Trends and Developments in US Enforcement of International Trade Remedies against Unfair Competition and Infringement of Intellectual Property Rights
The United States is a consumer nation. In 2019, it imported almost USD1 trillion more in goods than it exported. The net-import gap in goods has grown over the past two decades and, with the increasing globalisation of supply chains, that gap is poised to continue.
In the context of this net-import gap and its impact on competition, the United States has taken a hardline stance against manufacturers, exporters, importers, distributors, and retailers whose unfairly traded imports injure US industries and intellectual property rights holders, as well as countries supporting unfair trade practices. This chapter discusses recent trends in the imposition and enforcement of international trade and intellectual property judgments that have resulted in a sharp increase in seizures, exclusions, and duty collections, and the ramifications of those trends for US and foreign companies.
Increased enforcement against imports
The recent emphasis on the role of US Customs and Border Protection (CBP) in gatekeeping at US ports of entry has significantly increased the volume and value of goods seized or excluded in three categories: products failing US health and safety standards, counterfeit goods, and products that infringe US intellectual property rights.
Collaborating across 12 agencies, CBP’s Commercial Targeting and Analysis Centre (CTAC) seizes products failing standards issued by US agencies like the Consumer Product Safety Commission, Food and Drug Administration and National Highway Transportation Safety Administration. In fiscal year (FY) 2019, CTAC reported 7,211 seizures of unsafe imports valued at USD35.2 million ‒ a steep increase from the 243 seizures valued at USD3.8 million in FY 2017. (CBP Trade and Travel Reports, FY 2017, FY 2019.)
CBP has also increased its enforcement of private US intellectual property rights (IPR) and competition laws through two discrete mechanisms: recordation with CBP and enforcement of exclusion orders issued by the US International Trade Commission (ITC). Owners of federally registered trademarks and copyrights utilise CBP recordation to facilitate CBP’s ability to detect and seize counterfeits, particularly against smaller-volume, foreign, and repeat importers. In FY 2019, CBP enforced over 18,735 recorded trademarks and copyrights. (CBP IPR Seizure Statistics, FY 2019.) However, CBP recordation is limited to enforcement against copies and counterfeits of trademarks and copyrights. (19 C.F.R. Sections 133.21, 133.22, 133.42.)
To expand CBP’s enforcement authority, companies have increasingly turned to the ITC to issue orders directing CBP to exclude a broader range of imported goods involved in anti-competitive conduct, pursuant to Section 337 of the Tariff Act of 1930, as amended. (19 U.S.C. Section 1337.) (Section III, infra) While most frequently sought to stop patent infringement, ITC exclusion orders prohibit the importation of products or components involved in many forms of unfair competition. In the past two fiscal years, the number and value of shipments seized and excluded at the US border pursuant to ITC exclusion orders issued has doubled, from 115 shipments valued at USD1.9 million in FY 2017 to 372 shipments valued at USD3.6 million in FY 2019. (CBP IPR Seizure Statistics, FY 2017, FY 2019.) CBP has also createdinter partesopportunities for parties receiving ITC exclusion orders to challenge prospective importers’ requests for a ruling under Title 19 Code of Federal Regulations Part 177 that would allow intended imports entry into the United States, notwithstanding pending orders. Since FY 2017, CBP’s combined IPR enforcement through recordation and exclusion orders has led to 27,000-35,000 seizures of imported goods per year, with a value of USD1.2–1.5 billion per year if the seized goods had been authorised or genuine products. (CBP IPR Seizure Statistics, FY 2017, FY 2019.)
In addition, companies increasingly request binding CBP rulings regarding product classification and country of origin. Recent increases in special duty amounts and the number of imports subject to them (Sections IV–V, infra), have doubled CBP’s collection of import duties in two years ‒ from USD34.6 billion in FY 2017 to a staggering USD71.9 billion in FY 2019. (CBP Trade Statistics, FY 2017, FY 2019.) To mitigate the impact of these increased special duties, companies are more frequently requesting that CBP find their products properly classified as products not subject to special duties.
Increased protection from unfair competition under Section 337
Recognising the upward trend in imports, many companies ‒ US and international ‒ ask the ITC to investigate unfair competition and issue exclusion and cease and desist orders to stop a vast array of imports under Section 337. From FY 2016–2019, the ITC averaged 122 active investigations annually, compared to 80 active investigations annually from FY 2006–2009. (ITC Section 337 Statistics: Number of New, Completed, and Active Investigations by Fiscal Year, 2020). The ITC has investigated an extensive range of products, such as consumer electronics, pharmaceuticals, medical devices, semiconductors, and automotive products, demonstrating its widespread appeal despite other avenues for product litigation and regulation. The ITC’s unique attributes and recent metrics further demonstrate its appeal as a forum for adjudicating US IPR infringement and competition claims will continue.
The diversity of claims brought under Section 337 is unique and increasing
Section 337 is a trade statute administered by the ITC to protect entities with significant US product-centric activity, including manufacturing and research and development, from “unfair methods of competition and unfair acts” involving imported goods or components thereof. The statute does not define or limit claims of unfair competition, which have ranged from US IPR infringement and Lanham Act violations to trade secret misappropriation, Sherman Act violations, and others recognised under US law. Due to the jurisdictional limits CBP and US district courts face in enforcing patents against foreign importers, claims of patent infringement are most common, but recent filings suggest an increase in trade secret misappropriation and other, non-patent unfair competition claims.
Adjudication under Section 337 is unique and increasingly more efficient than litigation in other forums
Section 337 investigations afford due process to all parties, while providing “complainants,” that is, plaintiffs or rights-holders, with fast and cost-effective procedure. Investigations include fact and expert discovery, motions practice, a bench trial, briefing, a decision by an administrative law judge, and approval by sitting commissioners, but they out-pace US district courts in time to resolution. Since FY 2017, the ITC has, on average, completed investigations on the merits in 21 months, or in 15 months when settlement or other resolutions are considered. (ITC Section 337 Statistics: Average Length of Investigations, 2020.) In contrast, the World Intellectual Property Organization (WIPO) reported, in 2018, that the average duration of US patent litigation in the first instance was 18–42 months. (WIPO, World Intellectual Property Indicators, 2018.)
Further improving efficiency, many ITC investigations involve multiple discrete claims and/or multiple discrete entities or “respondents” in one case because the joinder and jurisdiction limitations adopted with the passage of the America Invents Act do not apply to Section 337 investigations. While investigations with one to five respondents are most common, the percentage of investigations with six to 50 respondents has increased in the last five years, allowing complainants to confront multiple sources of unfair competition in a single litigation.
Relief under Section 337 is unique and increasingly effective
If Section 337 is violated, a finding more likely in recent years, the ITC issues sweeping relief against US or foreign entities importing and selling goods in the United States. In most cases, relief is automatically enforced 60 days after a violation finding with no further action by a complainant, and expedited proceedings are available for even faster resolution of future enforcement disputes.
As the ITC’s administrative law judges preside over only infringement and competition claims, this allows a degree of specialisation and focus that produces impactful results for complainants facing infringement or unfair competition. The ITC’s statistics suggest that since FY 2015, complainants have achieved better outcomes than respondents in cases decided on the merits. (ITC Section 337 Statistics: Number Cases in Which Violation is Found/Year, 2020).
Consistent with the upward trend in violation findings, the ITC has issued more remedial orders in recent years. (ITC Section 337 Statistics: Remedial Orders Issued, 2020). The ITC issues exclusion orders and cease and desist orders, which prohibit conduct involving products similar to those found to violate Section 337. For example, an order based on infringing LED product "A" may be directed to “certain LED products that infringe…” and prohibit the importation and sale of future LED products "B", "C", and "D" during the life of the patent, unless "B", "C", and "D" are shown to be non-infringing. CBP enforces exclusion orders, which exclude future imports of the subject products from the United States and may be limited to the respondents sued or apply generally to respondents and non-parties attempting to import the subject products. (Section 1337(d)). The ITC enforces cease and desist orders, which prohibit specific respondents and their affiliates from engaging in importation, sale, and other US conduct involving the subject products at the risk of incurring severe monetary penalties. (Section 1337(f)).
ITC exclusion and cease and desist orders are powerful tools for stopping US IPR infringement and other unfair competition involving imported goods. Consequently, many Section 337 investigations are resolved without reaching the merits and, if a violation is found, there have been relatively few instances in which a complainant has had to return to the ITC for an enforcement or other proceeding to improve the efficacy of a previously issued exclusion or cease and desist order.
Increased enforcement under trade remedies statutes to protect against injurious imports
Complementing ITC orders remedying IPR infringement and unfair competition, the Trump Administration and US Department of Commerce (“Commerce”) have used trade remedies statutes to implement increasingly proactive protections for US producers.
Anti-dumping and countervailing duty proceedings, under the Tariff Act of 1930 (19 U.S.C. Sections 1671, et seq), are intended to address unfair and injurious imports. In an anti-dumping duty (AD) investigation, Commerce investigates whether a foreign manufacturer or exporter is “dumping” by selling identified “subject merchandise” in the United States at “less than fair value” ‒ that is, less than the price in the home market or the cost of production. In a countervailing duty (CVD) investigation, Commerce investigates whether a foreign manufacturer or exporter is selling subject merchandise in the United States and has received unfair or countervailable government subsidies. In both types of investigations, the ITC simultaneously and independently investigates whether the US industry producing the “domestic like product” ‒ products identical or comparable to the imported subject merchandise ‒ is being materially injured or threatened with material injury by reason of the dumped or subsidised imports. If Commerce finds dumping and/or subsidisation, and the ITC finds injury or threat of injury to the domestic industry by reason of those dumped or subsidised imports, an AD/CVD order is issued, imposing duties on imported products to offset the dumping and/or subsidisation.
AD/CVD investigations are not limited to the United States; international agreements governed by the World Trade Organization (WTO) set forth AD/CVD investigation procedures and requirements. Historically, the United States has been one of the most active users of these proceedings to protect its domestic industry against unfair and injurious imports and it currently maintains over 500 AD/CVD orders on imports from roughly 50 countries. (ITC Statistics.) Under the Trump Administration, however, Commerce has been unusually proactive in self-initiating investigations and enforcing AD/CVD orders against imports potentially evading duties.
Self-initiation of new AD/CVD investigations
The vast majority of AD/CVD investigations are initiated following a petition by domestic producers for investigation of the subject merchandise, but in recent years, Commerce has reasserted its authority to self-initiate an AD/CVD investigation.
In 2017, Commerce self-initiated its first anti-dumping and countervailing duty investigations in over 25 years on imports of common alloy aluminum sheet from China. Commerce had last self-initiated a CVD investigation in 1991 (on softwood lumber from Canada) and an AD investigation in 1985 (on 256 kilobit and above semiconductors from Japan).
The circumstances leading to the 2017 self-initiation bear similarity to Commerce’s 1985 self-initiation of the semiconductor AD investigation ‒ its self-initiated aluminum sheet AD/CVD investigations complemented other trade actions simultaneously undertaken to address imports of the product. Commerce self-initiated the 1985 256 kilobit and above semiconductors AD investigation following an earlier AD investigation into 65 kilobit semiconductors, at the semiconductor industry’s request, the same year and requests by the semiconductor industry for related investigations. Commerce’s 2017 self-initiated aluminum sheet AD/CVD investigation similarly followed its initiation of a related investigation of aluminum imports under Section 232 of the Trade Expansion Act of 1962. (19 U.S.C. Seciton 1862.)
Although Commerce has not self-initiated an AD/CVD investigation since aluminum sheet in 2017, more self-initiations should be expected. In FY 2019, Commerce created a separate unit dedicated to “enhance and further develop its efforts to assist US manufacturers and their workers through self-initiation of AD and CVD investigations.” (Commerce, International Trade Administration, “Budget Estimates Fiscal Year 2019: Congressional Submission”.) The unit continues to identify potential imports for investigation in co-ordination with domestic producers of those products.
Self-initiation of scope and anti-circumvention proceedings to enforce existing AD/CVD orders
In addition to self-initiating AD/CVD investigations, Commerce has enhanced monitoring of trade flow changes post-issuance of AD/CVD orders to self-initiate proceedings to prevent circumvention of those orders.
The scope of an AD/CVD order is proposed during the original investigation process by the petitioners in their petition for an investigation (or, in the event of a self-initiation, by Commerce). That scope may change based on the parties’ comments and the findings of Commerce and the ITC. The resulting scope language in the AD/CVD order dictates the imported merchandise subject to duties.
In response to an AD/CVD order and associated duties, manufacturers and importers adjust supply chains and exports and it frequently becomes necessary to determine whether a particular imported product is (or should be) within the scope of the issued AD/CVD order to enforce and maintain its intent. Two proceedings may be undertaken to make that determination: scope inquires and anti-circumvention inquiries.
In a scope inquiry, Commerce determines or clarifies whether certain merchandise is within the existing scope of the AD/CVD order, considering: the plain scope language, merchandise description in the petition, the investigation, and the determinations of Commerce and the ITC (and, if necessary, the physical characteristics of the product, expectations of the ultimate purchasers, ultimate use of the product, how the product is sold, and the manner in which it is advertised). Where merchandise processed in a third country, that is, outside of the subject country, may nonetheless be within the scope of the order, as part of the scope inquiry, Commerce conducts a “substantial transformation” analysis to determine whether the merchandise at issue has been fundamentally changed into out-of-scope merchandise.
An anti-circumvention inquiry, however, broadens the scope of the AD/CVD order to include merchandise that was not contemplated by the original scope. Such inquiries aim to stop circumvention of orders, for example, where imports are altered slightly from the merchandise subject to the order, developed after imposition of the order, or processed into subject merchandise in a third country with inputs from the country subject to the order (if that third-country processing is insignificant compared to the subject-country processing that occurred to create the input).
Like AD/CVD investigations, scope and anti-circumvention proceedings are most frequently requested by importers and exporters, but can be self-initiated by Commerce. And, like AD/CVD investigations, self-initiations of both proceedings have experienced a renaissance under the Trump Administration, which emphasised independently monitoring trade flows for potentially in-scope and circumventing imports. In August 2019, Commerce self-initiated anti-circumvention proceedings to determine whether imports of certain corrosion-resistant steel products (CORE) ‒ made in five countries using substrate from China or Taiwan, and then exported to the United States ‒ were circumventing the AD/CVD orders. Notably, Commerce itself discovered the information supporting this 2019 self-initiation through its own trade flow monitoring, rather than through another Commerce proceeding.
Following the CORE self-initiation, Commerce self-initiated both scope and anti-circumvention proceedings to determine whether imports of certain stainless steel sheet and strip products ‒ made in Vietnam from Chinese inputs, and then exported to the United States ‒ were substantially transformed in Vietnam or are circumventing the AD/CVD orders. Again, Commerce itself identified the trade flow information supporting its stainless steel self-initiation through proactive import monitoring.
In addition, Commerce is more frequently opening scope proceedings based on import information provided by CBP. Since 2017, Commerce has self-initiated or opened scope proceedings on the basis of CBP information pertaining to at least five products from various countries, in addition to covered merchandise referrals from CBP pursuant to the Enforce and Protect Act. (Pub. L. 114-125). As Commerce and CBP work in closer co-ordination, manufacturers should expect Commerce to continue opening scope proceedings to address merchandise on the fringes of AD/CVD orders.
Enforcement of non-adjudicated trade disputes under Section 301
In addition to taking a more enforcement-minded approach to international trade remedies, the Office of the United States Trade Representative (USTR) under the Trump Administration has revived the portion of Section 301 of the Trade Act of 1974 (19 U.S.C. Section 2411) intended to address restrictions on US commerce. Section 301 authorises the United States to enforce trade agreements and to address acts, policies, or practices of a foreign country that are “unjustifiable and burden or restrict United States commerce.”
Section 301 has primarily been used by prior administrations to enforce US rights under international trade agreements, following international trade dispute settlement body decisions, and the Trump Administration has continued that use. For example, in the dispute in EC and Certain member States — Measures Affecting Trade in Large Civil Aircraft, after the WTO found the subsidisation of the production of large civil aircraft by the European Union and its member states failed to comply with their WTO obligations, the USTR relied upon Section 301 to impose 10–25% retaliatory duties on USD7.5 billion of US imports from the European Union.
Although Section 301 was employed in the typical fashion following the WTO dispute in Large Civil Aircraft, the retaliatory duties emphasise the need for those engaging in international trade to understand that their imports can be used as leverage to enforce seemingly unrelated international judgments. The USTR included specialty consumer products far afield from large civil aircraft ‒ including cheese, whiskey, and clothing ‒ among the US imports targeted for retaliatory duties. The imposition of retaliatory tariffs on products unrelated to the merchandise in dispute, like the USTR’s employment of Section 301, aligned with historical use of the provision.
In addition, the Trump Administration has revived the use of Section 301 in the second context, to address perceived burdens or restrictions in international trade not yet adjudicated by a dispute settlement body like the WTO. In 2018, the USTR found that China employed policies forcing technology transfers from US companies to Chinese entities through a variety of investment and acquisition processes and cyber intrusions into US computer networks, and that those policies unjustifiably burdened or restricted US commerce. (2018 Daily Comp. Pres. Doc. 180.) As a result of its own findings, and without requesting a similar finding from an international dispute settlement body, the USTR imposed retaliatory tariffs, in four tranches, on certain Chinese imports.
In pursuit of a larger trade deal with China, the USTR has indefinitely delayed certain proposed tariffs and tariff increases and exempted certain exports from Section 301 duties. However, having achieved certain of its trade priorities though the expanded use of Section 301, the Trump Administration appears poised to continue the use of Section 301 to resolve other trade disputes not yet adjudicated by a dispute settlement panel. In late 2019, the USTR initiated an investigation into France’s digital services tax and concluded that the tax “discriminates against US companies[,] … is inconsistent with prevailing principles of international tax policy, and is unusually burdensome for affected US companies”. (USTR Report on France’s Digital Services Tax). As a result, the USTR has proposed additional duties of up to 100% on approximately USD2.4 billion of French imports, including cheeses and Champagne, which may take effect in 2020.
Despite the Trump Administration’s unconventional use of Section 301, the revived use of Section 301 to address burdens on US commerce not adjudicated by an international trade dispute settlement body has received widespread support in the United States and appears poised to continue in some form regardless of future political changes.
General trends in the enforcement of international trade remedies show greater use of US government resources by companies doing business in the United States to protect their commercial interests from unprecedented growth in the volume of imports. While the impact of the COVID-19 pandemic on import volumes is yet unknown, companies’ reliance on inter-agency enforcement actions to mitigate the adverse economic impact of the United States’ net-import gap is expected to continue.