The Federal Circuit Misapplies Chevron Deference (and Risks a Future “Supreme Scolding”) in Suprema Inc. v. ITC

Alden Abbott —  14 August 2015

On August 10, in Suprema, Inc. v. ITC, the en banc Federal Circuit granted Chevron deference to a U.S. International Trade Commission (“ITC”) statutory interpretation in holding that goods that do not directly infringe a U.S. patent at the time they are imported nevertheless may be excluded from entry by the ITC if they are used, after importation, to directly infringe by the importer at the inducement of the goods’ seller.  Although this decision is good news for believers in strong U.S. patent enforcement against infringing imports, it is problematic as a matter of jurisprudence.  It may face stormy waters if it eventually is subject to U.S. Supreme Court review.  The gist of the case is as follows.

In May 2010, Cross Match Technologies, Inc. (“Cross Match”) filed a complaint with the ITC, alleging infringement of four patents it owned that involved certain fingerprint scanning devices.  The ITC found the scanners were manufactured abroad by a Korean company, Suprema, Inc. (“Suprema”).  An American company, Mentalix, Inc., bought the scanners and imported them into the United States.  Mentalix subsequently combined the scanners with Mentalix software, and used and sold the scanners in the U.S.  The ITC determined that Mentalix directly infringed a Cross Match patent claim by integrating its software with the Suprema scanners.  The ITC also found that Suprema was liable for inducing patent infringement by Mentalix, in that it “willfully blinded” itself to and “actively encouraged” Mentalix’s infringing U.S. activities.  (Furthermore, Suprema “aided and abetted” Mentalix’s infringement by assisting Mentalix in getting Mentalix software to work with the scanners.)  Consequently, the ITC imposed an exclusion order covering the importation of scanners used in the infringement, applying Section 337 of the Tariff Act of 1930 (“Section 337”), which declares unlawful “importing articles that . . . infringe a valid and enforceable United States patent.”  On appeal, a three-judge Federal Circuit panel disagreed and found no Section 337 violation, reasoning that there are no “articles that infringe” at the time of importation when direct infringement does not occur until after importation.  The Federal Circuit granted a rehearing en banc and a six-judge majority vacated the panel decision, with four judges dissenting.

The en banc majority opinion, authored by Judge Jimmie V. Reyna, applied Chevron deference to the ITC’s determination.  (The administrative law principle known as “Chevron deference,” enunciated in 1984 by the U.S. Supreme Court in Chevron U.S.A. Inc. v. NRDC, gives judicial deference to an agency’s construction of federal statutory language if (1) the statutory language is ambiguous and (2) the agency’s interpretation is based on a “permissible” construction of the language.  An agency’s interpretation need not be the “best” or “most likely” statutory construction, it need only be “not unreasonable.”)  The opinion found first that because Section 337 refers to “articles that infringe,” not just to infringement (the subject of the Patent Act), textual uncertainty is introduced.  In other words, applying Chevron Step One, “Congress has not directly answered whether goods qualify as ‘articles that infringe’ when the [ITC] has found that an importer used such goods, after importation, to directly infringe at the inducement of the goods’ seller.”  Applying Chevron Step Two, Judge Reyna deemed reasonable the ITC’s determination that induced infringement was covered by Section 337:  “Induced infringement is one kind of infringement, and when it is accomplished by supplying an article, the article supplied can be an ‘article that infringes’ if the other requirements of inducement are met.”  Furthermore, “[t]he legislative history consistently evidence[d] Congressional intent to vest the ITC with broad enforcement authority to remedy unfair trade acts.”  Accordingly, Judge Reyna held that deference to the ITC’s interpretation of Section 337 was warranted.

A four-judge dissent, authored by Judge Kathleen M. O’Malley, found no ambiguity in the term “articles that infringe,” and stressed that “there is no actual harm to a patentee until an infringing use, and that harm only occurs after importation for method claims such as the ones at issue in this appeal. This is especially true for staple goods like Suprema’s scanners, where a broad assertion of the Commission’s power could prevent noninfringing goods from entering the country on the basis of what a customer may do with that item once it enters U.S. territory. Such considerations are the purview of the district courts, and fall outside the limited statutory jurisdiction of the [ITC].”  Notably, Judge O’Malley also relied heavily on the Supreme Court’s 2014 decision in Limelight Networks v. Akamai Technologies, when the Court held that inducement liability may arise if and only if there is direct patent infringement.  As Judge O’Malley explained, “[b]y permitting indirect infringement liability at the point of importation when there has been no direct infringement, the [Federal Circuit en banc] majority crafts patent policy where it believes there is a loophole ripe for abuse.”  But “[a]s the Supreme Court recently reminded us” in Limelight, “ ‘[t]he courts should not create liability for inducement of non-infringing conduct where Congress has elected not to extend that concept.’ ”

The dissent has the better case.  The fact is, the scanners did not infringe when they were imported, only when they were bundled subsequently with another company’s software in connection with their being marketed in the United States.  Finding ambiguity in the term “articles that infringe” involves an exercise in statutory construction that appears strained to the point of unreasonableness.  It would likely be viewed unfavorably by the Supreme Court, which recently has shown reluctance about routinely invoking Chevron deference (see, for example, the Court’s very recent summary rejection of such deference in Michigan v. EPA).  Furthermore, the en banc majority’s willingness to find inducement liability at a time when direct patent infringement has not yet occurred (the point of importation) is very hard to square with the teachings of Akamai.  Finally, Federal Circuit decisions have fared poorly before the Supreme Court in recent years, and Judge O’Malley’s thoughtful application of Akamais teachings makes the en banc majority’s opinion a particularly ripe target for Supreme Court reversal, should certiorari be granted. 

As Judge O’Malley pointed out, if U.S. patentees are being seriously harmed by induced infringement after the point of importation, a simple statutory tweak to Section 337 should deal with the problem.  Supporters of strong patent protection would be well advised to have such an amendment “in their back pocket” and ready to go should the Supreme Court elect to review the Suprema decision.

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.

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