For Chinese medical device companies (CMDCs), exporting devices to the United States stands to enhance profitability and stature in the international market. But it also can pose a genuine legal risk to the company.
CMDCs are at risk to be the target of US IP litigation. US IP litigation typically occurs in two venues: the federal court system and the US International Trade Commission (ITC).
Given CMDCs’ strong expansion into international markets, including the United States, and the medical device market’s generally litigious nature, the ITC is an important venue for CMDCs to be familiar with. It has the power to order the US Customs and Border Protection (US Customs) to bar products (including medical devices) that infringe US IP rights from being imported into the United States. For a CMDC that has spent millions of Yuan Renminbi on research and US regulatory approvals, this can be a major setback.
This article provides some basic information about the ITC and offers observations that can help CMDCs prepare for (or avoid) battles at the ITC, culled, in part, from my and my firm’s extensive IP litigation experience in the United States.1 After reading, the take-away from this article should be: develop a proactive strategy for IP litigation (IP acquisition) well in advance of entering the competitive U.S. marketplace.
Prepare For The US Legal Culture
It is elementary that a visitor to a foreign country should try to become familiar with the local customs and then adapt his or her conduct accordingly. Yet, despite significant exports to the United States, Chinese companies are still relatively unfamiliar with the risks presented by IP litigation in the United States and as such, are not prepared to adapt to those risks.
Unlike their US counterparts, managers at Chinese companies have typically devoted little time to preparing for litigation in the United States. They have not invested enough time and resources in advance of a dispute to develop a comprehensive IP strategy with their US counsel.
To be fair, there is good reason for this lack of preparation. China’s legal system for IP disputes and the repercussions of infringement are very different from the United States. China’s IP laws and related legal procedures are still not very mature. For example, there is not much of a judicial-based risk to business. Nor is it very costly to litigate in China.
By contrast, US laws and the legal system relating to IP rights are very mature, highly complex, and fiercely adversarial. It can cost millions of Yuan Renminbi to litigate in the United States, and the two venues for IP litigation offer no guaranteed outcome for any party when litigation starts, which is particularly true in cases involving medical devices. The risks to the “guilty” parties in the United States can be enormous. Remedies in US IP litigation in district courts can exceed hundreds of millions of dollars. Remedies at the ITC can also take the form of a company’s products being barred from import into the US market, which can have a devastating affect on a company’s bottom line or literally force it out of business. The stakes are high.
Background Of The ITC
The ITC is an independent, quasi-judicial federal agency with broad investigative responsibilities on matters of trade.2 The ITC’s power comes, in part, from a US federal statute, 19 U.S.C. § 1337 (Section 337). This statute governs the ITC’s IP investigations.3
The ITC comprises a panel of six commissioners, who are the ultimate decision makers.4 An administrative law judge (ALJ), distinct from the six commissioners, presides over each IP investigation and has initial decision-making authority on behalf of the commissioners.
In addition, unlike US district court litigations that typically involve two “warring” sides (plaintiffs and defendants), the Office of Unfair Imports and Injury (OUII), a part of the ITC, can be a separate participant to all ITC Section 337-based investigations. OUII represents the US public’s interest by investigating the factual and legal basis for the IP infringement complaint. Recently, the ITC announced that OUII will not play a role in every ITC investigation, which may affect the conduct of future investigations.
Stages Of An ITC Investigation
The first stage of an ITC investigation involves the filing of a complaint at the ITC by an IP rights holder, called a complainant, against an alleged infringer, called a respondent. Unlike a district court case, the ITC investigation does not begin at the time of filing. The ITC decides within 30 days of filing whether to initiate the investigation. If initiated (which it usually is), the respondent (the entity to which the complaint is addressed) must answer the complaint within 20 days. That leaves little time for a Chinese respondent to locate and interview US counsel, which is all the more reason to be prepared before a battle brews. It is good practice to have established relations with a US IP counsel, usually a registered patent lawyer, long before an ITC investigation or other IP litigation is initiated.
The next stage is the information exchange between the parties, called discovery. Discovery is a costly and intrusive part of the process. Your adversary will have access to sensitive business information, whether it has been publicly disclosed or not, as long as it is related to the IP infringement complaint. The discovery process typically lasts four to eight months.
The third stage is the hearing, or trial, before the ALJ. The complainant’s and respondent’s attorneys present arguments to the judge and question pertinent witnesses, who are under oath. The ALJ usually holds the hearing six to nine months from initiation of the investigation. The actual hearing only lasts three to five days (but each day can last 10 to 12 hours or longer), though some last longer. Following the hearing, the ALJ issues an initial determination on the merits. This determination usually occurs between two to four months after the hearing.
The last stage is the review process, including appeals. Within 45 days of the ALJ’s issuance, the commission may decide to review, adopt, modify, or reverse the ALJ’s initial determination based either on a party’s petition to review or on its own initiative. The commission’s resolution of the investigation is the ITC’s final determination.
Each party adversely affected by the ITC’s decision may then appeal to the US Court of Appeals for the Federal Circuit and, if appealed, the ITC must defend its decision before the Federal Circuit. The ITC’s final order is enforced by US Customs.
As a sign of the growing influence of the ITC in IP litigation, nearly 15% of the patent trials conducted in the United States in 2008 took place at the ITC instead of in the federal court system. Approximately 40 to 50% of ITC investigations are decided on the merits of the case, and another 50 to 60% are settled or withdrawn. Roughly 90% of all Section 337 actions involve patent infringement. The table below represents the upward growth in all investigations instituted by the ITC from 1998 to 2010 (estimated).
The ITC has also become increasingly relevant to Chinese businesses over the last several years. Of all investigations instituted during 2007-2009, 47% involved respondents located in China and/or Hong Kong, or involved imports from these locations, according to an ITC report. Prior to 1993, only one ITC investigation involved a Chinese business. While China has succeeded in significantly increasing its exports to the United States in recent years, the risks of ITC actions against Chinese manufacturers have increased, as well.
The ITC’s Medical Devices Investigations
A wide range of medical device technologies have been the subject of ITC investigations. Examples include artificial kidneys, CT systems, cardiac pacemakers, X-ray intensifier tubes, surgical implants, bone fragment fixation devices, and injectable implant compositions, to name just a few.
These investigations involved products that were imported from locations throughout the world, including China, Japan, Israel, Australia, the Netherlands, Spain, Germany, France, Switzerland, Brazil, England, Sweden, India, Canada, and Pakistan. Four of the most recent investigations involving medical devices are shown in Table 1 below:
TABLE 1: Recent ITC Investigations Involving Medical Devices
Country of Import
No. of Patents,
|Endoscopic Probes for Uses In Argon Plasma Coagulation Systems
||Claims valid; no infringement. No domestic industry. No violation.
|Nitrile Gloves and Nitrile Rubber Gloves
||China, Australia, Indonesia, Malaysia
||Infringement; asserted claims invalid. No violation.
|Catheters Consoles and Other Apparatus for Cryosurgery And Components Thereof
|Vein Harvesting Surgical Systems and Components Thereof
If the ITC finds infringement by an imported medical device, no monetary damages can be awarded. Rather, the ITC is authorized to issue an exclusion order. An exclusion order directs US Customs to exclude infringing products from entry into the United States. There are two ways that the ITC can exclude products: general exclusion orders (GEOs) and limited exclusion orders (LEOs). GEOs exclude all infringing products, regardless of the source. LEOs exclude only the infringing products from the named respondents. In general, there are more hurdles for an IP owner to obtain from the ITC a GEO against a respondent than there is for a LEO. The LEO is probably the most common exclusion order issued by the ITC.
The ITC may also issue cease and desist orders that forbid unfair practices in the United States, by restricting existing inventory of infringing products in the United States, for example. Violating an ITC cease and desist order can have severe consequences: US$100,000 per day or twice the domestic value of the imported goods, whichever is greater. The scope of this exclusionary power provides strong leverage over any company that imports devices that may infringe on IP rights.
Though not available at the ITC, money damages can be sought in a separate district court litigation brought by the patent owner. This separate district court litigation can be pursued simultaneously with or subsequent to the ITC investigation.
Benefits and Drawbacks Of The ITC
The ITC presents both benefits and drawbacks for a CMDC, particularly for respondents (i.e., the accused infringer) in an ITC case. Some benefits for respondents include:
- No monetary damages are available for infringement. The ITC issues prospective relief, i.e., an exclusion order. Monetary damages must be sought through litigation in a US district court, even if relief at the ITC is sought.
- More evidence is needed to prevail at the ITC. A complainant must show additional evidentiary proof beyond the proof of infringement that is required in a US district court case.
- Juries are not available. In cases before the ITC, a single judge (ALJ), who almost exclusively presides over IP disputes and therefore is specially attuned to IP issues, is the fact finder. The potential unpredictability of juries is not an issue at the ITC.
- US district courts are not bound by the ITC decision and record. This can mean if you lose at the ITC venue, you may get a chance in district court to present the same, different or refined arguments from those made at the district court to support your defense to an entirely new decision-maker.
- The breakneck pace of ITC litigation can disadvantage a complainant. While conventional wisdom holds that respondents are disadvantaged by the speed of the process, respondents can benefit, too, particularly where there are multiple respondents coordinating against a sole complainant or if the complainant half-heartedly approaches preparation.
- The ITC’s powerful exclusionary remedy can be limited if there are adverse effects on the “public interest.” The ITC balances the IP holder’s rights against the effect of exclusion upon public health and welfare, competitive conditions in the US economy, the production of like or directly competitive articles, and US consumers.
The following can be drawbacks of ITC litigation to a CMDC respondent:
- The ITC’s powerful remedy (i.e., exclusion order). By the ITC’s own account, it can “provide meritorious complainants with injunctive relief that is increasingly difficult to obtain in [US district court],” including the unique remedy of excluding articles from entry into the United States.5
- Fast resolution. The ITC strives to complete investigations within 12 to 15 months, but the target date for completion can be set later than 15 months under certain circumstances.
- A narrow scope of legal issues heard by the ITC. There are no counterclaims (i.e., claims a respondent can make against a complainant) that can be decided at the ITC. A respondent’s counterclaim(s), if raised, can be transferred to district court. Defenses under 35 U.S.C. § 271(g) also are not available at the ITC.6
- The breakneck pace of ITC litigation risks missteps. The pace allows little time to change course or correct strategies that do not work out as planned.
- Respondents have less time to prepare. Complainants get a head start in ITC proceedings because they know when they will file the complaint and can be as prepared as possible before the filing. That head start and the quick turnaround required from the respondent to answer the complaint gives CMDCs less time to carefully litigate than they might have in the district court, where the pace is more controlled and allows for case development.
- In rem jurisdiction. Essentially, this means that the ITC has jurisdiction over products imported (or imminently to be imported) into the US. A foreign entity, therefore, need not be subject to personal jurisdiction (i.e., certain minimum contacts) like in a US district court. Such jurisdiction can increase the likelihood that the ITC can exercise power over a foreign entity’s imported products.
Whether ITC litigation is seen as an advantage or disadvantage, the battle plan for every CMDC should be the same. Once a CMDC expects to or does, in fact, become embroiled in ITC litigation, he or she needs to decide early whether to default, fight or settle; prepare immediately for the intrusive nature of discovery in US litigation; evaluate designing around the asserted or potentially asserted IP to avoid the infringement claim; and identify early and stay focused on the best defenses.
Develop A Strategy Now
My and my firm’s experience tells us it is wise for CMDCs to proactively plan its strategies ahead. Strategies are needed to navigate complex medical device regulatory approval processes for importing devices into the United States – a rigorous legal process itself. Strategies are also needed, with the help of competent US patent counsel, for carefully developing a Chinese company’s own US IP portfolio for its medical device technology. Harvesting your own US IP can provide a strategic advantage over competitors in the US market and can provide a tool to wield against a competitor, if needed.
Here are some steps that can be implemented immediately to improve a company’s readiness:
- Thoroughly evaluate the US IP landscape for the product before exporting. CMDCs should conduct thorough IP due diligence with their US patent counsel before they enter the US marketplace. If possible, CMDCs should conduct IP due diligence in parallel with product development, long before a commercial product is ready for export.
- Develop a strategy to assert your own IP in the United States (if needed). As the US patent system has ever increasing foreign-based patent owners, the opportunity for foreign-owned IP to be used in litigation in district court is a possible strategy. Indeed, with proper planning, a CMDC may be able to use the ITC on the offense, if requirements for such an action can be met.
- Select a qualified and experienced US patent counsel. In US IP litigation, a US patent counsel typically plays a dominant role in counseling the client and appearing before the court (in IP disputes) and the United States Patent and Trademark Office (in acquiring IP). To be recognized as a patent lawyer in the United States, he or she must have a suitable technical background. In fact, many patent counsel hold degrees in science and engineering, ranging from mechanical, biomedical, chemical and electrical engineering to physics and PhD-level biotechnology. Such technically trained lawyers help navigate the IP landmines that are scattered in the US medical device market. Qualities that a CMDC should look for in an attorney and the attorney’s firm include trial experience in patent cases; registration to practice before the Patent and Trademark Office; in-depth knowledge about science and technology; experience with ITC procedures; and the ability to communicate and act within a short timeframe on any relevant issues.
The key to success is starting to prepare now.
With the increasing globalization of the medical device industry and the thickets of IP rights and complex IP law that need to be navigated, CMDC executives should begin shaping their IP strategy for the US medical device market early in the product development process.
Wil Rao is a trial attorney at the IP-focused law firm of McAndrews, Held & Malloy, Ltd., based in Chicago, Illinois (USA). He is a registered patent lawyer with extensive IP-based litigation experience with a particular emphasis on medical devices, including cases involving the ITC and US district courts in connection with IP disputes outside of the United States. For additional information or more detailed comments, the author can be reached at email@example.com.
1. This article represents the present views of the author alone, and does not represent the views of any clients of his firm or of any colleague who may have offered comments or suggestions. This article does not represent business advice or legal advice. Rather, this article is simply intended for purely informational purposes.
2. United States International Trade Commission Budget Justification: Fiscal Year 2011, United States International Trade Commission, at 1 (2010).
3. See 19 U.S.C. § 1337. Section 337 has its current roots to the Tariff (Smoot-Hawley) Act of 1930 (and earlier in section 316 of the Tariff Act of 1922), and has been amended several times to get us to its current incarnation. The Smoot-Hawley Act is generally viewed as expanding the depth of the Great Depression.
4. The ITC is viewed as non-partisan. No more than three (3) commissioners may be from one political party. The Chairman and Vice-Chairman must be from different political parties and different political parties rotate the chairman post. See, e.g., Public Law 102-185, 105 Stat. 1280 (1991). The current Commissioners are: Deanna Tanner Okun (Chairman), Irving A. Williamson (Vice Chairman), Charlotte R. Lane, Daniel R. Pearson, Shara L. Aranoff, and Dean A. Pinkert. See http://www.usitc.gov/press_room/bios.htm (last viewed May 11, 2011.).
5. United States International Trade Commission Budget Justification: Fiscal Year 2011, United States International Trade Commission, at 5 (2010).
6. See Kinik v. USITC, 362 F.3d 1359 (Fed. Cir. 2004).
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