Federal Circuit Limits ITC's Indirect Patent Infringement Authority

The Federal Circuit Opinion

The ITC, as an agency under the executive branch, derives its authority to bar unlawful importation from 19 U.S.C. '1337 (often referred to as simply “Section 337″), which authorizes the Commission to issue exclusion orders preventing “[t]he importation into the United States, the sale for importation, or the sale within the United States after importation by the owner, importer, or consignee, of articles that ' infringe a valid and enforceable United States patent.” 19 U.S.C. 1337(a)(1)(B) (emphasis added). The issue considered by the Federal Circuit, one that “ha[d] never [before] been presented to or decided by” the court, was whether, in light of the Commission's statutory authority being limited to importation of “articles ' that infringe,” the Commission is authorized to issue an exclusion order preventing importation of a product on an inducement theory where the article being excluded does not infringe at the time of importation ( i.e. , where direct infringement does not occur until after the article crosses the border into the United States).

Suprema argued on appeal that, among other things, the ITC had exceeded its statutory authority, as the “allegations of induced infringement d[id] not adequately connect the fact of importation to the ultimate infringement.” Suprema, 2013 WL 6510929, *5. The Federal Circuit agreed.

In its discussion of Section 271(b) of the Patent Act governing inducement and Federal Circuit case law interpreting the statute, the court noted that “while the inducing act must of course precede the infringement it induces, it is not a completed inducement under '217(b) until there has been a direct infringement.” Id. at *9. The Federal Circuit held that “[f]or inducement, the only pertinent articles are those which directly infringe ' at the time of importation.” Id. at *11. The court therefore found “that the Commission lacked the authority to enter an exclusion order directed to Suprema's scanners premised on Suprema's purported induced infringement of the method claimed in the [Cross Match '344] patent.” Id. at *9. The Federal Circuit clarified that it was not divesting the ITC of authority to deal with indirect infringement by an “inducer” ' but such authority would be limited to situations “where the article itself directly infringes when imported,” rather than when the imported article may or may not later give rise to direct infringement. Id. at *11.

In a 15-page opinion concurring in part and dissenting in part from the three judge panel's majority opinion, Judge Reyna expressed concern that the majority's opinion was “enabling circumvention of the legitimate legislative objective of Section 337 to stop, at the border, articles involved in unfair trade.” Id. at *23. Judge Reyna noted that under the majority's opinion, an importer could avoid the reach of Section 337 by importing disassembled components of an infringing article, or an article practicing all but one step of a patented method, and reserving the final assembly of the last part or performance of the last step of the patented method, until after importation. Id. at *24. Judge Reyna expressed concern that such a holding would “create a fissure in the dam of the U.S. border through which circumvention of Section 337 will ensue '.” Id. at *20.

The majority addressed Judge Reyna's concerns, writing that “virtually all of the mischief the dissent fears can be addressed by the ITC via resort to '271(a) or '271(c), or even to '271(b) where the direct infringement occurs pre-importation.” Id. at *9 n. 4.

Implications of the Court's Opinion

Although the ITC historically has been used by domestic companies to address infringement by foreign importers, given the practical realities of the cost of manufacturing high technology products, domestic companies now face exposure to potentially costly ITC proceedings based on their sale of devices manufactured abroad and imported into the United States. The ITC has become a popular forum for patent-holders, both because of the considerable expense to the accused infringer of defending ITC proceedings, caused in part by the speedy, statutorily mandated time to resolution, and the ability to effectively obtain injunctions possibly not available in district court litigation in light of eBay.

Makers of devices such as tablets, computers and smartphones ' or in this instance, fingerprint scanners ' are particularly vulnerable to claims that their general purpose devices infringe when combined with certain software, mobile applications or accessories. Often this combination only occurs once the devices are put into use after importation into the U.S., such as when a mobile application is loaded onto a smartphone or tablet. The Federal Circuit court's holding in Suprema effectively removes the ITC as a forum for such disputes where the only potential claim is for alleged inducement of infringement.

This has significant strategic implications for parties to ITC investigations ' favorable implications for accused infringers (respondents), and potentially unfavorable implications for patentees (complainants). For accused infringers, the significant limitation of the ITC's statutory authority in Suprema could open the door to a potential early case-dispositive summary judgment motion.

Though such motions historically have been rarely granted in ITC investigations, in favor of decisions on the merits of infringement and invalidity after a full evidentiary hearing, the Commission has indicated an increasing openness to resolving investigations in early stages prior to costly and time-consuming discovery. This is evidenced, for example, by its recently announced pilot program for early adjudication of potentially-dispositive issues in investigations. See, “Pilot Program Will Test Early Disposition of Certain Section 337 Investigations (Updated),” USITC.

Because a motion based on the Federal Circuit's holding in Suprema could be decided without reaching the merits of direct infringement allegations (i.e., it could be granted even assuming, for purposes of such a motion, that the complainant's infringement contentions were true), an Administrative Law Judge may be more likely to consider and grant the motion based on an abbreviated record showing that the alleged combination is made only after importation. This could allow the respondent to avoid extensive pre- and post-hearing briefing, expert discovery and the costs of conducting a full evidentiary hearing.

Conclusion

For complainants asserting patent infringement claims, the ruling in Suprema may effectively raise the pleading standard. Complainants in ITC investigations already must exceed the relatively low bar of the notice-based pleading requirements of federal district courts, as the Commission relies exclusively on the complaint in deciding whether to initiate an investigation. See, 19 C.F.R. '210.12 (detailing requirements of complaints in ITC investigations). Among other things, complainants in ITC investigations are required to provide detailed claim charts for each asserted independent claim and must state detailed facts regarding the alleged importation of infringing articles. Id . Now, in addition, complainants would be wise to pay careful attention to articulation of their infringement theories. After Suprema , complainants should avoid, if possible, sole reliance on a theory of inducement of infringement. If circumstances force reliance on such a theory, complainants should articulate facts, if present, showing that the alleged infringement takes places prior to importation.

Darryl Woo is a litigation partner at Fenwick & West, LLP, and former chair of the firm's litigation group. Darryl is a seasoned trial attorney focusing on patent litigation in the federal courts and International Trade Commission. Bryan Kohm is a senior associate in Fenwick's litigation group. Bryan's practice focuses on patent infringement and trade secret litigation in the federal courts and International Trade Commission. Ravi Ranganath is an associate in Fenwick's litigation group. Ravi focuses his practice on patent and other intellectual property litigation matters to support clients in the high technology and life science industries.

On Dec. 13, 2013, the United States Court of Appeals for the Federal Circuit, in Suprema, Inc., et al. v. International Trade Commission, issued a landmark decision limiting the statutory authority of the International Trade Commission (ITC) to remedy indirect infringement, holding “that an exclusion order based on a violation of 19 U.S.C. '1337(a)(1)(B)(i) may not be predicated on a theory of induced infringement under 35 U.S.C. '271(b) where direct infringement does not occur until after importation of the articles the exclusion order would bar.” Suprema, Inc. v. Int'l Trade Comm'n, ___ F.3d ___ 2013 WL 6510929, *1 (Fed. Cir. Dec. 13, 2013) (emphasis in original). The Federal Circuit's holding effectively renders patent infringement claims based purely on alleged inducement of infringement beyond the authority of the ITC.

The ITC Investigation

In the underlying ITC Investigation (Certain Biometric Scanning Devices, Components Thereof, Associated Software, and Products Containing Same, U.S.I.T.C. Inv. No. 337-TA-720), the Complainant, Florida-based Cross Match Technologies, Inc. (Cross Match), alleged that biometric (fingerprint) scanners sold by Respondent Suprema, Inc. of South Korea (Suprema) infringed Cross Match's '344 patent related to fingerprint scanning technology when combined with software created by fellow Respondent Mentalix, Inc. of Plano, TX (Mentalix). Suprema sold its fingerprint scanners in the United States through distributors such as Texas-based Mentalix, which packaged the scanners with a general purpose computer and fingerprint scanning software for sale to end customers. Suprema did not provide executable end-user software, but did provide a Software Development Kit (SDK) that allowed its customers and distributors to create their own software to operate the scanner. Suprema's scanners, as well as its SDK ' the only “articles” that were actually imported ' were found not to infringe the '344 patent when combined with software developed by other customers. Hence, the ITC concluded these items had substantial non-infringing uses, and did not contributorily or directly infringe. After a hearing and post-hearing briefing, the ITC found infringement of the '344 patent as to Suprema, solely on the basis of inducement of infringement, where the claimed direct infringement took place only after importation into the U.S. Based on this finding, the ITC issued a limited exclusion order.

The Federal Circuit Opinion

The ITC, as an agency under the executive branch, derives its authority to bar unlawful importation from 19 U.S.C. '1337 (often referred to as simply “Section 337″), which authorizes the Commission to issue exclusion orders preventing “[t]he importation into the United States, the sale for importation, or the sale within the United States after importation by the owner, importer, or consignee, of articles that ' infringe a valid and enforceable United States patent.” 19 U.S.C. 1337(a)(1)(B) (emphasis added). The issue considered by the Federal Circuit, one that “ha[d] never [before] been presented to or decided by” the court, was whether, in light of the Commission's statutory authority being limited to importation of “articles ' that infringe,” the Commission is authorized to issue an exclusion order preventing importation of a product on an inducement theory where the article being excluded does not infringe at the time of importation ( i.e. , where direct infringement does not occur until after the article crosses the border into the United States).

Suprema argued on appeal that, among other things, the ITC had exceeded its statutory authority, as the “allegations of induced infringement d[id] not adequately connect the fact of importation to the ultimate infringement.” Suprema, 2013 WL 6510929, *5. The Federal Circuit agreed.

In its discussion of Section 271(b) of the Patent Act governing inducement and Federal Circuit case law interpreting the statute, the court noted that “while the inducing act must of course precede the infringement it induces, it is not a completed inducement under '217(b) until there has been a direct infringement.” Id. at *9. The Federal Circuit held that “[f]or inducement, the only pertinent articles are those which directly infringe ' at the time of importation.” Id. at *11. The court therefore found “that the Commission lacked the authority to enter an exclusion order directed to Suprema's scanners premised on Suprema's purported induced infringement of the method claimed in the [Cross Match '344] patent.” Id. at *9. The Federal Circuit clarified that it was not divesting the ITC of authority to deal with indirect infringement by an “inducer” ' but such authority would be limited to situations “where the article itself directly infringes when imported,” rather than when the imported article may or may not later give rise to direct infringement. Id. at *11.

In a 15-page opinion concurring in part and dissenting in part from the three judge panel's majority opinion, Judge Reyna expressed concern that the majority's opinion was “enabling circumvention of the legitimate legislative objective of Section 337 to stop, at the border, articles involved in unfair trade.” Id. at *23. Judge Reyna noted that under the majority's opinion, an importer could avoid the reach of Section 337 by importing disassembled components of an infringing article, or an article practicing all but one step of a patented method, and reserving the final assembly of the last part or performance of the last step of the patented method, until after importation. Id. at *24. Judge Reyna expressed concern that such a holding would “create a fissure in the dam of the U.S. border through which circumvention of Section 337 will ensue '.” Id. at *20.

The majority addressed Judge Reyna's concerns, writing that “virtually all of the mischief the dissent fears can be addressed by the ITC via resort to '271(a) or '271(c), or even to '271(b) where the direct infringement occurs pre-importation.” Id. at *9 n. 4.

Implications of the Court's Opinion

Although the ITC historically has been used by domestic companies to address infringement by foreign importers, given the practical realities of the cost of manufacturing high technology products, domestic companies now face exposure to potentially costly ITC proceedings based on their sale of devices manufactured abroad and imported into the United States. The ITC has become a popular forum for patent-holders, both because of the considerable expense to the accused infringer of defending ITC proceedings, caused in part by the speedy, statutorily mandated time to resolution, and the ability to effectively obtain injunctions possibly not available in district court litigation in light of eBay.

Makers of devices such as tablets, computers and smartphones ' or in this instance, fingerprint scanners ' are particularly vulnerable to claims that their general purpose devices infringe when combined with certain software, mobile applications or accessories. Often this combination only occurs once the devices are put into use after importation into the U.S., such as when a mobile application is loaded onto a smartphone or tablet. The Federal Circuit court's holding in Suprema effectively removes the ITC as a forum for such disputes where the only potential claim is for alleged inducement of infringement.

This has significant strategic implications for parties to ITC investigations ' favorable implications for accused infringers (respondents), and potentially unfavorable implications for patentees (complainants). For accused infringers, the significant limitation of the ITC's statutory authority in Suprema could open the door to a potential early case-dispositive summary judgment motion.

Though such motions historically have been rarely granted in ITC investigations, in favor of decisions on the merits of infringement and invalidity after a full evidentiary hearing, the Commission has indicated an increasing openness to resolving investigations in early stages prior to costly and time-consuming discovery. This is evidenced, for example, by its recently announced pilot program for early adjudication of potentially-dispositive issues in investigations. See, “Pilot Program Will Test Early Disposition of Certain Section 337 Investigations (Updated),” USITC.

Because a motion based on the Federal Circuit's holding in Suprema could be decided without reaching the merits of direct infringement allegations (i.e., it could be granted even assuming, for purposes of such a motion, that the complainant's infringement contentions were true), an Administrative Law Judge may be more likely to consider and grant the motion based on an abbreviated record showing that the alleged combination is made only after importation. This could allow the respondent to avoid extensive pre- and post-hearing briefing, expert discovery and the costs of conducting a full evidentiary hearing.

Conclusion

For complainants asserting patent infringement claims, the ruling in Suprema may effectively raise the pleading standard. Complainants in ITC investigations already must exceed the relatively low bar of the notice-based pleading requirements of federal district courts, as the Commission relies exclusively on the complaint in deciding whether to initiate an investigation. See, 19 C.F.R. '210.12 (detailing requirements of complaints in ITC investigations). Among other things, complainants in ITC investigations are required to provide detailed claim charts for each asserted independent claim and must state detailed facts regarding the alleged importation of infringing articles. Id . Now, in addition, complainants would be wise to pay careful attention to articulation of their infringement theories. After Suprema , complainants should avoid, if possible, sole reliance on a theory of inducement of infringement. If circumstances force reliance on such a theory, complainants should articulate facts, if present, showing that the alleged infringement takes places prior to importation.

Darryl Woo is a litigation partner at Fenwick & West, LLP, and former chair of the firm's litigation group. Darryl is a seasoned trial attorney focusing on patent litigation in the federal courts and International Trade Commission. Bryan Kohm is a senior associate in Fenwick's litigation group. Bryan's practice focuses on patent infringement and trade secret litigation in the federal courts and International Trade Commission. Ravi Ranganath is an associate in Fenwick's litigation group. Ravi focuses his practice on patent and other intellectual property litigation matters to support clients in the high technology and life science industries.