United States: Certiorari Denied For $6.2 Million Consent Order Violation Based On A Patent Later Held Invalid

On November 28, 2016, the U.S. Supreme Court denied a writ of certiorari seeking appeal of the Federal Circuit's decision to uphold the ITC's imposition of a $6.2 million penalty against DBN, Inc. and BDN LLC1 (collectively, "DBN") for violating a consent order based on an invalid patent. The Federal Circuit upheld the penalty, in part, because the consent order expressly prohibited importation prior to invalidation of the patent.2 Dell, Google, HTC and others filed an amicus brief in support of appeal. The Supreme Court did not explain why it rejected the petition.

Background

In Certain Two-Way Global Satellite Communication Devices, Inv. No. 337-TA-854, the ITC investigated whether DBN's importation and assembly of components of satellite communication devices infringed claims of U.S. Patent No. 7,991,380 (the "'380 patent") to a satellite emergency monitoring system. Before assessing either infringement or validity, the ITC terminated the investigation via a consent order in which DBN voluntarily agreed not to import or sell "satellite communication devices, system, and components thereof, that infringe [certain] claims . . . of the '380 patent . . . until the expiration, invalidation, and/or unenforceability of the '380 patent." Prior to the filing of the original ITC complaint, DBN moved its assembly operations from Taiwan to the U.S., on the assumption that it would avoid any violation of the consent order. (Petition at 6.) Even though the assembly still used imported components, none of the imported components, by themselves, infringed the '380 patent. (Id.)

Despite DBN's move, the ITC found that DBN violated the consent order by inducing infringement via sales of devices with the imported components and imposed a penalty of $6.2 million. Concurrently, DBN had the '380 patent declared invalid in district court. On appeal, the Federal Circuit upheld both the invalidation and the penalty, finding that the order expressly prohibited importation prior to invalidation. Judge Taranto dissented in part, arguing for remand to consider the effect of the patent's invalidation on the penalty. DBN filed a petition for certiorari on July 13, 2016.

The Petition for Certiorari

DBN's petition made two principal arguments: (1) imposing a penalty for, essentially, domestic infringement exceeds the ITC's statutory authority to regulate international trade and (2) any authority to enforce the order evaporated when the patent was invalidated. (Id. at 10.)

DBN maintained that any infringement became purely domestic when DBN moved its assembly operations from Taiwan to Maine. (Id. at 5-6.) Although its U.S.-based assembly still incorporated imported components, the components, by themselves, did not infringe. (Id. at 11.) Therefore, the imported "articles" fell outside the ITC's mandate to determine whether imported "articles . . . infringe a valid and enforceable United States patent." 19 U.S.C. § 1337(a)(1)(B)(i). (Id.) DBN argued that the Supreme Court should grant certiorari to correct the Federal Circuit's expansive interpretation of "articles that infringe" and "stem the tide of sweeping agency authority and direct the commission to stop investigating domestic patent infringement." (Id. at 11-12.) According to DBN, non-practicing entities ("NPEs") exploit this overreach to "[t]ake advantage of the commission's fast paced and patent friendly proceedings to gain leverage associated with the threat of an exclusion order, while separately suing the same accused infringers in federal court for damages." (Id. at 25.)

DBN argued that the ITC's overreach into domestic infringement contravenes established precedent that a patent "is only infringed by a product . . . contain[ing] all elements in one combination." (Id. at 12.) It focused on a decades old case, Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518, 528 (1972), admittedly superseded by the statute establishing induced infringement3 and pertaining to exportation rather than importation. (Id. at 14.) According to DBN, Deepsouth defined "articles protected by the patent" as the "operable assembly of the whole" (id. at 14-15) such that "components of a patented combination are never, by themselves, infringing" (id. at 15).

DBN also argued that the Federal Circuit's decision in Suprema, Inc. v. ITC, 796 F.3d 1338, 1349 (Fed. Cir. 2015) sanctioned the ITC's overreach of its statutory jurisdiction. (Id. at 11, 18.) The court in Suprema applied Chevron deference to affirm the "Commission's interpretation that Section 337 grants it authority to prevent importation of articles that have been part of inducement." 796 F.3d at 1349. According to DBN, Suprema misapplied Chevron because "[t]he [§ 1337(a)(2)] statute is [already] clear . . . [a]n 'article that infringes' cannot be interpreted to cover an 'article that[, by itself,] does not infringe.'" (Id. at 19.) DBN argued that Judge O'Malley's dissent in Suprema recognized that the Commission's reading of the governing statute turns it into an "ever-expanding hydra that can sprout new areas of authority with each new interpretation." (Id. at 11, citing Suprema, 796 F.3d at 1368 (O'Malley, J., dissenting).)

According to DBN, the result in ClearCorrect Operating, LLC v. ITC, 810 F.3d 1283 (Fed. Cir. 2015) further illustrates the Federal Circuit's split on the extent of the ITC's reach. (Id. at 20.) In ClearCorrect, a "sharply divided" Federal Circuit panel rejected, as foreclosed by the statutory limitations on ITC authority, the Commission's determination that digital models sent from Pakistan were, under Section 1337, infringing "article[s]" of a patent directed to methods for forming orthodontic appliances using the models. (Id. at 20.) DBN argued that "[t]he dueling opinions in ClearCorrect, like those in Suprema, evidence deep disagreements among the Federal Circuit's judges over fundamental questions" relating to the ITC's domestic reach. (Id. at 21.)

With respect to DBN's second argument, concerning basing penalties on an invalid patent, it warned against the "specter of a zombie patent" able to live on in enforcement proceedings at the ITC that poses fundamental issues of fairness. (Id. at 27.) In particular, an invalid patent should not be permitted to interfere with free competition. (Id. at 29.) "[DBN] should not have to pay $6 million to have access to ideas that are not, and never should have been, protected by a patent." (Id. at 30.)

DBN also pointed to Judge Taranto's dissent in the instant Federal Circuit decision to argue that the ITC should treat the penalty as contempt sanctions were treated by ePlus, Inc. v. Lawson Software, Inc., 789 F.3d 1349 (Fed. Cir. 2015), cert. denied, 136 S. Ct. 1166 (2016). (Id. at 9, 27.) ePlus set aside contempt sanctions for violating an injunction based on a subsequent determination of patent invalidity. 789 F.3d at 1356-58.

The ITC's Opposition Brief

The ITC argued that the agreement of the parties, not its governing statute, gives force to the consent order (Opposition Brief at 14) according to contract law (id. at 2). Therefore, statutory authority over the imported "articles" and patent validity are both irrelevant. (Id. at 3.)

The ITC terminated its investigation in lieu of determining a Section 1337 violation because DBN voluntarily agreed to the consent order, despite its right to challenge patent validity at the ITC. (Id. at 2-3.) Therefore, enforcement is not limited by the sections of Section 1337 pertaining to patent infringement or "articles that infringe." (Id. at 12.) Instead, parties to a consent order "can agree to relief that is broader than the relief a court would have awarded . . . if the claims had been fully adjudicated." (Id. at 14 (citations omitted).) DBN's argument that the ITC lacked authority to enforce the consent order "runs afoul of (1) petitioners' 'express[] waive[r]' of 'all rights' to 'challenge or contest the validity of the Consent Order'; (2) their stipulation that '[t]he [ITC] has in rem jurisdiction' over the components at issue; and (3) the order's statement that petitioners are precluded from 'challenging or contesting the validity'" of the order. (Id. at 12.)

The ITC also argued that it correctly imposed penalties for violations before the patent claims were invalidated. (Id. at 10.) The order "specifically contemplated that . . . [the] patent might be declared invalid . . . and made it clear that petitioners would be liable for any violations of the consent order they might commit before such invalidation occurred." (Id. (emphasis added).) Unlike the contempt sanction set aside in ePlus, the instant consent order was "final and not appealable." (Id. at 21.) Moreover, according to the ITC, DBN's "use of the channels of international trade to facilitate" infringement transcends any domestic issue. (Id. at 18.) The ITC had authority to impose penalties because DBN induced infringement by incorporating the imported components into devices "sold with instructions . . . to use the integrated product in a way that constitutes direct infringement." (Id. at 10, 15.)

Amicus Brief

For the most part, the legal arguments in the amicus brief submitted by Dell, Google, HTC and others (hereinafter, the "Amici") mirrored those in DBN's petition. According to the Amici, encroaching ITC authority in the wake of Suprema over "alleged infringement occur[ing] entirely within the U.S. where district court remedies are fully available" chills domestic industry "[s]ince almost all U.S. made products include imported components." (Amicus Brief at 7.) This creates an environment ripe for exploitation by NPEs because "the ITC moves so fast and does not grant stays . . . [and] may complete its proceedings and impose a remedy before the district courts or the patent office can resolve parallel challenges to the asserted patents." (Id. at 8-9.) NPEs tend to use the near immediate injunctive relief offered by the ITC as "leverage" for lucrative settlements. (Id. at 3-4.)

Footnotes

1 DeLorme Publishing Company, Inc. and DeLorme inReach LLC changed their names to DBN, Inc. and BDN LLC, respectively, prior to filing the petition for certiorari.

2 We reported on the Federal Circuit's decision in a post dated November 23, 2015, here.

3 35 U.S.C. § 271(f).

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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