A company named Genesis should know the difference between the beginning and the end. And when Genesis Microchip Inc. beat back its rival MStar Semiconductor Inc. at the International Trade Commission in 2004, it certainly seemed like the grand finale of a costly legal battle. After a 17-month investigation, the ITC found that a competing chip made by Taiwan-based MStar infringed GenesisÕs patent. The commission awarded Genesis, which is based in Silicon Valley, its ultimate prize: a four-page exclusion order directing U.S. Customs and Border Protection to turn away all offending products. Shut out of the multi-million dollar U.S. market, MStarÕs fortunes looked bleak.
Then the real struggle started.
Over the next two years, the chipmakers fought over how Customs should interpret the ITCÕs exclusion order, and exactly what goods didÑand did notÑinfringe GenesisÕs patent. The case, which settled last October, stands as just one example of a little-examined and increasingly contentious aspect of patent litigation at the ITC: What happens after you win?
The ITC is heralded for its speed in resolving patent lawsuitsÑmost cases are wrapped up in 12Ð15 months. But fights at Customs can mean years of additional litigation, with the agency at times issuing conflicting opinions and statements. The end results can radically impact the spoils for the ITC victor and the pain for the loser. ÒThereÕs as much work on the back end of a case as the front end,Ó says Sturgis Sobin, a Washington, D.C.Ðbased partner at Heller Ehrman who has represented clients in dozens of ITC cases. ÒItÕs essentially round two.Ó What happens at Customs, he adds, Òdetermines whether the remedy is worth the paper itÕs written on.Ó
A U.S. patent, trademark, or copyright holder can file a complaint with the ITC under section 337 of the Tariff Act of 1930, alleging an imported product infringes domestic IP rights. There are no monetary damages. Instead, the prize is what amounts to a permanent injunction: The ITC directs Customs to exclude the infringing goods from entry into the United States for the life of the patent.
It sounds appealing, but determining how to enforce the ordersÑthere are 47 active onesÑis far from simple. Parsing patent claims is a lot to ask of an agency also trying to keep terrorists and nuclear bombs from entering the country. ÒThey do the best they can,Ó says Miller & Chevalier partner David Foster, who represented MStar. But, he adds, ÒAfter 9/11 there was unquestionably a movement of resources away from [Customs] commercial enforcement. Commercial activities have been shortchanged.Ó
Adding to the problem, the agencyÕs IP caseload has ballooned along with the ITCÕs popularity as a forum for litigating high-stakes patent disputes. In recent years, the number of exclusion orders issued has climbed sharply. In fiscal year 2000, only two such orders were issued, compared to ten in 2005, and eight in 2006. Nor is there any sign of slackening. A record 34 new cases were filed at the ITC in its 2006 fiscal year.
The enforcement of these orders falls to the tiny Intellectual Property Rights, or IPR, branch of Customs, which has just five lawyers and two paralegals. For the past three years, the chief of the branch has been George McCray, a nonpatent lawyer who first joined Customs as an attorney in 1992 and has worked his way up through the ranks. Harvey Fox, McCrayÕs former boss at Customs who is now a partner at D.C.Õs Adduci, Mastriani & Schaumberg, describes McCray as Òvery fair and very patient.Ó No small feat, he adds, Òwhen attorneys from both sides are yelling at you.Ó
Nonpatent casesÑsay, a trademark dispute over purple protective gloves or novelty glassesÑgenerate few controversies. But the patent cases, which often involve highly technical products like hardware logic emulation systems, steroid isomers, or light-emitting diodes, are another story.
For starters, the exclusion orders tend to be intentionally broad. As one ITC staff lawyer puts it, ÒIf an exclusion order is too specific or limited, the patent holder wouldnÕt have as much protection. The ITC canÕt really say what products will infringe at the time that it issues an order, because we donÕt know what future would-be importers will come up with.Ó By statute and practical necessity, Customs has to make these callsÑwithout much hand-holding from the ITC. ÒSometimes [Customs will] call and ask for advice, but otherwise, we donÕt know what [theyÕre] doing,Ó says the ITC staff lawyer, who asked not to be quoted by name as per agency policy.
After the ITC issues an exclusion order, Customs lawyers embark on something of a crash course, reviewing the inevitably lengthy file and judicial decision. Then, IPR staff typically invite the parties to meet with them separately at the agencyÕs offices in downtown Washington, D.C. In more complex cases, Customs has recently begun asking the parties to appear jointly in what amounts to a mini-hearing. Howrey partner Cecilia Gonzalez, who specializes in 337 cases, sums up the strategic goals for both sides: ÒIf you win, you try to get as broad an interpretation of the order by Customs as possible.Ó As for the loser, she continues, Òyou want it to be given a limited and narrow reading.Ó
McCray says his team uses the sessions to Òtry to wrap our minds around the order and whatÕs at issue, and how each side views enforcement.Ó Then, the IPR branch sends instructions to all of the United StatesÕs ports of entryÑthere are 327Ñtelling border control officers what to look for. ÒThe instructions by their nature have to be sort of simple, but we are often dealing with opaque issues,Ó acknowledges McCray. ÒItÕs very difficult to craft instructions so they are understandable yet effective. ThereÕs a bit of an art to it.ÓBecause Customs views the instructions as confidential law enforcement materials, they are not made available to the parties for review. As a practical matter, this means complainants sometimes donÕt know exactly whatÕs being allowed into the country until it turns up in the market.
ThatÕs what happened to Fuji Photo Film Co. In 1999 Fuji won a general exclusion order from the ITC barring the import of disposable cameras. Some 26 companies were found to be importing or selling such cameras (known technically as Òlens-fitted film packagesÓ), infringing up to 15 of FujiÕs patents.
But shortly after the order issued, Òwe started seeing infringing cameras in the marketplace,Ó recalls Fuji outside counsel Matthew Siegal, a partner at Stroock & Stroock & Lavan in New York. Some importers had slightly modified their cameras, Siegal explains, then met privately with IPR officials to convince them that these new cameras were not subject to the exclusion order. ÒCustoms was coming in cold,Ó notes Siegal. ÒThey werenÕt at the trial. They were newcomers, relying on the potential importers to show why there was no patent infringement.Ó
Without seeking input from Fuji, Customs let the modified cameras into the country. The agency determined that the term Òlens-fitted film package,Ó which occurs in all the asserted patents, did not apply to cameras that could be reloaded with filmÑdespite the fact that the ITC administrative law judgeÕs decision never construed the term that way.
Fuji complained to the ITC that the exclusion order was being violated. In 2002 the ITC initiated enforcement proceedings against 17 companies. Relatively uncommon, such proceedings usually take a year to complete and may rival the original trial in complexity and expense. At the hearing, some camera importers argued that they reasonably relied on CustomsÕs rulings that their products didnÕt infringe. The ITC was not impressed. ÒThe Commission is the sole arbiter of whether its [orders] are violated,Ó wrote the commissioners in a 2003 opinion. The parties Òhad no basis for relying on CustomsÕs rulings.Ó
The commission levied fines ranging from $200,000Ð$1.6 million on three companies, Photoworks Inc., Arugs Industries Inc., and Ad-Tek Specialties, Inc. (The ITC was able to impose these penalties because the three companies were based domestically, and were subject to a cease and desist order that is enforced by the ITC.)
ÒYou get a ruling from Customs that a product doesnÕt infringe, and a few months later the ITC rules that the exact same conduct Customs said was okay is not okay . . . and you get hit with a big fine,Ó observes Neville Peterson name partner John Peterson, who represented another camera importer, Jazz Photo Corp. ÒIt puts importers in a terrible bind.Ó
he alternative for importers is to ask the ITC for an advisory opinion on infringementÑnot a popular option given that such opinions take months to obtain, are nonbinding, and cannot be appealed. The opinions are mainly useful for convincing Customs to admit goods, as well as giving importers a sense of how they would fare if hauled back before the ITC in enforcement proceedings.
Not all of FujiÕs foes gambled on redesigned cameras. Three companies, including Jazz, opted to appeal a minor aspect of the original ITC determination to the U.S. Court of Appeals for the Federal Circuit. In 2001, the court found there was one way to legally make the cameras. This entailed taking the used plastic shells of Fuji cameras first sold in the U.S. and refurbishing them overseas. Jazz quickly announced its cameras would be made this way and presented Customs with its own 12-step Òinformed compliance program.Ó The idea was to document the refurbishment in order to prove the goods were legal.
The problem, as the ITC later found, was that JazzÕs record-keeping was disorganized, incomplete, and generally inadequate. Customs, nonetheless, was persuaded that the cameras were legitimate. From 2001 to 2003, the agency allowed about 27 million Jazz cameras into the country, generating revenue of more than $68 million for the Hong Kong and New JerseyÐbased company.
Again, Fuji complained to the ITC, which began a second enforcement proceeding against Jazz. In April of 2004, ITC administrative law judge Paul Luckern determined that 25 million of the 27 million cameras Jazz imported were made in an infringing manner. The ITC went on to fine both Jazz and its founder Jack Benun a record $13.675 million each for violating the ITCÕs original cease and desist order.
In holding Benun personally liable, the commission called him Òthe moving force behind JazzÕs infringement of FujiÕs patents.Ó The commission also found Jazz acted in bad faith when dealing with Customs, offering an Òunsupported guarantee of complianceÓ that the cameras were legal. Jazz reached a settlement with the ITC. (Benun has appealed his fine to the Federal Circuit, and a decision was pending at press time.)
In the wake of the ITC proceedings, Customs began to crack down on Jazz and excluded two shipments of cameras in September 2004. Jazz fought back, suing Customs in the Court of International Trade. In late 2004 the court found that the bulk of these shipments were made legally and ordered Customs to let them in. But each entry is treated as a separate legal event, and CustomsÑonce burnedÑdid not extend the favorable court decision to JazzÕs other camera shipments, which had begun to back up at the ports. The agencyÕs attitude, Peterson says, was Ò ÔYou want to get them in, sue us.Õ Ó
Jazz went into liquidation in 2005 with 1.4 million cameras still held up at Customs. ÒThe company was put out of business in large part because Customs excluded cameras that the court found permissible,Ó says Peterson.McCray declined to comment on the case, but acknowledges that any dispute involving the process by which a product is made presents a challenge to Customs, especially (as in the camera case) if the infringing and noninfringing goods are physically indistinguishable.
When a patent covers a manufacturing process, Customs relies on importers to certify that the goods were made legally. Importers sign a declaration saying, in effect, that they have mended their ways and their products are now being made in a noninfringing manner. McCray calls it Òthe only effective mechanism we have,Ó and he says the system usually works. ÒMost importers are pretty cognizant of the potential ramifications of being involved in fraud,Ó he says. But he adds, ÒIt can also be used as a way to circumvent orders, and weÕre very well aware of that.Ó
Arent Fox partner Ralph Mittelberger recalls a case that he had in 2001 that concerned a patented process for making high-tech abrasive products used to polish silicon wafers. His client won an exclusion order, but wasnÕt thrilled with the Customs certification system as a remedy. ÒThe respondent never admitted they were practicing an infringing process in the first place,Ó says Mittelberger. ÒSo how do you enforce it? That is, without just trusting the good faith of a company already found to be an infringer?Ó
But Mittelberger says he also understands that there have been instances (which he declines to specify) where patent owners have hired overseas investigators to check up on their rivalsÕ manufacturing processes. If the investigators find that a patented process is being infringed, or more generally that infringing products are being shipped to the United States, the company informs Customs, and Mittelberger says the agency has been responsive when receiving such information.
In addition to the certification program, product redesigns, like those in the Fuji case, also tend to trigger intense Customs fights. Both were at issue in another recent case involving truck transmissions. Cleveland-based Eaton Corp. won a limited exclusion order in 2005 against ArvinMeritor of Troy, Michigan. The company was found to be infringing EatonÕs patent for automated mechanical transmission systems for medium and heavy-duty trucks.ArvinMeritor promptly introduced a redesigned ÒFreedomLineÓ transmission, which it said didnÕt infringe EatonÕs patent, and asked Customs to allow it into the country. The problem was, neither Customs nor the ITC had the chance to evaluate the redesigned product. ArvinMeritor asked the ITC for an advisory opinion, but knew it might be a year before the agency weighed in. Customs had not yet made its own determination about whether the exclusion order applied to the redesigned transmission. Rather than be shut out of the market while awaiting a decision, ArvinMeritor had a speedy interim solution: it would sign a certificate saying the new transmission didnÕt infringe EatonÕs patent. Initially, Customs appeared to go along with the plan. But after receiving an inquiry about the matter from Representative Joe Knollenberg (RÐMichigan), well known as an advocate for U.S. manufacturers, the agency adopted a harder line. ÒCertification was not intended to allow indiscriminate importation of articles which respondent merely claims is noninfringing,Ó wrote McCray and staff attorney Goli Gharib in a memo to the Office of Congressional Affairs. ÒSuch an interpretation would effectively allow the importer to unilaterally certify noninfringement without the benefit of infringement evaluation by a fact finder.ÓBut when Customs began to hold up shipments of transmissions, ArvinMeritor, represented by Peterson, sued the agency in the Court of International Trade. Eaton never even had the chance to intervene. ÒWe found out about the case hours before the preliminary injunction hearing,Ó says EatonÕs lawyer, Sobin of Heller Ehrman. He dashed to the airport to catch the first flight from Washington, D.C., to New York, only to arrive and be handed a settlement agreement between ArvinMeritor and the government. The agreement let ArvinMeritor continue its imports based on its own certification of noninfringement.ÒI was flabbergasted,Ó Sobin says. ÒOur rights were settled away before we even found out about the matter.Ó Eaton sued Customs at the Court of International Trade to block the settlement and won. However, the Federal Circuit stayed the injunction over a technical point, without ruling on the underlying issues.ÒIn light of the stay,Ó says Sobin, ÒCustoms decided it didnÕt need to do anything, so it just let the transmissions keep coming in.Ó Ultimately, the ITC ruled in 2006 that the new FreedomLine transmission did not infringe EatonÕs patent. Peterson says ArvinMeritor was happy with the outcome, but he still finds CustomsÕ inconsistencies troubling. ÒIt was like the government changed its position based on whoever had its ear most recently,Ó he says.As for Sobin, his biggest complaint is that on CustomsÕ end, Òthere was no enforcement at all. . . . It wasnÕt that they reached a decision on the merits that seemed wrong, but that they refused to make a decision and effectively delegated it to the very party that had already been found to have infringed the patent.Ón the Genesis/MStar dispute, Customs did take a stand. Two stands, in fact. After its loss at the ITC, MStar redesigned its infringing chip. And at first the redesigned ÒTsunamiÓ display controller chip did not pass muster with Customs. In a June 3, 2005, letter to the parties, McCray wrote that Òbased upon a careful review of informationÓ as well as tests by CustomsÕs laboratories, the new chip was subject to the exclusion order and could not be imported.But then, seven weeks later, Customs changed its mind. With apparently no new evidence, the agency ruled that the Tsunami controllers did not actually infringe GenesisÕs patent, which covered technology used to produce images on LCD monitors. ÒAfter careful reconsideration . . . there is not enough evidence to find that the Tsunami controllers infringe upon the Õ867 patent,Ó wrote McCray on July 15. MStar and McCray declined to comment on the case. In a press release issued at the time, MStar chairman Wayne Liang proclaimed he was Òdelighted that [Customs] has recognized that the Tsunami chips are not subject to the exclusion order.ÓMcCrayÕs next move in the case signaled a change in procedure for the IPR branch. A hearing was held on November 3, 2005. Unlike the meetings of the past, both sides had equal time to make their case before each other and IPR staff. Each side submitted written materials during and after the meetingÑand had to give each other copies. A week later, Customs issued a second and final determination that the Tsunami controllers did not infringe GenesisÕs patent and could be imported.Genesis lawyers spelled out their theory of what transpired in a May 9, 2006, letter to the ITC: ÒMStar used ex parte contacts to mislead Customs on the facts and law to cause Customs to reverse itself,Ó wrote Brian Nester, a partner at Fish & Richardson in Washington, D.C. ÒAmong other things, MStar apparently convinced Customs that it was shielded from infringement because it had sought patent protection for its new products. MStar also convinced Customs it was not necessary to apply the CommissionÕs claim constructions to determine infringement.ÓGenesis petitioned the ITC for review, and enforcement proceedings began in April 2006. The two sides settled the case on October 18, 2006. Despite the ruling from Customs that the Tsunami chip didnÕt infringe, MStar agreed to pay undisclosed running royalties to license the technology from Genesis. Lawyers for both sides wouldnÕt say whether the settlement was in effect a vote of no confidence in the Customs ruling, or, conversely, whether the ruling caused the terms of settlement to be reduced to the point where it became reasonable for MStar to end the matter. Genesis spokesperson Pamela Goncalves merely reports that the company is Òsatisfied with the final outcome.ÓMcCray would only say that such joint hearings are the wave of the future for Customs when dealing with redesigned products. ÒEx parte meetings didnÕt work as well,Ó he admits. Under the new system, which is still in the process of being codified into formal regulations, the idea is to Òget parties in a room and establish confidentiality so they feel free to discuss everything with us and before each other. It gives us a level of certainty we need to be sure that parties are not misrepresenting,Ó he says. ÒWithout the other party there, we could make a bad decision.ÓVirtually all lawyers who deal with the ITC and Customs agree that more resources would help the IPR branch carry out its mission. A bill is now pending in the Senate that would establish an Intellectual Property Rights Enforcement Division within Customs. Introduced by Senator Chuck Grassley (RÐIowa), the bill calls for increasing the officeÕs head count to 20 lawyersÑa four-fold increase. The bill would also add more auditors and a senior investigative liaison to help coordinate efforts with the agency at large. ÒThe division needs additional staff in a hurry,Ó says Fox of Adduci, Mastriani & Schaumberg, who headed the Customs Office of Rules & Regulations, which oversees IPR, from 1986 to 1995. ÒThey do a very important function, and should be supported with more people as soon as possible.Ó
