Bonding With Teeth At The ITC

Portfolio Media. Inc. | 860 Broadway, 6th Floor | New York, NY 10003 | www.law360.com
Phone: +1 646 783 7100 | Fax: +1 646 783 7161 | customerservice@law360.com

Bonding With Teeth At The ITC
Law360, New York (October 15, 2012, 3:45 PM ET) -- A rarely used regulation was recently brought into
focus at the U.S. International Trade Commission in the case of Certain Semiconductor Chips With
Minimized Chip Package Size, ITC Inv. No. 337-TA-605 (Semiconductor Chips) — an action brought by
Tessera Inc. alleging patent infringement by importers of semiconductor devices. There, after the
exhaustion of all appeals by respondents, the presiding judge considered the application of 19 C.F.R. §
210.50 and clarified how the bonds posted by the respondents, pursuant to the ITC’s remedial orders,
should be forfeited to Tessera. This noteworthy decision reaffirms the robust trade protection afforded
by Section 337.

Background on Section 337 and Its Bonding Procedures

Section 337 makes it unlawful, among other unfair acts, to import any article into the United States that
infringes a valid and enforceable U.S. intellectual property right. A successful complainant is typically
awarded a limited exclusion order (LEO) blocking the importation of infringing goods. The ITC may also
issue cease-and-desist orders (CDOs), which prohibit respondents from, inter alia, distributing, selling or
marketing infringing articles in their U.S. inventory. These powerful remedies, along with other
advantages of litigating at the ITC — such as IP savvy judges and expeditious proceedings — have made
Section 337 an important tool for U.S. IPR owners seeking to curtail unfair foreign competition.

At the end of the proceedings, when the ITC finds a violation and issues remedial orders, the president
has 60 days to review the remedy on policy grounds.[1] A respondent may continue to import and sell
infringing articles during the presidential review period (PRP), but only after posting a bond “in an
amount determined by the Commission to be sufficient to protect the complainant from any injury.”[2]

The nature of an LEO bond is specified in 19 C.F.R. Part 113, Appendix B. This is a single entry bond,
meaning a separate bond must be filed with U.S. Customs and Border Protection for each entry of goods
subject to the LEO. A CDO bond, which allows a respondent to sell previously imported infringing
inventory during the PRP, is filed with the ITC, not Customs. It is made by submitting to the ITC a
certified check or bank draft proportionate to the amount of the infringing sales.

Assuming the president does not disapprove the ITC’s determination and remedial orders, "proceedings
to determine whether a respondent’s bond should be forfeited to a complainant in whole or part may
be initiated upon the filing of a motion by a complainant within 90 days after expiration of the [PRP.]"[3]
In assessing a complainant’s request for bond forfeiture, the judge is to be guided by practice under
Federal Rule of Civil Procedure 65.[4] This means the complainant is entitled only to the amount
commensurate with its injury proximately caused by the continued importations or sales.

Certain Lens-Fitted Film Packages, ITC Inv. No. 337-TA-406, is the only case prior to Semiconductor Chips
in which a bond forfeiture motion was fully adjudicated. There, the presiding judge permitted discovery
and held a hearing. He concluded that the amount of injury to the complainant, and thus the
appropriate forfeiture, was $667,312, rather than the $877,000 bond posted by the respondent.

The Semiconductor Chips Precedent

Underlying Investigation

Tessera filed its complaint in 2007, alleging infringement of two U.S. patents by the imports of
Qualcomm Inc., Freescale Semiconductor Inc., Spansion Inc. and Spansion LLC, ATI Technologies,
STMicroelectronics NV, and Motorola.[5] On May 20, 2009, the ITC found both patents valid and
infringed. The ITC issued LEOs against all respondents and CDOs against Qualcomm, Freescale and
Spansion, based on its finding that those respondents maintained commercially significant inventories of
infringing goods. After considering arguments from the parties, the ITC set the bond at 3.5 percent of
the value of an infringing product.

The respondents appealed the ITC’s decision of violation of Section 337 to the U.S. Court of Appeals for
the Federal Circuit. Meanwhile, Tessera filed a motion seeking forfeiture of any bonds posted by
respondents during the PRP. The judge denied Tessera’s motion due to the ongoing appeal, stating it
would be inappropriate to initiate bond forfeiture proceedings until a final judgment had been rendered
on the underlying matter. Tessera’s filing was critical, however, as there is a regulatory limitation on the
timeline of such a motion. Unlike one of the respondents, Tessera’s filing preserved its future rights with
respect to its claim to the bonds.

On Dec. 21, 2010, the Federal Circuit affirmed the ITC’s final determination in all respects.[6] The
respondents subsequently filed petitions for certiorari with the U.S. Supreme Court, which were denied
on Nov. 28, 2011. The respondents’ appeals having been exhausted, Tessera returned to the ITC seeking
forfeiture of the bonds posted by respondents.

2012 Bond Forfeiture Proceedings

In its January 2012 bond forfeiture motion, Tessera argued that all bonds posted by respondents
Qualcomm, Freescale, Spansion, ATI and STMicro should be forfeited. Tessera was aware that certain
CDO bonds had been posted with the ITC due to publicly available filings. However, Tessera requested
the right to take discovery in order to ascertain what additional bond amounts were or should have
been posted so that any forfeiture would be comprehensive.

All respondents individually opposed Tessera’s motion, arguing, inter alia, that Tessera’s request for
discovery was not supported by applicable ITC rules. However, after some negotiation Qualcomm and
Spansion agreed to forfeit all of their bonds to Tessera, thus ending the proceedings as to those
companies.[7]

ATI and STMicro, against whom CDOs were not issued, represented that they did not post any bonds
because they did not import any covered products during the PRP. Accordingly, they contended they
should not be part of any forfeiture proceeding. The judge agreed, finding that the applicable statute
and regulation did “not provide for relief if a respondent has failed to post a bond at all or whether the
posted amount is sufficient.”[8] Such an inquiry may be conducted only in an enforcement
proceeding.[9]

Interestingly, Freescale filed its own motion seeking the return of bonds it posted with Customs and the
Commission. This, too, is a rarely utilized tool provided by the Commission Rules. Freescale argued that
Tessera could not have suffered any injury from Freescale’s activities because Freescale’s products are
specialized devices that neither Tessera nor its licenses could have sold during the PRP.

Tessera raised a number of objections to Freescale’s motion, most significantly that the motion was
untimely because it was not filed within 90 days after expiration of the PRP as required by the applicable
rule.[10] (Recall that this was why Tessera filed its original bond forfeiture motion while the
investigation was on appeal to the Federal Circuit.) The judge agreed and denied Freescale’s motion on
that procedural basis.[11]

With respect to Tessera’s motion, Freescale argued that Tessera was required, but failed, to make a
prima facie showing that Tessera or its licensees could have made its (Freescale’s) sales during the PRP.
The judge disagreed, stating that Tessera was not required to make that showing “without the benefit of
some discovery.”[12] Thus, the judge ordered discovery for the limited purpose of determining what
damages Tessera sustained from Freescale’s continued importations and sales.

After taking written discovery from Freescale, Tessera filed a motion for summary determination.
Tessera argued that Freescale’s sales during the PRP would have been made by Tessera’s licensees.
Relying on expert analysis, Tessera presented evidence showing that its licensees make up 81.8 percent
of the relevant market. Accordingly, Tessera contended it was entitled to at least 81.8 percent of
Freescale’s posted bond amounts, plus prejudgment interest. Tessera utilized the lost sales and royalties
framework set forth in Panduit Corp. v. Stahlin Bros. Fibre Works Inc., 575 F.2d 1152 (6th Cir. 1978),
which held that:

        to obtain as damages the profits on sales [a company] would have made absent the
        infringement, i.e., the sales made by the infringer, a patent owner must prove: (1) demand for
        the patented product, (2) absence of acceptable noninfringing substitutes, (3) [the company’s]
        manufacturing and marketing capability to exploit the demand, and (4) the amount of profit [the
        company] would have made.

Freescale opposed Tessera’s motion on multiple grounds. Freescale argued that, because it included in
its bonds imports of products not covered by the remedial orders, the amount subject to forfeiture
should be reduced accordingly. Freescale also argued that the products of Tessera’s licensees were not
interchangeable with its own and that Tessera’s licensees could not have rapidly redesigned their
products to compete with Freescale’s during the 60-day PRP. Therefore, according to Freescale, its
continued activities did not cost Tessera any royalties.

The judge ruled in favor of Tessera, rejecting virtually all of Freescale’s arguments.[13] Significantly, the
judge found that all but one of the Panduit factors was met. First, demand for the patented products
was evidenced by Freescale’s admission that it imported and sold covered products during the PRP.
Second, Freescale’s own documents repeatedly acknowledged that its main competitors in the relevant
market were Tessera licensees. Third, Tessera’s licensees were supplying the market with covered
products at the time of the PRP, and it would have taken minimal effort for those companies to replace
Freescale’s infringing products.

The judge disagreed only with Tessera's calculation regarding Panduit factor 4 — the profit Tessera
would have made but for Freescale’s continued activities. The judge found that the combined market
share of Tessera’s licensees was 62.1 percent as opposed to 81.8 percent, because, where the
marketplace contains unidentified manufacturers, the judge was uncomfortable accepting that all of
Freescale's sales would have gone to Tessera's licensees.

Thus, to determine Tessera’s lost profits and the appropriate amount of forfeiture, the judge multiplied
that market share by the total bond amounts posted by Freescale. The judge further found that Tessera
was entitled to prejudgment interest, based on Moody’s AAA corporate bond rate and calculated from
May 2009 (when the remedial orders were issued) to September 2012 (date of the bond forfeiture
decision). The interest added 18.0 percent to the amount awarded to Tessera. The parties agreed to
stipulate to the results of the judge's order and terminate the proceeding.

Implications for Future ITC Cases

The bond forfeiture proceeding in Semiconductor Chips is notable in many respects. Importantly, the
proceeding produced three distinct results: voluntary forfeiture by two respondents, denial of requested
discovery into the possible PRP activities by two respondents who had posted no bonds, and a final
decision in favor of the complainant with respect to the remaining respondent. Those results carry
lessons for complainants and respondents alike. And, as the first bond forfeiture adjudication in almost a
decade, the judge’s final decision sets a new precedential bar.

This proceeding highlights just how valuable ITC remedial orders can be. Proper use of the ITC rules can
result in both injunctive relief and a financial reward. Future complainants under Section 337 should
think carefully about how to take full advantage of the statute in this manner.

--By Katherine Lahnstein and Beau Jackson, Adduci Mastriani & Schaumberg LLP

Katherine Lahnstein and Beau Jackson are attorneys in Adduci Mastriani & Schaumberg's Washington, D.C., office.
The authors are contributors to the second edition of the firm’s American Bar Association's book titled "A Lawyer’s
Guide to Section 337 Investigations Before the U.S. International Trade Commission."

Adduci Mastriani & Schaumberg represented complainant Tessera Inc. only in the bond forfeiture proceedings in
the matter of Certain Semiconductor Chips With Minimized Chip Package Size, ITC Inv. No. 337-TA-605.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or
Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is
not intended to be and should not be taken as legal advice.

[1] The Office of the U.S. Trade Representative performs this task on behalf of the president. See 70 Fed. Reg.
43251 (Jul. 26, 2005). The president has disapproved an ITC remedy in only five instances, the last time being 23
years ago.

[2] 19 U.S.C. § 1337(j)(3); see also 19 C.F.R. § 210.50(a)(3).

[3] 19 C.F.R. § 210.50(d)(1)(i).

[4] See 19 C.F.R. § 210.50(d)(3). Federal Rule 65 addresses injunctions and restraining orders. Part (c) of the rule
focuses on “the costs and damages sustained by any party found to have been wrongfully enjoined or restrained.”

[5] Tessera and Motorola eventually reached a settlement agreement.

[6] Spansion Inc. v. Int’l Trade Comm’n, 629 F.3d 1331, 1360 (Fed. Cir. 2010).

[7] See Semiconductor Chips, Order Nos. 70 and 71 (Apr. 2 and 24, 2012).

[8] Semiconductor Chips, Order No. 68 at 7 (Apr. 2, 2012).

[9] See 19 C.F.R § 210.75.

[10] See 19 C.F.R. 210.50(d)(1)(ii).

[11] Semiconductor Chips, Order No. 69 (April 2, 2012). Tessera also noted there is no express statutory authority
for return of a respondent’s bond. Rather, the statute only contemplates that a respondent’s bond “may be
forfeited to the complainant.” See 19 U.S.C. § 1337(j). Tessera contended that this statutory omission, if not a total
bar to any return of a respondent’s bond, at least suggests that a forfeiture analysis should give greater deference
to the complainant’s position.

[12] Semiconductor Chips, Order No. 68 at 9 (April 2, 2012).

[13] See Semiconductor Chips, Order No. 73 (Sept. 18, 2012).

All Content © 2003-2012, Portfolio Media, Inc.