United States: Digital Models: Federal Circuit Rejects ITC Jurisdiction Over Electronic Transmissions

Last Updated: December 4 2015
Article by Kirk A. Sigmon, G. Brian Busey and Lynn I. Levine

On November 10, 2015, the Federal Circuit released its opinion in ClearCorrect Operating, LLC v. International Trade Commission reversing the International Trade Commission's (the ITC or the "Commission") determination that electronic transmissions could be infringing "articles" within the ITC's jurisdiction. In a divided panel, Chief Judge Prost, writing for the majority, limited "articles" in 19 U.S.C. § 1337 ("Section 337") to "material things." The Federal Circuit's ruling thus prevents the ITC from issuing remedy orders against infringing products that are digitally transmitted, potentially limiting the ITC's jurisdiction in protecting intellectual property rights at a time when digital commerce is growing in importance.

Background

The decision in ClearCorrect v. International Trade Commission resulted from an appeal of the ITC's final determination In the Matter of Certain Digital Models, Digital Data, and Treatment Plans for Use in Making Incremental Dental Positioning Adjustment Appliances, the Appliances Made Therefrom, and Methods of Making the Same, Inv. No. 337-TA-833 ("Digital Models").

In Digital Models, the complainant, a manufacturer of dental repositioning appliances, asserted that respondents ClearCorrect Pakistan and ClearCorrect Operating, LLC (collectively "ClearCorrect") were unlawfully importing – via the Internet – data used to create infringing dental repositioning appliances.  In brief, ClearCorrect would receive orthodontic measurements from dentists in the United States, process those measurements in Pakistan to produce 3D-printable models of dental repositioning appliances, and then electronically transmit those infringing models to the United States for 3D printing.

In Digital Models, the Commission had held that electronically transmitted information was an article under Section 337.  Section 337 prohibits "[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).  While the Commission had over a decade ago – in Certain Hardware Logic Emulation Systems and Components Thereof, Inv. No. 337-TA-383 (1998)  – concluded its jurisdiction extended to electronic transmissions as articles, it revisited the issue in Digital Models and ultimately reiterated that it had jurisdiction over electronic transmissions.  (Our article on that decision and the accompanying client alert is available here.)  One ITC Commissioner, Johanson, dissented from the ITC's decision.

ClearCorrect was argued on August 11, 2015.  (Our article on the oral arguments is available here.)

The Federal Circuit's Ruling

In the opinion by Chief Judge Prost, the Federal Circuit reversed the Commission's decision and held that the term "articles" refers only to "material things."  The Federal Circuit thus concluded that the ITC does not have jurisdiction over transmissions of electronic data.

The Court conducted a two-step Chevron analysis of the Commission's definition of "articles."

First, the Court considered whether the term "articles" was ambiguous.  It ruled that, "when viewed in context and with an eye towards the statutory scheme," the literal text of Section 337 defined "articles" as "material things."  Though Section 337 does not define the term "articles," the Court noted that contemporaneous and modern dictionaries limited "articles" to "material thing[s]" and that the United States Tariff Commission's (the predecessor to the ITCs) own contemporaneous definition of "articles" also defined "articles" as, generally, physical "commodities."  For statutory context, the Court also examined the use of "articles" in different parts of Section 337, noting that the use of the term "articles" in the forfeiture provisions of Section 337 implied that "articles" was limited to goods that could be physically "forfeited" and/or "seized."  The Court also examined Section 337 and the legislative history of the statute in its entirety, concluding again that the term "articles" was limited to "material things."

Turning to step two of the Chevron analysis, although the Court determined Congress's intent was "unambiguous," the Court determined that "the Commission's interpretation of the term 'articles' was unreasonable" and thus did not warrant deference.1  The Court criticized the Commission's analysis of the plain meaning of "articles," its analysis of legislative history, and its reliance on Congressional debates.  The Court concluded:

It is not simply a question of the Commission having the choice between two 'right' definitions, but instead it represents a systematic pattern of the Commission picking the wrong conclusion from the evidence. Here the Commission has not offered a reasoned explanation for its definition of 'articles' and thus is owed no deference.2

In her opinion, Chief Judge Prost also noted her agreement with Commissioner David Johanson's dissent in the Commission's Digital Models decision.  For example, Chief Judge Prost concurred with Commissioner Johanson's view that it made no sense for "articles" to encompass digital transmissions because exclusion orders against such transmissions were not enforceable.

In conclusion, the Court emphasized that it would leave to Congress "the task of expanding the statute" to include electronic transmissions if Congress so desired.3

Judge O'Malley's Concurrence

In a concurrence, Judge O'Malley further criticized the Commission's decision, arguing that Chevron deference to the Commission's decision was unnecessary.  Judge O'Malley noted that the Commission defined "articles" to include "electronic transmissions" despite "never having purported to regulate Internet transmissions in the past, despite no reference to data transmissions in the statute under which it acts, and despite an absence of expertise in the agency in dealing with such transmissions." 4  In essence, Judge O'Malley argued that, "[i]f Congress intended for the Commission to regulate one of the most important aspects of modern-day life – the Internet – Congress surely would have said so expressly."5

Judge Newman's Dissent

In her dissent, Judge Newman argued that the Court's ruling effectively eviscerated the statutory purpose of Section 337: facilitating a remedy against unfair competition.6  Judge Newman characterized the Court's ruling as one that limited Section 337 "to the kinds of technology that existed in 1922 or 1930."7  According to Judge Newman, "[n]o dictionary, and no statutory constraint, limits 'articles' to items that are grossly 'tangible,'"8 and the Commission's ruling thereby warranted Chevron deference.

Judge Newman's dissent criticized many of the bases relied on by the majority.  First, Judge Newman explained that both Commission and Federal Circuit cases supported an expansive reading of "articles," emphasizing a legal trend of reading statutory language "in light of . . . drastic technological change."9  Next, Judge Newman argued that the Commission's interpretation of Section 337 was correct and that the broad definition of the term "article" in the statute was consistent with the purpose of a "remedial" statute to reach all unfair practices.

Judge Newman also criticized the practical implications of the majority's ruling, noting that – as a result of the ruling – the Commission may now stop importation of a CD-ROM but not the exact same data contained on the CD-ROM if transmitted into the U.S. electronically.  "My colleagues' reliance on possible difficulty of enforcement against electronic transmission of infringing digital data and related articles . . . merely adds imprecision to judicial guidance in this commercially important area."10

Potential Ramifications

The Federal Circuit's holding significantly limits the Commission's jurisdiction to address the increasing amount of international commerce conducted via electronic transmissions.  Because the Commission is – under the Federal Circuit's decision – prevented from issuing remedial orders against electronic transmissions, importers of infringing goods could attempt to circumvent ITC jurisdiction by using the Internet, satellites, or other methods of electronic transmission to distribute infringing digital data.  For example, importers may elect to digitally import the necessary digital data for a product and then subsequently physically manufacture infringing goods in the U.S. to prevent Customs and ITC enforcement of intellectual property rights.  Owners of patents that may be infringed by the use of digital data may need to explore potential alternative means to protect their rights domestically.

It is not yet clear whether the ITC or any of the parties will seek rehearing or rehearing en banc, although, in light of the importance of the decision and the divided panel, there appears to be more than a possibility of further review.

Footnotes

1. ClearCorrect Operating, LLC v. Int'l Trade Comm'n, No. 2014-1527, at *31 (Nov. 10, 2015).

2. Id. at *35.

3. Id. (citing Bayer AG v. Housey Pharm., Inc., 340 F.3d 1367, 1376-77 (Fed. Cir. 2003)).

4. Id. at *2 (O'Malley, J. concurring).

5. Id.

6. Id. (Newman, J., dissenting) at *2.

7. Id. (Newman, J., dissenting) at *6.

8. Id. at *10 (Newman, J., dissenting).

9. ClearCorrect Operating, LLC v. Int'l Trade Comm'n, No. 2014-1527, at *6-7 (Nov. 10, 2015) (Newman, J. dissenting) (citing Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 390, 395-96 (1968).

10. Id. at *15 (Newman, J., dissenting).

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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Kirk A. Sigmon
G. Brian Busey
Lynn I. Levine
 
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