The Law At Odds: Looking for Harmony Between 337 and the '271(g) Exception

Development Corp. owns a patent covering a process for making a chemical 'X.' Imports Inc. uses the process to make chemical X in Europe. Chemical X is then materially altered as it is converted to chemical 'Z'; then it is shipped to the United States. Can Development Corp. block importation of chemical Z? The answer might depend on what forum Development Corp. chooses.

According to U.S. patent law, the answer should be 'yes.' 35 U.S.C. '271(g) specifically allows importation of a product made by a patented process in a foreign country as long as the product is materially changed prior to entry in the United States. However, in Kinik Co. v. ITC, 362 F.3d 1359 (Fed. Cir. 2004), the Federal Circuit upheld an International Trade Commission ('ITC') ruling that the defenses established in '271(g) are not available in so-called 337 actions brought before the ITC under 19 U.S.C. '1337. Thus, even though it is permissible under U.S. patent law to import a product made employing a U.S. patented process somewhere upstream, the possibility remains that the ITC could enjoin the importation of that product anyway pursuant to its own finding of infringement under the administrative laws.

This inconsistency suggests that there is a need for Congress to harmonize the patent and administrative laws, such as by amending 19 U.S.C. '1337 to include the defenses of 35 U.S.C. '271(g). Cases litigated under '271(g) are relatively rare and Kinik has not been used for the premise that '271(g) defenses are not available in 337 actions. However, the inconsistency in the laws places a burden on a practitioner's ability to give a client reliable guidance. Absent congressional or court intervention, attorneys providing legal counsel to those importing products into the United States can take some solace in the ITC's 'EPROM' method of determining remedies in importation cases. See Certain Erasable Programmable Read-Only Memories, Components Thereof, Products Containing Such Memories, and Processes for Making Such Memories, Inv. No. 337-TA-276, USITC Pub. 2196, Comm'n. Op. at 124-26 (May 1989)('EPROM'), aff'd sub nom. Hyundai Elec. Indus. Co. v. ITC, 899 F.2d 1204 (Fed. Cir. 1990). In EPROM, the Commission determined that it had authority to issue an exclusion order that covers 'downstream products,' which are products that incorporate the infringing articles as components. In making such a determination, the Commission identified certain factors, reproduced in Table 1 on page 4, that should be considered. In applying the so-called EPROM test, the ITC should refrain from enjoining importation under '1337 where facts establish non-infringement under '271(g).

Recently, computer chip maker Broadcom Corp. brought an action in federal district court against Qualcomm Inc., Broadcom Corp. v. Qualcomm Inc., 05cv00468 (Filed Aug. 2, 2005 C.D.Cal.), with concurrent proceedings before the ITC. Certain Baseband Processor Chips and Chipsets, Transmitter and Receiver (Radio) Chips, Power Control Chips, and Products Containing Same, Including Cellular Telephone Handsets, Inv. No. 337-TA-543, Final Determination (June 7, 2007)('BroadcomITC'). The ITC's application of '1337 in BroadcomITC of its EPROM test for determining exclusionary remedies illustrates how facts sufficient to establish non-infringement under '271(g) should also result in no injunction under '1337. Unfortunately, absent congressional intervention, this is not a foregone conclusion, and uncertainty remains.

The Application of 35 U.S.C. '271(g)

Under 35 U.S.C. '271(g), a product that is made by a patented process will not be considered to be so made after: 1) it is materially changed by subsequent processes; or 2) it becomes a trivial and nonessential component of another product.

Guidelines for determining when a product made by a patented process becomes a trivial and nonessential component of another product have not been established. Instead such cases have been decided on the facts. However, the Federal Circuit has held that a 'material' change in a compound is most naturally viewed as a significant change in the compound's structure and properties. Even more generically, the court has stated that 'materially changed' requires, at a minimum, there be a real difference between the product imported, offered for sale, sold, or used in the United States and the products produced by the patented process.

The Application of 19 U.S.C. '1337

In BroadcomITC, Broadcom alleged that defendant Qualcomm infringed several of its patents for computer chips by importing the chips themselves and downstream wireless devices that incorporated the allegedly infringing chips. Thus, before the ITC, Broadcom was seeking an injunction from importation of not only the infringing chips, but also any device that employed the chips in 'downstream' wireless devices; that is, devices that incorporate or are made from infringing components.

The ITC ruled partially in favor of Broadcom. The commission felt defendant Qualcomm's chips infringed one of Broadcom's asserted patents and enjoined importation of those patented chips. With respect to downstream wireless devices that included the infringing chips, after a lengthy analysis, the ITC determined that all new models of devices containing the chips would be banned, but that existing models currently on the market would be exempt from the ban.

In fashioning its remedy with respect to downstream products, the ITC employed its EPROM test. Under the EPROM test, the commission weighs various factors to come up with an exclusion order. While not exclusive, the commission generally considers nine factors (see Table 1). The ITC's application of the EPROM factors in the Broadcom dispute illustrates how the commission applies the factors generally.

Essentially, in analyzing the factors, the ITC seems to be concerned with the substantiality of the patented article to the downstream product, the detriment to the complainant, the burden on third parties, and the likelihood of evasion of an exclusion order.

In BroadcomITC, as is generally the case, the commission found that the allegedly infringing articles were a substantial part of the downstream product. Moreover, the commission found that the complainant, Broadcom, would bear a higher burden than the respondent, Qualcomm, if an exclusion was not issued. While Broadcom's burden would be heavy without an exclusion, the commission also found that its burden must be balanced with that of third parties, which do not have alternatives to the infringing chips or wireless devices. Weighing the factors, the commission felt a partial exclusion was in order, and that, though burdensome, U.S. Customs would be able to enforce the order.

After considering the nine factors and crafting an appropriate exclusion order, the commission then reviewed the effect of the exclusion order on: 1) the public health and welfare, 2) competitive conditions in the U.S. economy, 3) the production of like or directly competitive articles in the United States, and 4) U.S. consumers, as required by statute. Noting that the ITC has only denied relief three times based on the public interest, the BroadcomITC commission decided that the limited exclusion order crafted under the EPROM test was sufficient to protect the public health and welfare.

EPROM and '271(g)

Assuming, for the sake of argument that an imported product is materially changed according to the court's test under '271(g), in many, if not most cases, one could argue that the EPROM factors weigh against exclusion of the product from importation under '1337.

A critical argument to make is that the imported product does not contain a patented product as a component at all, let alone a substantial component. Moreover, one should argue that those importing the downstream product would bear a higher burden than the U.S. patent owner if an exclusion order were issued. Depending on the particular industry, third parties may also bear an excessive burden, and facts should be presented in such a light. Finally, while not given substantial weight in BroadcomITC, the identity of the manufacturer of the downstream products is important. If the product of the patented process is obtained by a third party rather than the manufacturer of the particular downstream product, the ITC is likely to weigh the circumstances against downstream relief.

Though the ITC has rarely denied relief based on the public interest factors, some domestic industries can make very strong arguments in favor of doing so for their products. For example, in the generic pharmaceutical industry, Congress has acted to ensure that the public may obtain affordable alternatives to high-priced brand name drugs. Thus, to exclude legally imported drug products would place a heavy burden back onto the general public, which burden it is the intent of Congress to remove. Accordingly, the generic pharmaceutical industry is an example of where the public interest factors should hold great weight for denying downstream relief.

Conclusion

It is inconsistent for the law to allow an injunction under '1337 of imported products produced using a materially changed product made by a U.S. patented process. Such imported products are lawful according to the patent laws and the inconsistency in '1337, as interpreted by the Kinik court, should be reconciled either by reversing Kinik or amending '1337. Until that time, though '271(g) cases are rare before the courts and ITC, it is not rare for the issue to come up for purposes of counseling a client. Thus, while the inconsistency remains, practitioners should endeavor to consider whether facts sufficient to establish material changes and non-infringement under '271(g) are likewise sufficient to avoid injunction to importation under the ITC's EPROM test pursuant to '1337.

[IMGCAP(1)]

Christopher Demas is a patent agent with Pearne & Gordon LLP, working under Michael Garvey and Richard Sharpe, both partners at the firm.

Development Corp. owns a patent covering a process for making a chemical 'X.' Imports Inc. uses the process to make chemical X in Europe. Chemical X is then materially altered as it is converted to chemical 'Z'; then it is shipped to the United States. Can Development Corp. block importation of chemical Z? The answer might depend on what forum Development Corp. chooses.

According to U.S. patent law, the answer should be 'yes.' 35 U.S.C. '271(g) specifically allows importation of a product made by a patented process in a foreign country as long as the product is materially changed prior to entry in the United States. However, in Kinik Co. v. ITC , 362 F.3d 1359 (Fed. Cir. 2004), the Federal Circuit upheld an International Trade Commission ('ITC') ruling that the defenses established in '271(g) are not available in so-called 337 actions brought before the ITC under 19 U.S.C. '1337. Thus, even though it is permissible under U.S. patent law to import a product made employing a U.S. patented process somewhere upstream, the possibility remains that the ITC could enjoin the importation of that product anyway pursuant to its own finding of infringement under the administrative laws.

This inconsistency suggests that there is a need for Congress to harmonize the patent and administrative laws, such as by amending 19 U.S.C. '1337 to include the defenses of 35 U.S.C. '271(g). Cases litigated under '271(g) are relatively rare and Kinik has not been used for the premise that '271(g) defenses are not available in 337 actions. However, the inconsistency in the laws places a burden on a practitioner's ability to give a client reliable guidance. Absent congressional or court intervention, attorneys providing legal counsel to those importing products into the United States can take some solace in the ITC's 'EPROM' method of determining remedies in importation cases. See Certain Erasable Programmable Read-Only Memories, Components Thereof, Products Containing Such Memories, and Processes for Making Such Memories, Inv. No. 337-TA-276, USITC Pub. 2196, Comm'n. Op. at 124-26 (May 1989)('EPROM'), aff'd sub nom. Hyundai Elec. Indus. Co. v. ITC , 899 F.2d 1204 (Fed. Cir. 1990). In EPROM, the Commission determined that it had authority to issue an exclusion order that covers 'downstream products,' which are products that incorporate the infringing articles as components. In making such a determination, the Commission identified certain factors, reproduced in Table 1 on page 4, that should be considered. In applying the so-called EPROM test, the ITC should refrain from enjoining importation under '1337 where facts establish non-infringement under '271(g).

Recently, computer chip maker Broadcom Corp. brought an action in federal district court against Qualcomm Inc., Broadcom Corp. v. Qualcomm Inc., 05cv00468 (Filed Aug. 2, 2005 C.D.Cal.), with concurrent proceedings before the ITC. Certain Baseband Processor Chips and Chipsets, Transmitter and Receiver (Radio) Chips, Power Control Chips, and Products Containing Same, Including Cellular Telephone Handsets, Inv. No. 337-TA-543, Final Determination (June 7, 2007)('BroadcomITC'). The ITC's application of '1337 in BroadcomITC of its EPROM test for determining exclusionary remedies illustrates how facts sufficient to establish non-infringement under '271(g) should also result in no injunction under '1337. Unfortunately, absent congressional intervention, this is not a foregone conclusion, and uncertainty remains.

The Application of 35 U.S.C. '271(g)

Under 35 U.S.C. '271(g), a product that is made by a patented process will not be considered to be so made after: 1) it is materially changed by subsequent processes; or 2) it becomes a trivial and nonessential component of another product.

Guidelines for determining when a product made by a patented process becomes a trivial and nonessential component of another product have not been established. Instead such cases have been decided on the facts. However, the Federal Circuit has held that a 'material' change in a compound is most naturally viewed as a significant change in the compound's structure and properties. Even more generically, the court has stated that 'materially changed' requires, at a minimum, there be a real difference between the product imported, offered for sale, sold, or used in the United States and the products produced by the patented process.

The Application of 19 U.S.C. '1337

In BroadcomITC, Broadcom alleged that defendant Qualcomm infringed several of its patents for computer chips by importing the chips themselves and downstream wireless devices that incorporated the allegedly infringing chips. Thus, before the ITC, Broadcom was seeking an injunction from importation of not only the infringing chips, but also any device that employed the chips in 'downstream' wireless devices; that is, devices that incorporate or are made from infringing components.

The ITC ruled partially in favor of Broadcom. The commission felt defendant Qualcomm's chips infringed one of Broadcom's asserted patents and enjoined importation of those patented chips. With respect to downstream wireless devices that included the infringing chips, after a lengthy analysis, the ITC determined that all new models of devices containing the chips would be banned, but that existing models currently on the market would be exempt from the ban.

In fashioning its remedy with respect to downstream products, the ITC employed its EPROM test. Under the EPROM test, the commission weighs various factors to come up with an exclusion order. While not exclusive, the commission generally considers nine factors (see Table 1). The ITC's application of the EPROM factors in the Broadcom dispute illustrates how the commission applies the factors generally.

Essentially, in analyzing the factors, the ITC seems to be concerned with the substantiality of the patented article to the downstream product, the detriment to the complainant, the burden on third parties, and the likelihood of evasion of an exclusion order.

In BroadcomITC, as is generally the case, the commission found that the allegedly infringing articles were a substantial part of the downstream product. Moreover, the commission found that the complainant, Broadcom, would bear a higher burden than the respondent, Qualcomm, if an exclusion was not issued. While Broadcom's burden would be heavy without an exclusion, the commission also found that its burden must be balanced with that of third parties, which do not have alternatives to the infringing chips or wireless devices. Weighing the factors, the commission felt a partial exclusion was in order, and that, though burdensome, U.S. Customs would be able to enforce the order.

After considering the nine factors and crafting an appropriate exclusion order, the commission then reviewed the effect of the exclusion order on: 1) the public health and welfare, 2) competitive conditions in the U.S. economy, 3) the production of like or directly competitive articles in the United States, and 4) U.S. consumers, as required by statute. Noting that the ITC has only denied relief three times based on the public interest, the BroadcomITC commission decided that the limited exclusion order crafted under the EPROM test was sufficient to protect the public health and welfare.

EPROM and '271(g)

Assuming, for the sake of argument that an imported product is materially changed according to the court's test under '271(g), in many, if not most cases, one could argue that the EPROM factors weigh against exclusion of the product from importation under '1337.

A critical argument to make is that the imported product does not contain a patented product as a component at all, let alone a substantial component. Moreover, one should argue that those importing the downstream product would bear a higher burden than the U.S. patent owner if an exclusion order were issued. Depending on the particular industry, third parties may also bear an excessive burden, and facts should be presented in such a light. Finally, while not given substantial weight in BroadcomITC, the identity of the manufacturer of the downstream products is important. If the product of the patented process is obtained by a third party rather than the manufacturer of the particular downstream product, the ITC is likely to weigh the circumstances against downstream relief.

Though the ITC has rarely denied relief based on the public interest factors, some domestic industries can make very strong arguments in favor of doing so for their products. For example, in the generic pharmaceutical industry, Congress has acted to ensure that the public may obtain affordable alternatives to high-priced brand name drugs. Thus, to exclude legally imported drug products would place a heavy burden back onto the general public, which burden it is the intent of Congress to remove. Accordingly, the generic pharmaceutical industry is an example of where the public interest factors should hold great weight for denying downstream relief.

Conclusion

It is inconsistent for the law to allow an injunction under '1337 of imported products produced using a materially changed product made by a U.S. patented process. Such imported products are lawful according to the patent laws and the inconsistency in '1337, as interpreted by the Kinik court, should be reconciled either by reversing Kinik or amending '1337. Until that time, though '271(g) cases are rare before the courts and ITC, it is not rare for the issue to come up for purposes of counseling a client. Thus, while the inconsistency remains, practitioners should endeavor to consider whether facts sufficient to establish material changes and non-infringement under '271(g) are likewise sufficient to avoid injunction to importation under the ITC's EPROM test pursuant to '1337.

[IMGCAP(1)]

Christopher Demas is a patent agent with Pearne & Gordon LLP, working under Michael Garvey and Richard Sharpe, both partners at the firm.