the presumption of competition as patent's baseline would 

begin by confining the scope of protection to what was actually invented - the new 

process of purification and the method of using purified Adrenalin. Beyond the specific 

process and method of use, open competition would prevail. The product and with it the 

idea of purified Adrenalin would be freely available in the public domain. 84 

In a very recent decision that has attracted attention, a federal court in New York City 

ruled that isolated and purified DNA was not patentable because it lacked "markedly 

different characteristics" from native DNA. 85 The plaintiffs referred to the Adrenalin case 

in arguing, "Isolated DNA molecules should be treated no differently than other chemical 

compounds for patent eligibility." But the court rejected the reference by distinguishing 

DNA from other chemical compounds in the body While Adrenalin and other 

compounds necessarily convey information, DNA encodes an entirely different kind of 

infonnation, not about its own molecular structure involving its own biological function 

but rather about its biological function of directing the synthesis of other molecules in the 

body. This distinction was dispositive because, in the court's view, the isolated and 

purified DNA carried precisely the same infonnation as the native DNA and thus lacked 

"markedly different characteristics." 

" Only patents for improved or new production processes or methods of usc were possible. The result 

would be blocking patents. 

81 With a targeted incentive theory. the question might be whether it would be good industrial policy to 

support the cxclusionary rcgimc of a product patent for Adrcnalin and a suitably defincd catcgory of 

naturally occurring substances in order to chamlel research and development in a direction that is currently 

neglected miller what would otherwise be a regime of open access required by free competition. Since the 

qucstion would call for ajudgmcnt about industrial policy. it would be for Congress to legislate somc 

combination of general standards and specific rules for the Patent Office. which would promulgate 

guidelines for its examiners, who would provide teclmological expertise. as they do now, according to 

guidclines in thc prosccution stage ofthc patcnt Iifc cyclc. 

85 .~ssociation fi,,' Alolecular Pathologv v u.s. Patent and Trademark Office, S. UN Y, No. 09 Civ. 4515, 

March 29.2010. 

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The court recognized the importance of the case in stating, "The widespread use of gene 

sequence information as the foundation for biomedical research means that resolution of 

these issues will have far-reaching implications, not only for gene-based health care and 

the health of millions of women facing the specter of breast cancer, but also for the future 

course of biomedical research." In short, competition and cooperation in gene research 

would not be controlled by patent holders. Despite the court's special treatment of DNA, 

the same could be said for generally denying product patents for purified forms of all 

naturally occurring substances. 

The last example involves the description and enablement requirement already discussed 

in the jurisprudence section - here, the requirement as it applies to computer software. 

Ten years ago the Federal Circuit Court declared that a general functional description 

satisfies the requirement86 for software patents. The practical consequence of these cases 

is lack of adequate description and enablement. The description is insufficient to assure 

that the claimant actually "has possession" of the invention rather than simply a general 

idea about its function. Moreover, enabling a skilled programmer to make or use the 

software would require flow charts, source code, and the detailed descriptions that 

annotate modules, descriptions that computer programmers customarily include as 

documentation for others who subsequently need to understand, change, or fix the source 

code. Both protocols 87 and programmer comments are embedded in source code listings, 

while protocols also appear in software documentation. Why is a general functional 

description enough for the Federal Circuit Court and, thus, for the Patent Office though it 

is does not meet industry standards? Because, according to the court, conversion of 

functional description into source code is "a mere clerical function to a skilled 

programmer." 88 

S6 Patent Act § 112. The court acknowledged that more might be required iu special cases. 

" A protocol is a standard procedure and [annat that two computers or other devices must understand, 

accept and use in order to communicate with one another. Examples include network log on procedures and 

html fOIDla!. 

88 7yorthem Telecofll, Tnc. v J)atapoint ('orp" 908 F.2d 93 1,942 (Fed. Cir. 1990) (citing Tn re ,%erwood. 

613 F.2d 809,817 n. 6 (C.c.P.A. 1980». There nlaY be exceptional cases where more is required. Ibid 

38 
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The court's rationale rings hollow for anyone who has actually designed or written 

operating system or complex applications software. Indeed, no judge sitting on the 

Federal Circuit could have taken the stated view after having any actual experience in the 

field. The author of this chapter spent some years designing and writing such software, 

and the experience evidences the reality that conversion of systems design specifications 

to source code is often challenging work that involves much more than mere clerical 

function. Nonetheless, the Federal Circuit in its nescience requires only a general 

description of the software process. 

While general information about software function has some limited value, its 

satisfaction of the patent disclosure requirement creates two problems. First, general 

claims and descriptions produce software patents that are too broad and, as a result, 

foreclose too much competition as functional equivalents. This problem includes 

treatment of business method inventions, which are typically embodied in software. 

Second, there is insufficient information flow for subsequent inventors. The combination 

is deadly: broad patent rights and little public information about them. This situation is 

exacerbated by the acknowledged difficulty in locating and identifying prior art in the 

category of computer software. 

If the patent regime is intended to encourage learning from prior art and thereby foster 

competition by invention, the level and quality of information must be improved. The 

current requirement of a general process description requires only a low level of 

information and, in consequence, erects a bamer to further invention, a bamer that 

benefits the patent holder by keeping rivals out, rather than an information flow that 

benefits society by enabling others to improve and surpass the invention. 

Moreover, a surprising anomaly anses: Despite the patent requirement of disclosure, 

specific code modules in patented software can be protected as trade secrets. The patent 

requirement of disclosure and anomaly of trade secrecy in its midst can co-exist because 

39 
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of the Federal Circuit's general description requirement. Recognizing the public 

knowledge benefit of competition in ideas during the prosecution stage of the patent life 

cycle would call for a more demanding description and enablement standard for computer 

software. The change would call for disclosure of the source code and system 

documentation that industry practices recognize as needed to enable subsequent work on 

the software. 

Moreover, in the broader ambit of innovation policy, a proper patent requirement to 

disclose would obviate the need for antitrust litigation to resolve some issues of 

interoperability and disclosure through compulsory licensing of patented software. The 

E.D. Microsoft antitrust case provides a handy example because it involved computer 

software for which Microsoft asserted patent and trade secret protection as defenses to 

antitrust liability for refusals to disclose information rivals needed for the continued 

interoperability of their software with Microsoft WINDOWS for PCs. How would the 

analysis of lP claims proceed if antitrust were no longer seen as the sole source of a 

conflicting competition policy? And if patent policy were no longer seen as driven 

exclusively by property rights to exclude competitors? Instead, let's look at policies of 

exclusion and access not in opposition to one another, not in antithetical domains of 

patent and antitrust, but rather in a joint venture to set the conditions for relationships of 

competition and cooperation. K9 

In the actual Microsoft case, the Court of First Instance (CFT) affirmed the Commission 

judgment that Microsoft abused its dominant position in the market for PC operating 

S9 Wcsley Hohfeld made thc fundamental point that property rights can be bcst understood as relations 

between persons rather Uulll between a person and a tiring. W Hohfeld, 'Some Fundamental Legal 

Conceptions as Applied in Judicial Reasoning' (1923) 23 Yale Law JOUfnalI6: JW Singer, 'The Legal 

Rights Debate in Analytical Jurispmdencc from Bcntham to Hohfeld' (j 982) Wisconsin Law Rcvicw 97 5. 

The chapter takes up tlris well-known relational conception of property rights and extends it to competition 

and cooperation. The extension is indebted to the voluminous literature about the interplay between 

compctition and coopcration - whcthcr litcrature relating directly to innovation and efficiencics OT mOTC 

broadly throughout the social and management sciences. Much of the literature is infonned by game theory, 

from the simple prisoners' dilemma to complex multi-layered iterative games. For a brief introduction to a 

game thcory approach to parallel connllcreial conduct. sec Peritz. 'Doctrinal cross-dressing in derivative 

aftennarkets: Kodak Xerox and the copycat game' (2006) 51 Antitrust Bulletin 287 and sources cited 

thcrcin. 

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systems by leveraging WINDOWS' dominance into the market for work group server 

operating systems. The CFI concluded that Microsoft wrongfully applied this leverage in 

refusing to disclose to rivals in the server market information they needed for continued 

interoperation with work group PCs running WINDOWS9o The information included 

interface protocols and an "Active Directory," [Directory] which organized the protocols 

in an arguably original way that allowed Microsoft's server software to interoperate 

smoothly and efficiently with WINDOWS. Microsoft claimed that patent and trade secret 

protection allowed them to deny access to this information. 91 

The CFI began its analysis by resolving what it treated as a conflict between competition 

policy and intellectual property rights. The contlict was resolved as follows: First, the 

Court simply assumed that Microsoft had patent and trade secret protection of the 

protocols and the Directory, despite some hesitation over the strength of the claims. 

Second, the Court affirmed the Commission's determination that, under exceptional 

circumstances, competition policy can trump patent and trade rights. The exceptional 

circumstances turned on the question of access to an indispensable asset controlled by a 

dominant firm, here WINDOWS protocols controlled by Microsoft. The protocols were 

deemed an essential facility for competition in the market for server operating system 

software. The CFl concluded that in the special circumstances competition policy 

trumped Microsoft's exclusionary rights in the absence of objective justification. It 

followed that the proper remedy was a decree compelling Microsoft to disclose the 

information to their competitors. 

90 The case also involved distribution of WINDOWS MEDIA PLAYER. As Professor Steven Anderman 

pul iL four threads run through the CFI analysis: "(I) The significance of the findings of 'indispensability' 

of the interface protocols to interoperability in the 'second market' (2) The significance of the finding that 

thcrc was a 'risk' of elimination of com pc tit ion in the second market (3) Thc 'cxccptional cirelUllstanecs' 

in which competition law will find thal a refusal to license an IPR will be an infringemenl of ArL 82. (4) 

The finding of an absence of objective justificatio11 " Anderman, 'Pro-Consumer Efficiencies in Antitrust 

Law and Practicc' (26 Oetobcr 2007) LUISS University, Romc. 

91 C1se T-201/04 Alicmsojt v Commission [2007] ECR TT-3601 (interoperability protocols for some frontcnd server software); sec also, Lockwood" clmerican ,iirtines, Inc., 107 F.3d 1565 (Fed. CiT. 1997). 

41 
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The effect was a sharp change in the competitive and cooperative relationships between 

Microsoft and its rivals. Until the decision, both competition and cooperation were 

restrained by Microsoft's asserted property rights to refuse disclosure of interoperability 

information, an exclusionary right asserted under the aegis of trade secret and patent 

ownership. As is often the case, competition on the merits was not possible without some 

cooperation between participants. The CFI decision applied the competition policy of 

then-Section 82 to compel Microsoft to cooperate with rivals in order to allow 

competition on the merits of the server software rather than on the advantage derived 

from Microsoft's ownership of exclusive access to an essential component in PC 

networks comprising numerous components. 

So much for E.U competition policy and exclusionary rights. Tn the US., the outcome 

would have been in doubt. First, the Supreme Court has in effect gutted essential facility 

doctrine as a basis for antitrust liability. Second, turning on its head the E.U. view, patent 

rights trump US. antitrust policy. And third, as a general matter, US. courts are 

indisposed toward granting compulsory licenses, seeing them as insults to the institution 

of private property. Tn sum, US. antitrust is a weak voice for expressing competition 

policy92 

Now comes the emergent view of the US. patent domain as a distinct competition regime 

and, in consequence, a more rigorous requirement of description and enablement. How 

would this play out on the bare-bone facts of the E.U Microsoft antitrust case?93 

As already discussed, the current description and enablement requirement for computer 

software calls only for a general description of the process. And so Microsoft is not 

currently required to specify the protocols or the Directory. In short, the information 

92 See. e. g .. Perilz, 'The Microsoft Chronicles' in Luca Rubini (ed) "I!icro.'·(!fl on Trial: Legal and 

Economic Analvsis afa Transatlantic Antitrust Case, (forthcoming 2010): 'Microsoft e il flusso di 

informazioni' (2007) 9 Mercato, Concorrenza, Regole 523 (Ita!. Wms by Andrea Giannaccari). 

93 For an expansive introduction to patent. copyright, trade secret. and trademark as competition regimes, 

sec Peritz (2006) (n~ above). 

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would likely be secret. But if the requirement were reformulated in consonance with the 

emergent view, then both the protocols and the Directory would be disclosed - the 

protocols as necessary to enable skilled practitioners to use the software and the 

Directory as reflecting the protocols' best mode ofuse94 

A more demanding description and enablement would have two effects. First, it would 

improve the information flow during the patent term, the public knowledge benefit 

expected from the prosecution stage's competition in ideas. Second, it would define more 

clearly and more narrowly the metes and bounds of the patent monopoly. In relational 

terms, it would expand the patent holder's obligation to cooperate with rivals and other 

interested parties, a third party obligation enforced during the prosecution stage of the 

patent life cycle. As a result, it would change the conditions of competition during the 

patent term by having given rivals the information needed to compete on the merits. In 

sum, the relational changes would track those of the CFl decision in the E.U. Micrus(!ft 

decision. 

But the relational changes would not be identical. First, the patent resolution would 

require no litigation for disclosure. Second, it would involve no licensing, no judicial 

oversight, and thus no licensing fee, no bargaining or other transaction costs. Third, 

however, the use value of the information would depend on the scope of experimental use 

permitted. In the United States, the use under current law is for all practical purposes 

forbidden. But with a viable experimental use doctrine properly understood as 

competition during the patent term, experimentation short of commercial use would be 

permitted. Finally, unlike the compulsory license in the E.U. case, patent disclosure of the 

Directory as the best mode of organizing the protocols would not necessarily permit its 

commercial use. Certainly second comers could use the protocols commercially because 

they lack invention; but if the Directory is a nonobvious invention, patent rights would 

block its commercial use. Here, the patent regime's compelled cooperation between 

94 For a demanding approach to the description requirement, see The Gentry Gallery \' The Berkline Corp .. 

114 F.3d 147:l (Fed. Cir. 1998). For criticism, see Molia v Diamond Automation, inc., 125 F.ld 1 lOa, 1123 

(Fed. Cir. 2003) (Rader. J., dissenting). 

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Microsoft and its rivals should not include commercial use of the Directory, if determined 

a nonobvious invention, because commercial competition on the merits is possible 

without access. Indeed competition in the development of more efficient or otherwise 

superior protocol organization in other directories holds the promise of technological 

progress. 

This final example has shown how the patent regime can be understood as an instrument 

of economic progress that shapes relationships of competition and cooperation. The 

analysis begins with the presumption that free competition promotes economic progress. 

Any policy or adj udication that would expand the scale or scope of patent rights requires 

evidence of its progressive value. What justifies this shift from the current patent 

regime's presumption that exclusionary rights promote progress? It begins with 

recognition of a policy stalemate that derives from the indeterminacy of incentive theory 

as the basis for preferring either patent protection or free competition as the superior 

engine of progress. This stalemate is broken by free competition's superior distributional 

effects, superior because competition generates more allocatively efficient outcomes and, 

with them, conditions more conducive to future inventive activity. At the same time, 

recent Supreme Court jurisprudence reflects an emergent strain of patent doctrine that 

recognizes an internal competition policy - what an earlier decision by a unanimous 

Court called "a baseline of free competition." More broadly, adopting a baseline of 

competition would change the current u.S. view of lP and antitrust as antithetical 

regimes, as a binary opposition between monopoly and competition, between exclusion 

and access. What would emerge is a more progressive and more functional view of IP 

and antitrust as two intertwined regimes comprising policies of both exclusion and 

access, two sets of rules and policies that set the conditions for relationships of 

competition and cooperation to promote the progress of knowledge and industrial 

technology. 

Conclusion 

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This chapter has sketched the orthodox view of the patent regime as founded on 

exclusionary rights to promote progress, its jurisprudence, and its dependence on a failed 

incentive theory, as well as an emergent view expressed in the jurisprudence and in a 

residual economics that converge to support the reconceptualization of patent protection 

as a competition regime. The emergent jurisprudence echoes an opinion by Justice 

Sandra Day O'Connor written some twenty years ago for a unanimous Supreme Court, an 

opinion that described the foundation of patent policy as a "baseline of free competition." 

While the chapter adopts the baseline of free competition, it otherwise diverges from 

Justice O'Connor's opinion insofar as the chapter's ensuing analysis refiects the failure of 

incentive theory as the economic logic for patent protection, a failure that is not 

acknowledged in the opinion or in today's mainstream jurisprudence. Still there is a 

residual economic logic that is surprisingly straightforward despite its absence in the 

mainstream literature: While the dynamic efficiency effects of both free competition and 

patent rights are indeterminate, their distributional effects point toward free competition. 

Why? Because patents that actually have economic value produce monopoly prices and, 

with them, welfare losses in both static and dynamic terms. Tn consequence not only 

consumers but subsequent inventors are better ofT under a regime of free competition 

because it gives inventors open access to new infonnation. The result is improved 

conditions for subsequent invention. In this light, a rule or policy that would strengthen 

patent rights should first be shown to promote greater progress than would otherwise 

occur. Yet patent protection can serve the public interest as a sharp instrument for 

targeted industrial policy though it fails as a magic potion for promoting economic 

progress. But even with patents as sharp tools of industrial policy, risks of failure and 

unintended consequences call for careful analysis to overcome the presumption that free 

competition better serves the public interest. 

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2 1 50' ChNIl.JRY PAniNl RI' fJf~M 

W'fr,rlfl'''''olHlrifin !,1 r nlrlfrn ;1m~", rill (N",><'M,\'>W-.' 

W pa(entsmattet.oom 

Submission of Views 

by 

K{:vin H. Rhodes 

Member of the Steering Committee 

Coalition for 21S t CennlfY Patent Reform 

and 

Chief IP Counsel of 3M Company 

to the 

Subcommittee on Intellectual Property, Competition 

and tbe Internet 

Committee on the Judiciary 

United States House of Representatives 

on 

"Tbe International Trade Commission and Patent 

Disputes" 

July 16, 2012 
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75152B4-2.eps

Chairman Goml1atte, Ranking Member Watt and \Iembers of the Subcommittee: 

I am pleased to have this opportunity to submit for the record these views of the 

Coalition for 21st Century Patent Reform (21C) on the role and functioning of the 

International Trade Commission (ITC) in investigating and remedying unfair methods of 

competition and unfai1" acts in the impm-tation of articles that infringe U.S. patents I 

I am a member of the 21C Steering Committee. I am also the Chief Intellectual 

Property Counsel of 3M Company and the President and Chief Intellectual Property 

Counsel of 3\1 Tnnovative Properties Company, but T am submitting these views on behalf 

of 21e. Our coalition has nearly 50 members from 18 diverse industry sectors and includes 

many of the nation's leading manufactw"ers. Tn addition to 3'v1, the coalition's stee1~ng 

committee includes Caterpillar, General Electric, Johnson & Jolmson, Eli Lilly and Procter 

& G amble. The coalition has members in a variety of industry sectors, including: aerospace 

and defense, chemical, computers, diversified f11lancials, diversified technology, energy, food 

production, forest & paper products, health care, household & personal products, industrial 

equipment, medical equipment & devices, netwm"k & communications, payroll se1"Vices, 

pharmaceutical, biotechnology, semiconductors & electronic components, and 

transportation equipment. 21 C was an active participant in the legislative process that led to 

the enactment of the Leahy-Smith America Invents Act, and 21C remains active and 

engaged with CmIgres>, the Administration, including the United States Patent and 

Trademark Office, and the federal courts on issues of patent law and policy. 

1 The ITC's authority to undertake such investigations <U1d to issue Exclusion Orders arises from 

Section 337 of the Tariff Act of 1930, 19 e.s.c:. § 1337 (hereinafter "Section 337"). 
229 


75152B4-3.eps

My submission for the record will address two different types of complainants which 

seek ITC Exclusion Orders under Section 337 to prohibit the imporl'1tion into, and the sale 

'within, the United States of imported articles that infringe a v'alid and enforceable US 

patent, and for which there exists a so-called "domestic industry," For each type of 

complainant, T will discuss the perceived concerns that have arisen regarding its use of TTC 

Section 337 proceedings to resolve patent infringement disputes and the changes to I'J'C law 

and practice that have been proposed to address those concenlS, 

First, T will discuss some concerns that have been raised re.s>anling the TTC's issuance 

of Exclusion Orders in Section 337 uwestigations of alleged patent infrulgement brought by 

a subset of non-practicing entities (NPFs) that acquire patents fm the sole pmpose of 

obtaining settlement payments by asserting them agalllst alleged ulfringers, These NPEs 

(frequently referred to as "patent a"ertion entities or "PAEs'}' cannot establish a "domestic 

industry" through manufacture of til(' patented articles Ul tile United States and have no 

intention of cstablishulg such an industry by manufacturulg or marketlllg any articles 

covered by their patents, Rather, PA Fs seek to show a "domestic industry" through 

investments Ul "liccnsing" their patents, vvith such licensulg investments ulcluding litigation 

fees and costs associated willi enforculg the patents against alleged ulfringers, Even though 

they seek to license their patents, not to exclude others from practicing them, P ellis are said 

to be tUnlUlg to the ITC to seek Exclusion Orders solely to obtain negotiating leverage to 

extract larger royalties from accllsed infringers, because they are less likely to obtain similar 

2 See Fed. Trade Comm'n, The Evolving IP l'I!orketplace: Aligning Patent Notice and Remedies \\~th 

Competition 8 n5 (2011) (available at http://W',vw.ftc.gov / OS/2011/03/ 110307patentrepon.pdtj. 

2 
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leyerage in the tiJrm of injunctions from U.S. district courts following the L; .S. Supreme 

Court decision in eEay, 111c. I). Aiercl:.'xchaJ{ge, LLC, 547 U.S. 388 (200G). 

Second, T will touch briefly on the issue of TTC Exclusion Orders in Section 337 

investigations initiated by the mvners of "standard-essential patents" (SEPs), when the 

patent owner has agreed to license its SFP on fair, reasonable and non-discriminatory 

("FR;\"\.ID") terms.' When the owner of a SEP and a firm interested in practicing that SEP 

are unable to agree upon what constituents FR..AND licensing terms, the patent owner may 

attempt to obtain more fayorable terms by seeking an TTC Exclusion Onlet" against 

imported products alleged to practice the SEP. The question that has been posed is whether 

the seeking of an TTC Fxclusion Order by such patent owners is inconsistent with their 

FR.!\'-iD licensing commitments and thus should be disallowed or curtailed. 

I. NPEs and PAEs in ITC Section 337 Investigations 

Under Section 337, a domestic industry rdating to articles protected by the patent for 

which an Exclusion Order is sought is considered to exist if there is, in the United States and 

with respect to those patented articles: 

(A) significant investment in plant and equipment; 

(B) significant employment of labor or capit."ll; or 

(C) substantial investment in its exploitation, including engineering, researc h 

and deYelopment, or Iicensing4 

') Such licensing cornrnitrncnts arc also cODullonl y referred to as "reasonable and nondiscriminatory" (l,-AND) terms. In this statement, 1 usc the acronym Fl,-AND generally to refer to 

F1L"'-"D and lL"'-"D conllilitments. 

'19 USc:. 1337(a) (3). 
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;\ t the out,et, it is important to remember that not all '\.I Pb:s fall into the category of 

PAEs. Thcrc arc many t-:PEs - e',g., uniycrsitics and small cnginccring firms - that cxpcnd 

considerable resource, on the research and deye10pment of new products that they ,eek to 

commercialize indirectly through the sale and/ or licensing of patents covering those 

products. These "PEs clearly have a "domestic industry" that satisfies most or all of the 

three indicia set forth in Section 337. In that ,eme, these "PEs haye many of the same 

attributcs as fit,llS that manufacture patentcd products, which likcwisc must make 

inYestment, in such thing, a, plant and equipment, labor or capital, and en,l,'ineering, 

rescarch and dcvelopment before they bcgin to manufacturc the patentcd product. 

T believe there is widespread consensus - as there should be - that such NPEs need 

access to thc lTC and the remedies available undcr Scction 337 to exclude the importation 

of infringing products. Just as with patent owners who actually manufacture patented 

products, for these ~PEs the availability of the lTC, with its in rem jurisdiction oycr the 

imported infringing articlcs themselvcs, is absolutely essential to prcvent the importation of 

infi-inging products by manufacturers who are beyond the reach of C.S. district court 

infringcmcnt actions or who may bc locatcd in countries whcre it is not feasible to obtain or 

to enforce effectively a patent in that country. 

The stated goal of those seeking to amend the lTC's authority is to address the 

perceived problem of PAEs, that subset of t-:PEs who seek to use the ITC not to exclude 

infringing imports, but rather to extract larger royalties from companies that are 

manufacturing products under the threat of an Exclusion Order to block the importation of 

nece"ary components. 21e does not question whether there are PAEs that seek to misuse 

4 
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Section 337 remedie, in this manner, but before changes to ITC juti,diction or practice are 

made to address such misuse, proponents of those changcs should show (1) that the ITC is 

incapable of distint,'1lishing between P;\ Es who are misming the TTC and those "IPEs who 

should bc entitled to Exclusion Ordcrs, and fashioning its remedics accordingly; and (2) that 

the proposed changes are nan'owly tailO1'ed to avoid unintended negative consequences for 

N P b:, who ,1lOuld be entitled to b:xc1usion Orders. 21 C does not believe that the case has 

been made for (1), or that the proposed "fi.."es" are narrow enough to satisfy (2). 

A. Has the Case Been Made That the ITC Cannot, 

Or Is Not, Applying Section 337 To Prevent Misuse by PAEs? 

ITC statistic, are being used to support the claim that P;\ h seeking b:.xc1usion 

Orders are a problem, but it is unclear whether those statistics really make the case. It is 

undoubtedly tme that the number of ITC Section 337 inve,tigations, and the number of 

respondents in those investigations, have incrcased over the past several years, with sizeable 

increa,es in 201 J.S Tt also seem, to be tme that the prevalence of complainant, relying on 

licensing alone to establi,h a domestic indmtrv has increased. Yet without an accepted 

conscnsm on the definition of an NPE, let alone a PAE, and without an examination of the 

specific type, of licensing activities being cited as supportive of a dome,tic industry, claims 

that these statistics show PAEs have flooded the ITC with requests for Section 337 

inve,tigations, where the tme goal is not an Exclusion Order but rather leverage in licensing 

ncgo tiations, arc far from clear. And 21 C is no t awarc that anyonc has claimcd that a P AE 

actually has obtained an ITC Exclusion Order in such circumstances. 

5 Jee http://wwvi.usitc.gov/press_room/337_stats.htm. 

5 
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75152B4-7.eps

Nor has the case been made that the ITC lacks the ability to prevent future attempts 

by PAEs to obtain unwarranted Exclusion Orders. In an ITC investigation where the 

complainant is a P;\ E, presumably the P;\ E would try to meet the domestic industry 

requirement through its investments in "licensing,"!' as it would be unlikely that a PAE could 

show that any other of the statutory bases for a domestic indush-y exists. Yet both the TTC 

and the Federal Circuit have held that patent infringement litibration expenses alone, i.e., 

patent infringement litigation activi.ties that are not related to engineering, research and 

development, or licensing, do not create a domestic industty under the term "licensing" in 

Section 337(a)(3)(C)7 As the Federal Circuit explained, "rwle agree with the Commission 

that expenditures on patent litigation do not automatically constitute evidence of the 

existence of an industry in the United States established by substantial investment in the 

exploitation of a patent."s 

Although it is tme that the ITC and the t'ecleral Circuit have not foreclosed any 

possibility that litigation expenses could be recognized as creating a domestic industry, there 

is no basis to suggest that the TTC is incapable of effectively distinguishing between genuine 

licensing investments and sham activi.ties designed solely to create a basis for being in the 

G Section 337 requires that an investrnent in licensing relate to "t...'{ploitation" of the asserted patent. 

ill rt Semi(()Jlduc/o{' Chip.l" }vilh iHillimi.z:ed (]Jt'p Packqge Si.,\y and PmduciJ Crmfaillil{~ Same, Inv. No. 337-TA-

~32, Order No. 13 ~t 11-13 (unreviewed) (Tan. 2~, 2001) ("Semiconductor Chips"). A,,'ord1n Ir 

Celtaill Coaxial Cable Conne,1olr alld Compollentr '1'helroj alld Pmdt/,1s 1m; No. 337-TA-

(,SO, Comm'n Op. ~t H-SI (1\pr. I~, 2010) ("CorL,oia! Cable COllnettolr"), 

T/I(.; (d/b/a ppc, Tne);; Tnt'! Tmde Comm'lI, 660 F.3d 1322 (Fed. Cir. 201 

, Coax:ia! Lab!e COlmelfoll' at 44-51 ("'I'he owner of the property right must be actively eng,"ged in 

steps leading to the exploitation of the intellectual property, including application engineering, 

design work, or other such activities. S. Rep. '\Jo. 100-1 j at 130");.Tobll ivIezza!illglia, 660 !:i.3d at 1328. 

jo/i", i\jle,~,;:afj'(~lIa, 660 [i. 3d at 132R. 

G 
234 


75152B4-8.eps

ITC. The fTC assesses whether licensing or litit-,>ation expenses establish a domestic industry 

on a case-by-case basis, based on the nexus bel:\veen litigation expenses and efforts to license 

the asserted patent and whether there has been "substantial investment in the exploitation of 

the patent."') This is a factually-specific inquiry which may vary depending on the nature of 

the industry and the resources of the complainantIO 

Given that all types of L:.S. patent owners, including small and large companies, 

universities, and individual inventors, routincly license and litigate their patents, it is entirely 

appropriate that the TTC determine whether licensing or liti,l,>ation expenses establish a 

domestic industry on a case-by-case basis, rather than adopting per se mles that risk the 

unintended consequence of cutting off the TTC as a forum whel'e patent owners who have 

licensed their inventions can seek to prevent infringing imports from destroying their 

investments. Moreover, Section 337 requires the IT(; to consider the effect of any 

Exclusion Order it is contemplating issuing upon the public health and welfare, competitive 

conditions in the United States economy, the production of like or directly competitive 

9 Coa:xia! Cable Connec/on at +3-++ ("Depending on tl1e circumstances, llicensing activitiesJ may 

include, among oilier tl1ings, drafting and sending cease and desist letters, iiling and conducting a 

patent infringement litigation, conducting settlen1.ent negotiations, and negotiating, drafting cmd 

executing a license. The mere fact, however, that a license is executed does not mean that a 

comphinant can necessarily capture all expenditures to estahlish a suhstantial investment in the 

exploitation of the patent. \ complainant must clearly link each activity to hcensing efforts 

concerning the asserted patent."). 

19 See Iii It Stringed Intstmtlmlts, Inv. No. 337'1'A-586, Comm'n Op. at 25-26 (l"lay 16,2008) (,,'lhert 

is no l11.inimUlli monetary expenditure that a complainant HlUSt denlOnstrate to qualify as a domestic 

industry under ilie 'substantial investment' requirement of l19 l.S.C. § 1337 (a) (3) (C)J .... 

[SJhowing the existence of a domestic industry will depend on the industry in question, and the 

complainant's relative size .... [TJhere is no need to detlne or quantify the industry itself in ~hsolute 

mathematical terms."); Jee afro III Ie ('ettaill Multimedia DiJplay and NaI":gatioll De;ieeJ, Inv. Ko, 337-TA-

(,94 (July 22, 2011). 

7 
235 


75152B4-9.eps

article, in the United State" and United States comumer,.ll These public interest factors 

provide the ITC "IN'ith considerable discretion to decide whether to deny or limit an 

Exclmion Order in an inve,tib'3tion initiated by a P;\ E. ;\b'3in, we are not aware of any 

n'idcnce that the ITC is incapable of appropriately considering and applpng the public 

interest factors in its issuance of Fxclusion Orders when they are being sought by P;\ Es. 

In sum, 21C believes the ITC has ample authority and discretion under Section 337 

to issue and tailor Exclusion Orders to ensure that they preclude the importation of an 

infringing product only when such importation would destroy or mbstantially injure an 

industry in the enitcd States or prcvent its cstablishmcnt. On balance, 2IC believcs thc ITC 

has used this authority and disCl-etion appropriately and the case has not been made that 

sweeping changcs to Section 337, changes that would impact all patcnt OWllers and risk 

unintended consequences, are needed because the ITC has allowed PAEs to abuse Section 

337 investigations for negotiating leverage. 

B. Do the eBay Factors Belong in ITC Investigations? 

Some proponents of changes to TTC law and practice intended to prevent PAEs 

from sceking Exclusion Orders solely to obtain ncgotiating leverage have proposed that the 

issuance of Exclusion Orders be made subject to the same traditional four-factor equitable 

test that the Supreme COUli held should be applied in deciding whether to issue a permanent 

injunction against patent infringement. See eBa)" 1m: 1'_ AlerclixdJan,ge, LLC, 5-1-7 U.S. 388 

(2006). In ella)" the Court listed four factors that a patent owner must demon,trate to obtain 

a permanent injunction: 

11 19 C.S.c. § 1337(d)(1)_ 

8 
236 


75152B4-10.eps

(1) it has suffered an irreparable injury; 

(2) remedies available at law, such as monetary damages, are inadequate to 

compensate for that injury; 

(3) considering the balance of hardships between the plaintiff and defendant, a 

remedy in equity is warranted; and 

(+) the public interest would not be dis served by a permanent injunction. L' 

Unlike these equitable factors listed in eBay, the lTC's decision whether to issue an 

Exclusion Order is based on the statutory criteria set forth in Section :B7. Accordingly, the 

ITC has held that the (lBay test does not apply when deciding whether to issue an Exclusion 

Order because Section 337 "represents a legislative modification of the traditional test in 

equity ... [and] it is unnecessary to show il1:eparable harm to the patentee in the case of 

infringement by importation."l3 The Federal Circuit has affirmed that the lTC's remedies 

are governed by statute and not by equiL1.ble principles.l< 

In our view, the eBay factors are simply inapplicable to the determination of whether 

an Exclusion Order should be issued in a Section 337 proceeding. These factors arise from 

the traditional test in equity, where the issue is whether remedies at law, such as monetary 

damages, are adequate to compensate the plaintiff. \\7hcn applied in patent infringement 

actions in U.S. district coLU1:s, the judge is deciding whether a permanent injunction should 

U Dlrf Certail! Basebal!d Pme'eJJor ChipJ I1lld OJipJetJ, lnv. 1',0. 337-'l'A-5+3 at 62-3 n.230 (In!'l Trade 

Comm'n 2007). 

, • .lpall,!r!ll, 1n" I'. 1nl'! hade Comm'n, 629 F.:,d 1;131, 13S9 (red. Cif. 2010). 

') 
237 


75152B4-11.eps

issue in addition to whatever damages have been awarded to compensate for the 

infringement. In contrast, the only remedies available in an ITC Section 337 investigation 

are in essence injunctive relief - Exclusion and Cease and Desist Orders. Damages are not 

available and thus there is no determination of whether damages alone are an adequate 

remedy, as when a district court applies the eRay test. Thus, applying the eR{!y factors in 

Section 337 proceedings would mean that whenever the nc determines that a complainant 

has not made an adequate showing that they arc met, the patent owner would be left with no 

lTC remedy whatsoever to prevent the continued importation of products that were found 

to infringe a valid and enforceable U.S. patent. 

A short discussion of each of the four eR{9 factors will show how inapposite they are 

to the ques tion of whether the ITC should issue an Exclusion Order to prevent the 

continued importation of producB found to infringe a \'alid and enforceable U.S. patent. 

The first three factors are simply inapplicable when taken out of their context in equity and 

grafted into Section 337's statutory framework, and the fourth factor is already part of the 

lTCs determination. 

With respect to the first eBay factor - whether the patent owner has suffered an 

irreparable injury - C:ongre" did comider the applicability of tlus question when it amended 

Section 337 to remove the requirement that the importation of a patented product "destroy 

or substantially injure an industry" in the Omnibus Trade and Competitiveness Act of 

1988.15 ;\s the House Report explained, "the Committee believes that requiring proof of 

15 Puh. L. ~o. 1O(Q1R, § B~2, 102 StCLt. 1107, 1212-1(, (codiEed at 19 C.S.C 1337 (1988)). 

10 
238 


75152B4-12.eps

injury, beyond that ,hown by proof of the inti-ingement of a valid intellectual property right, 

should not be necessary." 16 

That rea,oning remains equally tme today. The que,tion of 'whether an injury is 

irreparable boils dO\vn to whcther or not it can be repaired vvith money damages. In district 

court patent infringement actions, a prevailing patent owner has a statut01'Y right to recover 

damages "adequate to compensate for the inti-ingement but in no event less than a 

reasonable royalty for the usc made of the invention by the infringer, together "ith interest 

and cmts as fixed by the court."17 The traditional four-factor test in equity that the Supreme 

Court applied to patent infringement actions in eBay determines whether the patcnt owner 

also is entitled to a permanent injunction. Tn other words, the eRay factors were never 

intended to determine ,vhcther the patent ow-ner would obtain any remedy when 

infringement has been proven. Tlms, the question of whether the patent owner's injury is 

"irreparable" - i.e., repairable "ith a damages award - makes little, if any, sense in the lTC, 

where the patent owncr either gets an Exclusion Ordcr or gocs homc empty-handed. 

,"or the same reasons, the second eRr!y factor - whether remedies available at law, 

such as monetary damages, arc inadequate to compensate for the injurv - is equally 

inapplicable to ITC proceedings. The ITC cannot award money damages, which moots the 

question. 

The third eBay factor - whether, considering the balance of hardships between the 

plaintiff and defendant, a remedy in equity is warranted - also becomes inapt when it is 

10 JUt. Rep. No. 100-40 at 156 (1987). 

F 3S eSc. § 284. 

11 
239 


75152B4-13.eps

taken out of its context for detennining whether relief in the fonn of both money damages 

and a pcrmancnt injunction is an cquitablc rcmcdy. Thcrc can bc no mcaningful balancing 

of hanbhips between the owner of a patent found to be yalid, enforceable and infringed 

who would receiYe no relief whatsoever 'without an Exclusion Order, versus an infringer 

who would mel'ely be denied the ability to benefit from importing only those products found 

to infringe into the United States before the U.S. patent expires, while retaining the ability to 

makc and scll thcm anywhere else in the world. 

Tt is not a satisfactory answer to argue that C.S. patent mnwrs could mitigate any 

hardship from failing to obtain an Exclusion Order by seeking relief in C.S. district court. 

As discussed already, foreign defendants may not be subject to personal jUl~sdiction in the 

United States. l':or is it pcrsuasiyc to arguc that U.S. patent holdcrs should file infringemcnt 

actions agaimt offshore manufacturers in the cOLUltries where the infringing products are 

made. '-'ot only would it be exorbitantly expensive to seck patent protection in every 

country wherc products that infringe a C.S. patent could be madc, but effective patcnt 

coverage, and especially effective enf01'Cement of those patents that can be obtained, is 

simply not possible in many jurisdictions whcre infringing products originatc. 

Ginally, regarding eB'!lr public interest factor. tlle ITC already must consider four 

public interest factors when determining whether to issue an Exclusion Order: (1) tlle public 

health and welfare, (2) competitive conditions in tlle U.S. economy, (3) tlle production of 

like or directly competitive articles in tlle U.S., and (-1-) U.S. conSUlllers.18 ;\s the nc has 

obserred, these public interest factors "are not meant to be given mere lip service," but 

1'19 C.S.c. § 1337 (d) (1). 

12 
240 


75152B4-14.eps

rather "public health and welfare and the asmrance of competitive conditions in the United 

States economy must be the overriding considerations in the administration of this 

statute."1,) 

In sum, 21 C docs not support the proposal that the ITC be required to consider the 

e13(!y factors in detennining whether to issue Exclusion 01·ders. Such an approach would 

take the factors out of their proper context in determining whether it is equitable to issue an 

injunction in addition to an a\\'ard of money damages in a patent infringement case. The 

result would be .greater uncertainty for all es. patent owners, especially those who are not 

manufacturers, such as universities, research-oriented engineering firms and independent 

inventors, as to the availability of Exclusion Orders to prevent impmted infringing products 

from flooding the L.s. marketplace. 

Moreover, the proposal to introduce the eB{{y factors into Section 337 would impose 

added burdens and complexity on all patent owners seeking to usc the 1'1'C. 1t is not just 

PAEs, or even :\iPEs, who would be forced to prove that the cHay factors justify issuance of 

an Exclusion Order to prevent infl~nging importation. These additional bmdens may fall 

hardest on small and medium enterprises struggling to create a business in the United States 

in the face of infringing imports. Particularly when the evidence is arguable for claims that 

the He is being abused by PAEs, making this sweeping limitation to the lTC's authority, in 

all investigations sought by all patent owners, is neither warranted nor wise. 

10 ill 11' Calain inclilled hdd Acce/em/iun 'iirbe! and CompolICII/J Tbm'of, Iny. No. 337-TA-67, USITC Puo. 

1119, Comm'n (Jp., at 22 (Dec. 1980) (quoting S. Rep. 93-1298, at 197 (197-1), reprinted in 197-1 

C.S.c:.CA.l'\. 7186, 7330). 
241 


75152B4-15.eps

C. Proposed Changes to the Definition of "Domestic Industry." 

Anothcr proposal which has bccn discusscd as a possiblc approach for limiting thc 

ability of P;\ Es to obtain TTC Exclusion Orders is to restrict those "licensing" investments 

eligible to support a domestic industry. As we understand it, the proposal would clarify that 

a domestic industt-y Illay be established thwugh licensing only when that licensing takes 

place prior to the alleged infrinh>1ng activity and promotes the adoption of the patented 

invcntion. 

21C cannot support the proposal in that form. Tt \\'()uld generate uncertainty and risk 

for C.S. patent mVllers, particularly rescarch-oricnted American univcrsitics and cngineering 

firms, that thei1' investtnents in licensing, even if substantial, would be disregarded for 

purposes of cstablishing a domcstic industry if the infringement began before a license was 

offered, negotiated and executed. Indeed, limiting access to Section 117 to those licensors 

who entered into licenses prior to infringement would almost certainly lead to perverse 

results, including a "race to import" an infringing product before the infringer would engage 

in licensing negotiations with the U.S. patent owner. 

Thc limitation that liccnsing only qualifics to support a domestic industry if it 

"promotes the adoption of the patented technology" adds further uncertainty. One can 

envision extended collateral disputes over whether this limitation is satisfied by the patent 

owner's licensing activities. Civen the unresolved debates over the definition of what exactly 

constitutes an ~PE, and a PAE, it is not difficult to imagine similar debates over whether 

the licensing activities of such firms actually promote the adoption of the patented 

technology or instead represent a tax on innovation and technology adoption. 

14 
242 


75152B4-16.eps

That i, not to ,ay, however, that 21 C i, unwilling to consider ,upporting change, to 

the definition of "licensing" in Section 337 to address perceived abuses of the ITC by PAEs. 

Tn fact, 21 C has been discnssing such concern, and po"ible solutiom with tho,e 

stakeholders who have raised them. 21C believes that, \vith further investigation and 

discussions, it nlay be possible to reach consensus on a very p1-ecise and Harren'\! solution that 

would tighten the definition of "licensing" for purpose, of establi,hing a domestic indnstry 

while avoiding the very real specter of adverse unintended consequences. The risk of 

unintended impact is perhaps most acute when patent laws are amended at the behe,t of 

some industry segments and in the face of opposition from others, so 21 Cremains 

committed to working toward the goal of consensus. But at a time when U.S. economic 

recovery is in such a precarious state, we urge caution with respect to efforts to limit the 

ITCs powers in Section 337 investigations that might benefit foreign manufacturing over 

domestic. 

II. SEPs in ITC Section 337 Investigations 

T turn now to the second category of TTC complainants which has ill'awn an 

increasing amount of attention lately; namely, the owners of SEPs. Firms, especially in the 

information technology and telecommunicatiom industries, face the problem that hundreds 

of patented inventions need to work together in devices operating together within a system. 

To solve the inevitable "interoperability" problem that would arise if all the firms were to 

practice their competing technologies, the firms may engage in voluntary, consensus 

standard setting conducted by standards-setting organizations (SSOs). These voluntary 

15 
243 


75152B4-17.eps

bodies adopt standards to ensure that devices operating within a system win work together 

and communicate w-ith cach othcr in standardizcd, predictable ways. 

\'Fhen an adopted standard incoq:lOrates patented technology owned by a participant 

in the standard-setting process, it creates the potential for the SEP mvner to engage in what 

has been referred to as "patent hold-up." The SEP owner may use the leverage it acquired 

when the SSO based the standard on its patented technology to negotiate much higher 

royalty ratcs than would have bccn possible beforc thc standard was sct. Thc SEP mvncr 

may have the ability to demand and obtain royalty payments based not on the tme market 

value of its patents, but on the costs and delays of ",-itching away from the standardized 

technology. As the r:ederal Trade Commission (r:TC) has explained, "once a standard is 

adoptcd, implementers bcgin to make investments tied to the implementation of the 

standard. Because it may not be feasible to deviate from the standard unless all or most 

other participants in the industry agree to do so in compatible ways, and because all of these 

participants may face substantial s",-itching costs in abandoning initial dcsigns and 

substituting a diffel'ent technology, an entil'e industry may become locked in to a standard."20 

To preclude such opportunistic conduct, SSO mcmbers often agree to liccnse their SEPs on 

GRAl':D terms as a qllid pro qttO for the inclusion of their patents in a standard. 

The t"l'C, L:.S. Department of Justice (DOJ) and other commentators have 

questioned whether the ITe should be precluded from granting Exclusion Orders with 

respect to Sb:Ps that patent owners have committed to license on FR.'\'\.Il) terms. They 

20 .lee Third United States Federal Trade Commission's Statement on the Public Interest, 1111~ 

C"tain (,'allli I{~ Related Jojhmre, and CompONents Thmof, Inv. No. 337-T 1\-752 

at 2 (Int'I Trade Comm'nJune G, 2012). 

16 
244 


75152B4-18.eps

have raised the prospect that a patentee could make a FR;\ND commitment as a member of 

the SSO, and then seck an Exclusion Order for infringement of the FR/\~D-encumbered 

SFP as a way of securing royalties that may be inconsistent with that FRAI\'D commitment 

and the value of the patented technology. l\either the FTC nor the DOJ, however, has gone 

so far as to assert that Exclusion Orders should not be available categorically to SEP 

owners 21 

In our view, the right approach to this issue is a nuanced one. There should be no 

blanket rule that Exclusion Orders are, or are not, available to SFP owners. That is because 

for legal purposes, a FRi\"!D commitment is a contractual obligation. \\ihen a patent owner 

voluntarily makes a PRAND commitment, it is entering into an agreement with the SSO to 

which implementers of the standard are third-party beneficiaries. Like any contract, the 

scope and meaning of a FR/\~D commitment is determined by its language, as interpreted 

in view of the intention and understanding of the pat-ties who formed the contract. The 

meaning may depend on the written agreements, policies, and procedures of the SSO at the 

time the PRA"!D commitment was made, as not all SSOs structure PRAND obligarions in 

the same matmer. Likewise, what licensing terms are "fair" or "reasonable" will be factually 

specific, based on evidence such as industry practice, terms agreed to by other licensees and 

the negotiations between the parries. 

21 See, e.g., Hearing of the lnited States Senate Committee on the Judiciary, "Overoight of the Impact 

on Competition of Exclusion Orders to Enforce Stmdard-Essential Patents" Guly II, 2012) 

(Statement of Joseph F. \\'ayland, Acting "\ssistant Attorney General, Antitrust Division, C.S. Dep't 

of Justice) (available at http://viww.judiciary.senate.gov /pdf/12-7-11 WaylandTestimony.pdtj; 

(Statement of Edith Ramirez, Commissioner of the Fed. Trade Comm'n) (available at 

http://vi\vw.Judiciary.senate.gov /pdf/ 12-7 -IIR~mirezTestimony.pdl). 

17 
245 


75152B4-19.eps

;\cconlingly, a b'R;\~[) commitment must be constmed on a case-by-case basis to 

give effect to the parties' intent. That intent mayor may not be consistent 'Weith the SEP 

owner's request for an TTC Exclusion Order. For example, suppose that the SEP owner 

offered to grant a license on FRAND tenns and has attempted in good faith to negotiate 

such terms with the infringer, but the infringer has rejected the offer. Tn that case, a blanket 

mle eliminating an ITC b:xc1usion Order as a remedy would punish the patentee for giving 

the FRll.~D commitment, reward thc infringer for its intransigence and discourage 

participation in SSOs and the making of FR;\ND commitments. Tndeed, if the inft~nger is 

located overseas, beyond the reach of C.S. district courts, an Exclusion Order may be the 

only remedy available to the SFP owner who faces an obstinate infringer. 

On the other hand, suppose that the neidence shows the alleged infringer would be 

licemed if the SEP owner had complied with iB FRll.:,\!D commitment. In that case, the 

ITC would be entitled to conclude tile public interest would be damaged by entering an 

Exclusion Order. The public would hardly be served if a SEP O\vner were able to make a 

r:RA1\'D commitment in order for its patented technology to be included in a standard; then 

in breach of the F~"'l':D commitment, refuse to license its SEP on F~"'ND terms to a 

respondent willing to accept such terms, but not the terms the SEP owner now demands; 

and then obtain an ITC Exclusion Order against the standard-practicing products of tile 

respondent. 

The ITC should be allowed to take into account these nuanced fact patterns on a 

case-by-case basis. The ITC already has the statutory authority it needs to do so. F'or 

example, the Commission has been considering whether a respondent may raise a FRA~D18 
246 

f 


75152B4-20.eps

based affinnative defense under Section 337."" In any event, the nc could cite the public 

interest factors it must consider under Section :n7 in determining that an Exclusion Order 

should not issue, or should be limited somehow, when the investigation involves a SEP 

subject to a FRc,\~D obligation. 

Tn sum, the TTC is no less capable than are the district courts of considering the 

impact of FRj\~J) oblit,rations when Sb:J) owners request exclusionary relief. Rather than 

adopting bright-line mles on this issue, the ITC is best positioned to consider the facts of 

particular cases and to determine, under its mandate to consider the public interest factors 

set out in Section 337, whether an Exclusion Order is an appropriate remedy. To exclude 

such patent ownel'S fl'om the TTC risks leaving them with no l'emedy against a manufacturer 

of imported infringing products who refuses to negotiate a license on FRAND terms. 

* * * 

T thank the Subcommittee for the opportunity to submit for the record 21C's views 

on the 1']'C's role in investigating patent disputes. ;\s always, 21 C remains committed to 

working with all stakeholders on these and other issues of patent law and policy. I will be 

pleased to submit written ans\\'ers to any questions my statement may raise and to supply 

any additional infonnation for the record that may be requested. 

".lee 111 tr Certain lJ;""I,rle.>.> Commullication Delite.>, Portable MIIJitalld Data Pmce.>.ril(~ Delite.>, Compllter, alld 

Component, Thereof, Inv. :--.10. 337-TA-H\ Comm'n Decision to Review in Part, 77 Fed. Reg. 3R82() 

(June 2'), 2012). 

19 
247 

Letter from Catherine A. Novelli, Vice President, 

Worldwide Government Affairs, Apple Inc. 


75152C-1.eps

1uly 18, 2012. 

The Honorable Lamar Smith 

Chairman, Committee Orl the 11ldicla.ry 

U oiled States House of Representatives 

Washington, DC 

The Honorable John Conyers, Jr. 

Ranking.Me111ber, Committee on the JudicialY 

United Stales House of Repr"sentatives 

Washington, DC 

The Honorable Bob Goodlatte 

Chairman, Subcommittee 011 Illtellectual Property, Competition, and the fntemel 

Uniled States House of Representatives 

Wnshington, DC 

The.Honorable Melvin Watt 

R!\nkingMember. Subcommitt<;e on Intellectual Property, Compt'tition. and the Internet 

United States House ofRepresctltativcs 

Washington. DC 

Dear Chainn.en Smith ann Goodlatte and Ranking Members Conyers <lnd Watt: 

ll1ank you for holding the rec(:nt hearing on patent disputes before the InterMtlOnal 

Trade Commission. Attached is a letter sent by Apple General Counsel Bruce Sewellia 

Chairman Leahy:and Ranking Member Grasslel' of the Senate Judiciary Committee after 

thatcommittee'g hearing to examine the anti-competitjveuse of standard-essential 

patents. I bring il to your attention to give you agn,ate:r l!Oderstanding of Apple's 

perspective and experience with these issues; Abuse ofstandard"essentiaJ patents and the 

International Trade Commission process is a critical matter, and J appreciate lhe 

Commil1ee's attention 10 it. 

Sincerely. 

Cam.erille A. Novelll 

Vice President, Worldwide Governtnent Affl)[rs 

AppieIm;. 

cc: Representative Darrel1lssa 

Representative Zoe Lofgren 
248 


75152C-2.eps

July 1&,2012. 

The Honorable Patrick J.Leahy 

Chairman, Committee on the Judiciary 

United States Senate 

Washinglun, DC 

The Honorabl,;: Ch~k Grassley 

RaoJdng Member, Committee tln the Judiciary 

United.Stales Senate 

Washington, DC 

VIA: HAND DE:LIVERY 

Dear Chairmaq Leahy and Ranking Member Grassiey; 

! \\;Tile with. regard to l!ill! week's hearing on the problems created by attempts to use .;tllegedly 

"standard essential" patents that are subject to commitnten~ to license on "fair, reasonable, and 

non-discriminatory" ("FUND") terms to seek exclUsionary remedies-incllllfingin the 

In.tem,ational TKade Commission ("ITC»). Such remedies would result in removal of products 

from fue United States market, and sonw FRAND patent owners have Llsed the 'prospect of 

exclusion to '~hold up"competitors. The Department of Justice and FederaJ Trade Commission 

voiced significant concems about these patenl hold-up praJ:;nces. We thank. the Committee for its 

bipartisan effort to review these important issues, Apple has experienced these abuses first-hand, 

and r write to share so.nw observations on these issues. 

The nOJ and FTC ellpfe1lsed hope that this problem may be fesolvedby the and Article m 

courts, and signs of progress exist. For example, Judge Richatd Posner's recent deCision 

tejecting the effort ofMoromla (Google's subsidiary) 10 enjoin the sale of the iPhQne and iPad in 

the Northem District of Illinois articulated several important limits on FUND patenJsincluding,cfucially, that they cannot.be used as a basis for injunctions. The ITC m.;ty rea<:h the 

same conclusion through proper application of the public interest factors that it must consider in 

every case. 19 U;S:c. § 1331(d)(1) 

Yet COncerns remain. The lTC's Office ofUnfuir lmport Inve$1igatiollS, for example, tool;: the 

positionjusf last week that the [TC should assert jUhsdiqtion over cases involving Fl~AND 

patents-and issue exclUSion orders based on such }latent&. !ftne ITC adopts this position, 

Con.&,'Tess may need to act to. ensure that FRAND patents are not used as weapons to harm 

competition and consumers. 

Two Types: QfT~/m.{}i(}gy: $umdaNiizedAnd Product-Differentiating 

All agree that standards are critical to the modem economy. Slimdards facilitate interQperabiIity 

of devices, and create a l:Qm1non t'oundation for robust competition among devic:e~ thar share 

cettUn core functionality. 
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On this common platform, mobile device manufacturers compete vigorously to develop features 

that differentiate their products from competitors. The differentiating features can take the form 

of product design (such as the physical shape ohhe device), the user interface, the processing 

capabilities, or other aspects. It is competition among nonstandardized, product-differentiating 

technologies that drives the current marketplace and benefits consumers. And it is this 

competition that is threatened by the abusive use ofFRAND patents. 

The capabilities of an iPhone are categorically different from a conventional phone, and result 

from Apple's ability to bring its traditional innovation in computing to the mobile device market. 

Using an iPhone to take photos, manage a home-finance spreadsheet, play video games, or run 

countless other applications has nothing to do with standardized phone protocols. Apple spent 

billions in research and development to create the iPhone, and third-party software developers 

have spent billions more to develop applications that run on the iPhone. The price of an iPhone 

(and the cost of applications that can be purchased from third parties) reflects the value of these 

nonstandardized technologies-as well as the value of the aesthetic design of the iPhone, which 

also reflects immense study and development by Apple, and which also is entirely unrelated to 

standards. 

The heart of the problem is that a handful ofFRAND patent holders are using their standard 

essential patents as leverage to extort either (i) a share of the monetary value of nonstandardized, 

product-differentiating technology or (ii) the right to use, themselves, proprietary 

nonstandardized technology owned by other companies. To enhance their bargaining position, 

the FRAND patent holders have sought injunctions or other exclusionary remedies-to threaten 

companies like Apple that have been leaders in developing product-differentiating technology, 

and to force them to either pay exorbitant royalties or license their product-differentiating 

technology. 

FRAND Compensation 

The royalty for a FRAND patent should be based on the value of the component that contains the 

standardized functionality. See Federal Trade Commission, The Evolving IP Marketplace at 212 

("The practical difficulty ofidentirying a royalty rate that accurately reflects the invention's 

contribution to a much larger, complex product often counsels toward choosing the smallest 

priceable component that incorporates the inventive feature.") (Mar. 2011); Cornell Univ. v. 

Hewlett-Packard Co., 609 F. Supp. 2d. 279, 288 (N.D.N.Y. 2009) (selecting a processor as the 

royalty base where it was the smallest priceable unit). 

For wireless standards like the third-generation (or "3G") standards created by the European 

Telecommunications Standards Institute, any standardized functionality in a mobile device is 

substantially located in a computer chip called a "baseband processor." The price of a baseband 

processor is typically less than $20, and often less than $10. Thus, to obtain the computer chip 

that enables a device to communicate using 3G standardized protocols, a device manufacturer 

must pay less than $20 per device. That same inexpensive chip could be used in a "plain vanilla" 

mobile phone, or a cutting-edge device like an iPhone. The standardized functionality is exactly 

the same. Given the enormous volume of the mobile device market, a FRAND patent holder can 

collect significant total royalties, even if the per-unit royalties are properly constrained. 

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The use of FRAND patents to try to collect a share of the value of nonstandardized technologyor to extract coerced license rights to such technology-is neither fair, reasonable, nor nondiscriminatory. It is inherently unfair and unreasonable to use a patent directed to one thing 

(standardized functionality centered in a commodity baseband chip) to collect money or crosslicense rights on another thing (product-differentiating, nonstandardized technology). It is also 

discriminatory, because the result would be for makers of cutting-edge devices to pay more for 

precisely the same standardized technology used in simple phones. 

That is why it is wrong to charge FRAND royalties on the end price of a device like the iPhone, 

whose value arises more from product-differentiating technology than standardized technology, 

and whose price reflects this. A FRAND royalty on an iPhone should be no higher than a 

FRAND royalty on any other 3G phone. It is akin to a toll on a highway: the toll is identical for 

a jalopy and a new sports car-the sports car does not pay more just because it is faster, more 

stylish, and has a better sound system. 

Nor is it FRAND to seek royalties based on the mere fact that a particular technology was 

standardized; a FRAND royalty should be limited to the true technical value of a patented 

technology, not an artificially inflated value based on the fact that it has been included in a 

mandatory industry standard. As Judge Posner recently put it, "once a patent becomes essential 

to a standard, the [patentee's] bargaining power surges because a prospective licensee has no 

alternative to licensing the patent; he is at the patentee's mercy." Apple, Inc. v. Motorola, Inc., 

No. I:11-cv-08540, ECF No. 1038, slip. op. at 18 (N.D. Ill. June 22, 2012). 

At its core, FRAND is a pro-competitive concept intended to prevent patentees from abusing this 

artificial, standard-derived market power, and is meant to limit FRAND patent holders to the 

intrinsic, pre-standardization value of the standardized technology. The essence of the FRAND 

bargain is that patent holders receive the benefits of standardization (including a large market of 

potential licensees, and in some cases first-mover advantages arising from the ability to quickly 

implement their own patented technology) in return for restricting themselves to royalties based 

on the true value of the standardized technology. 

Resolution of FRAND Disputes 

Apple believes in resolving license disputes through negotiation, to the greatest extent 

practicable, and has successfully executed licenses with many FRAND patent holders. But when 

certain companies have demanded non-FRAND compensation for FRAND patents, Apple has 

put them to their burden. A FRAND patent holder should be prepared to demonstrate that its 

demand is truly fair, reasonable, and non-discriminatory. FRAND should not be subject to the 

patent holder's subjective, often selt~serving, interpretation. 

To take Motorola as an example, Apple has negotiated for years to try to persuade Motorola to 

comply with FRAND. Motorola has demanded a royalty of2.25% of the price of each Apple 

wireless device--which translates into more than $13 per unit-for rights to its allegedly 

standard essential patents. This is more than the price of the baseband processor chip. 

Motorola's demand is not based on the value of standardized technology-rather, Motorola 

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seeks to expropriate the value of the non-standardized technology in Apple's products. For 

example, Motorola's demand would result in significantly different royalties for different iPad 

models, which sell for different prices depending on the amount of memory included in the 

device. But the amount of memory-and its cost-is wholly unrelated to wireless standards. 

That Motorola has steadfastly refused to comply with FRAND makes Motorola an unwilling 

licensor on FRAND terms. Apple is not alone in reaching this conclusion: in an ITC case 

between Motorola and Microsoft, the judge rejected Motorola's "standard terms," finding that 

"the royalty rate offered by Motorola of 2.25%, both as to its amount and the products covered, 

could not possibly have been accepted by Microsoft." Certain Gaming and Related Consoles, 

Related Software, and Components Thereof, Inv. No. 337-TA-752, Initial Determination (Public 

Version) at 300 (Apr. 23, 2012). 

Such disputes can be finally resolved in federal district courts, which have the jurisdiction and 

expertise to adjudicate patent royalty issues. I To the extent the FRAND patent holders' positions 

are correct, they will win an award of damages in the amount they seek, plus interest. To the 

extent Apple (or others who refuse non-FRAND demands) is correct, that position will be 

vindicated by the judge or jury. Given the increasing scrutiny of district courts into the 

relationship between a damages demand and the actual functionality at issue2

, Apple is confident 

that its position will prevail. But for now, the critical point is that FRAND disputes are monetary 

disputes and should be decided on monetary terms-whether by negotiation or, if the parties 

reach an impasse, in district court. 

Yet some FRAND patent holders have sought to distort the dispute-resolution process, by 

hanging the sword of an injunction or exclusionary order over the proceedings. This is a "hold 

up" technique: the goal is to force prospective licensees to agree to pay exorbitant royalties 

and/or cross-license nonstandardized, product-differentiating technology--or have their products 

taken off this market. This hold-up power is, as discussed below, fundamentally incompatible 

withFRAND. 

Apple recognizes that in the exceptional and rare circumstance where a foreign company 

is not subject to personal jurisdiction in any United States district court, the ITC might be an 

appropriate forum for adjudication of a FRAND dispute. The Department of Justice raised this 

scenario at last week's hearing. 

See, e.g., Lucent Teehs., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009), in which 

the Federal Circuit overturned the jury's damages award on the grounds that the "entire market 

value rule" had been improperly applied because the patented feature was only a small part of 

"an enormously complex software program [Outlook] comprising hundreds, ifnot thousands or 

even more, features." Id. at 1332. Lucent and other recent cases make clear that patent holders 

will no longer be able to collect royalties against the entire market value of a device unless an 

asserted patent truly drives demand for that entire market value. In the case of advanced wireless 

devices like the iPhone, it is beyond question that standardized communications protocols do not 

drive demand for their entire market value; if so, then basic phones would sell for the same price 

as iPhones, because both equally use those standardized protocols. 

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The Hold-Up Effect OJ Exclusionary Remedies 

Pennitting injunctions or exclusion orders for FRAND patents would empower makers of 

FRAND declarations to engage in the very type of anticompetitive patent hold-up that they 

disavowed in return for having their purportedly essential technologies standardized. The 

Federal Trade Commission has clearly articulated the severity of the threat that an exclusion 

order based on a FRAND-committed patent would pose to competitive conditions and U.S. 

consumers: 

[A] royalty negotiation that occurs under threat of an exclusion order may be 

weighted heavily in favor of the patentee in a way that is in tension with the 

RAND commitment. High switching costs combined with the threat of an 

exclusion order could allow a patentee to obtain unreasonable licensing terms 

despite its RAND commitment, not because its invention is valuable, but because 

implementers are locked in to practicing the standard. The resulting imbalance 

between the value of patented technology and the rewards for innovation may be 

especially acute where the exclusion order is based on a patent covering a small 

component of a complex multicomponent product. In these ways, the threat of an 

exclusion order may allow the holder of a RAND-encumbered [standard-essential 

patent] to realize royalty rates that reflect patent hold-up, rather than the value of 

the patent relative to alternatives, which could raise prices to consumers while 

undermining the standard setting process. 

Certain Wireless Communication Devices, Portable Music and Data Processing Devices, 

Computers and Components Thereof, Inv. No. 337-TA-745, Third Party United States Federal 

Trade Commission's Statement on the Public Interest ("FTC Public Interest Statement") at 3-4 

(June 6, 2012)3 Judge Posner echoed the FTC's view when he flatly rejected the possibility of 

an injunction for patents subject to FRAND commitments, explaining that the FTC's logic 

"embraces any claim to enjoin the sale of an infringing product." Apple, slip op. at 19. 

The threat to competition associated with pennitting exclusion orders based on FRANDcommitted patents is particularly acute where, as in the wireless-communications industry, 

devices comply with many different standards, each of which is subject to many parties' claims 

to hold standard-essential patents. If exclusion orders or injunctions were available, each and 

See also other public interest submissions made in Investigation No. 337-TA-745, 

including Comment on the Public Interest by AT&T, June 8, 2012, Doc. ID 482441; Comment 

in Response to the Request for Statements on the Public Interest by Cisco Systems, Inc., June 7, 

2012, Doc. ID 482396; Comments on the Public Interest by Microsoft Corporation, June 6, 2012, 

Doc. ID 482241; Comments on the Public Interest by Nokia Corporation, June 6, 2012, Doc. ID 

482247; Comments on the Public Interest by Business Software Alliance, June 6, 2012, Doc. ID 

482232; Comments on the Public Interest by Hewlett-Packard Company, June 6, 2012, Doc. ID 

482215; Comments Retail Industry Leaders Association, June 6, 2012, Doc. ID 482212; see also 

Certain Gaming and Related Consoles, Related Software, and Components Thereof, Inv, No. 

337-TA-752, Statement Regarding the Public Interest by Non-Party Intel Corporation, June 8, 

2012, Doc. ID 482466. 

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every party claiming to hold a standard-essential patent would be empowered to seek exclusion 

of standard-compliant products from the market-and to use that power to hold up suppliers of 

new and innovative products for exorbitant royalties or other license terms. Indeed, absent 

obtaining licenses in advance from every declared-essential patent holder for every standard 

covering its products-which would take years, if it could ever be accomplished-device 

manufacturers could no longer invest in, develop, and bring to market new and innovative 

products without fear that any of the declared-essential patent holders could seek to enjoin 

product sales. To put this into perspective, companies have declared thousands of patents as 

essential to the 3G "UMTS" standard alone, and UMTS is only one of dozens of standards 

practiced by advanced wireless communications devices.4 The use ofFRAND patents to seek 

exclusion orders or injunctions has great potential to stit1e competition from new market entrants. 

This anticompetitive effect would be all the more serious because declared standard-essential 

patent holders would have strong incentives to "hold out" and refuse to agree to FRAND 

royalties, to take advantage of increased leverage from the sunk costs that potential licensees put 

into not only developing their devices, but also obtaining licenses from others-and patent 

holders could demand ever more exorbitant royalties as the price for removing the possibility of 

an exclusion order halting sales of the devices in which costs have been sunk. Not only would 

these incentives further distort the negotiation process, but they could lead to even more delay 

before the device manufacturer could bring new and innovative products to market without threat 

of an exclusionary remedy. 

The bottom line is that if exclusion orders or injunctions were available for patents subject to 

RAND commitments, devices makers would operate under a constant threat of being excluded 

from the market. The end result would be great harm to the competitive conditions of the U.S. 

economy. Product supply would be put at risk-either because of exclusion orders, or because 

companies decide practicing the standard is simply not worth the cost and voluntarily withdraw 

from the market or never introduce their products in the first place; product prices would 

increase sharply; the reduced supply would diminish the availability of like or directly 

See. e.g., Certain Wireless Communication Devices. Portable Music and Data 

Processing Devices. Computers and Components Thereof, Inv. No. 337-TA-745, 

Public Interest Statement by Nokia Corporation at 4 ("For the UMTS standard, companies have 

disclosed thousands of patents as potentially essential to practice the standard. UMTS is only one 

of many, many standards that cover various components in modem high-teclmology devices 

such as computers and smarlphones."); Tim Simcoe, Can Standard Setting Organizations 

Address Patent Holdup? Comments/or the Federal Trade Commission, August 5, 2011, 

available at hltp:llwww.ftc.gov/os/comments/patentstandardsworkshop/00040-80169 .pdf ("ETSI 

requires explicit disclosure and sometimes gets thousands of declared essential patents for a 

single project."); Fairfield Resources International, Inc. Review 0/ Patents Declared Essential to 

LTE and SAE (4G Wireless Standards) Through June 30.2009, January 6, 2010, available at 

http://www.frlicense.com/LTE%20Final%20Report.pdf( .. The lists of patents and patent 

applications declared as essential to L TE or SAE [two fourth generation cellular technology 

standards] compiled by ETSI contains more than 1100 distinct entries declared as of June 30, 

2009."). 

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competitive articles; and U.S. consumers would experience a substantial reduction in innovation 

and product quality, to their detriment. 

The Problems With The "License Offer As The Ticket To An Injllnction" Theory 

Even parties like Motorola and its parent Google recognize that FRAND imposes some form of 

constraint on their ability to use FRAND patents to seek injunctions; all agree that FRAND 

patents are not like other patents. But such companies seek to make that constraint as minimal as 

possible-notably, by advocating what might be called the "license offer as the ticket to an 

injunction" theory. Under this theory, if the FRAND patent holder makes what it deems to be a 

FRAND-compliant offer, and the prospective licensee declines, then the patent holder is freed to 

seek an injunction in district cOUli or an exclusion order at the ITC. This theory is wrong, for 

several reasons. 

First, it places all the leverage into the hands of the patent holder. After the patent holder makes 

the self-interested judgment that it has made a FRAND offer, it frees itself to seek exclusionary 

remedies. This distorted and unfair approach ignores the far more equitable alternative of an 

independent decision-maker-such as a court-setting a FRAND royalty, without injunction 

demands hanging over the proceedings. 

Second, as the FTC noted in its recent ITC submission, "a royalty negotiation that occurs under 

threat of an exclusion order may be weighted heavily in favor of the patentee in a way that is in 

tension with the RAND commitment." Certain Wireless Communication Devices, Portable 

Music and Data Processing Devices, Computers and Components Thereof, lnv. No. 337-T A-745, 

FTC Public Interest Statement at 3. The United States District Court for the Western District of 

Washington recently reached a similar conclusion in a case between Microsoft and Motorola, 

stating, "[A] negotiation where [the licensor] must either come to an agreement or cease its sales 

throughout the country ... fundamentally places that party at a disadvantage." Microsoft COlp. v. 

Motorola, Inc., No. 10-cv-1823, ECF No. 318, slip op. at 24 (W.D. Wash. May 14,2012). 

Simply put, with the threat of an injunction or exclusion order hanging over the defendant's head, 

the dynamic between the parties is fundamentally distorted-creating an unfair incentive to settle 

the litigation on non-FRAND terms. 

Third, the patentee does not need exclusionary remedies to recover FRAND compensation. 

FRAND means money, and in particular royalties-which the district court can award, with 

interest, if the patent holder demonstrates it is entitled to them. By committing to FRAND, the 

patent holder has necessarily admitted that money is adequate compensation-which cuts 

sharply against the availability of an injunction. As Judge Posner concluded, "a [FRAND] 

royalty would provide all of the relief to which [the patentee] would be entitled ifit proved 

infringement ... and thus it is not entitled to an injunction." Apple, slip. op. at 21. 

Nor, as Motorola has argued, is the threat of exclusionary relief necessary to ensure that potential 

licensees bargain in good faith. As Judge Posner explained in rejecting that contention, absent 

the threat of exclusionary relief, both the FRAND patentee and potential licensees have strong 

incentives to reach agreement and avoid the costs of patent litigation, and a potential licensee 

that rejects a license offer later found to be RAND "[runs] tlle risk of being ordered by a court to 

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pay an equal or even higher royalty rate." Apple, slip. op. at 20. It is the distortion from the 

threats of exclusionary reliefthat imperils fair and fruitful negotiations. 

Fourth, the "normal rules" for patents simply do not apply to FRAND-committed patents, and 

thus arguments about the normal remedies available to patent holders are unavailing. Even 

parties like Motorola seem to recognize this, by suggesting a FRAND license offer as the ticket 

to an injunction. No such license offer needs to be made for "normal" patents---owners of 

nonstandardized, non-FRAND committed patents are free to never license their patents. The 

"offer as the ticket to an injunction" theory actually proves too much-it is an implicit 

concession that unrestricted licensing lies at the heart of the FRAND bargain, and this simple 

fact compels the conclusion that exclusionary remedies are inappropriate. 

Fifth, the notion that standard-setting organizations like ETSI have accepted injunctions for 

FRAND patents is incorrect. Quite the contrary: on June 8, 2012, Dr. Michael Walker, former 

Chairman ofthe Board ofETSI, testified on Apple's behalf at the hearing in the International 

Trade Commission case that Samsung brought against Apple. Dr. Walker testified that even 

though the ETSI IPR Policy does not explicitly address injunctions, that Policy is "all about 

seeking a license, not preventing use ofIPR, which an injunction is at the end ofthe day." 

Certain Electronic Devices, Including Wireless Communications Devices. Portable Music and 

Data Processing Devices. and Tablet Computers, Investigation No. 337-T A-794, Hearing 

Transcript at 1350. Samsung did not call any witness to rebut Dr. Walker. 

"De Facto Standards" 

Google's letter submission to tile Committee refers to certain "de facto" standards. This is, 

Apple submits, an attempt to deflect tile Committee's attention from the real problem-and, 

perhaps, an attempt to unduly obtain rights to nonstandardized technologies developed outside of 

the standard-setting process. 

Standard-setting is an industry-wide process to develop common technologies through collective 

action and agreements. Mechanisms like FRAND are required to safeguard against 

anticompetitive abuses that could arise from such industry-wide efforts. 

In contrast, if a single company develops a proprietary technology, this unilateral action does not 

implicate the same considerations as the joint process of standard-setting. That a proprietary 

technology becomes quite popular does not transfonn it into a "standard" subject to the same 

legal constraints as true standards. 

Apple's Commitment To FRAND 

Finally, let me discuss Apple's license terms for its own strong and growing portfolio ofFRAND 

patents. Apple is willing to license its FRAND patents for wireless communications standards 

on license terms that rely on the price of baseband processor chips as the royalty base, at a rate 

that reflects Apple's share ofthe total declared-essential patents for those standards-provided 

that its licensee reciprocally agrees to the same approach. Simply put, Apple is "walking the 

walk" on FRAND, and is not asking that any company do anything that Apple itself is unwilling 

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