Section 337 Update - Over 20 Million USD in Penalties Imposed for Violations of ITC Remedial Orders

Welcome to the second issue of the Section 337 Update. This newsletter is designed to provide you with practical updates and developments on Section 337 proceedings before the U.S. International Trade Commission.

Over 20 Million USD in Penalties Imposed for Violations of ITC Remedial Orders

The U.S. International Trade Commission (“ITC”) recently reminded parties of the risks they may face if they fail to comply with the ITC’s remedial orders.  As part of a formal enforcement proceeding in Certain Ink Cartridges and Components Thereof, Judge Luckern issued an Enforcement Initial Determination (“ED”) wherein he determined that the enforcement respondents violated the cease and desist and consent orders issued at the conclusion of Investigation No. 337-TA-565.  He recommended the maximum civil penalty against the seven respondents, an amount exceeding $30 million.  The ED is available online.  On August 17, the Commission issued a notice agreeing that civil penalties should be imposed, but reducing the penalty amount for one group of respondents, thereby imposing total penalties of over $20 million.  The Commission notice is also available online.

Formal enforcement proceedings are one route that the ITC or complainants can take to enforce ITC exclusion, cease and desist and consent orders.   

For each day that a respondent imports or sells a product in violation of a cease and desist order, the Commission may assess a civil penalty.  (19 U.S.C. § 1337(f)(2).)  In this proceeding, Judge Luckern recommended the maximum daily penalty, which is the greater of $100,000 or twice the value of the infringing products imported or sold on that day.  (Id.)  Lesser penalties, however, may be assessed against respondents who are able to show mitigating circumstances, such as demonstrating an effort to comply with the cease and desist order. 

To determine the appropriate penalty, the ITC traditionally analyzes six factors: “(1) the good or bad faith of the respondent, (2) the injury to the public, (3) the respondent’s ability to pay, (4) the extent to which the respondent has benefited from its violations, (5) the need to vindicate the authority of the Commission, and (6) the public interest.”  (Id. at  64.)   

Judge Luckern evaluated the six factors as to three of the respondents (collectively, “Ninestar”) and found that all six factors weighed in favor of assessing a large penalty against Ninestar.  He recommended that the Ninestar respondents be jointly and severally liable for a total penalty of $20,504,974.16 for importing or selling products in violation of a cease and desist order on 187 separate days.  The Commission reduced this amount to $11,110,000; its reasoning will be explained in an order and opinion to be issued at a later date.  Joint and several liability is routinely imposed upon related respondents.  The Ninestar respondents were found to be sufficiently related to warrant such treatment because one of the respondents was the sole shareholder of and sole supplier of covered goods to the other two respondents, its subsidiaries.

To determine whether Ninestar had violated the cease and desist order in bad faith, Judge Luckern analyzed whether Ninestar: (1) had a reasonable basis to believe that the products it was selling or importing were not within the scope of the order, (2) requested a clarification from the ITC regarding the scope of the order, (3) sought legal advice before participating in the violating acts, (4) relied on the decisions of management and technical personnel, without legal advice, in deciding whether products fell within the scope of the order, and (5) satisfied its reporting requirements under the relevant ITC order.  The finding of bad faith hinged largely on the fact that Ninestar was aware of steps it should have taken to avoid violation, but chose to ignore such steps.  Furthermore, it was clear that Ninestar relied solely on its management and in-house personnel to determine which products were subject to the cease and desist order, without consulting the ITC for clarification or seeking advice from legal counsel.  Ninestar’s blatant and repeated violations of the cease and desist order also supported Judge Luckern’s finding that the authority of the ITC needed to be vindicated.

The second factor, injury to the public, focuses on the harm to the domestic industry and is measured by a respondent’s unlicensed sales.  Judge Luckern held that factor two weighed against Ninestar because it had made no effort to comply with the remedial orders and harmed Complainants through the infringing sales.  The fourth factor, respondents’ benefit from the violations, has a similar focus.  The benefit to respondents can be determined by the general magnitude of the infringing conduct.  Judge Luckern found that the benefit to Ninestar was equivalent to the profit made from the infringing sales. 

Ninestar attempted to claim that it would be unable to pay a significant penalty without going out of business.  However, it did not present any knowledgeable witnesses or reliable financial records to support this claim.  As a result, Judge Luckern rejected Ninestar’s argument and held that the third factor, ability to pay, weighed against Ninestar. 

With respect to the final factor, Judge Luckern found that high civil penalties would be in the public interest because they would safeguard the ITC’s ability to protect U.S. intellectual property rights.   

Four other respondents were held to be in default during the enforcement proceedings.  For two of these respondents, Judge Luckern recommended the maximum penalty, which totaled $9.7 million, for the 97 days on which these respondents sold or imported covered products in violation of the cease and desist order issued against them.  The remaining two respondents were found to have violated a consent order they had entered into during the original investigation.  Violations of consent orders carry the same monetary penalties that are applied to violations of cease and desist orders.  Judge Luckern also recommended the maximum penalty for these respondents, which totaled $700,000 for the 7 days of violations.  The Commission did not reduce either of these two amounts.

An enforcement proceeding does not necessarily lead to civil penalties.  The ITC may instead modify remedial orders to prevent further violations, bring a civil action in district court requesting a civil penalty or mandatory injunction, or revoke a cease and desist order or consent order and direct that the covered products be excluded from entry into the United States. 

The penalty recommended by Judge Luckern marks the largest that has been recommended by an ITC judge.

Enforcement Initial Determinations in Section 337 Enforcement Proceedings

Below please find examples of other cases where Enforcement Initial Determinations were issued.

• Inv. No. 337-TA-406 Enforcement Proceedings (II), Certain Lens-Fitted Film Packages Opinion (recommending a penalty of $13,675,000 against a  respondent and its president, jointly and severally, based on a daily penalty rate of $25,000 for 547 violation days in light of the respondents' bankrupt state (later reduced in response to the Federal Circuit’s reduction in the number of infringing products)).  The decision is available online in two parts: 1 and 2.

• Inv. No. 337-TA-380, Certain Agricultural Tractors Under 50 Power Take-off Horsepower (imposing a penalty of $2.32 million based on a daily penalty rate of $40,000 for 58 violation days in light of the relatively low total sales revenue received by respondents, $753,976, from selling infringing articles).  The decision is available online.

We will periodically provide you updates on developments relating to Section 337 litigation. If you have any questions or for further information, please feel free to contact Charles Schill at 202.429.8162; Alice Kipel at 202.429.6743; or Steve Barber at 202.429.6430.