Archives For international trade

The terms of the United Kingdom’s (UK) exit from the European Union (EU) – “Brexit” – are of great significance not just to UK and EU citizens, but for those in the United States and around the world who value economic liberty (see my Heritage Foundation memorandum giving the reasons why, here).

If Brexit is to promote economic freedom and enhanced economic welfare, Brexit negotiations between the UK and the EU must not limit the ability of the United Kingdom to pursue (1) efficiency-enhancing regulatory reform and (2) trade liberalizing agreements with non-EU nations.  These points are expounded upon in a recent economic study (The Brexit Inflection Point) by the non-profit UK think tank the Legatum Institute, which has produced an impressive body of research on the benefits of Brexit, if implemented in a procompetitive, economically desirable fashion.  (As a matter of full disclosure, I am a member of Legatum’s “Special Trade Commission,” which “seeks to re-focus the public discussion on Brexit to a positive conversation on opportunities, rather than challenges, while presenting empirical evidence of the dangers of not following an expansive trade negotiating path.”  Members of the Special Trade Commission are unpaid – they serve on a voluntary pro bono basis.)

Unfortunately, however, leading UK press commentators have urged the UK Government to accede to a full harmonization of UK domestic regulations and trade policy with the EU.  Such a deal would be disastrous.  It would prevent the UK from entering into mutually beneficial trade liberalization pacts with other nations or groups of nations (e.g., with the U.S. and with the members of the Transpacific Partnership (TPP) trade agreement), because such arrangements by necessity would lead to a divergence with EU trade strictures.  It would also preclude the UK from unilaterally reducing harmful regulatory burdens that are a byproduct of economically inefficient and excessive EU rules.  In short, it would be antithetical to economic freedom and economic welfare.

Notably, in a November 30 article (Six Impossible Notions About “Global Britain”), a well-known business journalist, Martin Wolf of the Financial Times, sharply criticized The Brexit Inflection Point’s recommendation that the UK should pursue trade and regulatory policies that would diverge from EU standards.  Notably, Wolf characterized as an “impossible thing” Legatum’s point that the UK should not “’allow itself to be bound by the EU’s negotiating mandate.’  We all now know this is infeasible.  The EU holds the cards and it knows it holds the cards. The Legatum authors still do not.”

Shanker Singham, Director of Economic Policy and Prosperity Studies at Legatum, brilliantly responded to Wolf’s critique in a December 4 article (published online by CAPX) entitled A Narrow-Minded Brexit Is Doomed to Fail.  Singham’s trenchant analysis merits being set forth in its entirety (by permission of the author):

“Last week, the Financial Times’s chief economics commentator, Martin Wolf, dedicated his column to criticising The Brexit Inflection Point, a report for the Legatum Institute in which Victoria Hewson, Radomir Tylecote and I discuss what would constitute a good end state for the UK as it seeks to exercise an independent trade and regulatory policy post Brexit, and how we get from here to there.

We write these reports to advance ideas that we think will help policymakers as they tackle the single biggest challenge this country has faced since the Second World War. We believe in a market place of ideas, and we welcome challenge. . . .

[W]e are thankful that Martin Wolf, an eminent economist, has chosen to engage with the substance of our arguments. However, his article misunderstands the nature of modern international trade negotiations, as well as the reality of the European Union’s regulatory system – and so his claim that, like the White Queen, we “believe in impossible things” simply doesn’t stack up.

Mr Wolf claims there are six impossible things that we argue. We will address his rebuttals in turn.

But first, in discussions about the UK’s trade policy, it is important to bear in mind that the British government is currently discussing the manner in which it will retake its independent WTO membership. This includes agricultural import quotas, and its WTO rectification processes with other WTO members.

If other countries believe that the UK will adopt the position of maintaining regulatory alignment with the EU, as advocated by Mr Wolf and others, the UK’s negotiating strategy would be substantially weaker. It would quite wrongly suggest that the UK will be unable to lower trade barriers and offer the kind of liberalisation that our trading partners seek and that would work best for the UK economy. This could negatively impact both the UK and the EU’s ongoing discussions in the WTO.

Has the EU’s trading system constrained growth in the World?

The first impossible thing Mr Wolf claims we argue is that the EU system of protectionism and harmonised regulation has constrained economic growth for Britain and the world. He is right to point out that the volume of world trade has increased, and the UK has, of course, experienced GDP growth while a member of the EU.

However, as our report points out, the EU’s prescriptive approach to regulation, especially in the recent past (for example, its approach on data protection, audio-visual regulation, the restrictive application of the precautionary principle, REACH chemicals regulation, and financial services regulations to name just a few) has led to an increase in anti-competitive regulation and market distortions that are wealth destructive.

As the OECD notes in various reports on regulatory reform, regulation can act as a behind-the-border barrier to trade and impede market openness for trade and investment. Inefficient regulation imposes unnecessary burdens on firms, increases barriers to entry, impacts on competition and incentives for innovation, and ultimately hurts productivity. The General Data Protection Regulation (GDPR) is an example of regulation that is disproportionate to its objectives; it is highly prescriptive and imposes substantial compliance costs for business that want to use data to innovate.

Rapid growth during the post-war period is in part thanks to the progressive elimination of border trade barriers. But, in terms of wealth creation, we are no longer growing at that rate. Since before the financial crisis, measures of actual wealth creation (not GDP which includes consumer and government spending) such as industrial output have stalled, and the number of behind-the-border regulatory barriers has been increasing.

The global trading system is in difficulty. The lack of negotiation of a global trade round since the Uruguay Round, the lack of serious services liberalisation in either the built-in agenda of the WTO or sectorally following on from the Basic Telecoms Agreement and its Reference Paper on Competition Safeguards in 1997 has led to an increase in behind-the-border barriers and anti-competitive distortions and regulation all over the world. This stasis in international trade negotiations is an important contributory factor to what many economists have talked about as a “new normal” of limited growth, and a global decline in innovation.

Meanwhile the EU has sought to force its regulatory system on the rest of the world (the GDPR is an example of this). If it succeeds, the result would be the kind of wealth destruction that pushes more people into poverty. It is against this backdrop that the UK is negotiating with both the EU and the rest of the world.

The question is whether an independent UK, the world’s sixth biggest economy and second biggest exporter of services, is able to contribute to improving the dynamics of the global economic architecture, which means further trade liberalisation. The EU is protectionist against outside countries, which is antithetical to the overall objectives of the WTO. This is true in agriculture and beyond. For example, the EU imposes tariffs on cars at four times the rate applied by the US, while another large auto manufacturing country, Japan, has unilaterally removed its auto tariffs.

In addition, the EU27 represents a declining share of UK exports, which is rather counter-intuitive for a Customs Union and single market. In 1999, the EU represented 55 per cent of UK exports, and by 2016, this was 43 per cent. That said, the EU will remain an important, albeit declining, market for the UK, which is why we advocate a comprehensive free trade agreement with it.

Can the UK secure meaningful regulatory recognition from the EU without being identical to it?

Second, Mr Wolf suggests that regulatory recognition between the UK and EU is possible only if there is harmonisation or identical regulation between the UK and EU.

This is at odds with WTO practice, stretching back to its rules on domestic laws and regulation as encapsulated in Article III of the GATT and Article VI of the GATS, and as expressed in the Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary (SPS) agreements.

This is the critical issue. The direction of travel of international trade thinking is towards countries recognising each other’s regulatory systems if they achieve the same ultimate goal of regulation, even if the underlying regulation differs, and to regulate in ways that are least distortive to international trade and competition. There will be areas where this level of recognition will not be possible, in which case UK exports into the EU will of course have to satisfy the standards of the EU. But even here we can mitigate the trade costs to some extent by Mutual Recognition Agreements on conformity assessment and market surveillance.

Had the US taken the view that it would not receive regulatory recognition unless their regulatory systems were the same, the recent agreement on prudential measures in insurance and reinsurance services between the EU and US would not exist. In fact this point highlights the crucial issue which the UK must successfully negotiate, and one in which its interests are aligned with other countries and with the direction of travel of the WTO itself. The TBT and SPS agreements broadly provide that mutual recognition should not be denied where regulatory goals are aligned but technical regulation differs.

Global trade and regulatory policy increasingly looks for regulation that promotes competition. The EU is on a different track, as the GDPR demonstrates. This is the reason that both the Canada-EU agreement (CETA) and the EU offer in the Trade in Services agreement (TiSA) does not include new services. If GDPR were to become the global standard, trade in data would be severely constrained, slowing the development of big data solutions, the fourth industrial revolution, and new services trade generally.

As many firms recognise, this would be extremely damaging to global prosperity. In arguing that regulatory recognition is only available if the UK is fully harmonised with the EU, Mr Wolf may be in harmony with the EU approach to regulation. But that is exactly the approach that is damaging the global trading environment.

Can the UK exercise trade policy leadership?

Third, Mr Wolf suggests that other countries do not, and will not, look to the UK for trade leadership. He cites the US’s withdrawal from the trade negotiating space as an example. But surely the absence of the world’s biggest services exporter means that the world’s second biggest exporter of services will be expected to advocate for its own interests, and argue for greater services liberalisation.

Mr Wolf believes that the UK is a second-rank power in decline. We take a different view of the world’s sixth biggest economy, the financial capital of the world and the second biggest exporter of services. As former New Zealand High Commissioner, Sir Lockwood Smith, has said, the rest of the world does not see the UK as the UK too often seems to see itself.

The global companies that have their headquarters in the UK do not see things the same way as Mr Wolf. In fact, the lack of trade leadership since 1997 means that a country with significant services exports would be expected to show some leadership.

Mr Wolf’s point is that far from seeking to grandiosely lead global trade negotiations, the UK should stick to its current knitting, which consists of its WTO rectification, and includes the negotiation of its agricultural import quotas and production subsidies in agriculture. This is perhaps the most concerning part of his argument. Yes, the UK must rectify its tariff schedules, but for that process to be successful, especially on agricultural import quotas, it must be able to demonstrate to its partners that it will be able to grant further liberalisation in the near term future. If it can’t, then its trading partners will have no choice but to demand as much liberalisation as they can secure right now in the rectification process.

This will complicate that process, and cause damage to the UK as it takes up its independent WTO membership. Those WTO partners who see the UK as vulnerable on this point will no doubt see validation in Mr Wolf’s article and assume it means that no real liberalisation will be possible from the UK. The EU should note that complicating this process for the UK will not help the EU in its own WTO processes, where it is vulnerable.

Trade negotiations are dynamic not static and the UK must act quickly

Fourth, Mr Wolf suggests that the UK is not under time pressure to “escape from the EU”.  This statement does not account for how international trade negotiations work in practice. In order for countries to cooperate with the UK on its WTO rectification, and its TRQ negotiations, as well to seriously negotiate with it, they have to believe that the UK will have control over tariff schedules and regulatory autonomy from day one of Brexit (even if we may choose not to make changes to it for an implementation period).

If non-EU countries think that the UK will not be able to exercise its freedom for several years, they will simply demand their pound of flesh in the negotiations now, and get on with the rest of their trade policy agenda. Trade negotiations are not static. The US executive could lose trade-negotiating authority in the summer of next year if the NAFTA renegotiation is not going well. Other countries will seek to accede to the Trans Pacific Partnership (TPP). China is moving forward with its Regional Cooperation and Economic Partnership, which does not meaningfully touch on domestic regulatory barriers. Much as we might criticise Donald Trump, his administration has expressed strong political will for a UK-US agreement, and in that regard has broken with traditional US trade policy thinking. The UK has an opportunity to strike and must take it.

The UK should prevail on the EU to allow Customs Agencies to be inter-operable from day one

Fifth, with respect to the challenges raised on customs agencies working together, our report argued that UK customs and the customs agencies of the EU member states should discuss customs arrangements at a practical and technical level now. What stands in the way of this is the EU’s stubbornness. Customs agencies are in regular contact on a business-as-usual basis, so the inability of UK and member-state customs agencies to talk to each other about the critical issue of new arrangements would seem to border on negligence. Of course, the EU should allow member states to have these critical conversations now.  Given the importance of customs agencies interoperating smoothly from day one, the UK Government must press its case with the European Commission to allow such conversations to start happening as a matter of urgency.

Does the EU hold all the cards?

Sixth, Mr Wolf argues that the EU holds all the cards and knows it holds all the cards, and therefore disagrees with our claim that the the UK should “not allow itself to be bound by the EU’s negotiating mandate”. As with his other claims, Mr Wolf finds himself agreeing with the EU’s negotiators. But that does not make him right.

While absence of a trade deal will of course damage UK industries, the cost to EU industries is also very significant. Beef and dairy in Ireland, cars and dairy in Bavaria, cars in Catalonia, textiles and dairy in Northern Italy – all over Europe (and in politically sensitive areas), industries stands to lose billions of Euros and thousands of jobs. This is without considering the impact of no financial services deal, which would increase the cost of capital in the EU, aborting corporate transactions and raising the cost of the supply chain. The EU has chosen a mandate that risks neither party getting what it wants.

The notion that the EU is a masterful negotiator, while the UK’s negotiators are hopeless is not the global view of the EU and the UK. Far from it. The EU in international trade negotiations has a reputation for being slow moving, lacking in creative vision, and unable to conclude agreements. Indeed, others have generally gone to the UK when they have been met with intransigence in Brussels.

What do we do now?

Mr Wolf’s argument amounts to a claim that the UK is not capable of the kind of further and deeper liberalisation that its economy would suggest is both possible and highly desirable both for the UK and the rest of the world. According to Mr Wolf, the UK can only consign itself to a highly aligned regulatory orbit around the EU, unable to realise any other agreements, and unable to influence the regulatory system around which it revolves, even as that system becomes ever more prescriptive and anti-competitive. Such a position is at odds with the facts and would guarantee a poor result for the UK and also cause opportunities to be lost for the rest of the world.

In all of our [Legatum Brexit-related] papers, we have started from the assumption that the British people have voted to leave the EU, and the government is implementing that outcome. We have then sought to produce policy recommendations based on what would constitute a good outcome as a result of that decision. This can be achieved only if we maximise the opportunities and minimise the disruptions.

We all recognise that the UK has embarked on a very difficult process. But there is a difference between difficult and impossible. There is also a difference between tasks that must be done and take time, and genuine negotiation points. We welcome the debate that comes from constructive challenge of our proposals; and we ask in turn that those who criticise us suggest alternative plans that might achieve positive outcomes. We look forward to the opportunity of a broader debate so that collectively the country can find the best path forward.”


The latest rankings of trade freedom around the world will be set forth and assessed in the 24th annual edition of the Heritage Foundation annual Index of Economic Freedom (Index), which will be published in January 2018.  Today Heritage published a sneak preview of the 2018 Index’s analysis of freedom to trade, which merits public attention.  First, though, a bit of background on the Index’s philosophy and methodology is appropriate.

The nature and measurement of economic freedom are explained in the 2017 Index:

Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself. . . .  

[The Freedom Index] measure[s] economic freedom based on 12 quantitative and qualitative factors, grouped into four broad categories, or pillars, of economic freedom:

  1. Rule of Law (property rights, government integrity, judicial effectiveness)
  2. Government Size (government spending, tax burden, fiscal health)
  3. Regulatory Efficiency (business freedom, labor freedom, monetary freedom)
  4. Open Markets (trade freedom, investment freedom, financial freedom)

Each of the twelve economic freedoms within these categories is graded on a scale of 0 to 100. A country’s overall score is derived by averaging these twelve economic freedoms, with equal weight being given to each. More information on the grading and methodology can be found in the appendix.

As was the case in previous versions, the 2018 Index explores various aspects of economic freedom in several essays that accompany its rankings.  In particular, with respect to international trade, the 2018 Index demonstrates that citizens of countries that embrace free trade are better off than those in countries that do not.  The data show a strong correlation between trade freedom and a variety of positive indicators, including economic prosperity, unpolluted environments, food security, gross national income per capita, and the absence of politically motivated violence or unrest.  Reducing trade barriers remains a proven recipe for prosperity that a majority of Americans support.

The 2018 Index’s three key trade-related takeaways are:

  1. A comparison of economic performance and trade scores in the 2018 Index shows how trade freedom increases prosperity and overall well-being.
  2. Countries with the most trade freedom have much higher per capita incomes, greater food security, cleaner environments, and less politically motivated violence.
  3. Free trade policies also encourage freedom in general. Most Americans support free trade, and believe its benefits outweigh any disadvantages.

Follow this space for further updates on the 2018 Index.

On March 14, the U.S. Chamber of Commerce released a report “by an independent group of experts it commissioned to consider U.S. responses to the inappropriate use of antitrust enforcement actions worldwide to achieve industrial policy outcomes.”  (See here and here.)  I served as rapporteur for the report, which represents the views of the experts (leading academics, practitioners, and former senior officials who specialize in antitrust and international trade), not the position of the Chamber.  In particular, the report calls for the formation of a new White House-led working group.  The working group would oversee development of a strategy for dealing with the misuse of competition policy by other nations that impede international trade and competition and harm U.S. companies.  The denial of fundamental due process rights and the inappropriate extraterritorial application of competition remedies by foreign governments also would be within the purview of the working group.

The Chamber will hold a program on April 10 with members of the experts group to discuss the report and its conclusions.  The letter transmitting the report to the President and congressional leadership states as follows:

Today, nearly every nation in the world has some form of antitrust or competition law regulating business activities occurring within or substantially affecting its territory. The United States has long championed the promotion of global competition as the best way to ensure that businesses have a strong incentive to operate efficiently and innovate, and this approach has helped to fuel a strong and vibrant U.S. economy. But competition laws are not always applied in a transparent, accurate and impartial manner, and they can have significant adverse impacts far outside a country’s own borders. Certain of our major trading partners appear to have used their laws to actually harm competition by U.S. companies, protecting their own markets from foreign competition, promoting national champions, forcing technology transfers and, in some cases, denying U.S. companies fundamental due process.

Up to now, the United States has had some, but limited, success in addressing this problem. For that reason, in August of 2016, the U.S. Chamber of Commerce convened an independent, bi-partisan group of experts in trade and competition law and economics to take a fresh look and develop recommendations for a potentially more effective and better-integrated international trade and competition law strategy.

As explained by the U.S. Chamber in announcing the formation of this group,

The United States has been, and should continue to be, a global leader in the development and implementation of sound competition law and policy. . . . When competition law is applied in a discriminatory manner or relies upon non-competition factors to engineer outcomes in support of national champions or industrial policy objectives, the impact of such instances arguably goes beyond the role of U.S. antitrust agencies. The Chamber believes it is critical for the United States to develop a coordinated trade and competition law approach to international economic policy.

The International Competition Policy Expert Group (“ICPEG”) was encouraged to develop “practical and actionable steps forward that will serve to advance sound trade and competition policy.”

The Report accompanying this letter is the result of ICPEG’s work. Although the U.S. Chamber suggested the project and recruited participants, it made no effort to steer the content of ICPEG’s recommendations.

The Report is addressed specifically to the interaction of competition law and international trade law and proposes greater coordination and cooperation between them in the formulation and implementation of U.S. international trade policy. It focuses on the use of international trade and other appropriate tools to address problems in the application of foreign competition policies through 12 concrete recommendations.

Recommendations 1 through 6 urge the Trump Administration to prioritize the coordination of international competition policy through a new, cabinet-level White House working group (the “Working Group”) to be chaired by an Assistant to the President. Among other things, the Working Group would:

  • set a government-wide, high-level strategy for articulating and promoting policies to address the misuse of competition law by other nations that impede international trade and competition and harm U.S. companies;
  • undertake a 90-day review of existing and potential new trade policy tools available to address the challenge, culminating in a recommended “action list” for the President and Congress; and
  • address not only broader substantive concerns regarding the abuse of competition policy for protectionist and discriminatory purposes, but also the denial of fundamental process rights and the extraterritorial imposition of remedies that are not necessary to protect a country’s legitimate competition law objectives.

Recommendations 7 through 12 focus on steps that should be taken with international organizations and bilateral initiatives. For example, the United States should consider:

  • the feasibility and value of expanding the World Trade Organization’s regular assessment of each member government by the Trade Policy Review Body to include national competition policies and encourage the Organisation for Economic Cooperation and Development (OECD) to undertake specific peer reviews of national procedural or substantive policies, including of non-OECD countries;
  • encouraging the OECD and/or other multilateral bodies to adopt a code enumerating transparent, accurate, and impartial procedures; and
  • promoting the application of agreements under which nations would cooperate with and take into account legitimate interests of other nations affected by a competition investigation.

The competition and trade law issues addressed in the Report are complex and the consequences of taking any particular action vis-a-vis another country must be carefully considered in light of a number of factors beyond the scope of this Report. ICPEG does not take a view on the actions of any particular country nor propose specific steps with respect to any actual dispute or matter. In addition, reasonable minds can differ on ICPEG’s assessment and recommendations. But we hope that this Report will prompt appropriate prioritization of the issues it addresses and serve as the basis for the further development of a successful policy and action plan and improved coordination and cooperation between U.S. competition and trade agencies.

Neil TurkewitzTruth on the Market is delighted to welcome our newest blogger, Neil Turkewitz. Neil is the newly minted Senior Policy Counsel at the International Center for Law & Economics (so we welcome him to ICLE, as well!).

Prior to joining ICLE, Neil spent 30 years at the Recording Industry Association of America (RIAA), most recently as Executive Vice President, International.

Neil has spent most of his career working to expand economic opportunities for the music industry through modernization of copyright legislation and effective enforcement in global markets. He has worked closely with creative communities around the globe, with the US and foreign governments, and with international organizations (including WIPO and the WTO), to promote legal and enforcement reforms to respond to evolving technology, and to promote a balanced approach to digital trade and Internet governance premised upon the importance of regulatory coherence, elimination of inefficient barriers to global communications, and respect for Internet freedom and the rule of law.

Among other things, Neil was instrumental in the negotiation of the WTO TRIPS Agreement, worked closely with the US and foreign governments in the negotiation of free trade agreements, helped to develop the OECD’s Communique on Principles for Internet Policy Making, coordinated a global effort culminating in the production of the WIPO Internet Treaties, served as a formal advisor to the Secretary of Commerce and the USTR as Vice-Chairman of the Industry Trade Advisory Committee on Intellectual Property Rights, and served as a member of the Board of the Chamber of Commerce’s Global Intellectual Property Center.

You can read some of his thoughts on Internet governance, IP, and international trade here and here.

Welcome Neil!

Public policies that rely on free-market forces and avoid government interventions that distort terms of international trade benefit producers, consumers, and national economies alike.  The  full benefits of international trade will not be realized, however, if sales and purchase decisions are distorted by anticompetitive behavior or other illegitimate commercial conduct (such as theft, fraud, or deceit) that undermines market forces.  Thus, the importation of goods produced through the theft of U.S. property, including intangible “intellectual property” (including, for example, patents, copyrights, and trademarks), distorts the market and merits being curbed.

The provision of U.S. trade law that is targeted most specifically at anticompetitive and other harmful business conduct affecting American imports is Section 337 of the Tariff Act of 1930, which is administered by the U.S. International Trade Commission (USITC).  Section 337 condemns as illegal imports that violate U.S. intellectual property (IP) rights related to a U.S. industry or involve “unfair methods of competition and unfair acts” that harm a U.S. industry.  The standard remedy for a Section 337 violation is the issuance of an order excluding the offending imports from the U.S. market.  As I explain in a Heritage Foundation “Backgrounder” published on June 2, 2016, congressional consideration of reforms that address policy constraints on its application, potential limitations on its reach, and the breadth of the conduct it covers could help Section 337 to become an even more valuable tool with which to protect U.S. IP rights and combat truly unfair competition in a manner that is consistent with general free trade principles.

More specifically, while Section 337 should be judiciously modified to make it an even more effective weapon against foreign theft of U.S. IP rights, it should at the same time be amended so that it cannot be applied in a protectionist manner to curb vigorous and legitimate competition from abroad.  The U.S. antitrust laws are well designed to deal with legitimate cases of anticompetitive foreign business activity not involving IP.  Moreover, the USITC’s brief (and unsuccessful) experimentation during the 1970s with non-IP-related investigations revealed that Section 337, if not appropriately cabined, had a welfare-inimical protectionist potential.  That potential will remain unless and until Section 337 is amended to make it an “IP theft only” statute.

My June 2 Backgrounder concludes as follows:

Section 337 of the Tariff Act of 1930 provides valuable relief to American IP holders whose property rights are undermined by infringing imports. In many cases, Section 337 may be the only truly effective means by which industries that depend on U.S. IP can protect their interests and compete on an undistorted playing field with imported products. Nevertheless, a few carefully tailored amendments to the statute could render it even more effective. Specifically, Congress should seriously consider language that would:

  • Clarify that Section 337 covers all imports, both intangible (such as electronic data compilations) and tangible;
  • Specify that it applies to import schemes aimed at infringing IP rights, even if there is no direct infringement at the precise time of importation;
  • Limit the President’s unreviewable discretion to overturn Section 337 exclusion orders, except on grounds of public health or safety; and
  • Eliminate Section 337’s application to non-IP-related import practices.

Adoption of reforms along these lines could make Section 337 an even more effective tool with which to protect U.S. IP rights in international trade and ensure that Section 337 is applied in a procompetitive, pro-consumer fashion. Such reforms would enhance the role of Section 337 as a law that supports American innovation and economic growth in a manner that is consistent with free trade principles.

In a 2015 Heritage Foundation Backgrounder, I argued for a reform of the United States antidumping (AD) law, which allows for the imposition of additional tariffs on “unfairly” low-priced imports.  Although the original justification for American AD law was to prevent anticompetitive predation by foreign producers, I explained that the law as currently designed and applied instead diminishes competition in American industries affected by AD tariffs and reduces economic welfare.  I argued that modification of U.S. AD law to incorporate an antitrust predatory pricing standard would strengthen the American economy and benefit U.S. consumers while precluding any truly predatory dumping designed to destroy domestic industries and monopolize American industrial sectors.

A recent economic study supported by the World Bank and released by the European University Institute confirms that the global proliferation of AD laws in recent decades raises serious competitive concerns.  The study concludes:

Over a century, antidumping has gradually evolved from an obscure and rarely used policy tool to one that now constitutes an important form of protection not subject to the same WTO [World Trade Organization] controls as members’ bound tariff rates. Rather, antidumping is one of several instruments that allow members to exceed their bound tariffs, albeit subject to very detailed WTO procedural disciplines. Moreover, while the application of antidumping was until the WTO era mainly the province of a few traditional users, emerging markets have become some of the most active users of antidumping and related policies as well as important targets of their application. And though these policies are known collectively as temporary trade barriers, WTO rules governing the duration of antidumping measures are much weaker than for safeguards.

As antidumping use has evolved and proliferated (about 50 countries now have antidumping statutes although some are not active users), both its economic justification and the concerns raised by its possible abuse have also evolved. While the original justification of antidumping was to protect importing countries from predation by foreign suppliers, by the 1980s antidumping had come to be regarded as just another tool in the protectionist arsenal. Even more worrying, evidence began to mount that antidumping was being used in ways that actually enforced collusion and cartel arrangements rather than attacking anticompetitive behavior.

Today’s world economy and international trading system are much different even from those of the early 1990s, when this concern reached its peak. Some changes, in particular the significant growth in the number of countries and firms actively engaged in international trade, tend to limit the possibility of predation by exporters. Moreover, antidumping has developed a political-economic justification as a tool that can help countries manage the internal stresses associated with openness. But other changes, especially the important role of multinational firms and intra-firm trade and the increased use by many countries of policies to limit exports, suggest that concerns about anticompetitive behavior by exporters cannot be entirely dismissed. Vigilance to ensure that antidumping is not abused by complainants to achieve and exploit market power thus remains appropriate today.

In sum, the study reveals that anticompetitive misuse of AD law has become a serious international problem, but, because the potential still remains for occasional predatory use of dumping (China is discussed in that regard), what is called for is appropriate monitoring of the actual application of AD laws.

Building on the study’s conclusion, the best way of monitoring AD laws to ensure that they were employed in a procompetitive fashion would be the redesign of those statutes to adopt a procompetitive antitrust predatory-pricing standard, as recommended in my 2015 Backgrounder.  Such an approach would tend to minimize error costs by providing a straightforward methodology to readily identify actual cases of foreign predation, and to quickly reject unjustified AD complaints.

This in turn suggests that a new Administration interested in truly welfare-enhancing international trade reform could press for redesign of the WTO Antidumping Agreement to require that WTO-conforming AD laws satisfy antitrust-based predation principles.  Initially, a more modest effort might be to work with like-minded nations for the consideration of plurilateral agreements whereby the signatories would agree to conform their AD laws to antitrust predation standards.  Simultaneously, of course, the new Administration would have to make the case to Congress that such an antitrust-based reform of American AD law made good economic sense.

American AD reform along these lines would represent a rejection of crony capitalism and endorsement of a consumer welfare-based approach to international trade law – an approach that would strengthen the economy and ultimately benefit American consumers and producers alike.  It would also reinforce the role of the United States as the leader of the effort to liberalize international trade and thereby promote global economic growth.  (Moreover, to the extent foreign nations adopted the proposed AD reform, American exporters would directly benefit by being afforded new opportunities to compete in foreign markets.)

I have previously written at this site (see here, here, and here) and elsewhere (see here, here, and here) about the problem of anticompetitive market distortions (ACMDs), government-supported (typically crony capitalist) rules that weaken the competitive process, undermine free trade, slow economic growth, and harm consumers.  On May 17, the Heritage Foundation hosted a presentation by Shanker Singham of the Legatum Institute (a London think tank) and me on recent research and projects aimed at combatting ACMDs.

Singham began his remarks by noting that from the late 1940s to the early 1990s, trade negotiations under the auspices of the General Agreement on Tariffs and Trade (GATT) (succeeded by the World Trade Organization (WTO)), were highly successful in reducing tariffs and certain non-tariff barriers, and in promoting agreements to deal with trade-related aspects of such areas as government procurement, services, investment, and intellectual property, among others.  Regrettably, however, liberalization of trade restraints at the border was not matched by procompetitive regulatory reform inside borders.  Indeed, to the contrary, ACMDs have continued to proliferate, harming competition, consumers, and economic welfare.  As Singham further explained, the problem is particularly acute in developing countries:  “Because of the failure of early [regulatory] reform in the 1990s which empowered oligarchs and created vested interests in the whole of the developing world, national level reform is extremely difficult.”

To highlight the seriousness of the ACMD problem, Singham and several colleagues have developed a proprietary “Productivity Simulator,” that focuses on potential national economic output based on measures of the effectiveness of domestic competition, international competition, and property rights protections within individual nations.  (The stronger the protections, the greater the potential of the free market to create wealth.)   The Productivity Simulator is able to show, with a regressed accuracy of 90%, the potential gains of reducing distortions in a given country.  Every country has its own curve in the Productivity Simulator – it is a curve because the gains are exponential as one moves to the most difficult reforms.  If all distortions in the world were eliminated (aka, the ceiling of human potential), the Simulator predicts global GDP would rise by 1100% (a conservative estimate, because the Simulator could not be applied to certain very regulatorily-distorted economies for which data were unavailable).   By illustrating the huge “dollars and cents” magnitude of economic losses due to anticompetitive distortions, the Simulator could make the ACMD problem more concrete and thereby help invigorate reform efforts.

Singham also has adapted his Simulator technique to demonstrate the potential for economic growth in proposed “Enterprise Cities” (“e-Cities”), free-market oriented zones within a country that avoid ACMDs and provide strong property rights and rule of law protections.  (Existing city states such as Hong Kong, Singapore, and Dubai already possess e-City characteristics.)  Individual e-City laws, regulations, and dispute-resolution mechanisms are negotiated between individual governments and entrepreneurial project teams headed by Singham.  (Already, potential e-cities are under consideration in Morocco, Saudi Arabia, Saudi Arabia, Bosnia & Herzegovina, and Somalia.)  Private investors would be attracted to e-Cities due to their free market regulatory climate and legal protections.  To the extent that e-Cities are launched and thrive, they may serve as “demonstration projects” for the welfare benefits of dismantling ACMDs.

Following Singham’s presentation, I discussed analyses of the ACMD problem carried out in recent years by major international organizations, including the World Bank, the Organization for Economic Cooperation and Development (OECD, an economic think tank funded by developed countries), and the International Competition Network (a network of national competition agencies and experts legal and economic advisers that produces non-binding “best practices” recommendations dealing with competition law and policy).  The OECD’s  “Competition Assessment Toolkit” is a how-to manual for ferreting out ACMDs – it “helps governments to eliminate barriers to competition by providing a method for identifying unnecessary restraints on market activities and developing alternative, less restrictive measures that still achieve government policy objectives.”  The OECD has used the Toolkit to demonstrate the huge economic cost to the Greek economy (5.2 billion euros) of just a very small subset of anticompetitive regulations.  The ICN has drawn on Toolkit principles in developing “Recommended Practices on Competition Assessment” that national competition agencies can apply in opposing ACMDs.  In a related vein, the ICN has also produced a “Competition Culture Project Report” that provides useful survey-based analysis competition agencies could draw upon to generate public support for dismantling ACMDs.  The World Bank has cooperated with ICN advocacy efforts.  It has sponsored annual World Bank forums featuring industry-specific studies of the costs of regulatory restrictions, held in conjunction with ICN annual conferences, and (beginning in 2015).  It also has joined with the ICN in supporting annual “competition advocacy contests” in which national competition agencies are able to highlight economic improvements due to specific regulatory reform successes.  Developed countries also suffer from ACMDs.  For example, occupational licensing restrictions in the United States affect over a quarter of the work force, and, according to a 2015 White House Report, “licensing requirements raise the price of goods and services, restrict employment opportunities, and make it more difficult for workers to take their skills across State lines.”  Moreover, the multibillion dollar cost burden of federal regulations continues to grow rapidly, as documented by the Heritage Foundation’s annual “Red Tape Rising” reports.

I closed my presentation by noting that statutory international trade law reforms operating at the border could complement efforts to reduce regulatory burdens operating inside the border.  In particular, I cited my 2015 Heritage study recommending that United States antidumping law be revised to adopt a procompetitive antitrust-based standard (in contrast to the current approach that serves as an unjustified tax on certain imports).  I also noted the importance of ensuring that trade laws protect against imports that violate intellectual property rights, because such imports undermine competition on the merits.

In sum, the effort to reduce the burdens of ACMDs continue to be pursued and to be highlighted in research, proposed demonstration projects, and efforts to spur regulatory reform.  This is a long-term initiative very much worth pursuing, even though its near-term successes may prove minor at best.

Tomorrow, Geoffrey Manne, Executive Director of the International Center for Law & Economics, will be a panelist at the Cato Institute’s Policy Forum, “The ITC and Digital Trade: The ClearCorrect Decision.”  He will be joined by Sapna Kumar, Associate Professor, University of Houston Law Center and Shara Aranoff, Of Counsel, Covington and Burling LLP, and former Chairman of the U.S. International Trade Commission (“ITC”).

The forum is focused on a recent Federal Circuit decision, ClearCorrect v. ITC, in which a divided three judge panel overturned a 5-1 majority decision of the ITC holding that the Tariff Act granted it the power to prevent the importation of digital articles that infringe a valid U.S. patent. Key to the Federal Circuit’s decision was a hyper-textualist parsing of the term “article” as understood in 1929–a move that stands in stark contrast to the Federal Circuit’s recent en banc decision in Suprema, which was crucially based on a wider reading of the context of the Tariff Act in order to understand the the full meaning of the phrase “articles … that infringe” as contained therein.

Critics of the ITC’s interpretation in this matter contend that such jurisdiction would somehow grant the ITC the power to regulate the Internet. However, far from being an expansive power grab, the ITC’s decision was in fact well reasoned and completely consistent with the Tariff Act and Congressional intent. Nonetheless, this remains an important case because the cost of the Federal Circuit’s error could be very high given the importance of IP to the national economy.

Full details on the event:

“The ITC and Digital Trade: The ClearCorrect Decision”
Wednesday, December 9, 2015 at 12 PM EDT.
F. A. Hayek Auditorium (located on the lobby level of the Cato Institute)
1000 Massachusetts Ave., N.W.
Washington, D.C.

Registration begins at 11:30 a.m.


More from us on this and related topics:

False Teeth: Why An ITC Case Won’t Chew Up The Internet (Forbes)

Suprema v. ITC: The Case for Chevron Deference

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


Today, in ClearCorrect Operating, LLC v. International Trade Commission, the U.S. Court of Appeals for the Federal Circuit held that electronic transmissions of digital data from abroad do not involve the importation of “articles” for purposes of Section 337 of the Tariff Act (“Section 337,” 19 U.S.C. § 1337), thereby stripping the U.S. International Trade Commission (“ITC”) of jurisdiction over infringement of intellectual property (IP) facilitated through such transmissions.  If allowed to stand, this unfortunate and ill-reasoned 2-1 panel decision will incentivize IP infringement schemes involving data imports, thereby harming U.S. IP holders (including holders of federally-protected patents, copyrights, trademarks, and designs) and rewarding unfair methods of import competition, contrary to the broad statutory purpose of Section 337.

Align Technology, Inc. held various patents covering the production of orthodontic tooth-straightening appliances, known as aligners.  ClearCorrect Operating, LLC (“ClearCorrect US”) used patented Align Technology without authorization to create digital models of patients’ teeth, and electronically transmitted those models to its Pakistani affiliate, Clear Correct Pakistan.  The Pakistani affiliate manipulated those models and then transmitted final digital models back to the United States, which ClearCorrect US utilized to make orthodontic aligners.  Align Technology complained to the ITC, which found that Clear Correct Pakistan engaged in infringing activity in Pakistan and that data transmission of its digital models to the U.S. violated Section 337(a)(1)(B)(ii), in that it involved the importation of articles covered by the claims of a valid and enforceable United States patent.  ClearCorrect appealed the ITC’s determination to the Federal Circuit.

Judge Sharon Prost’s majority opinion, while conceding that the term “articles” is not defined in the Tariff Act, nevertheless found that because “dictionaries point to the fact that ‘articles’ means ‘material things’”, the term “’articles’ does not cover electronically transmitted digital data.”  Thus, finding the term “articles” to be clear (“commonsense dictates that there is a fundamental difference between electronic transmissions and ‘material things[.]’”), Judge Prost rejected the ITC’s findings under step one (is there statutory ambiguity) of Chevron deference analysis.  Even assuming that “articles” is ambiguous, however, Judge Prost held that the ITC’s interpretation of that term was “unreasonable,” and thus failed step two (was the agency’s interpretation permissible) of Chevron analysis.  Specifically, Judge Prost deemed the ITC’s definition as inconsistent with dictionary definitions and with the Tariff Act’s legislative history.

In her short concurring opinion, Judge Kathleen O’Malley reasoned that the ITC’s definition of “articles” would give it jurisdiction over all incoming international Internet data transmissions, something Congress had not foreseen – “[b]ecause Congress did not intend to delegate such authority to the Commission, I would find the two step Chevron inquiry inapplicable in this case”.  Judge O’Malley added, however, that assuming Chevron applies, “I agree with the majority’s ruling that the Commission erred when it determined that it had jurisdiction over the disputed digital data.”  (Judge O’Malley’s apparent concern that upholding the ITC’s determination would have given that agency excessive regulatory control over the Internet appears to wrongly conflate the protection of property rights through a targeted and carefully-tailored provision (Section 337) with far-reaching command and control regulation – something that is clearly beyond the scope of the ITC’s authority.)

In her dissent, Judge Pauline Newman pointed out that Section 337 was written in broad terms that are adaptable to changes in technology.  She noted compellingly that contrary to the majority’s crabbed reading of “articles,” the term “was intended to be all-encompassing”, and “[t]he Supreme Court [itself] defined ‘articles of commerce’ to include pure information”.  Accordingly, limiting Section 337’s application to the non-digital technology that existed in the 1920s and 1930s (when the statutory core of the Tariff Act was enacted) makes no sense.  Summing it up, Judge Newman trenchantly concluded that “[o]n any standard, the Commission’s determination is reasonable, and warrants respect.  The panel majority’s contrary ruling is not reasonable, on any standard.”

U.S. patentees are not the only IP holders that face serious harm from the Federal Circuit’s regrettable holding.  For example, the Motion Picture Association of America stated that “[t]his ruling, if it stands, would appear to reduce the authority of the ITC to address the scourge of overseas web sites that engage in blatant piracy of movies, television programs, music, books, and other copyrighted works”.

An en banc Federal Circuit (or, better yet Supreme Court) reversal of this decision would prove helpful, but judicial processes move slowly.  Given the potential for serious harm to U.S. IP-dependent industries stemming from this holding, Congress may wish to seriously consider clarifying that the term “articles” in Section 337 is applicable to all forms of commerce, including digital transmissions.

Recently, the en banc Federal Circuit decided in Suprema, Inc. v. ITC that the International Trade Commission could properly prevent the importation of articles that infringe under an indirect liability theory. The core of the dispute in Suprema was whether § 337 of the Tariff Act’s prohibition against “importing articles that . . . infringe a valid and enforceable United States patent” could be used to prevent the importation of articles that at the moment of importation were not (yet) directly infringing. In essence, is the ITC limited to acting only when there is a direct infringement, or can it also prohibit articles involved in an indirect infringement scheme — in this case under an inducement theory?

TOTM’s own Alden Abbott posted his view of the decision, and there are a couple of points we’d like to respond to, both embodied in this quote:

[The ITC’s Suprema decision] would likely be viewed unfavorably by the Supreme Court, which recently has shown reluctance about routinely invoking Chevron deference … 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 [Limelight v.] Akamai.

In truth, we are of two minds (four minds?) regarding this view. We’re deeply sympathetic with arguments that the Supreme Court has become — and should become — increasingly skeptical of blind Chevron deference. Recently, we filed a brief on the 2015 Open Internet Order that, in large part, argued that the FCC does not deserve Chevron deference under King v. Burwell, UARG v. EPA and Michigan v. EPA (among other important cases) along a very similar line of reasoning. However, much as we’d like to generally scale back Chevron deference, in this case we happen to think that the Federal Circuit got it right.

Put simply, “infringe” as used in § 337 plainly includes indirect infringement. Section 271 of the Patent Act makes it clear that indirect infringers are guilty of “infringement.” The legislative history of the section, as well as Supreme Court case law, makes it very clear that § 271 was a codification of both direct and indirect liability.

In taxonomic terms, § 271 codifies “infringement” as a top-level category, with “direct infringement” and “indirect infringement” as two distinct subcategories of infringement. The law further subdivides “indirect infringement” into sub-subcategories, “inducement” and “contributory infringement.” But all of these are “infringement.”

For instance, § 271(b) says that “[w]hoever actively induces infringement of a patent shall be liable as an infringer” (emphasis added). Thus, in terms of § 271, to induce infringement is to commit infringement within the meaning of the patent laws. And in § 337, assuming it follows § 271 (which seems appropriate given Congress’ stated purpose to “make it a more effective remedy for the protection of United States intellectual property rights” (emphasis added)), it must follow that when one imports “articles… that infringe” she can be liable for either (or both) § 271(a) direct infringement or § 271(b) inducement.

Frankly, we think this should end the analysis: There is no Chevron question here because the Tariff Act isn’t ambiguous.

But although it seems clear on the face of § 337 that “infringe” must include indirect infringement, at the very least § 337 is ambiguous and cannot clearly mean only “direct infringement.” Moreover, the history of patent law as well as the structure of the ITC’s powers both cut in favor of the ITC enforcing the Tariff Act against indirect infringers. The ITC’s interpretation of any ambiguity in the term “articles… that infringe” is surely reasonable.

The Ambiguity and History of § 337 Allows for Inducement Liability

Assuming for argument’s sake that § 337’s lack of specificity leaves room for debate as to what “infringe” means, there is nothing that militates definitively against indirect liability being included in § 337. The majority handles any ambiguity of this sort well:

[T]he shorthand phrase “articles that infringe” does not unambiguously exclude inducement of post-importation infringement… By using the word “infringe,” § 337 refers to 35 U.S.C. § 271, the statutory provision defining patent infringement. The word “infringe” does not narrow § 337’s scope to any particular subsections of § 271. As reflected in § 271 and the case law from before and after 1952, “infringement” is a term that encompasses both direct and indirect infringement, including infringement by importation that induces direct infringement of a method claim… Section 337 refers not just to infringement, but to “articles that infringe.” That phrase does not narrow the provision to exclude inducement of post-importation infringement. Rather, the phrase introduces textual uncertainty.

Further, the court notes that it has consistently held that inducement is a valid theory of liability on which to base § 337 cases.

And lest you think that this interpretation would give some new, expansive powers to the ITC (perhaps meriting something like a Brown & Williamson exception to Chevron deference), the ITC is still bound by all the defenses and limitations on indirect liability under § 271. Saying it has authority to police indirect infringement doesn’t give it carte blanche, nor any more power than US district courts currently have in adjudicating indirect infringement. In this case, the court went nowhere near the limits of Chevron in giving deference to the ITC’s decision that “articles… that infringe” emcompasses the well-established (and statutorily defined) law of indirect infringement.

Inducement Liability Isn’t Precluded by Limelight

Nor does the Supreme Court’s Limelight v. Akamai decision present any problem. Limelight is often quoted for the proposition that there can be no inducement liability without direct infringement. And it does stand for that, as do many other cases; that point is not really in any doubt. But what Alden and others (including the dissenters in Suprema) have cited it for is the proposition that inducement liability cannot attach unless all of the elements of inducement have already been practiced at the time of importation. Limelight does not support that contention, however.

Inducement liability contemplates direct infringement, but the direct infringement need not have been practiced by the same entity liable for inducement, nor at the same time as inducement (see, e.g., Standard Oil. v. Nippon). Instead, the direct infringement may come at a later time — and there is no dispute in Suprema regarding whether there was direct infringement (there was, as Suprema notes: “the Commission found that record evidence demonstrated that Mentalix had already directly infringed claim 19 within the United States prior to the initiation of the investigation.”).

Limelight, on the other hand, is about what constitutes the direct infringement element in an inducement case. The sole issue in Limelight was whether this “direct infringement element” required that all of the steps of a method patent be carried out by a single entity or entities acting in concert. In Limelight’s network there was a division of labor, so to speak, between the company and its customers, such that each carried out some of the steps of the method patent at issue. In effect, plaintiffs argued that Limelight should be liable for inducement because it practised some of the steps of the patented method, with the requisite intent that others would carry out the rest of the steps necessary for direct infringement. But neither Limelight nor its customers separately carried out all of the steps necessary for direct infringement.

The Court held (actually, it simply reiterated established law) that the method patent could never be violated unless a single party (or parties acting in concert) carried out all of the steps of the method necessary for direct infringement. Thus it also held that Limelight could not be liable for inducement because, on the facts of that case, none of its customers could ever be liable for the necessary, underlying direct infringement. Again — what was really at issue in Limelight were the requirements to establish the direct infringement necessary to prove inducement.

On remand, the Federal Circuit reinforced the point that Limelight was really about direct infringement and, by extension, who must be involved in the direct infringement element of an inducement claim. According to the court:

We conclude that the facts Akamai presented at trial constitute substantial evidence from which a jury could find that Limelight directed or controlled its customers’ performance of each remaining method step. As such, substantial evidence supports the jury’s verdict that all steps of the claimed methods were performed by or attributable to Limelight. Therefore, Limelight is liable for direct infringement.

The holding of Limelight is simply inapposite to the facts of Suprema. The crux of Suprema is whether the appropriate mens rea existed to support a claim of inducement — not whether the requisite direct infringement occurred or not.

The Structure of § 337 Supports The ITC’s Ability to Block Inducement

Further, as the majority in Suprema notes, the very idea of inducement liability necessarily contemplates that there will be a temporal separation between the event that gives rise to indirect liability and the future direct infringement (required to prove inducement). As the Suprema court briefly noted “Section 337(a)(1)(B)’s ‘sale . . . after importation’ language confirms that the Commission is permitted to focus on post-importation activity to identify the completion of infringement.”

In particular, each of the enforcement powers in § 337(a) contains a clause that, in addition to a prohibition against, e.g., infringing articles at the time of importation, also prohibits “the sale within the United States after importation by the owner, importer, or consignee, of articles[.]” Thus, Congress explicitly contemplated that the ITC would have the power to act upon articles at various points in time, not limiting it to a power effective only at the moment of importation.

Although the particular power to reach into the domestic market has to do with preventing the importer or its agent from making sales, this doesn’t undermine the larger point here: the ITC’s power to prevent infringing articles extends over a range of time. Given that “articles that … infringe” is at the very least ambiguous, and, as per the Federal Circuit (and our own position), this ambiguity allows for indirect infringement, it isn’t a stretch to infer that that Congress intended the ITC to have authority under § 337 to ban the import of articles that induce infringement that occurs only after the time of importation..

To interpret § 337 otherwise would be to render it absurd and to create a giant loophole that would enable infringers to easily circumvent the ITC’s enforcement powers.

A Dissent from the Dissent

The dissent also takes a curious approach to § 271 by mixing inducement and contributory infringement, and generally making a confusing mess of the two. For instance, Judge Dyk says

At the time of importation, the scanners neither directly infringe nor induce infringement… Instead, these staple articles may or may not ultimately be used to infringe… depending upon whether and how they are combined with domestically developed software after importation into the United States (emphasis added).

Whether or not the goods were “staples articles” (and thus potentially capable of substantial noninfringing uses) has nothing to do with whether or not there was inducement. Section 271 makes a very clear delineation between inducement in § 271(b) and contributory infringement in § 271(c). While a staple article of commerce capable of substantial noninfringing uses will not serve as the basis for a contributory infringement claim, it is irrelevant whether or not goods are such “staples” for purposes of establishing inducement.

The boundaries of inducement liability, by contrast, are focused on the intent of the actors: If there is an intent to induce, whether or not there is a substantial noninfringing use, there can be a violation of § 271. Contributory infringement and inducement receive treatment in separate paragraphs of § 271 and are separate doctrines comprising separate elements. This separation is so evident on the face of the law as well as in its history that the Supreme Court read the doctrine into copyright in Grokster — where, despite a potentially large number of non-infringing uses, the intent to induce infringement was sufficient to find liability.

Parting Thoughts on Chevron

We have some final thoughts on the Chevron question, because this is rightly a sore point in administrative law. In this case we think that the analysis should have ended at step one. Although the Federal Circuit began with an assumption of ambiguity, it was being generous to the appellants. Did Congress speak with clear intent? We think so. Section 271 very clearly includes direct infringement as well as indirect infringement within its definition of what constitutes infringement of a patent. When § 337 references “articles … that infringe” it seems fairly obvious that Congress intended the ITC to be able to enforce the prohibitions in § 271 in the context of imported goods.

But even if we advance to step two of the Chevron analysis, the ITC’s construction of § 337 is plainly permissible — and far from expansive. By asserting its authority here the ITC is simply policing the importation of infringing goods (which it clearly has the power to do), and doing so in the case of goods that indirectly infringe (a concept that has been part of US law for a very long time). If “infringe” as used in the Tariff Act is ambiguous, the ITC’s interpretation of it to include both indirect as well as direct infringement seems self-evidently reasonable.

Under the dissent’s (and Alden’s) interpretation of § 337, all that would be required to evade the ITC would be to import only the basic components of an article such that at the moment of importation there was no infringement. Once reassembled within the United States, the ITC’s power to prevent the sale of infringing goods would be nullified. Section 337 would thus be read to simply write out the entire “indirect infringement” subdivision of § 271 — an inference that seems like a much bigger stretch than that “infringement” under § 337 means all infringement under § 271. Congress was more than capable of referring only to “direct infringement” in § 337 if that’s what it intended.

Much as we would like to see Chevron limited, not every agency case is the place to fight this battle. If we are to have agencies, and we are to have a Chevron doctrine, there will be instances of valid deference to agency interpretations — regardless of how broadly or narrowly Chevron is interpreted. The ITC wasn’t making a power grab in Suprema, nor was its reading of the statute unexpected, inconsistent with its past practice, or expansive.

In short, Suprema doesn’t break any new statutory interpretation ground, nor present a novel question of “deep economic or political significance” akin to the question at issue in King v. Burwell. Like it or not, there will be no roots of an anti-Chevron-deference revolution growing out of Suprema.