NPEs Increasingly Opt for ITC Action

The International Trade Commission has become a popular venue for patent confrontations between NPEs and operating companies.  After years of relatively consistent activity, NPE-driven investigations in the ITC jumped fourfold, from 4 to 16, between 2010 and 2011 (NPE suits filed in district court, by comparison, rose 84% year to year).  In a parallel trend, the total number of respondents in NPE patent actions has also exploded in the ITC, with the number of respondents to NPE complaints rising from 22 companies in 2010 to 235 through the end of 2011.

The ITC, of course, is a quasi-judicial executive agency that has the power to administer unfair trade remedies pursuant to 19 U.S.C. §1337 (“Section 337”) to prevent infringing products and processes from harming domestic industry.  It is not an Article III court (i.e., Federal District Court) – so matters are tried before an Administrative Law Judge and there is no jury.  The ITC cannot award monetary damages or attorney’s fees, but can, through Customs, enforce general exclusion orders that stop offending products at the US border, and/or issue cease-and-desist orders.  This power has made the Commission an attractive setting for NPEs seeking leverage in their disputes with operating companies.

Today, NPEs represent an increasing percentage of total ITC actions.  Fully 25% of ITC Investigations in 2011 were filed by an NPE and 51% of respondents hauled into the ITC were in response to an NPE complaint.

The Commission threw the doors of the ITC wide open to NPEs in In re: Coaxial Cable Connectors, Inv. 337-TA-650 in 2010, holding that the domestic industry requirement is met when licensing is a Complainants’ sole economic activity.  Since this ruling, the percentage of complainants in the ITC relying on licensing activity to meet the domestic industry requirement has risen from 13% in 2008 to 32% in 2011.

NPEs increasingly turn to the ITC to leverage a severely compressed cost window to increase settlement pressure.   The average time to trial in district court is 36 months.  The average ITC Investigation gets to trial before an Administrative Law Judge in just 10 months, meaning respondents’ legal costs per month are three times what they would be in district court.  Further, informal surveys of RPX clients indicate the total legal costs in the ITC are roughly double what they are in district court.  Tack on the inevitability of parallel filings in district court, the threat of inconsistent judgments and the intercession of the Federal Circuit to resolve discrepancies between the rulings of the two bodies, and the total bill for ITC respondents is drastically higher than an action confined to just district court.

But the pain of ITC adjudication doesn’t stop at higher costs.  In the wake of the Supreme Court’s 2006 ruling in eBay v. MercExchange, NPEs turned to the ITC to revive the threat of injunction-like relief through general exclusion orders and cease-and-desist orders, which stop an entire product at the border for what might be a single alleged infringing process in a complex device like a cell phone or automobile.  Notably, nearly half of ITC Investigations go to trial, and once before the Administrative Law Judge, respondents fare poorly:  55% of trials result in exclusion or cease-and-desist orders, or both.

The lesson here is that NPEs are a market phenomenon and the market always adapts.  Given a new avenue to increase pressure to settle, NPEs began migrating to the ITC.  The America Invents Act’s limitation on joining parties in the same suit will likely result in a similar adaptation by NPEs to meet the challenges of a changing patent environment.