301 Moved Permanently

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The solar energy industry has become intimately familiar with the U.S. International Trade Commission (ITC) in recent years as the ITC and the U.S. Department of Commerce conducted two lengthy anti-dumping (AD) and countervailing duty (CVD) investigations with respect to solar modules. Ultimately, the investigations resulted in stiff tariffs in 2012 on products originating from China as well as Commerce also imposing preliminary tariffs on other products from China and Taiwan earlier this year.

But another aspect of the ITC’s jurisdiction appears to have gone largely unnoticed by the solar sector: an intellectual property-oriented trade provision known as “Section 337,” which empowers the ITC to bar the importation of products found to infringe on U.S. intellectual property rights. This potent legal weapon has been used by patent litigants in almost every segment of the electronics industry hundreds of times over the past 30 years - but the solar sector has only litigated under Section 337 a handful of times. This will almost certainly change as the solar sector matures and revenues grow.

 

What is Section 337?

Section 337 of the U.S. Code had its origins in protectionist trade legislation enacted by Congress in 1922. Initially, Section 337 was understood to provide a broad remedy for all kinds of unfair competition and unfair acts of importation, but over time, the focus of Section 337 came to be on intellectual property, which, historically, has almost always meant patents. Under Section 337, the ITC has the authority to conduct investigations of products imported into the U.S. to determine whether the products infringe a U.S. patent.

Investigations are initiated by the patent holder (complainant) which is required to file a detailed complaint describing the asserted patents, identifying the accused infringing products and the parties responsible for importing the accused products into the U.S. (respondents), explaining in detail how the accused products infringe and providing other extensive information required under the statute and ITC regulations. Although the ITC need not commence an investigation upon receipt of the complaint, in practice the ITC rarely declines to do so.

It is worth noting that not every patent holder is entitled to file a Section 337 complaint at the ITC. Only U.S. patent holders having a “domestic industry” pertaining to articles protected by the asserted patents are entitled to initiate an investigation. However, the statutory provision defining what constitutes a domestic industry is sufficiently broad that many foreign companies with U.S. patents have been able to invoke Section 337 procedures at the ITC.

Any firm involved with or dependent on imported products is potentially at risk from Section 337. Respondents in a Section 337 investigation can be, and usually are, foreign manufacturers, foreign or domestic importers and domestic sellers of the accused products. Once named as a respondent, a party must appear before the ITC and participate in the investigation or risk being found in default.

Once a Section 337 investigation is commenced, the complainant and the respondents proceed to litigate their infringement dispute before an ITC administrative law judge (ALJ) much as they would in federal court. However, a Section 337 investigation is essentially patent litigation “on steroids” - a complex infringement case that would take several years to litigate in court is compressed into an approximately 12- to 18-month period, and procedures are expedited. These procedures have many built-in advantages favoring the complainant.

For example, there is little time for the parties to conduct fact discovery, which can severely disadvantage an unprepared respondent attempting to construct its legal defenses - for example, by investigating the prior art in attempting to prove that the patent is invalid because the claimed invention was, in fact, not novel or would have been obvious. Document and evidence gathering and production is conducted at a breakneck pace, placing enormous burdens on the respondents, which are typically required to produce voluminous documents related to the accused products and their chain of distribution, among many other things. Section 337 trials are also expedited, and it is not unusual for an ALJ to require the parties to complete trial of all issues within one week.

If a violation of Section 337 is found, the ITC has the authority to issue an exclusion order requiring the U.S. Customs Service to bar importation of the accused products into the U.S. going forward. This is a draconian remedy, particularly in an industry like the solar sector, where manufacturing is done abroad and the finished products are imported into the U.S. Typically, ITC exclusion orders are directed only to the respondents’ accused products and are known as limited exclusion orders, but in certain situations, the ITC may issue a general exclusion order, which bars the importation of infringing products from any source, even from entities that did not participate in the investigation.

The ITC may also issue cease and desist orders (CDOs), directing the respondents to immediately cease and desist from engaging in the unfair activities at issue. Activities that are typically barred under CDOs include sales, distribution, marketing, advertising or solicitations related to infringing products in the U.S. The ITC can assess civil penalties against any respondent violating a CDO, which can amount to many millions of dollars, depending on the circumstances at issue.

 

Solar and Section 337

The ITC has initiated well over 900 Section 337 investigations, with most having taken place within the past 30 years. Dozens are filed each year. In 2014 alone, 26 Section 337 complaints have been filed to date, involving technologies ranging from televisions, smartphones, audio technology, sonar imaging and semiconductor chips to windshield wipers, laser-abraded denim and dental implants. Surprisingly, however, only two Section 337 investigations directly bearing on the solar sector have ever been initiated at the ITC.

In 2011, Westinghouse Solar initiated an investigation, No. 337-TA-811, against Zep Solar - now a wholly owned subsidiary of SolarCity - and Canadian Solar (the author represented Canadian Solar in this Section 337 investigation). The patents at issue in the -811 investigation generally concerned technologies for mounting photovoltaic panels to rooftops, including module frame technologies and racking systems. Westinghouse Solar’s complaint was directed at Zep Solar’s PV mounting technologies and compatible PVs sold by Canadian Solar, and it sought to exclude any such products from being imported into the U.S.

The Westinghouse Solar -811 investigation was brought after the parties had been mired in court litigation for several years, culminating in the court staying the litigation due to pending patent reexamination proceedings in the U.S. Patent and Trademark Office (USPTO). The respondents in the -811 investigation also sought to have the ITC proceeding stayed pending reexamination, but, unlike the court, the ITC declined to postpone trial and the matter moved forward. Ultimately, the parties reached a settlement agreement prior to trial.

In 2010, the ITC initiated a Section 337 investigation, No. 337-TA-736, on behalf of Duggal Dimensions and related entities. The -736 investigation involved a design patent covering the ornamental design of a wind and solar-powered light post. Four Canadian companies, including Canadian wind turbine manufacturer Gus Power, were named as respondents. Less than a year later, the complaint was withdrawn on the basis of a settlement agreement and the investigation was terminated.

 

What does the future hold?

Whether to engage in patent litigation is usually a business decision requiring a cost/benefit analysis. Regardless of who is in the right and who is in the wrong, litigation is an expensive and intrusive proposition - and patent litigation is possibly the most expensive and intrusive type of civil litigation around. But as sales, revenues and profits grow, the cost/benefit equation begins to change. The relative cost of litigation begins to decrease and the benefits of pursuing litigation in order to preserve a competitive advantage increase.

It is an exciting period of growth in the solar sector, and the market for solar technologies has been exploding. Indeed, the Solar Energy Industries Association described 2013 as a “record year” for PV installations in the U.S. The long-term trends point to more installations, higher revenues and increasing profits.

At the same time, data shows that the number of alternative energy patents being issued by the USPTO has been increasing significantly. One recent study found that energy-related patenting increased at an average annual rate of approximately 12% between 2004 and 2009, and solar patenting in particular increased at a 13% rate. This heightened patenting activity, coming in the midst of a dramatic expansion of the solar energy market, suggests that an escalation in solar sector patent litigation will not be far behind.

The ITC’s AD/CVD trade investigations have had an enormous impact on the solar sector. As solar-related patent litigation activities increase, the ITC’s Section 337 investigations will undoubtedly join the trade investigations on center stage.

The potential impact of Section 337 is undeniable. PVs and other solar energy equipment are typically manufactured overseas and imported into the U.S. An ITC exclusion order barring importation would effectively cut off the U.S. solar market with respect to any products found to infringe. While injunctive relief having a similar impact would be theoretically available in U.S. courts, injunctions are far from standard, and courts often prefer to award only monetary damages.

Moreover, the ITC’s remedies are available on an expeditious basis - many months, if not years, before relief could possibly be obtained in the congested U.S. court system. And even before the parties get to the remedial stage, the burdens associated with litigating on an expedited basis in the ITC, as well as the mere threat of exclusion from the U.S. market, often encourage parties to come to terms on a settlement. In short, Section 337 will be an attractive option for solar patent holders.

Against this backdrop, it is vital that solar firms involved in the importation of products into the U.S. - whether as manufacturers, importers or sellers - pay attention to Section 337 and the associated risks. Are there defensive measures that can be taken proactively?

Solar firms should be actively patenting their innovations and building strong patent portfolios of their own. Existing portfolios should be reviewed and strengthened where necessary, both quantitatively and qualitatively. A strong patent portfolio is like a nuclear arsenal: It may never need to be used in court, but its mere existence provides a deterrent effect and offers counterattack options should a competitor come calling. Even if litigation never ensues, a strong patent portfolio offers a better opportunity for patent cross-licenses on favorable terms.

Along the same lines, it is also important to understand competitors’ products and whether a firm’s patent portfolio covers its competitors’ key technologies. A firm may also decide to have counsel evaluate competitors’ patent portfolios for potential coverage over the firm’s products. Proactive intelligence gathering will enable a faster and more effective response should patent litigation hit - especially fast-paced Section 337 litigation.

At the end of the day, however, patent litigation is a fact of life in a vibrant, mature technological industry and cannot be absolutely avoided. In the solar energy industry, the stakes are large and becoming larger every day. Section 337 must be on everyone’s radar screen. S

 

Teague I. Donahey is a partner in Sidley Austin LLP’s San Francisco office, where he focuses on the representation of technology companies in litigation and trials in U.S. courts and in Section 337 proceedings before the ITC. Donahey can be reached by email at tdonahey@sidley.com.