A Revitalized Section 337 To Prohibit Unfairly Traded Imports
By Tom M. Schaumberg
As published in the Journal of the Patent and Trademark Office Society (March 1995)
After more than six years of uncertainty caused by an adverse GATT Panel Report,1 Section 337 of the Tariff Act of 1930,2 which provides for the exclusion of unfairly traded goods from the United States, has been amended as part of the Uruguay Round legislative package3 The amendments not only rectify the issues raised by the GATT Panel but serve to modernize and strengthen the statute. Even with respect to the need to eliminate the time limits associated with Section 337, the statute is strengthened by tying it to current district court practice. Moreover, there is clear legislative history in the Senate Report4 that exhorts the administering agency, the U.S. International Trade Commission (“ITC”), to decide these cases in at least as rapid a time frame as previously.
THE GATT PANEL REPORT
The finding of a Section 337 violation in the Aramid Fibers investigation5 led to the convening of a GATT Panel to determine whether certain aspects of Section 337 were discriminatory against imported goods and, therefore, in violation of the national treatment provisions of Article III:4 of the GATT.6 The GATT Panel, in fact, so found in its Report of November 23, 1988, thereby casting a pall over Section 337. The GATT Panel Report was adopted by the GATT Council approximately one year later, on November 7, 1989.7
After reviewing the arguments of the Government of the United States, on the one hand, and those of the European Community, supported by Canada, Japan, the Republic of Korea and Switzerland, on the other, the Panel found six aspects of Section 337 inconsistent with Article III:4:
(i) the availability to complainants of a choice of forum in which to challenge imported products, whereas no corresponding choice is available to challenge products of United States origin;
(ii) the potential disadvantage to producers or importers of challenged products of foreign origin resulting from the tight and fixed time-limits in proceedings under Section 337, when no comparable time-limits apply to producers of challenged products of United States origin;
(iii) the non-availability of opportunities in Section 337 proceedings to raise counterclaims, as is possible in proceedings in federal district court;
(iv) the possibility that general exclusion orders may result from proceedings brought before the USITC under Section 337, given that no comparable remedy is available against infringing products of United States origin;
(v) the automatic enforcement of exclusion orders by the United States Customs Service, when injunctive relief obtainable in federal court in respect of infringing products of United States origin requires for its enforcement individual proceedings brought by the successful plaintiff; [and]
(vi) the possibility that producers or importers of challenged products of foreign origin may have to defend their products both before the USITC and in federal district court, whereas no corresponding exposure exists with respect to products of United States origin.8
In a further analysis, the Panel determined that certain aspects of Section 337 are “necessary to secure compliance” with United States patent law and, thus, are entitled to an exception under Article XX(d) of the GATT. Specifically, it found that Customs Service enforcement of exclusion orders is such an exception9 and that, in certain circumstances, general exclusion orders of an in rem nature may be appropriate.10 However, none of the other four discriminatory aspects was found “necessary.”
THE SEARCH FOR A SOLUTION
The incumbent U.S. Trade Representative, Carla Hills, commented that, while the United States did not block adoption of the Panel Report, it did not join in the consensus or accept the Report’s findings.11 Simultaneously, President Bush set forth the Administration’s policy with respect to Section 337. He stated that:
Pending enactment of legislation amending section 337, which could most effectively occur through Uruguay Round implementing legislation, the Administration will continue to enforce section 337 without change.12
While no one expected it to take five years, in fact, the amendments to Section 337 required by the GATT Panel Report are part of the Uruguay Round legislative package.13
The intervening five years engendered an extensive debate on the appropriate solution to the Section 337 problems identified by the GATT Panel. The participants in that debate encompassed a broad segment of the intellectual property community, including business groups such as the U.S. Chamber of Commerce and the Intellectual Property Owners, bar groups such as the American Bar Association, the ITC Trial Lawyers Association and the American Intellectual Property Law Association, government agencies, particularly the Office of the United States Trade Representative, and users of the statute such as 3M, Texas Instruments, Motorola, Intel, Corning, Genentech and Micron.14
Some proposals would have made wholesale changes to the role of the ITC or to the enforcement of patent rights generally, while others would have changed the balance between district court and administrative proceedings in the intellectual property area. In the final analysis, the amendments to Section 337 reflect the minimalist approach taken in the legislation sponsored midway through the process by Senator Jay Rockefeller, the principal member of Congress active in seeking a solution.15 The Rockefeller approach was to make the fewest changes necessary to Section 337 to meet the findings of the GATT Panel while preserving the effectiveness of Section 337 as a border enforcement measure. In fact, the legislation, as enacted,16 is even more minimal than the Rockefeller approach would have been, resulting from compromises that were reached, in part to satisfy private interests, in part, governmental ones.
THE AMENDMENTS TO SECTION 337
Some of the amendments to Section 337 contained in the Uruguay Round legislation go beyond the issues raised by the GATT Panel. Those amendments were, essentially, non-controversial and were designed to bring practice before the ITC more into line with federal court practice. In fact, several of the GATT-mandated changes were, surprisingly, also non-controversial, including the elimination of statutory time limits. The two most contentious issues turned out to be the choice of forum and counterclaim aspects of the GATT Panel Report.
1. Time Limits
The “tight and fixed time-limits” referred to in paragraph 5.20(ii) of the Panel Report have technically been removed by the elimination of the one year and eighteen month statutory deadlines. In fact, however, it can be anticipated that investigations will proceed at the same pace as before. First, the statute requires the ITC to decide cases “at the earliest practicable time.” Then, “to promote expeditious adjudication,” the ITC is required to establish “a target date for its final determination” within 45 days of initiating the investigation.17
The Statement of Administrative Action which accompanied introduction of the legislation explains that the setting of target dates parallels the procedures in federal court under Rule 16 of the Federal Rules of Civil Procedure.18 Since there are now federal courts which decide cases in less than one year under their local version of Rule 16, it can be expected that the ITC will follow suit. In fact, the Senate Joint Committee Report19 issued just prior to the vote states:
"Although the fixed deadlines for the completion of section 337 investigations have been eliminated, the Committee expects that, given its experience in administering the law under the deadlines in current law, the ITC will nonetheless normally complete its investigations in approximately the same amount of time as is currently the practice."
As a final matter, nothing in the Panel Report and, therefore, nothing in the amendments disturbs the strict statutory deadlines for temporary exclusion order determinations, which are the ITC’s equivalent of a preliminary injunction. Those will continue to be available within 90 days of initiation (150 days in cases deemed to be complex in nature).20
While the GATT Panel found the unavailability of counterclaims in Section 337 proceedings to be discriminatory, American manufacturers, particularly those in high-tech industries, were concerned that the Rockefeller bill’s approach of having the ITC adjudicate directly related counterclaims, coupled with the elimination of statutory time limits, could make Section 337 proceedings endless. This coincided with the concerns of some in government who thought it would be inappropriate for the ITC, an administrative agency with limited subject matter jurisdiction, to become a forum for the adjudication of counterclaims that might go beyond traditional trade issues. Rather than limiting the types of counterclaims that can be raised, the legislation provides that a respondent may raise “any counterclaim”.21 However, that counterclaim must be immediately removed to a United States district court with proper venue.
The amendments to Title 28 needed to effectuate the counterclaim provisions establish jurisdiction in the federal courts to the extent that such counterclaims arise out of “the transaction or occurrence” that is the subject of the Section 337 investigation.22 That the respondent will have to establish jurisdiction for any counterclaim that is permissive makes the notion that a respondent may raise “any counterclaim” somewhat illusory. On the other hand, a federal court defendant must also establish jurisdiction before its permissive counterclaims will be heard and, to that extent, the amendment to Section 337 is consistent with federal court practice.
The third sentence of the counterclaim amendment is also noteworthy. It states that:
"Action on such counterclaim shall not delay or affect the proceeding under this section, including the legal and equitable defenses that may be raised under this subsection."23
Clearly, this reflects a compromise that was reached during the legislative process. The first part of the sentence assures that counterclaims, whether valid or frivolous, will not affect the time-sensitive nature of Section 337 proceedings. With the elimination of the specific statutory deadline, it was deemed important to state explicitly that the pendency of a counterclaim would neither “delay or affect” the underlying Section 337 proceeding.
The second part of the sentence assures that the availability of a counterclaim will not eliminate any of the defenses previously available to respondents. For instance, inequitable conduct before the Patent and Trademark Office is a defense to patent infringement but can also be the subject of a counterclaim for anti-competitive conduct. As set forth in the Statement of Administrative Action, the intent of the sentence is to clarify that the latter does not preclude the former:
"The right to raise counterclaims.., supplements language.., that permits a respondent to raise all legal and equitable defenses and does not affect a party’s right to raise such defenses."24
The Statement of Administrative Action provides a further gloss on this subject not explicit in the legislation:
[T]he ITC will review, as it has in the past, the effect of exclusion orders under sections 337(d), (e), (f), and (g) in determining whether relief will be granted.25
This clarifies that, despite the availability of counterclaims, the ITC will continue to consider “public interest” factors. This concept is embodied in each of those subsections by the following language describing the circumstances—rarely found in previous cases—under which a remedy will not be imposed even after a violation of the statute is found:
"[A]fter considering the effect of such exclusion upon the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive articles in the United States. and United States consumers ...."
In other words, even though some of those same public interest factors could be raised by counterclaim, the ITC will continue to consider them as part of the remedy phase of its investigations.26
3. Multiple Proceedings and Choice of Forum
From its inception, Section 337 has provided that its use is “in addition to any other provision of law.”27 However, the GATT Panel found discriminatory “the possibility that producers or importers of challenged products of foreign origin may have to defend their products both before the USITC and in federal district court”28 and, correspondingly, “the availability to complainants of a choice of forum in which to challenge imported products.”29
In its analysis of what it called the double proceeding possibility, the GATT Panel recited that “The [European] Community raised the question of the possibility of simultaneous proceedings.”30 If one posits that the only way to avoid double proceedings is to find a means eliminate one, the issue could have become whether Section 337 should have been abolished or whether a special court should have been created to hear all patent cases, both those relating to imports as well as to domestically produced goods. In fact, both of these solutions were proposed during the five year debate over this vexing issue.
Senator Rockefeller’s proposed legislation31 contained three elements in this respect, two of which became part of the final amendments. Because it was clear that one of the principal concerns of the GATT Panel was the simultaneous nature of potential multiple proceedings, both the Rockefeller bill and the final legislation provide that a defendant has the right to request and the district court must grant a stay if that defendant is also a respondent with respect to the same issues in a Section 337 proceeding. A second element of the Rockefeller bill and the final amendments is to provide that the record created before the ITC may be used in the district court proceeding, subject to appropriate evidentiary objections.32 In addition to the fact that this “could expedite proceedings and provide useful information to the court,” as set forth in the Statement of Administrative Action,33 it should also serve to reduce duplication of effort and, therefore, cost in the district court proceeding.
A third element of the Rockefeller proposal that did not become part of the final amendments was the creation of a declaratory judgment action at the ITC available to foreign respondents threatened with litigation. This would have created a choice of forum for declaratory judgments with respect to imported goods, and, to that extent, would have mirrored the choice available to plaintiffs. However, USTR rejected this approach and eliminated it from the amendments.
USTR, itself, made a proposal late in the deliberations to remedy the choice of forum issue. That proposal would have barred a complainant from seeking injunctive relief in district court if it had already filed a claim under Section 337 and, similarly, would have barred a Section 337 investigation if a prospective complainant had previously “sought” injunctive relief in a civil action based on the same underlying claim.34 USTR’s reasoning appeared to be that, since a Section 337 exclusion order was tantamount to an injunction, the plaintiff should be required to make a choice to satisfy the GATT Panel Report.
This proposal served to galvanize company, industry and bar association support for the Rockefeller position. It was the unanimous view that USTR’s proposal would place U.S. industry at a tremendous disadvantage and would, in all likelihood, make Section 337 unworkable.35
For instance, it was pointed out that an ITC exclusion order could be more limited with respect to products, parties, periods of time or scope than a district court injunction. Furthermore, under this proposal an action brought in one forum could not be moved to the other for purposes of adding or deleting parties. Finally, a complainant who lost a Section 337 case because of an inability to establish the unique “domestic industry” requirement of that statute could be deprived of a remedy altogether. Since none of these results was mandated by the GATT Panel Report, USTR’s proposal was seen as going too far in attempting to remedy the choice of forum issue.
As a final matter, the facts underlying that issue had changed since 1988. Most importantly, the GATT Uruguay Round provisions with respect to Trade-Related Aspects of Intellectual Property Rights (“TRIPs”)36 specifically provide for border enforcement of intellectual property rights by administrative agencies. This is exactly the function of Section 337 and, as reflected in the Senate Joint Committee Report:
"The TRIPs Agreement, which is part of the Uruguay Round agreements, recognizes that it may be necessary to treat imported and domestically produced goods differently in order to enforce intellectual property rights with respect to imported goods."37
Similarly, in its discussion of the choice of forum issue, the GATT Panel had alluded to “the differences between the proceedings of the USITC and of federal courts”.38 Those differences have been virtually eliminated by changes in district court practice, for instance the establishment of expedited target dates under Rule 16 of the Federal Rules of Civil Procedure, and by the changes to Section 337 brought about by the current amendments.
With all of these developments, Senator Rockefeller’s proposal to provide for a stay and transfer of the ITC record to the district court was viewed as sufficient to deal with both the dual forum and choice of forum issues. Proposals that would have rendered the ITC inferior to the district courts or, worse, that would have eliminated Section 337 as a viable statute, could have deprived foreign as well as domestic owners of U.S. intellectual property rights of a potent weapon against unfair import competition.
4. General Exclusion Orders
The GATT Panel, recognizing the in rem nature of general ITC exclusion orders, found them to be discriminatory because such relief is not available in district court, but then found them to be “necessary” in some cases, and, therefore, not violative of the GATT. Therefore, the issue that remained from a legislative viewpoint was to define those circumstances in which a general, rather than limited exclusion order would be appropriate.39 In fact, the ITC had established a clear test through its opinions, but it was not in the statute. The examples given by the GATT Panel, i.e., a widespread pattern of unauthorized use of the patented invention or difficulty in identifying the source of the infringing product, were virtually identical to the instances previously found by the ITC.40
The final language of the Amendment provides that a general exclusion order will be appropriate if it “is necessary to prevent circumvention” of a limited exclusion order or “there is a pattern of violation ... and it is difficult to identify the source of infringing products.”41 These criteria will continue to enable complainants to obtain in rem exclusion orders, which are not available from the district courts, in those cases where widespread infringement can be shown.
5. Other Amendments
Of the other amendments to Section 337, two that have substantive significance, although not mandated by the GATT Panel Report, were included to conform ITC practice to district court practice. First, Section 337 provides for the posting of bonds in connection with the issuance of temporary exclusion or cease and desist orders42 and for entries made after the ITC finds a violation but before referral to the President has been concluded.43 Previously, any bond forfeitures were paid into the U.S. Treasury. The amendments, following the practice under Rule 65 of the Federal Rules of Civil Procedure relating to bonding in connection with temporary restraining orders and preliminary injunctions, now provide that bonds may be forfeited to the adverse party. This remedies a previous inequity in the statute, for now the funds will be paid to the party that was presumably injured by the act requiring the posting of the bond.
The other Amendment relates to a previous quirk in Section 337. It has been well established that parties who agree to submit their disputes to arbitration are protected from federal court litigation.44 However, a decision by the Court of Appeals for the Federal Circuit held that, despite the existence of an arbitration clause, a domestic party was not precluded from availing itself of Section 337 in an effort to exclude its competitor’s product.45 The amendments provide that, henceforth, the ITC, like the courts, is empowered to terminate an investigation where an arbitration agreement exists between the parties.46
THE FUTURE OF SECTION 337
With the amendments in place, the cloud over Section 337 has been removed. The statue has survived and may well serve as the international prototype of border enforcement regime envisioned by the TRIPs provisions of the Uruguay Round agreements.
Section 337 will continue to be available, particularly to intellectual property rights holders, as a remedy that provides advantages over district court proceedings. The ITC, in turn, remains a forum where an aggrieved rights holder can, in one proceeding, join respondents from any one or more of the 50 States who serve as importers of infringing goods, along with producers from any one or more of over 100 countries, without concern about long-arm statutes or the technicalities of international service of process. It is a forum where one can obtain foreign discovery, including plant inspections, with relative ease. It is a forum where patent and other complex intellectual property issues are tried before administrative law judges with vast experience in the subject who do not shrink from the challenge. It is a forum where, in the case of a successful complainant, not only will the U.S. Customs Service enforce the relief that has been granted, but such relief is available against entities which were not even part of the proceeding.
In terms of speed, it is a forum where complainants continue to have statutory assurance of a decision on preliminary relief within 90 days of initiation of the investigation. With respect to permanent relief, there is every reason to believe that the ITC will continue to operate within a one year time frame if Congressional oversight means anything. In fact, in a speech before the annual meeting of the ITC Trial Lawyers Association on November 4, 1994, Peter S. Watson, Chairman of the ITC, stated that he saw no reason why his agency should not continue to adjudicate Section 337 investigations in twelve months or less. In support of his view he stated that the current amendments would not add any complexities to the cases and, furthermore, that district courts are adjudicating cases quickly, as well, without being bound by statutory deadlines.
At the same meeting, a spokesman for 3M, which has filed more Section 337 cases than any other company, shared his experience that Section 337 cases cost about half as much as district court litigation. He credits the limits on discovery caused by the speed of the cases and the ease of obtaining foreign discovery with much of the savings. Another speaker added as a factor the traditional swiftness of discovery rulings by the administrative law judges compared to the reluctance of many district court judges and magistrates to resolve discovery disputes.
As a final matter, there is the question of how far the frontiers of Section 337 can be taken. It is clear that the statute covers intellectual property rights and antitrust47 violations in connection with imports, but the full extent of the phrase “[u]nfair methods of competition and unfair acts",48 remains to be explored. For instance, it has been suggested that, where the manufacture of goods imported into the United States involves human rights violations, this general language of Section 337 might be available to prevent their importation.49 Similarly, the failure to adhere to internationally recognized environmental norms might be argued to be “unfair acts” because it gives the foreign producer a cost advantage over his American competitor. While these are only possibilities today, Section 337 could become the remedy of choice if no other form of protection is available against these types of abuses of internationally recognized standards of fairness.
With completion of the Uruguay Round, including the amendments to Section 337, the ITC, along with the U.S. Customs Service, will continue to provide effective border enforcement against unfair imports.
© 1995, Tom M. Schaumberg
1. Tariff Act of 1930, ch. 497, § 337, 46 Stat. 590, 703 (1930) (codified as amended at 19 U.S.C. § 1337 (1988)).
2. Uruguay Round Agreements Act, 108 Stat. 4809 (1994).
3. S. Rep. No. 412, 103d Cong., 2d Sess. 118-122 (1994).
4. In re Certain Aramid Fibers, 8 I.T.R.D. 1967 (Int’l Trade Comm’n), aff”d, 808 F.2d 1471 (Fed. Cir. 1986), cert. denied, 482 U.S. 909 (1987).
5. General Agreement on Tariffs and Trade, 61 Stat. Parts 5 & 6, T.I.A.S. No. 1700 (1947).
6. GA TT Panel Report, supra note 1.
7. Id. at § 5.20.
8. Id. at § 5.33.
9. Id. at § 5.32.
10. Press Release of U.S. Trade Representative Carla A. Hills, Announcing GATT Council’s Adoption of Panel Report on Section 337 (November 7, 1989).
11. President’s Memorandum for the U.S. Trade Representative, Pub. Papers 1476 (November 7, 1989).
12. Uruguay Round Agreements Act, supra note 3, § 321 at 4943.
13. For an extensive discussion of the alternatives presented see Robert G. Krupka, Philip C. Swain, and Russell E. Levine, Section 337 and the GATT: The Problem or the Solution, 42 Am. U. L. Rev. 779 (1993). Also see Monique L. Cordray, GATT Compliance of Section 337, 1 Fed. Cir. B. J. 39 (1991).
14. S. 3172, 102d Cong., 2d Sess. (1992); S. 148, 103d Cong., 1st Sess. (1993).
15. Uruguay Round Agreements Act. supra note 3, § 321 at 4943.
16. 19 U.S.C. § 1337(b). (Section 337, showing both the deletions and additions of the Uruguay Round amendments, as attached as Appendix A, and statutory references herein are to the statute, as amended.)
17. H.R. Doc. No. 316. 103d Cong., 2d Sess., Vol. 1, at 656, 705 (1994).
18. S. Rep. No. 412, supra note 4, at 119.
19. 19 U.S.C. § 1337(e)(2).
20. 19 U.S.C. § 1337©.
21. Uruguay Round Agreements Act, supra note 3, § 321(b)(3)(A) at 4946.
22. 19 U.S.C. § 1337©.
23. H.R. Doc. No. 316, supra note I9. at 705.
24. Id. at 706.
25. 19 U.S.C. §§ 1337(d)(1), (e)(l), (f)(1), (g)(1).
26. 19 U.S.C. § 1337(a)(I).
27. GATT Panel Report, supra note 1, at § 5.20(vi).
28. Id. at § 5.20(i).
29. Id. at § 5.19.
30. See S. 3172 and S. 148, supra note 15.
31. Uruguay Round Agreements Act, supra note 3, § 321(b)(l)(A) at 4946.
32. H.R. Doc. No. 316, supra note 18. at 705.
33. Inside U.S. Trade, Vol. 12, No. 21. May 27, 1994, at 1, 15-18.
34. Id. at Vol. 12, No. 27, July 8, 1994, at 7-9.
35. H.R. Doc. No. 316, supra note 18, at 981-1007.
36. S. Rep. No. 412, supra note 4, at 119.
37. GATT Panel Report, supra note 1, at § 5.18.
38. GATT Panel Report, supra note 1, at § 5.32.
39. Certain Airless Paint Spray Pumps and Components Thereof, USITC Pub. 1199, Inv. No. 337-TA-90 (November 1981).
40. 19 U.S.C. § 1337(d)(2).
41. 19 U.S.C. §§ 1337(e)(1), (e)(2), (f)(1).
42. 19 U.S.C. § 1337(j)(3).
43. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985).
44. Farrel Corp. v. United States Int’l Trade Comm’n, 949 F.2d 1147 (Fed. Cir. 1991), cert. denied, U.S. 112 S. Ct. 1947 (1992).
45. 19 U.S.C. § 1337©.
46. Certain Electrically Resistive Monocomponent Toner and “Black Powder” Preparations Therefor, USITC Pub. 2069, Inv. No. 337-TA-253 (March 1988). See also Tom M. Schaumberg, Section 337 of the Tariff Act of 1930 As an Antitrust Remedy, 27 J. Am. & Foreign Antitrust & Trade Reg. 51 (1982).
47. 19 U.S.C. § 1337(a)(1)(A).
48. Dr. Cheri M. Taylor and George C. Summerfield, Alternative Uses of Section 337 (October 28, 1994) (unpublished manuscript, on file with author).