The Importance of Auditing Components to Avoid ITC Jurisdiction

Your company (or your client’s company) is an American company. All your offices and employees are here in the United States, likely in the same location. You assemble your products or devices here. You purchase all the parts and components that you don’t make yourself from other American companies, probably by calling or emailing their American salespeople that you have a longtime relationship with. And you sell your products to other American companies. Surely your company thus cannot be sued for patent infringement in the International Trade Commission (ITC), whose mission is to “investigate and make determinations in proceedings involving imports claimed to injure a domestic industry or violate U.S. intellectual property rights.” Not so fast.

While the ITC regulations require the complainant to show the “importation into the United States, the sale for importation, or the sale within the United States after importation . . . of articles that infringe a valid and enforceable United States patent,” the ITC has set a low bar for the importation requirement. 19 U.S.C. § 1337(a)(1)(B). “Importation of even a single infringing article is sufficient to support an action under section 337, and discontinuance of unfair importation is not a defense under section 337.” Certain Condensers, Parts Thereof & Products Containing Same, Inv. No. 337-TA-334, Comm’n Op. at 23 (Aug. 20, 1997). You don’t even have to be the importer to meet the importation requirement. Comcast Corp. v. Int’l Trade Comm’n, 951 F.3d 1301, 1309 (Fed. Cir. 2020).

As it relates to this article, the ITC has found even the importation of components that alone cannot infringe are enough to clear the importation requirement’s low bar. See, e.g., Certain High-Density Fiber Optic Equipment and Components Thereof, No. 337-TA-1194, Comm’n Op. at 17 (Aug. 23, 2021). The Commission recently extended this analysis to the “importation of a single, standard component used in a manufacturing process that occurs in the U.S.” In the Matter of Certain Chem. Mech. Planarization Slurries & Components Thereof Pub. Comm’n Opinion, Inv. No. 337-TA-1204, Comm’n Op. at 11-13 (Jan. 6, 2022). As the Commission reasoned, the importation of just one component “is sufficient to establish the importation requirement, i.e., that there be an ‘importation into the United States’ as provided in section 337(a)(1)(B).” Id.

What Does This Mean for You?

Many companies take some action to limit their exposure to patent infringement lawsuits, whether through routine patent searches or some other means. But there are two opportunities where companies undertake specific efforts to limit their exposure to being hit with a patent infringement suit: 1) when planning to assert their own patents; and 2) when seeking freedom to operate before launching a new product. When a party is engaging counsel and preparing to file suit, there is (or should typically be) a discussion about the possibility of a countersuit. For a freedom to operate opinion, a company is looking for some assurance that its product does not infringe at least the patents of its direct competitors. Both undertakings involve considerable due diligence.

If your company is not already, part of the due diligence needs to include an audit of the components and supply chain to avoid the ITC, if possible.

Not Many Upsides for Defendants the ITC

Litigating at the ITC is usually worse for defendants than litigating in district court. The ITC is typically more expensive, you can’t counterclaim and have your counterclaim heard by the ITC, the ITC will not stay the case pending inter partes review (IPR), the speed means significant commitment of the company’s time and resources, and so on. Even if you win, ITC rulings are generally not binding on the district court in parallel litigation, because “Congress did not intend decisions of the ITC on patent issues to have preclusive effect.” Texas Instruments Inc. v. Cypress Semiconductor Corp., 90 F.3d 1558, 1569 (Fed. Cir. 1996). And you cannot recover your attorney’s fees at the ITC for exceptional cases. So even if you win on the merits, the complainant may still get a second bite at the apple in district court with your playbook from the ITC case in hand. There is just no upside and a lot of potential downsides for a company defending itself at the ITC.

For some companies, avoiding the ITC by removing any imports from their products before they are imported is impossible. Their products are made outside the United States and imported as a final or almost final product. But for many other companies, especially those set up like the company in the opening, it is possible and desirable to make sure none of the components or parts you purchase are imported.

Just because a component is ordered from an American company through an American salesperson does not mean that it is not being imported. You have to check the invoices and other records to know where the product is coming from.

Take a company like Texas Instruments, for example. While TI has both facilities and manufacturing in the United States, your components may still be imported. TI also has manufacturing all over the world, especially across Southeast Asia. So, calling up John Smith at TI’s headquarters in Dallas, Texas and ordering the chips you need does not guarantee those chips are not imported. If TI or whatever other manufacturer you use handles all the shipping and import responsibilities, this may not be clear to your company without some effort. The parts arrive at your facility just like every other shipment. And under ordinary circumstances, your company would not care where they came from as long as they arrived on time and in proper working order.

Benefits of Consent Orders

Even if you are not able to rework your supply chain to avoid an ITC case altogether, an audit on your components and supply chain may put you in a position to enter into a consent order to avoid the cost and hassle of an ITC case.

Under Commission Rule 210.21(c), a respondent can terminate an ITC investigation if it agrees under a consent order not to “sell for importation, import, or sell after importation the subject articles” specified in the consent order stipulation. A complainant cannot prevent a respondent from entering a consent order. While there are a lot of factors to consider before entering a consent order, a consent order may be an attractive option even if you have strong defenses on the merits because it abruptly ends the investigation. But the ITC investigation will keep moving while you evaluate a potential consent order. Knowing your supply chain and your options to stop importing ahead of time will save time, which means saving money.

Depending on your company and its product offerings, you might can make simple changes in your components and supply chain to ensure that you do not get trapped in an ITC investigation that drains your company’s resources. But to make those changes in advance, you must know where your products are shipped from. And knowing that requires a regular audit of your bills of materials and your packing lists.

Image Source: Deposit Photos
Author: georgejmclittle
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