Innovation drives the progress of civilization, and patent law governs the rules for profiting from innovation in America. Yet, when the rules of patent disputes operate in ways that reward unproductive entities at the expense of successful American enterprises, the law slows innovation and reverses progress.
The International Trade Commission, a federal agency created to protect American businesses from unfair trade practices committed by foreign companies, has become a haven for “patent trolls,” non-practicing shell companies whose business model is based not on producing or selling anything but on exploiting loopholes in the American patent system.
This dysfunctional system did not always operate this way — so how did it come to be?
In 1916, Congress established the U.S. Tariff Commission — the entity that would later become the International Trade Commission — to make recommendations to Congress regarding global trade practices.
The ITC’s power grew dramatically over the next century. After being renamed and given an expanded role in 1922, the Trade Act of 1974 gave the ITC the authority to issue exclusion orders barring goods that infringe on U.S. patents from the U.S. market through “Section 337 investigations.” These investigations were supposed to follow a “domestic industry requirement,” so they could only be brought by and for American companies and when the public interest stood to benefit.
This changed in 1988, however, when a few words tucked into the thousand-page-plus Omnibus Trade and Competitiveness Act subverted the ITC’s original mission to protect productive U.S. industries from unfair competition. The legislation was amended to expand the domestic industry standard so a complainant could gain standing at the ITC by relying on licensing activities related to the patent, even if the complainant does not actually manufacture or service the products protected by the patent in the United States.
As a result, over the following two decades, newly formed patent trolls sprung up, shoehorning themselves into the “domestic industry” category without producing any goods or services that benefit Americans.
Armed with newfound standing, these trolls began bringing costly investigations against American companies at the ITC to turn a quick profit for themselves and their increasingly foreign-based third-party funders. That business model is not “industry” as we Americans know it but bad-faith legal manipulation, which hamstrings innovation and raises prices for our consumers.
By effectively abandoning the domestic industry requirement, the ITC has allowed patent trolls to spur a whopping 18 percent of its unfair trade practice investigations in 2022, according to the ITC’s records, many of which are brought against American companies.
The problem has gotten so out of hand that even patent trolls from foreign countries are now filing complaints against American companies at the ITC. For example, as Colleen Chien, co-director of the Berkeley Center for Law & Technology, and Mark Lemley, director of the Stanford Program in Law, Science and Technology, explain, “In 2011, Beacon Navigation GmbH, a Swiss patent-holding company with few U.S. employees and no products, research, or development … sued all major carmakers for their use of GPS navigation systems.”
Worse yet, because of the high cost of defense at ITC investigations, these infringement cases can hurt American innovators even when their claims are meritless, as companies face a coercive pressure to settle. This pressure is even greater given the all-or-nothing threat of Section 337 exclusion orders, which, when issued, amount to a death penalty for the products that American companies who manufacture parts of their goods overseas sell.
The ITC now facilitates the very sort of illicit trade activity it is supposed to protect American companies from. This will continue until the ITC or Congress clarifies the rules such that the ITC can further its original mission of protecting American businesses from unfair trade.
One step toward that goal would be for the ITC, in its assessment of “domestic industry,” to give no weight to the sort of licensing activity engaged in by patent trolls while using its public interest exception authority to revisit past decisions that benefit these trolls at the expense of American companies and consumers.
Another step would be for the ITC to mandate robust discovery into third-party funding involvement in ITC investigations, so foreign actors cannot game our federal agencies for their own gain, as they already have in similar cases in our civil courtrooms.
These are some of the long-overdue reforms that the ITC badly needs in order to return to defending against bad-faith trade practices and affirmatively advancing American business interests. Absent any changes, however, the ITC will continue being a venue for patent trolls to siphon resources from American companies, to the advantage of America’s foreign competitors.