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January 13, 2009 10:09 PM

Will the ITC Become the New Troll Hangout?

Posted by Andrew Goldberg

Each year a growing number of IP lawyers heads to the International Trade Commission, asking officials there to enforce Section 337 of the Tariff Act of 1930. That Depression-era law forbids various "unfair trade practices," including the importation of products that infringe a U.S. patent--the goal is protecting domestic industries and jobs.

But a new complaint brought by a Texas patent-holding company is looking to stretch the boundaries of what constitutes a "domestic industry" worthy of protection.

Last month, Saxon Innovations LLC filed a complaint asking the ITC to ban importation of six models of cell phones manufactured by Nokia Corp., HTC Corp., Research in Motion, Inc., and Palm, Inc., as well as a television controller created by Panasonic Corp. Saxon argues the devices infringe three of the 180 patents it bought from a spin-off of chipmaker Advanced Micro Devices, Inc., in 2007. (A link to download the complaint is below.) Saxon isn't the first patent-licensing operation to file a complaint at the ITC, but a few factors make it stand out even in that small group.

What would the Commission be protecting by issuing an exclusion order on behalf of Saxon? The "industry" begins and ends with Saxon, a company that fits neatly within the definition of what some patent reform advocates call a "patent troll”: five employees, no products or services, a growing trail of litigation, and a leased office in the Eastern District of Texas, a popular venue with patent plaintiffs.

Companies whose main business is threatening and filing patent lawsuits have proliferated in the past few years, but are a rarity at the ITC. Most holding companies are after big damage numbers, after all, and the ITC is a quasi-judicial body that can't award damages at all. The sole form of relief it can provide is the issuance of an exclusion order that tells customs officials to stop importation of goods that infringe a U.S. patent. That extraordinary remedy is only available to complainants who can show the existence of a domestic industry related to the patents in question.

The bar for proving the existence of a domestic industry isn't high: even if a company manufactures and assembles products offshore, providing warranty or repair services in the U.S. is typically enough to allow the filing of an ITC complaint. Patent licensing, as well, has been deemed a "domestic industry" by the ITC on several occasions. That precedent has allowed companies like Rambus, Inc., and Tessera Technologies, Inc., whose revenue comes almost entirely from licensing and litigating patents, to file cases at the ITC. But Rambus and Tessera are giants compared to Saxon--both have significant research budgets, and each employs close to 300 people.

James Otteson, head of ITC litigation at Wilson Sonsini Goodrich & Rosati, suggests that defendants would have a good shot at opposing Saxon's claim that licensing three of its 180 patents constitutes an industry worthy of government protection. "The Saxon complaint is a much thinner read" than those of other patent licensors, he says. "I'm skeptical."

It's hard to know how many licensees a patent holding company needs to sign up to  constitute a meaningful domestic industry in the eyes of an administrative law judge. "That area is not cut and dried," says Sonnenschein Nath & Rosenthal litigator Yar Chaikovsky. In one instance, a complainant company failed at the ITC because its two patent licenses, derived from litigation settlements, weren't enough. But patent holders who have won a few victories have a clear advantage, because they can use the U.S. facilities and activities of their licensees to bolster their own "domestic industry" argument.

That's the advantage that former Columbia University professor Gertrude Rothschild is hoping to leverage. She started demanding licensing fees for her patents on LEDs and laser diodes from electronics companies in 2005, and has won three settlements on suits filed in U.S. court. In March she asked the ITC to bar the importation of Blu-ray DVD players, mobile phones, and other electronic devices made by 31 companies she said were infringing her patents. More than a dozen of those companies have since settled and taken licenses. Rothschild's ITC case is still pending.

St. Clair Intellectual Property Consultants, a patent-holding company with five employees, pursued a strategy similar to Rothschild's when it filed an ITC complaint against Kodak in 2007. "We had a history of licensing, and licensees," says Robins, Kaplan, Miller & Ciresi lawyer Ron Schutz, who represented St. Clair. "You just can't form a company, get some patents, and the first thing you do is go file an ITC complaint." Kodak denied that St. Clair met the "domestic industry" requirement; the case settled before a hearing.

New patent-holding companies "tend to want to sue an entire industry out of the gate," says ITC veteran David Barkan of Fish & Richardson's Silicon Valley office. "Those cases are not suitable for the ITC."

Wherever the line is drawn, it's clear Saxon Innovations is on the edge. Like St. Clair, the company has five employees, and it names only one: Pennsylvania patent attorney Anthony Grillo, who serves as the company's senior vice president of licensing and manages the enforcement of the company's patent portfolio. Grillo is joined by a full-time engineer, who "identifies licensing opportunities" and does "teardown analysis of consumer electronics and communications products," as well as a part-time paralegal and part-time CEO. Saxon doesn't mention any of its own licensees, but says it "routinely engages in licensing discussions" with consumer electronics companies, and confidentially cites "certain costs incurred to pursue these licensing opportunities."  Saxon also spent money buying its patents, "researching and evaluating its portfolio," and, of course, litigating them against 14 companies, so far. Thus, a relevant domestic industry "exists and/or is in the process of being established."

Neither Saxon nor its attorneys responded to interview requests for this story. Court records and corporate filings indicate Saxon is connected to Altitude Capital Partners, a New York investment firm that boasts of having $250 million to invest in patent licensing and litigation.

The ITC’s allure for patent holders dreaming of a big payout has grown since the Supreme Court's 2006 decision in eBay v. MercExchange, which made it much harder for patent-holding companies to get an injunction in federal court. (It was the threat of injunction that coerced BlackBerry manufacturer Research in Motion to make its famous $612 million payout to patent-holding company NTP, Inc., earlier that year.)  An exclusion order barring a defendant from importing goods is the next best thing. If patent-holding companies do get a foothold at the ITC, an already tough litigation landscape could become even more daunting for defendants.

Download Saxon Complaint

Joe Mullin is a staff reporter with IP Law & Business, a sibling publication of The Am Law Daily. Contact him at [email protected]

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