Feb 28

Using Section 337 to Stop the Importation of Goods that Infringe U.S. Patents and Trademarks from China (and Beyond)

On January 3, 1975, Congress passed the Trade Act of 1974 (Act). Buried in its over 1200 pages were five pages which amended a little known provision of the trade law, Section 337 of the Tariff Act of 1930. This somewhat obscure section of the law which outlawed unfair acts and unfair methods of competition in the importation of goods into the United States had been rarely used in the over forty (40) years of its existence. In one case during that time, however, In re von Clemm, 229 F.2d 441 (C.C.P.A. 1955), the Court of Customs and Patent Appeals (CCPA), a predecessor of the Court of Appeals for the Federal Circuit (CAFC), ruled that patent infringement was an unfair act and unfair method of competition under the statute. This decision was to have large consequences twenty (20) years later when Congress sought to modernize the trade laws.

In 1974, the United States was suffering trade deficits for the first time since World War II. Congress sought legislation to prevent what it felt was an onslaught of unfairly traded goods into the United States. Of particular concern to the Senate, was the theft of U.S. intellectual property by persons abroad and the subsequent importation of those infringing goods. The Senate report on the bill stated that these infringing imports were costing U.S. companies billions of dollars in lost sales, and resulting in millions of lost jobs for Americans. Sen. Rep. 93-1298. Drawing from the In re Von Clemm case, the Senate sought to pass a law with “teeth in it” to stop these infringing imports – the modern section 337 was born.

First, the Congress made clear that the phrase, “unfair acts and unfair methods of competition” covered patent, trademark, and copyright infringement. Congress set strict time limits in which to complete an investigation, 12-18 months, in order to provide quick and expeditious relief. The statute sought to provide complete and effective remedies by providing for the exclusion of infringing goods from the United States, enforced by the U.S. Customs Service, now Customs and Border Protection (CBP). Cease and desist orders could also be issued against persons within the jurisdiction of the United States; violation of a cease and desist order could lead to fines, imprisonment or both. To provide for a due process proceeding within which to conduct the investigation, the statute placed Section 337 investigations under the Administrative Procedure Act (APA), 5 U.S.C. 501 et seq., which requires that proceedings be conducted with full due process rights to both complainants and respondents before an Administrative Law Judge.

The administration of this new trade law was given to a brand new agency created by the Act to protect United States trade, the U.S. International Trade Commission (ITC).

Of particular concern to the Congress is what is often colloquially called “knock-off” cases. These are cases where the foreign manufacturer or importer has copied the U.S. good and is flooding the U.S. with these cheap copies, often using fictitious names and addresses. These persons are outside the reach of U.S. jurisdiction, and beyond its subpoena power. The U.S. courts are powerless to stop this type of unfair trade. These “copying cases” very frequently threaten the very existence of the U.S. industry as defined by the product.

To effectively combat these copying and counterfeit-property cases, Section 337 has a number of unique features not available in a court of law. The investigations are in rem (against the thing) rather than in personem (against the person). This means the case is brought against the infringing good itself, not against persons unknown or outside the jurisdiction of the United States, who can keep changing their name and address to avoid discovery and evade sanctions. One does not even have to give notice or get service of process against these persons in order to proceed, although one must show importation of the infringing good.

The remedy, the exclusion order, is also in rem. It is against the infringing good that will be seized at the border. The statute provides that a general exclusion order can be issued by the ITC against all infringing products in an investigation, regardless of source or country of origin if it can be shown that a limited exclusion order issued against a specific person or company could be easily circumvented or evaded.

Therefore, if a company is faced with a situation where 1) its patented or trademarked product has been copied and 2) it is facing a flood of imports from a myriad of importers, Section 337 may be the solution, – the only solution to stop the problem. As one U.S. manufacturer put it, “It’s like playing WHACK-A-MOLE. You hit one and two more pop up.” A general exclusive order prevents all of this. Once in place, the good is seized. It doesn’t matter from where or whom it came.

A recent case before the ITC will demonstrate the effectiveness of the law. The U.S. manufacturer was faced with a tidal wave of imports from China of exact copies of its patented products. The company lost all of its store accounts to the Chinese imports. For internet sales, every time the company got Amazon or eBay to take down one infringing site, the next day there were two more sites under a different name and address selling the exact same product.

Faced with financial disaster, the company filed a complaint under Section 337 with the ITC. During the investigation, it was found that most of the firms selling the Chinese product didn’t even exist. The websites were phony, complete with pictures of non-existent buildings and fictitious addresses. When investigators visited the addresses, they found vacant fields, abandoned buildings, factories of other companies which made completely different products and whose managers had no knowledge of the infringers, and buildings that were mail drops for literally hundreds of companies. In one case, investigators who went to the listed address for one of the major infringing importers, found an apartment in a high rise residential block where the door was answered by an elderly woman who lived there.

As the ITC investigation progressed, the infringing Chinese importers put fraudulent countries of origin, usually Taiwan or Vietnam, on the packaging of the infringing goods in an attempt to evade detection. They even went as far as to try and “launder” the infringing goods through Eastern European countries such as Ukraine and Lithuania. When the ITC issued its general exclusion order, all this stopped. CBP began enforcing the order at the border, using traditional methods, such as search and seizure, combined with the highly sophisticated computer detection programs. The infringing imports disappeared almost overnight.

Section 337 can provide an effective relief, which the federal courts cannot, for certain types of unfair import practices, particularly in the patent and trademark areas. It should be a tool which every company keeps in its arsenal to fight unfair methods of foreign trade.

Donald R. Dinan
Goetz Fitzpatrick

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