United States: Federal Circuit Rejects ITC Jurisdiction Over Electronic Transmissions In "Digital Models"

On November 10, 2015, the Federal Circuit released its opinion in ClearCorrect Operating, LLC v. International Trade Commission, reversing the International Trade Commission's (the ITC or the "Commission") determination that electronic transmissions could be infringing "articles" within the ITC's jurisdiction. In a divided panel, Chief Judge Prost, writing for the majority, limited "articles" in 19 U.S.C. § 1337 ("Section 337") to "material things." The Federal Circuit's ruling thus prevents the ITC from issuing remedy orders against infringing products that are digitally-transmitted, potentially limiting the ITC's jurisdiction in protecting intellectual property rights at a time when digital commerce is growing in importance.

BACKGROUND

The decision in ClearCorrect v. International Trade Commission resulted from an appeal of the ITC's final determination In the Matter of Certain Digital Models, Digital Data, and Treatment Plans for Use in Making Incremental Dental Positioning Adjustment Appliances, the Appliances Made Therefrom, and Methods of Making the Same, Inv. No. 337-TA-833 ("Digital Models").

In Digital Models, the complainant, a manufacturer of dental repositioning appliances, asserted that respondents ClearCorrect Pakistan and ClearCorrect Operating, LLC ("ClearCorrect") were unlawfully importing – via the Internet – data used to create infringing dental repositioning appliances. In brief, ClearCorrect would receive orthodontic measurements from dentists in the United States, process those measurements in Pakistan to produce 3D-printable models of dental repositioning appliances, and then electronically transmit those infringing models to the United States for 3D printing.

In Digital Models, the Commission had held that electronically transmitted information was an "article" under Section 337. Section 337 prohibits "[t]he importation into the United States, the sale for importation, or the sale within the United States after importation by the owner, importer, or cosignee, of articles that . . . infringe a valid and enforceable United States patent." ¹ While the Commission had over a decade ago concluded its jurisdiction extended to electronic transmissions as "articles," ² it revisited the issue in Digital Models and ultimately reiterated that it had jurisdiction over electronic transmissions. (Morrison & Foerster's client alert on that earlier opinion is available here.)

THE FEDERAL CIRCUIT’S RULING

In the opinion by Chief Judge Prost, the Federal Circuit reversed the Commission's decision and held that the term "articles" refers only to "material things." ³ The Federal Circuit thus concluded that the ITC does not have jurisdiction over transmissions of electronic data. ⁴

The Court conducted a two-step Chevron analysis⁵ of the Commission's definition of "articles."

First, the Court considered whether the term "articles" was ambiguous. It ruled that, "when viewed in context and with an eye towards the statutory scheme," the literal text of Section 337 defined "articles" as "material things." ⁶ Though Section 337 does not define the term "articles," the Court noted that contemporaneous and modern dictionaries limited "articles" to "material thing[s]" ⁷ and that the United States Tariff Commission's⁸ own contemporaneous definition of "articles" also defined "articles" as, generally, physical "commodities." ⁹ For statutory context, the Court also examined the use of "articles" in different parts of Section 337, noting that the use of the term "articles" in the forfeiture provisions of Section 337¹⁰ implied that "articles" was limited to goods that could be physically "forfeited" and/or "seized." ¹¹ The Court also examined Section 337 and the legislative history of the statute in its entirety, concluding again that the term "articles" was limited to "material things." ¹²

Turning to step two of the Chevron analysis, although the Court determined Congress' intent was "unambiguous," the Court determined that "the Commission's interpretation of the term 'articles' was unreasonable" and thus did not warrant deference. ¹³ The Court criticized the Commission's analysis of the plain meaning of "articles," its analysis of legislative history, and its "improper[]" reliance on Congressional debates. ¹⁴ The Court concluded:

In her opinion, Chief Judge Prost also noted her agreement with ITC Commissioner David Johanson, who dissented in the Commission's Digital Models decision. For example, Chief Judge Prost concurred with Commissioner Johanson's view that it made no sense for "articles" to encompass digital transmissions because exclusion orders against such transmissions were not enforceable. ¹⁶

In conclusion, the Court emphasized that it would leave to Congress "the task of expanding the statute" to include electronic transmissions if Congress so desired. ¹⁷

JUDGE O'MALLEY'S CONCURRENCE

In a concurrence, Judge O'Malley further criticized the Commission's decision, arguing that Chevron deference to the Commission's decision was unnecessary. Judge O'Malley noted that the Commission defined "articles" to include "electronic transmissions" despite "never having purported to regulate Internet transmissions in the past, despite no reference to data transmissions in the statute under which it acts, and despite an absence of expertise in the agency in dealing with such transmissions." ¹⁸ In essence, Judge O'Malley argued that, "[i]f Congress intended for the Commission to regulate one of the most important aspects of modern-day life – the Internet – Congress surely would have said so expressly." ¹⁹

JUDGE NEWMAN'S DISSENT

In her dissent, Judge Newman argued that the Court's ruling effectively eviscerated the statutory purpose of Section 337: facilitating a remedy against unfair competition. ²⁰ Judge Newman characterized the Court's ruling as one that limited Section 337 "to the kinds of technology that existed in 1922 or 1930." ²¹ According to Judge Newman, "[n]o dictionary, and no statutory constraint, limits 'articles' to items that are grossly 'tangible,'" ²² and the Commission's ruling thereby warranted Chevron deference. ²³

Judge Newman's dissent criticized many of the bases relied on by the majority. First, Judge Newman explained that both Commission²⁴ and Federal Circuit cases²⁵ supported an expansive reading of "articles," emphasizing a legal trend of reading statutory language "in light of . . . drastic technological change." ²⁶ Next, Judge Newman argued that the Commission's interpretation of Section 337 was correct, and that the broad definition of the term "article" in the statute was consistent with the purpose of a "remedial" statute to reach all unfair practices. ²⁷

Judge Newman also criticized the practical implications of the majority's ruling, noting that – as a result of the ruling – the Commission may now stop importation of a CD-ROM, but not the exact same data contained on the CD-ROM if transmitted into the U.S. electronically. ²⁸ "My colleagues' reliance on possible difficulty of enforcement against electronic transmission of infringing digital data and related articles . . . merely adds imprecision to judicial guidance in this commercially important area." ²⁹

POTENTIAL RAMIFICATIONS

The Federal Circuit's holding significantly limits the Commission's jurisdiction to address the increasing amount of international commerce conducted via electronic transmissions. Because the Commission is – under the Federal Circuit's decision – prevented from issuing remedial orders against electronic transmissions, importers of infringing goods could attempt to circumvent ITC jurisdiction by using the Internet, satellites, or other methods of electronic transmission to distribute infringing digital data. For example, importers may elect to digitally import the necessary digital data for a product, and then subsequently physically manufacture infringing goods in the U.S. to prevent Customs and ITC enforcement of intellectual property rights. Owners of patents that may be infringed by the use of digital data may need to explore potential alternative means to protect their rights domestically.

It is not yet clear whether the ITC or any of the parties will seek rehearing or rehearing en banc, although, in light of the importance of the decision and the divided panel, there appears to be more than a possibility of further review.

Footnotes

1 19 U.S.C. § 1337(a)(1)(B) (emphasis added).

2 See Certain Hardware Logic Emulation Systems and Components Thereof, Inv. No. 337-TA-383 (1998).

3 ClearCorrect Operating, LLC v. Int'l Trade Comm'n No. 2014-1527, at *3-4 (Nov. 10, 2015).

4 Id.

5 Under Chevron, a court reviews an agency's construction of its organic statute by asking two questions: first, whether Congress has directly spoken to the precise question at issue, and second, whether the agency's answer to the precise question at issue is based on a permissible construction of the statute. Suprema, Inc. v. Int' l Trade Comm'n, 2015 WL 4716604 at *6 (Aug. 10, 2015) (citations omitted).

6 ClearCorrect Operating, LLC v. Int'l Trade Comm'n, No. 2014-1527, at *12-13 (Nov. 10, 2015).

7 Id. at *14-16.

8 The predecessor to the ITC.

9 ClearCorrect Operating, LLC v. Int'l Trade Comm'n, No. 2014-1527, at *16-17 (Nov. 10, 2015) (citing Articles, DICTIONARY OF TARIFF INFORMATION (1924)).

10 19 U.S.C. § 1337(i).

11 ClearCorrect Operating, LLC v. ITC, No. 2014-1527, at *21-22 (Nov. 10, 2015). The Court applied a similar analysis to the provisions relating to "attempted entry" as used in 19 U.S.C. § 1337(i)(3). Id. at *22-23.

12 See generally id. at *23-31.

13 Id. at *31.

14 Id. at *31-35.

15 Id. at *35.

16 Id. at 22.

17 Id. (citing Bayer AG v. Housey Pharm., Inc., 340 F.3d 1367, 1376-77 (Fed. Cir. 2003)).

18 Id. at *2 (O'Malley, J. concurring).

19 Id.

20 Id. (Newman, J., dissenting) at *2.

21 Id. (Newman, J., dissenting) at *6.

22 Id. at *10 (Newman, J., dissenting).

23 Id. at *16-17 (Newman, J., dissenting).

24 Certain Hardware Logic Emulation Systems, Inv. No. 337-TA-383, USITC Pub. 3089, at 18 (Mar, 1998).

25 Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1321 (Fed. Cir. 2009).

26 ClearCorrect Operating, LLC v. Int'l Trade Comm'n, No. 2014-1527, at *6-7 (Nov. 10, 2015) (Newman, J. dissenting) (citing Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 390, 395-96 (1968).

27 Id. at *8-9 (Newman, J. dissenting).

28 Id. at *13 (Newman., J., dissenting) (citing Certain Hardware Logic Emulation Systems, Inv. No. 337-TA-383, USITC Pub. 3089, at 29 (Mar. 1998)).

29 Id. at *15 (Newman, J., dissenting).

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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