“Even though they have won an ITC exclusion order, Netlist doesn’t want SK hynix to stop importing the accused LRDIMM memory modules into the United States. Quite the opposite. Netlist would love nothing more than for SK hynix to import as much product into the United States as they possibly can. Netlist just wants to get paid.”

Several weeks ago, the International Trade Commission (ITC) announced that Chief Administrative Law Judge (ALJ) Charles Bullock issued a Notice of Initial Final Determination recommending that certain memory modules manufactured and imported by SK Hynix, Inc. and its subsidiaries should be excluded from importation into the United States.

As is common with these announcements, the ITC first released a one-page indication of the decision, which was followed by the redacted full decision once the parties had an opportunity to request redaction of trade secrets and confidential information. The full decision has now been released, and the ITC is asking for comments relating to public interest issues from the parties, interested persons, and other government agencies and departments. See 19 C.F.R. 210.50(a)(4).

Second ITC Win for an SEP

This case is of such interest because this marks only the second time that the ITC has found a violation of Section 337 of the Tariff Act of 1930 based on the infringement of a standard essential patent (SEP). The previous time the ITC had found exclusion appropriate relating to an SEP was in the patent wars dealing with Apple and Samsung, when the ITC issued a final determination finding a violation of Section 337 and granted a limited exclusion order prohibiting Apple from importing certain wireless communication devices, portable music and data processing devices and tablet computers. Ultimately, President Obama vetoed the limited exclusion order, so it never went into effect.

Will Netlist, the owner of the infringed patent in question, be able to hold on to this exclusion order? In addition to the typical questions of fact and law that will ordinarily be argued about and potentially considered by the Commission on review, there are political and philosophical questions raised by this case.

The Thorny Issue for an ITC Exclusion Order

An ITC exclusion order is for all intents and purposes an injunction; an order that prohibits the act of importation into the United States. Should an SEP be capable of supporting an injunction? There are some that believe the answer should be no; if you own an SEP there should be no possibility of an injunction even if the recalcitrant infringer refuses to take a license under fair, reasonable and non-discriminatory terms (FRAND).

This is a thorny political issue because the U.S. Department of Justice (DOJ) and the U.S. Patent and Trademark Office (USPTO) are no longer on the same page relating to the appropriateness of an injunction as a remedy for the infringement of SEPs. And while the casual observer may suspect it would be the USPTO that would be in favor of injunctions when the patents they issue are infringed, that would be an erroneous belief. It is the DOJ that is leading the reform efforts to bring some semblance of sanity back to the patent world for innovators who have invested in the creation of multi-billion dollar innovations and spent years obtaining large patent portfolios that contain assets that are supposedly presumed to be valid. See 35 U.S.C. 282.

Delrahim Leads the Way on SEPs

In December 2018, Assistant Attorney General for the Antitrust Division of the U.S. Department of Justice, Makan Delrahim, withdrew assent to the 2013 Joint Policy Statement during remarks delivered at the 19th Annual Berkeley-Stanford Advanced Patent Law Institute. Delrahim has acknowledged that there are times when an injunction or exclusion order may be an appropriate remedy even when the underlying patent is an SEP.

The 2013 Statement, a joint statement of policy entered into between the Department of Justice and the USPTO, advised that injunctions or ITC exclusion orders may not be appropriate with respect to SEPs because such orders may be “inconsistent with the public interest.” The statement said:

When a standard incorporates patented technology owned by a participant in the standards-setting process, and the standard becomes established, it may be prohibitively difficult and expensive to switch to a different technology within the established standard or to a different standard entirely. As a result, the owner of that patented technology may gain market power and potentially take advantage of it by engaging in patent hold-up, which entails asserting the patent to exclude a competitor from a market or obtain a higher price for its use than would have been possible before the standard was set, when alternative technologies could have been chosen.

The problem with the policy against injunctions and exclusion orders became evident over time. Without the fear of an injunction or exclusion order an unwilling or recalcitrant implementer has no incentive to enter into a license, regardless of whether the royalty rate offered is FRAND or RAND. The decision to infringe is not personal, it is strictly business, and frankly it has become a reasonable approach to business to simply ignore patents given how weak U.S. patents have become, the lack of any real injunctive threat, and the reality that damages (if ever obtained) will only be what would have been negotiated at an arms-length deal prior to the start of infringement.

Given the time value of money and the reality that at least some patents (likely many patents) will be invalidated by the Patent Trial and Appeal Board (PTAB), and the further reality that damages are low and almost guaranteed to be reduced on appeal to the Federal Circuit, it is almost malpractice for an attorney to advise a client to take a license. That is extraordinarily sad, but that is the state of the law and business of the industry.

Now It’s Up to the USPTO

So, where is the USPTO? Director Andrei Iancu has yet to take a public position on whether he agrees with Assistant Attorney General Delrahim that there are situations where an injunction or exclusion order may be appropriate even when the underlying patent is an SEP.

It is obvious to everyone in the industry with knowledge of licensing talks and litigation that the supposed problem of hold-up, where the patent owner can stop an implementer altogether, is pure fiction. Innovators do not want to stop implementers, and anyone who believes that is either crazy or misinformed. Innovators innovate and get paid when implementers implement. What innovators want is to get paid, period. Unfortunately, because the problem of hold-out is very real, and the problem of efficient infringement is very real, many implementers make the reasonable business decision based on the laws to simply ignore patents because they do not fear an injunction or exclusion order.

This case is a prime example. In October 2017, Netlist filed a complaint at the ITC claiming that SK hynix imported into the U.S. and sold in the U.S. certain memory module products infringing U.S. Patent No. 9,606,907 and 9,535,623. Meanwhile, as is typical with these types of disputes, Netlist also sued in federal court in California. In that federal lawsuit, Netlist did point out that they attempted to license SK hynix under FRAND terms, which was rebuffed in favor of a path of infringing importation.

Even though they have won an ITC exclusion order, Netlist doesn’t want SK hynix to stop importing the accused LRDIMM memory modules into the United States. Quite the opposite. Netlist would love nothing more than for SK hynix to import as much product into the United States as they possibly can. Netlist just wants to get paid. And we know they have good claims because the claims of the ‘907 patent found to infringe survived a PTAB challenge.

So, what say you Director Iancu? Will the USPTO file public comments at the ITC by the deadline? Will the USPTO finally recognize that in at least some cases an injunction and/or exclusion order is appropriate?

Do We Want an Open Source Patent System?

At least when a FRAND offer has been made and infringement of a valid patent claim continues, an injunction and/or exclusion order has to be an available remedy or the U.S. patent system isn’t even a compulsory licensing system. Infringers who can infringe with impunity? That sounds like open source to me, and hardly what Title 35 and the U.S. Constitution envision for the U.S. patent system.