Shell Company Distortion of ITC Probes Needs Better Oversight

The best intentions are often manipulated by the worst actors. This is the case at the US International Trade Commission, a trade body with the mandate to protect US domestic industry from unfair foreign competition.

For decades, the ITC’s unfair import, or Section 337, investigations have been a resource for US businesses to combat unjust trade practices. But recently, shell companies—often foreign—have exploited the same tool to extort domestic companies. Congress established Section 337, and now has a responsibility to prevent it from undermining US economic interests.

Businesses request Section 337 investigations when they believe a competitor is importing products that infringe on their intellectual property. Following the investigation, the ITC is empowered to hand down a devastating punishment, instructing Customs and Border Protection to prevent, or “exclude,” the infringing product from entering the country.

Patent Trolls

Exclusion orders are necessary to protect US industry, especially when the foreign competitor engaging in unfair practices has few or no US assets or presence. Unfortunately, shell companies, sometimes called non-practicing entities or patent trolls, use them for less virtuous purposes. NPEs don’t put their intellectual property to constructive use. They build patent portfolios and monetize them through dubious lawsuits.

For years, NPEs have been responsible for a majority of all patent litigation in US courts. Now they have turned to the ITC, where they initiated one-third of Section 337 investigations last year.

The existence of NPE-initiated investigations is troubling, even if the companies they accuse aren’t found guilty of patent infringement. ITC cases are extraordinarily expensive, and US businesses are forced to waste significant resources on legal defenses and contingency plans to reengineer products and production lines in case an exclusion order is issued. As a result, many end up settling simply to mitigate this risk. NPEs use Section 337 investigations as hold-ups, demanding settlement payments.

Worse, NPEs aren’t as a matter of course required to disclose their investors to the ITC, so the investigations are an opportunity for foreign entities to compromise their American competitors. Absent disclosure, the ITC, which is mandated to act in the public interest, has no way of knowing if the NPE seeking to exclude goods from the US is an arm of a foreign sovereign wealth fund or a strategic competitor nation seeking to undermine US industry, for example. Without transparency, it’s also impossible for ITC staff to know if they’re subject to recusal in any given case. This is unacceptable.

NPEs shamelessly distort Section 337 investigations—whether a foreign NPE initiates an investigation that would have banned almost all smartphones and tablets sold in the US, a foreign NPE accuses US car manufacturers of infringement over an electric vehicle part, or an NPE issues a subpoena to manipulate the system and force a foreign technology company to become a co-complainant against a US technology company.

Action Needed

Congress, with its power of the purse, allocates taxpayer dollars to fund federal agency operations, including Section 337 investigations. Now that these dollars are being used to harm US interests, Congress has a duty to intervene.

The federal agency funding proposal for fiscal year 2024 includes more than $122 million for the ITC to execute its enforcement caseload. The bill draft in the House of Representatives clarifies that funding can’t be used for Section 337 patent infringement investigations until the ITC requires investors in those cases be disclosed.

This commonsense measure would help ensure that the ITC isn’t using taxpayer money to conduct investigations that are anonymously backed by foreign entities hoping to leverage the process for their own gain.

Additional funding conditions to ensure ITC petitioners participate in productive economic activity and enhance investigations’ public interest mandate are the type of Congressional oversight that would prevent NPE abuse.

Congress can also take up separate reforms specifically designed to counteract ITC manipulation. The bipartisan Advancing America’s Interests Act would limit NPEs’ ability to use Section 337 investigations by strengthening the domestic industry standard for companies whose only business is patent licensing. If a business wants to start an investigation that is supposed to protect US industry, they must prove they have skin in the game.

As an independent agency, the ITC could have easily adopted most of these measures already. The fact it hasn’t makes clear the need for Congress to step in. NPEs’ misuse of Section 337 investigations undermines the ITC’s core mission and American economic interests. For the investigations to do more good than harm, Congress must put additional protections against legal manipulation in place.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Max Baucus was US Ambassador to the People’s Republic of China from 2014 to 2017, US senator from Montana from 1978 to 2014, and Chairman of the US Senate Committee on Finance.

Bob Goodlatte represented Virginia’s 6th District in the US House of Representatives from 1993 to 2019, and was Chairman of the House Judiciary Committee.

The Goodlatte Group engages in general lobbying efforts but doesn’t lobby on issues related to patents, patent reform, or the ITC. The Baucus Group doesn’t engage in lobbying. The authors do however contribute public commentary related to patent policy and worked on patent policy issues while in Congress.

Write for Us: Author Guidelines