Assessing bias in patent infringement cases: a review of International Trade Commission decisions.

AuthorHahn, Robert W.

TABLE OF CONTENTS I. INTRODUCTION II. PRIOR EMPIRICAL RESEARCH ON SECTION 337 INVESTIGATIONS A. The Value of ITC Litigated Patents B. Characteristics of Firms Utilizing the Section 337 Process III. APPROPRIATENESS OF INJUNCTIVE RELIEF IN PATENT CASES IV. PURPORTED BENEFITS OF SECTION 337 INVESTIGATIONS A. Protectionism B. Speed in Resolving Patent Disputes C. Filling Gaps in District Court Jurisdiction V. EMPIRICAL RESULTS ON POSSIBLE BIASES IN SECTION 337 INVESTIGATIONS A. Does the ITC Rule in Favor of Complainants Too Frequently? 1. Percentage of Favorable Outcomes for Complainants in ITC Proceedings 2. Frequency with Which the ITC is Overturned on Appeal 3. Comparing Outcomes in Parallel District Court and ITC Proceedings B. Does the ITC Grant Injunctive Relief Too Often? 1. Frequency of Injunctive Relief in the ITC and District Courts 2. Does the ITC Issue Injunctive Relief in Cases That Likely Would Not Satisfy the eBay Test? VI. POSSIBLE REFORMS OF THE ITC SECTION 337 PROCESS A. Minimizing the Social Costs of Errors Committed by the ITC and Administrative Costs Associated with Implementing Reforms B. Reform Proposals 1. Restrict the ITC's Jurisdiction Over Patent Cases 2. Require the ITC to Apply the eBay Test Before Granting Injunctive Relief VII. CONCLUSION APPENDIX 1: PARALLEL DISTRICT COURT/ITC PROCEEDINGS APPENDIX 2: CANDIDATES FOR TYPE II ERRORS BY THE ITC--CASES THAT RESULTED IN AN EXCLUSION ORDER (WITHOUT SETTLEMENTS) BETWEEN 1990 AND 2000 APPENDIX 3: CANDIDATES FOR TYPE II ERRORS BY THE ITC--CASES THAT RESULTED IN A SETTLEMENT (WITHOUT EXCLUSION ORDER) BETWEEN 1990 AND 2000 APPENDIX 4: ITC CASES INVOLVING THE EPROM TEST I. INTRODUCTION

The International Trade Commission ("ITC")--one of the two venues in which a firm can enforce its U.S. patent rights--awards patent holders nearly automatic injunctive relief if it finds infringement. (1) Yet an important new strand of academic literature demonstrates that awarding injunctive relief to patent holders, even when their patents are infringed, is often inconsistent with the socially optimal result. (2) In particular, when the patent covers a small component of an end product or when the patent holder is a non-practicing entity, the award of--or even the threat of--injunctive relief can lead to settlements at inflated royalty rates that are then passed on to end users in the form of higher prices. (3) In these cases, monetary fines or reasonable royalty rates will typically be better than injunctions at improving economic efficiency. (4)

A recent dispute in the ITC brought these issues sharply into focus. Broadcom, a U.S. company that makes communications-related technology, filed a complaint in the ITC against Qualcomm, another U.S. company that is a world leader in wireless communications technology. (5) In June 2007, the ITC imposed a limited exclusion order against Qualcomm chipsets, preventing the importation of many new, popular EV-DO handsets into the United States. (6) This action demonstrates the power of the ITC in influencing relations between domestic litigants. (7) The ITC's ruling has potentially far-reaching repercussions on the entire wireless industry, which may include increased costs, (8) the exclusion of more products, and the creation of precedent for future lawsuits. (9)

This Article presents the results of an empirical examination of ITC patent litigation. The ITC, which has jurisdiction to hear patent disputes under section 337 of the Smoot-Hawley Tariff Act of 1930 (10) ("section 337"), is likely to play an increasingly important role in the resolution of such disputes, not only because of the types of relief it can award, but because it has grown in popularity as a patent litigation venue. (11) Figure 1 shows the number of section 337 cases alleging patent infringement by year. The average number of patent cases filed at the ITC was ten per year in the 1990s; since 2000, the number of cases has doubled to an average of twenty-three per year. (12)

The ITC has assumed an increasingly prominent role in adjudicating patent disputes in recent years. It has become an attractive venue for patent cases involving electronic products, since electronics are primarily manufactured overseas. A review of the ITC Database of section 337 investigations ("ITC Database") suggests that other important industries are affected by the ITC's role in patent law, including computers, semiconductors, and communications systems. (14) These three "high technology" sectors of the economy are highly dependent on intellectual property and have been implicated in recent ITC patent cases. (15) Combined, these sectors contributed nearly half a trillion dollars to U.S. gross domestic product in 2005. (16) Thus, while the number of actual section 337 cases at the ITC may be small relative to the number of patent cases in district courts, a single ITC case, such as the Broadcom versus Qualcomm case, can have far-reaching effects for an entire industry. (17) Moreover, if the ITC becomes a safe haven for so-called "patent trolls," (18) then the number of cases could increase significantly, further adding to the social costs of the patent resolution process. (19)

Commentators have identified three institutional advantages of the ITC that might explain why the ITC has become a favored venue for patent holders. (20) First, jurisdiction under section 337 derives from the mere act of importation, (21) which eliminates wrangling over complex jurisdiction and venue issues that are common in district court proceedings. Second, ITC procedures sharply limit the time available for discovery, making it possible for the ITC to resolve cases more quickly than district courts. (22) Third, in cases involving process patents, certain defenses available in district court are not available at the ITC, (23) despite the terms of section 337(c), which provide that a respondent in an ITC complaint proceeding may raise "[a]ll legal and equitable defenses." (24)

The perception that patent holders enjoy an advantage at the ITC (25) is reinforced statistically. Patent holders are more likely to win their cases at the ITC than in district court. Between 1975 and 1988, the complainant prevailed--achieved a favorable decision or a settlement--in 65% of patent cases brought to the ITC, compared with a 40% to 45% win rate for patent plaintiffs in federal district courts. (26) In more recent years, the ITC "has decided 54 percent of contested cases in favor of the patent holder. This compares positively with win rates for district court patent cases." (27)

Furthermore, a patent holder at the ITC has substantial leverage over an alleged infringer when negotiating a settlement. The remedies available to the ITC are injunctive in nature--exclusion orders banning the importation of infringing products, and cease and desist orders barring the continued sale of imported articles. (28) In contrast, a district court can issue injunctions, impose monetary damages, or mandate a reasonable royalty. (29) As described below, in the absence of alternative remedies, the ITC is extremely likely to issue injunctive relief following a finding of infringement. The virtual certainty of injunctive relief is a major advantage for complainants.

A key objective of this Article is to determine whether the ITC is a biased venue for resolving patent disputes. When the average outcome across all decisions in a venue does not equal the average outcome of an efficient system, the venue is biased. In contrast, in an unbiased venue, the average across all decisions is equal to the average outcome of an efficient system, though any particular decision may be incorrect. (30)

To determine whether a particular venue is biased, one needs to compare it against a benchmark. If one chooses an inappropriate benchmark, the comparison could lead to meaningless or misleading results. We used outcomes in district courts as the benchmark because, as a matter of theory, district court decisions in patent cases are likely to be less biased than those at the ITC.

In addition to the three institutional advantages the ITC affords plaintiffs, there is a theoretical basis for believing that the ITC may be biased: Congress designed the ITC to protect domestic manufacturers. (31) As an independent federal agency, the ITC is exposed to political pressure from legislators that control the agency's budget. (32) Because congresspersons care about political costs and benefits more than economic costs and benefits, (33) one would expect congressional influence over the ITC to favor domestic firms seeking to enforce their patents against foreign rivals, because domestic firms are better able to provide political benefits. This theory is supported by prior empirical research on the ITC's role in imposing antidumping duties, which suggests that the ITC is influenced by political factors. (34) Likewise, the win rate for plaintiffs at the ITC is highest when a domestic plaintiff sues a foreign defendant, and the loss rate is highest when a foreign plaintiff sues a domestic defendant, suggesting favoritism toward domestic litigants. (35)

In contrast, district courts are not exposed to the same sort of direct political pressures. District court judges have life tenure, which is intended to insulate them from political influence after their appointment. (36) Nonetheless, preferences of interest groups may affect district court judges in a number of ways. Initially, interest groups can influence the confirmation process. (37) They can also have a more direct impact on particular district court decisions by initiating or funding litigation, thus creating or enhancing asymmetries in litigation power between parties. (38) Lack of patent expertise could also affect outcomes. One would not, however, expect these factors to result in systematic favoritism of plaintiffs or defendants in patent cases. Unlike the pressures on the ITC, which lead it to favor...

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