Month: July 2015

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Digital Goods and the ITC: The Most Important Case That Nobody is Talking About

circuit boardBy Devlin Hartline & Matthew Barblan

In its ClearCorrect opinion from early 2014, the International Trade Commission (ITC) issued cease and desist orders preventing the importation of infringing digital goods into the United States. The ITC’s 5-1 opinion has since been appealed to the Federal Circuit, with oral argument scheduled for the morning of August 11th, and the case has drawn a number of amicus briefs on both sides. Despite receiving little attention in media or policy circles, the positive consequences of the ITC’s decision are significant.

This case is important because the problem of the importation of infringing digital goods continues to grow. The ITC’s authority over digital goods can be a powerful tool for creators and innovators against a threat that has only gotten worse, and it would permit the ITC to go about doing what it’s always done in the intellectual property space—protecting our borders from the threat of foreign infringing goods. Interestingly, a look at the proceedings in the ITC and the briefs now before the Federal Circuit reveals how some parties now opposing the ITC’s authority over digital goods had argued for the opposite just a few years back.

The ITC Proceedings

This case began in March of 2012, when Align Technology Inc. filed a complaint with the ITC alleging that its only competitor, ClearCorrect Operating LLC, violated Section 337 of the Tariff Act of 1930 by importing digital goods that infringed several of its orthodontic patents. Section 337, codified at 19 U.S.C. § 1337, makes unlawful the “importation . . . of articles” that infringe “valid and enforceable” patents, copyrights, or trademarks, and it declares that the ITC “shall investigate any alleged violation of this section on complaint under oath or upon its initiative.”

There are two statutory remedies available to a complainant in an ITC proceeding. The first is an exclusion order, which dictates that “the articles concerned . . . be excluded from entry into the United States.” Exclusion orders are issued by the ITC and enforced by the U.S. Customs and Border Protection. The second remedy is a cease and desist order, which directs any person violating Section 337 “to cease and desist from engaging in the unfair methods or acts involved.” The ITC enforces its own cease and desist orders through the imposition of civil penalties, recoverable in the federal district courts.

Align’s complaint with the ITC involved its patented Invisalign System, a “proprietary method for treating crooked and misaligned teeth” using modern plastic aligners instead of old-fashioned metal braces. Align alleged that ClearCorrect violated Section 337 by importing “digital models, digital data and treatment plans that . . . infringe or induce infringement of” its patents, and it asked the ITC to “issue permanent cease and desist orders” prohibiting ClearCorrect from importing the digital files. In response, ClearCorrect argued that “no articles” had been imported since the digital data associated with the teeth aligners were not themselves “articles.”

This was the primary bone of contention: The ITC only has statutory authority over the “importation . . . of articles,” and if digital goods are not “articles,” then the ITC has no jurisdiction. After an administrative law judge (ALJ) determined that the digital files at issue were indeed “articles” within the meaning of Section 337, ClearCorrect petitioned the ITC to review that determination. The ITC took the case and solicited comments from the public as to whether electronic transmissions are “articles” under Section 337.

The ITC ultimately sided 5-to-1 with Align. On the threshold issue of whether electronic transmissions constitute “articles” under Section 337, the ITC affirmed the ALJ’s conclusion that they do: “[T]he statutory construction of ‘articles’ that hews most closely to the language of the statute and implements the avowed Congressional purpose for Section 337 encompasses within its scope the electronic transmission of the digital data sets at issue in this investigation.” This was consistent, said the ITC, with the “legislative purpose . . . to prevent every type of unfair act in connection with imported articles . . . and to strengthen protection of intellectual property rights.”

Appeal to the Federal Circuit

Having lost at the ITC, ClearCorrect appealed to the Federal Circuit. There, it focused its arguments on the statutory question of whether digital goods constitute “articles” under Section 337.

Public Knowledge and the Electronic Frontier Foundation (EFF) filed an amicus brief calling the ITC’s decision “sweeping and unprecedented,” and they urged the Federal Circuit to reject the ITC’s “overzealous construction” of the term “articles.” Aside from the statutory issue, the digital rights groups suggested that there were “important reasons” why Section 337 “ought not cover telecommunications.” They stressed the “real and unanswered questions about the enforcement role” ISPs would play, and they noted how ISPs “could be required to actively block transmission of certain content.”

It’s worth noting that no ISPs were involved in the ClearCorrect litigation—only ClearCorrect itself was subject to a cease and desist order. But this ISP question seems to be the reason why the case drew their attention: The real concern wasn’t whether ClearCorrect had infringed Align’s patents; it was whether the ITC had the authority to issue cease and desist orders to ISPs. This sentiment was echoed in an amicus brief by the Internet Association, which includes Google, arguing that the internet “should not be restricted to national borders” because of “the unforeseeable but far-reaching results that would follow.”

The policy arguments made by Public Knowledge, the EFF, Google, and others were essentially circular: The internet should be “open” so we shouldn’t let the ITC “close” it. But that begs the question of what the ideal “open” internet looks like, and what illegal activities should or should not be tolerated in the digital space. We shut our borders to infringing physical goods. What makes infringing digital goods so special? A right is only as good as the remedies available to enforce it, so why should we give short shrift to the property rights of artists, creators, and innovators?

Align’s intervenor brief took the groups to task: “The amici briefs supporting ClearCorrect brim with hyperbole.” Align noted that the ITC “only asserts jurisdiction over the ‘articles” that are electronically transmitted, not over all acts of transmission.” It pointed out that it is the “owner, importer, or consignee” of the “articles” that violates Section 337, not the carrier, and it said that the claim that the ITC could issue cease and desist orders against ISPs for “data transmission activities” is “baseless.”

Supporting the ITC’s understanding of “articles,” an amicus brief filed by the Association of American Publishers explained that the ITC’s “authority over electronically transmitted copyrighted works is critical because . . . there has been rapid growth in digital publications.” It pointed to the rise in digital piracy “at the expense of U.S. creators and innovators.” It urged that affirming the ITC’s decision was “crucial” since it “will help ensure that unfair trade practices abroad do not harm the livelihoods” of those that “rely on copyright protection.”

An amicus brief filed by Nokia supporting the ITC also noted the importance of protecting intellectual property: “Stripping the Commission of its long-exercised authority over electronic transmissions could gravely damage the protection of valid patent rights through Section 337 investigations.” It pointed out that holding otherwise would lead to “absurd results” since the ITC would have jurisdiction over software “imported on a USB stick or CD-ROM” but not software disseminated by “electronic transmission.” Such a result would be “wholly contrary to the remedial purpose of Section 337.” Nokia concluded that the ITC’s “authority should not wax and wane as technology develops new methods of dissemination.”

The MPAA and the RIAA likewise submitted an amicus brief supporting the ITC. The industry groups pointed out that “illegal downloads and illegal streaming” account for most of the infringement losses they suffer, and they argued that “copyright protection is essential to the health” of their industries. They urged the Federal Circuit to affirm the ITC because “Section 337 is a powerful mechanism for stopping illegal electronic imports,” and doing so “would give effect to the intent of Congress that Section 337 protect U.S. industries from all manner of unfair acts in international trade.”

Who has the better argument here? Obviously, both sides argued that the text of Section 337 favored their positions. ClearCorrect and its supporters claimed that “articles” should be interpreted narrowly to include only tangible goods, while the ITC and its supporters wanted a read of the statute that allows the ITC to continue to fulfill its mission even as new technology and methods of trade become more common. What may come as a surprise, however, is that many of the groups now seeking to limit the ITC’s jurisdiction were arguing just the opposite a few years ago.

Remember the OPEN Act?

It may seem like ages ago, but it’s been less than four years since Congress debated the Stop Online Piracy Act (SOPA) and the PROTECT IP Act. Those two bills would have explicitly afforded artists and creators robust tools to use in the federal district courts against foreign rogue sites that aim their infringements at the United States. Many vocal opponents of the bills supported an alternative approach: the OPEN Act. Under the OPEN Act, the ITC would have been given explicit authority to investigate complaints against foreign rogue sites that import infringing digital goods into the United States.

The OPEN Act’s sponsors set up a website at keepthewebopen.com where members of the public could see the text of the bill and suggest changes to it. The website included an FAQ to familiarize supporters with the thinking behind the OPEN Act. As to why online infringement was an issue of international trade, the FAQ pointed out that “there is little difference between downloading a movie from a foreign website and importing a product from a foreign company.”

When advocating for the OPEN Act as a good alternative to SOPA and the PROTECT IP Act, the bill’s sponsors touted the ITC as being a great venue for tackling the problems of foreign rogue sites. Among the claimed virtues were its vast experience, transparency, due process protection, consistency, and independence:

For well over 80 years, the independent International Trade Commission (ITC) has been the venue by which U.S. rightsholders have obtained relief from unfair imports, such as those that violate intellectual property rights. Under Section 337 of the Tariff Act of 1930 – which governs how the ITC investigates rightsholders’ request for relief – the agency already employs a transparent process that gives parties to the investigation, and third party interests, a chance to be heard. The ITC’s process and work is highly regarded as independent and free from political influence and the department already has a well recognized expertise in intellectual property and trade law that could be expanded to the import of digital goods.

The Commission already employs important safeguards to ensure that rightsholders do not abuse their right to request a Commission investigation and the Commission may self-initiate investigations. Keeping them in charge of determining whether unfair imports – like those that violate intellectual property rights – [sic] would ensure consistent enforcement of Intellectual Property rights and trade law.

Some of the groups now arguing that the ITC shouldn’t have jurisdiction over digital goods openly supported the OPEN Act. Back in late 2011, the EFF stated that it was “glad to learn that a bipartisan group of congressional representatives has come together to formulate a real alternative, called the OPEN Act.” The EFF liked the bill because the “ITC’s process . . . is transparent, quick, and effective” and “both parties would have the opportunity to participate and the record would be public.” It emphasized how the “process would include many important due process protections, such as effective notice to the site of the complaint and ensuing investigation.”

Google likewise thought that giving the ITC jurisdiction over digital goods was a great idea. In a letter posted to its blog in early 2012, Google claimed that “there are better ways to address piracy than to ask U.S. companies to censor the Internet,” and it explicitly stated that it “supports alternative approaches like the OPEN Act.” Google also signed onto a letter promoting the virtues of the ITC: “This approach targets foreign rogue sites without inflicting collateral damage on legitimate, law-abiding U.S. Internet companies by bringing well-established International trade remedies to bear on this problem.”

Conclusion

The ITC has been protecting our borders against the importation of infringing goods for nearly a century now. As technology and trade evolves, it makes perfect sense to let the ITC continue to do its job by protecting our borders against the importation of infringing digital goods. This is an important tool for our innovators and creators in combating the ever-growing flood of foreign infringing goods.

The fact that many of those who supported the OPEN Act are now supporting ClearCorrect suggests that for them this appeal isn’t really about whether digital goods are “articles” under Section 337. The ITC is an appropriate venue for all of the reasons the supporters of the OPEN Act publicized just over three years ago: The process is transparent, there’s ample due process protections, the commissioners are experienced and independent, and their decisions are consistent.

As the 5-1 opinion suggests, affirming the ITC’s decision should be an easy choice for the Federal Circuit. Let’s hope the Federal Circuit does the right thing for our artists and innovators.

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How Rhetorical Epithets Have Led the FTC Astray in its Study of Patent Licensing Firms

We’ve all heard the narrative about patent licensing firms, often referred to pejoratively as “patent trolls.” These patent owners, who choose to license their innovations rather than build them, are the supposed poster-children of a “broken” patent system. It’s as if commercializing one’s property, just like a landlord leases his land for another to use, is suddenly a bad thing. Nevertheless, the power of this “troll” rhetoric cannot be denied. Many provisions in 2011’s Leahy-Smith America Invents Act were aimed at starving out these “trolls,” and no less than five bills currently under consideration in the House and Senate seek to further deflate their sails.

Another example of the powerful appeal of the “patent troll” rhetoric is that the agencies charged with enforcing antitrust law have also been convinced that there is something amiss with the commercial licensing of patented innovation in the marketplace. This has been a key feature of the deployment of patented inventions in America’s innovation economy since the early nineteenth century, as scholars have shown. Last year, the Federal Trade Commission (FTC) instigated its own investigative study of what it calls “patent assertion entities” (PAEs), which is merely a more formal and neutral-sounding synonym for the popularized “patent troll” epithet.

In a new paper published in the George Mason Law Review, Sticks and Stones: How the FTC’s Name-Calling Misses the Complexity of Licensing-Based Business Models, CPIP Senior Scholar Kristen Osenga takes a closer look at the FTC’s ongoing study of PAEs and finds that it is destined to fail for two simple, yet inescapably obvious, reasons.

The first is the basic definitional problem of the FTC’s characterization of PAEs, which puts all patent licensing firms in the same boat. Failing to take a more nuanced approach, Osenga warns, “fires up the rhetoric but obscures thoughtful discussion and debate about the issue.” Building upon her previous work, she explains:

[T]he real problem is that patent licensing firms are treated as a homogenous category, with no attention paid to the wide range of business models that exist under the patent licensing firm umbrella. The categorical determination of patent licensing firms as “problems” imputes to a large, diverse group of firms the negative actions and qualities of a small number of bad actors.

Since not all “trolls” are alike, Osenga cautions, it’s “naïve and inaccurate” to lump them all together. And when the FTC makes this mistake, it leads to a situation “where words actually can hurt, much more so than sticks and stones.” The FTC’s study is explicitly “premised on a one-size-fits-all conception of patent licensing firms.” Rather than shedding much-needed light on the complex innovation ecosystem, the study promises to squander the opportunity by failing to recognize that not all “trolls” are the same.

Osenga notes that the FTC is uniquely situated to obtain nonpublic information about how these patent licensing firms operate using its investigative power under Section 6(b) of the FTC Act. Unfortunately, however, the study is premised on the faulty notion that the only upside of patenting licensing firms is to “compensate inventors.” But this focus on patents-as-incentives misses the forest for the trees, Osenga urges, as it fails to account for the larger patent-commercialization network:

[T]here are many steps between invention and the introduction of an actual product to the market and consumers. These steps include transforming an idea in to a marketable embodiment, developing facilities to produce the marketable embodiment, creating distribution channels to bring the embodiment to the consumer, and making the consumer aware of the new product. Each of these steps requires its own additional resources in the form of both capital and labor.

The FTC study, like many patent skeptics, fails to consider the benefits of the division of labor that patent licensing firms represent. Not every inventor is willing or able to bring an invention to the marketplace. Osenga’s point is that patent licensing does more than simply compensate inventors for their troubles; it creates liquid markets and solves problems of asymmetrical actors and information. These exchanges increase innovation and competition by playing the role of match-maker and market-maker, and they place valuable patents into the hands of those who are better positioned to exploit their worth.

Osenga points out that there are indeed possible negative effects with patent licensing firms. For example, they sometimes engage in ex post licensing, waiting to offer licenses until after the would-be licensee has already adopted the technology. These firms can be better positioned litigation-wise since their potential exposure is typically less than that of the infringers they sue. Finally, patent aggregators tend to have greater market power, and it can be difficult to judge the quality of any given patent that’s asserted when they offer to license their entire portfolio.

As with all things, Osenga stresses, there’s both good and bad. The problem is figuring out which is greater. The FTC could conduct a study that reveals a “detailed understanding of the complex world of patent licensing firms,” she laments, but that’s not what the FTC is doing:

[T]he configuration of the study is slanted in such a way that only part of the story will be uncovered. Worse still, the study has been shaped in a way that will simply add fuel to the anti-“patent troll” fire without providing any data that would explain the best way to fix the real problems in the patent field today.

This leads to the second problem with the FTC study, which follows as a necessary, logical consequence from the first definitional problem: There are serious methodological problems with the study that will undermine any possible empirical conclusions that the FTC may wish to draw.

Osenga says that the FTC’s study is simply not asking the right questions. Painting a complete picture of complex licensing schemes requires more than just counting the number of patents a firm has and adding up the attempts to negotiate license deals. To really get to the bottom of things, she contends, the FTC should be asking why patentees sell their patents to licensing firms and why licensing firms buy them from patentees. Better still, ask them why they decided to become patent licensing firms in the first place.

This insight is powerful stuff. It’s not enough to simply ask these firms what they’re doing; to really understand them, the FTC must ask them why they’re doing it. And the results are likely to be varied:

Some, of course, begin with this business model in mind. Others invent new technology but are unable to successfully commercialize it themselves, despite making efforts to do so. Still others exist as practicing entities for years or decades before something changes—supply change issues, rampant infringement by competitors, and regulatory initiatives—and they are no longer able to exist as a viable practicing entity.

Similarly, the FTC could ask them what kind of firms they are, and these answers are also likely to be diverse. Osenga’s point is that the FTC’s questions aren’t designed to showcase the vast differences between the various types of patent licensing firms. If the FTC wants to get to the bottom of how these firms affect innovation and competition, the first step should be to realize that they’re not all the same. The FTC’s study is as clumsy as those who refer to all such firms as “patent trolls,” and the lack of nuance going in will unfortunately produce a study that lacks nuance coming out.

In the end, Osenga agrees that deterring abusive behavior is a good thing, and she worries about innovation and competition. However, unlike many in patent policy debates, she is also concerned that the rhetoric is having an undue influence on policymakers. Throwing all patent licensing firms under the “patent troll” bus will not get us the narrowly-tailored reforms that we need. Sadly, the FTC’s approach with its ongoing study appears to have swallowed this rhetoric wholesale, and it seems unlikely that the results will be anything but more fuel for the “patent troll” pyre.