In today's global e-commerce marketplace, it is virtually inevitable that products sold outside the United States will enter that country regardless of a manufacturer's intent, potentially exposing that manufacturer to an expensive lawsuit in a jurisdiction where it doesn't even do business.

As a hypothetical example, iTalk2U, Inc., a fictional Chinese company, is one of the top five sellers of smartphones in the world even though it doesn't sell smartphones (or any other products) in the United States. In fact, it has no interest in selling smartphones in the U.S at the moment. However, some of iTalk2U's distributors do sell iTalk2U smartphones in the U.S. market even though they are not supposed to, making iTalk2U vulnerable for to suit for patent infringement in the jurisdiction.

A U.S. federal agency, the International Trade Commission ("ITC"), can investigate any product that is imported into the market for infringement of any type of intellectual property including patents, under 19 U.S.C. § 1337. These cases are called "Section 337" cases. Sometimes, the manufacturer of these imported products—like iTalk2U—is sued in the ITC even if it doesn't sell its products in the U.S. In the event that iTalk2U loses that lawsuit, the ITC will issue an order that blocks iTalk2U products from entering the U.S., which could disrupt iTalk2U's plans to legitimately enter the market in the future. At the very least, iTalk2U would incur significant costs, likely to the tune of hundreds of thousands of dollars, defending itself in the ITC.

This article suggests some practical steps that non-US companies can take to avoid being sued in the ITC.

OVERVIEW OF THE LAW

A non-US company can be sued under Section 337 if it:

(1) imports an accused product into the U.S.;

(2) sells an accused product in the U.S. after importation; or

(3) sells an accused product for importation into the U.S.

In the first two scenarios, if a company imports a product into the U.S. (even one and not even for sale), it can be sued in the ITC; the same is true if the company sells an imported product in the U.S. The third scenario is more complex - how does the ITC determine if a company is selling an accused product "for importation" into the U.S.?

The Commission has found that a sale for importation occurs where there is a sufficient nexus between a respondent's activities and the importation of the accused product. This test is met "when a respondent that sold infringing articles knew or should have known that those articles would be subsequently exported to the U.S." For instance, iTalk2U may be sued in the ITC if it sells allegedly infringing smartphones to a distributor well-known for selling smartphones in the U.S. In that case, the Commission could find that iTalk2U either knew or should have known that its smartphones were going to be imported into the U.S. On the other hand, it "is not sufficient to establish importation" if iTalk2U simply puts its smartphones into the stream of commerce without any knowledge that they would be imported into the U.S.

But grey areas start to form when a distributor sells iTalk2U's smartphones on websites accessible in the U.S. or when a distributor of a distributor sells its smartphones in the country. At what point does the nexus between the manufacturer and the importation become so weak that the manufacturer can't be sued in the ITC? While the law on this point is less clear, manufacturers can take certain steps to weaken the nexus between themselves and the importation, thereby lessening the chance that they'll be subject to suit in the ITC.

AVOIDING ITC JURISDICTION

Keeping the products out of the U.S. altogether might be unlikely but steps can be taken to distance the company from any importation that occurs through third parties.

REFRAIN FROM IMPORTING THE PRODUCTS INTO THE U.S. FOR ANY REASON

This is the most important step to avoid ITC jurisdiction. Many non-U.S. companies mistakenly believe that they can be sued in the ITC only if their products are imported for sale in the market. In fact, the Commission has investigated products that are imported into the U.S. for other purposes, including demonstration at a trade show, qualification with a customer, and research and development. Therefore, in order to reduce susceptibility to suit in the ITC, avoid sending product samples to the U.S. for any reason, including with employees visiting the U.S.

AVOID ANY APPEARANCE OF DOING BUSINESS IN THE U.S. MARKET

Do not establish offices in the U.S. or hire employees there. Any employees in the U.S. should not work with physical samples of the products. Ensure that the company website clearly indicates that the products are not authorised for use or sale in the U.S., does not quote orders for delivery to the U.S., and does not advertise shipping to the U.S. Products that comply with industry standards should be advertised as compliant with those standards rather than as functioning in the U.S.

CONTRACTS WITH DISTRIBUTORS

Controlling where authorised distributors sell the products is a key step to weaken the importation nexus. As manufacturers have a certain amount of control over authorised distributors, their sales or importation of products into the U.S. may be used as evidence that the company was aware or, could have been aware, that the products were being imported. It is key to have written contracts, that can be produced as evidence, with distributors that limit the territories in which those distributors can sell the products and/or expressly forbid them from selling the products into the U.S. These contracts can be amended if the company decides to enter the U.S. market in the future.

The company should also consider including provisions in the contracts that distributors who sell outside their designated territory are subject to penalties, including fines, suspensions, and even termination of the agreement if the violations continue. If these penalties are imposed against authorised distributors, detailed documentation of actions taken are evidence of attempts to avoid importation into the U.S.

MONITORING

Monitor online marketplaces to look for advertisements of the products for sale in, or shipment to, the U.S. and attempt to stop such advertisements and sales. Efforts to take such action may be persuasive evidence that the company did not import the products into the U.S. under Section 337. If the advertisements can be traced to a specific distributor, penalise that distributor and ensure that the conduct ceases.

SOLUTIONS AT THE ITC

What can be done if a complaint is filed in the ITC? Move to be dismissed from the investigation as early as possible to save costs and avoid any adverse rulings against the products. Here are some potential avenues to do so:

PRE-INSTITUTION LETTER

After a complaint is filed, the ITC will publish a notice of complaint in the Federal Register, which is an official publication of the U.S. government. Within nine days of the publication, potential respondents can file a pre-institution letter, which will be publicly available. In that letter, refute any evidence of importation that the complainant included with its complaint. If the company truly does not import products into the U.S.— and has also forbidden its distributors from doing so — any evidence of importation is likely to be weak and based on importation or sales by unrelated third parties or even by the complainant itself. Even if this letter is ultimately not successful in defeating institution of the investigation, it sets the stage for the additional avenues below.

100-DAY PROGRAMME REQUEST

The company can also ask to participate in the ITC's early disposition programme, commonly referred to as the 100-Day Programme. Under this programme, the Commission directs the Administrative Law Judge ("ALJ") to rule on a potentially case dispositive issue within 100 days of institution of the investigation through expedited discovery and an abbreviated hearing limited to the specific issue. Lack of importation is a perfect issue for the 100-Day Programme as it involves a limited amount of discovery and would be case dispositive. If, however, the investigation involves multiple respondents, and the lack of importation is not case dispositive for all respondents, the request to participate in the 100-Day Programme will be denied.

EARLY MOTION FOR SUMMARY DETERMINATION

A final procedure for an early exit from an ITC investigation is to file a motion for summary determination ("MSD") early in the investigation. Produce all documents that support the company's lack of importation as early as possible and cooperate with the complainant on any importation related discovery. These documents include contracts with distributors, evidence of penalties enforced on distributors, and evidence of any attempts to stop third-party sellers from selling the products to U.S. customers.

The company's cooperation in discovery should defeat any argument the complainant may make that it needs additional discovery before the ALJ rules on the MSD. Also seek discovery on complainant's evidence of importation. The complainant will be entitled to take a corporate deposition related to the topic of importation, but once that is done, and the deposition topic is closed, the company could file an MSD. At the latest, an MSD regarding lack of importation should be filed immediately after the close of fact discovery to minimise further expenditures on litigation.

VIGOROUSLY DEFEND THE CLAIMS ON THE MERITS

Work with experienced ITC and patent attorneys to develop strong invalidity and noninfringement defenses. Often, complainants in the ITC accuse dozens of companies of infringement. At some point, a complainant may decide to focus its case on a smaller group of respondents and either dismiss or make a moderate settlement with other respondents, primarily those who have developed strong defenses.

CONCLUSION

The ITC claims very broad jurisdiction over any product imported into the U.S. and imposes severe remedies against companies that violate Section 337. Even if the company does not currently sell into the U.S. market, an exclusion order against the products can prevent entry into the U.S. market in the future. Avoid the ITC's jurisdiction until deciding to enter the U.S. market and develop a strong importation defense to dissuade complainants from naming the company in future ITC Section 337 complaints.

Originally published by Hong Kong Lawyer

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.