The US International Trade Commission (ITC), a federal administrative agency located in Washington, DC, has the authority to exclude from importation into the US articles that infringe a valid US patent.

If it finds patent infringement, the ITC issues an "exclusion order" that instructs the US Custom and Border Protection division of the Department of Homeland Security to prevent the entry of the infringing articles.

In certain cases, if the infringing device is a component in a larger product, known as a "downstream product", the ITC's order can also direct that such downstream products be restricted from entry into the US.

A recent decision by the US Court of Appeals for the Federal Circuit, however, has significantly limited the ITC's authority to exclude downstream products.

This decision, Kyocera v ITC, may have an impact on Chinese-based companies that export products, either directly or indirectly, to the US. In fact, in the past year, nearly 20 percent of the ITC's investigations have involved products from companies based in China.

ITC proceedings

The typical form of exclusion order the ITC can issue is called a limited exclusion order or LEO. An LEO is directed to the products made by a company specifically named as a defendant or "respondent" in the ITC proceedings.

The ITC also has the ability to issue a general exclusion order or GEO if certain additional criteria are met. A GEO can exclude all infringing articles regardless of the identity of the manufacturer or importer. It is generally understood that a GEO is more difficult to obtain.

In a series of cases involving LEOs, the ITC has addressed the situation where the respondent manufactures a component - for example, a semiconductor chip - that is made and sold abroad and then assembled into a downstream product, such as a cell phone, before being imported into the US.

Under past ITC decisions, if certain factors were met, the ITC could issue an LEO that not only excludes the component from importation, but also excludes the downstream product from importation. The ITC has held that the downstream product could be excluded, even if the manufacturer of the downstream product was not named as a respondent in the ITC's proceedings.

This arrangement gave US patent holders the power to disrupt the business of component manufacturers, even if those component manufacturers themselves import very few components into the US.

In particular, patent holders could use the threat of an order excluding downstream products to intimidate the component manufacturer's customers while not naming such customers as respondents in the ITC proceedings.

The Kyocera decision involved a patent dispute in which Broadcom sought an LEO against chips made by Qualcomm. The company imports very few chips itself, so Broadcom sought an LEO that would also exclude from imports all downstream products (such as cell phones) that contained a Qualcomm chip. However, Qualcomm was the only named respondent in the ITC proceedings.

The ITC issued an LEO that prohibited the importation of individual Qualcomm chips as well as downstream products containing such chips, even though such downstream products were made by companies who were not named as respondents in the proceedings.

The Federal Circuit reviewed the language of the relevant statute (Section 337) and determined that the ITC had overstepped its statutory authority. The court held that LEOs must only apply to parties found to violate Section 337. Thus, downstream products made or imported by third-party non-respondent manufacturers cannot be excluded by an LEO.

The court noted that the US Congress specifically set forth in Section 337(d) separate provisions (with more stringent criteria) regarding the issuance of a GEO that can exclude products made by parties other than the named respondents. Notably, Broadcom had not sought a GEO.

Kyocera v ITC

The Federal Circuit's decision regarding Kyocera diminishes the ITC's power to exclude a non-respondent's downstream products from importation into the US, even if those products contain a component found to infringe a US patent. This result will likely give manufacturers of downstream products more comfort and certainty regarding ITC proceedings. If the manufacturer is not named as a defendant in an investigation where an LEO is the only requested remedy, that manufacturer's product cannot be excluded from imports.

Consider the scenario of a Chinese-based manufacturer of a component. Some of those components are sold to customers that manufacture a downstream product that is imported into the US. The component manufacturer is identified as a respondent in an ITC investigation requesting only an LEO, but the downstream product manufacturer is not. The component manufacturer can give its customer the assurance that its downstream products will not be banned from importation into the US, even if the component is found to infringe.

The author is an intellectual property lawyer in the Silicon Valley office of Dechert LLP, a US law firm. The views expressed here are the author's own.

(China Daily 02/23/2009 page11)