Showdown at the ITC

Generally, people listen to a federal agency that orders them to stop breaking the law. But in this case, Ninestar continued to import and sell ink printer cartridges after the International Trade Commission (ITC) penned a series of orders that prohibited them from doing so. Things didn’t go well for Ninestar after it was hauled back into the ITC to explain why it shouldn’t be sanctioned for its actions.

Ninestar Technology Co. v. International Trade Commission, No. 2009-1549 (Fed. Cir. Feb. 8, 2012) (Judges Newman, Schall, and Linn)

Ninestar manufactures ink printer cartridges in China and imports and sells those cartridges in the U.S. through related companies.

Previously, the ITC ruled that these cartridges infringe U.S. patents owned by or exclusively licensed to Epson . So it issued orders prohibiting importation and sale of the infringing cartridges, including those in the inventory of Ninestar’s U.S. subsidiaries and other parties involved in the earlier ITC proceeding.

Stop the Press!

After the ITC orders issued, Ninestar’s related U.S. companies continued to import and sell ink cartridges. This led to an enforcement hearing on the orders.

At the ITC enforcement hearing, Ninestar executives admitted that they continued to import and sell cartridges after the ITC issued its orders. Ninestar manipulated shipment and sale transaction dates and mis-described certain cartridges as compliant with the exclusion order. The executives also admitted that they filed false statements that they were complying with the orders, after the orders became effective. The ITC judge was not amused—he found that Ninestar violated the ITC’s orders and awarded a civil penalty for this egregious violation. See 19 U.S.C. §1337(f)(2). The full Commission agreed with the civil penalty award but reduced the penalty amount.

Looking for Sympathy, from Above

Ninestar appealed the penalty ruling and amount to the Federal Circuit. Ninestar also objected to the inclusion of Ninestar’s Chinese parent company in the penalty award.

In its defense, Ninestar asserted that the ink printer cartridges were manufactured and sold in a foreign country and importation of those cartridges couldn’t violate U.S. patents. It argued that the ITC should not have imposed a penalty because it believed—in good faith—that the law on which the prior orders were based is incorrect. Essentially, it argued that the Federal Circuit’s 2001 Jazz Photo decision was wrongly decided and that the Supreme Court’s recent decision in the Quanta case, which clarified the limits of patent exhaustion, overruled the earlier Federal Circuit case.

The court disagreed with Ninestar: Quanta didn’t involve an issue of importation of a product that was foreign-made or sold in another country. And it didn’t eliminate the rule that U.S. patent rights are not exhausted for toner products that are manufactured and sold in China; importation still violates Epson’s U.S. patents. Thus, the Federal Circuit agreed with the Commission’s ruling that Ninestar knowingly violated its orders in bad faith and upheld the penalty of $55,000/day.

It also agreed that all three of the Ninestar companies, including the parent Chinese company, should be jointly or separately liable for the total amount of the civil penalties. The evidence relating to the Chinese parent’s control, commercial relationships, monetary flow, and knowing violation of the Commission’s orders supported the Commission’s ruling against the three Ninestar entities.

It’s Beyond the ITC’s Power

Finally, Ninestar made some creative constitutional arguments about the authority of administrative agencies. Ninestar argued that the ITC didn’t have the authority to issue a punitive penalty for violation of an administrative order. It made this argument for the first time on appeal but asserted that it didn’t raise its constitutional arguments below because the ITC can’t declare its governing statute unconstitutional. The Federal Circuit concluded that Ninestar was still tardy in raising this issue, but exercised its discretion to consider it anyway.

Ninestar argued that the $55,000/ day penalty is hefty enough to be criminal in nature, and that a criminal penalty levied by an agency violates separation of powers. Ninestar asserted that it must be tried in an Article III court and enjoy the constitutional safeguards to which criminal defendants are entitled, including the right to proof beyond a reasonable doubt and right to a jury trial. The Federal Circuit disagreed. It also noted that decisions of the Commission are subject to judicial review, as a safeguard against administrative excess.

The Ninestar opinion is interesting and unusual because of the infringer’s willful violation of the Commissions’ prior orders. The opinion includes a detailed analysis of the penalty ruling and the factors the ITC considered when determining an appropriate remedy for the violation:

  1. the good or bad faith of the respondent;
  2. any injury due to the infringement;
  3. the respondent’s ability to pay the assessed penalty;
  4. the extent to which the respondent benefitted from its violations;
  5. the need to vindicate the authority of the Commission; and
  6. the public interest.

It’s worth reading, since the Federal Circuit rarely confronts these issues.