By Eric Schweibenz
On February 8, 2012, the Federal Circuit issued a precedential opinion in Ninestar Tech. Co., Ltd., v. ITC (2009-1549).  This was an appeal from the International Trade Commission’s (“Commission”) assessment of a civil penalty against Ninestar Technology Co. Ltd., Ninestar Technology Company Ltd., and Town Sky Inc. (collectively, “Ninestar”) for failure to comply with exclusion and cease and desist orders arising from violation of Section 337 in Certain Ink Cartridges and Components Thereof (337-TA-565).  See our July 16, 2009 and September 28, 2009 posts for more information.

By way of background, the underlying investigation was requested by Complainants Seiko Epson Corporation, Epson America, Inc., and Epson Portland Inc. (“Epson”).  On October 17, 2007, the Commission ruled that certain ink printer cartridges infringed several U.S. patents owned by or exclusively licensed to Epson and issued a general exclusion order, limited exclusion orders, and cease and desist orders in Investigation No. 337-TA-565 prohibiting the unlicensed entry of ink cartridges covered by the patents at issue.

According to the opinion, “after issuance of the Commission’s exclusion and cease and desist orders, Ninestar U.S. and Town Sky continued to import into the United States and to sell the ink cartridges that were the subject of the orders.”  An enforcement proceeding was brought, and the ALJ found that Ninestar violated the orders and levied a civil penalty in accordance with 19 U.S.C. § 1337(f)(2).  The Commission adopted the findings and conclusions of the ALJ, but reduced the penalty by approximately half.  Ninestar appealed the assessment of the penalty and its amount, and also objected to the inclusion of Ninestar Technology Co., Ltd. (“Ninestar China”) as jointly and severally liable for the penalty along with the U.S. subsidiaries. 

Violation of the Commission’s Orders

The opinion notes that Ninestar executives testified at the enforcement hearing that they “continued to import and sell the ink cartridges…with knowledge that the cartridges had been held by the Commission to infringe United States patents and were subject to the Commission’s exclusion and cease and desist orders” and “acknowledged that they filed false affidavits of compliance.”  Furthermore, on appeal Ninestar “does not deny its actions and its knowledge that it was not in Compliance, but argues that it was justified in non-compliance because the law applied by the Commission is wrong.” 

As set forth in the opinion, Ninestar argued that “national patent rights are exhausted by the manufacture and sale in a foreign country of a product covered by a national patent, and thus the importation of that product cannot violate the national patent.”  In support of this position, Ninestar alleged that the lead case in this area, Jazz Photo Corp. v. ITC, 264 F.3d 1094 (Fed. Cir. 2001), were overruled by Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 632 n.6 (2008).  However, the Federal Circuit was not persuaded, and noted that it had previously specifically interpreted the Quanta Computer case as not eliminating the first sale rule’s territoriality requirement.  Fujifilm Corp. v. Benun, 605 F.3d 1366, 1371 (Fed. Cir. 2010).  The Federal Circuit concluded that “the evidence, including testimony of Ninestar executives…showed that Ninestar understood the law and the Commission’s orders” and thus affirmed the Commission’s ruling.   

The Statutory Penalty

Assessment of a civil penalty is reviewed on the standard of abuse of discretion.  The opinion notes that both the ALJ and full Commission found that the importation and sales were made in deliberate and knowing violation of the Commission’s orders.  Although the Commission agreed with the “egregious” bad faith of the violations, it reduced the ALJ’s determination of the maximum penalty by approximately half.  The Federal Circuit repeated the Commission’s remarks pointing out that the statutory penalty is designed to serve as a deterrent, and thus must be “substantial enough to deter future violations,” and noted that Ninestar has the ability to pay substantial penalties and “did not demonstrate any reason why the maximum penalties should not be imposed.”  Based on the record, the Federal Circuit held that the Commission’s penalty was within its authority and showed no abuse of discretion.

Ninestar argued that Ninestar China should not be held jointly and severally liable with the two Ninestar U.S. subsidiaries, stating “it is elementary and well established law that a parent is not liable for the actions of its subsidiary” and that the Commission failed to meet its burden of proof that Ninestar China controlled the activities of the subsidiaries.  However, the Federal Circuit noted that the record contained substantial evidence to support the finding that “Ninestar China knew of the cease and desist orders and was in a position to ensure compliance…yet it continued to supply covered products to its subsidiaries rather than directing compliance.”  As such, the Federal Circuit affirmed the Commission’s assessment of joint and several liability of the three Ninestar entities.

Ninestar argued “there should be no penalty in view of Ninestar’s good faith belief that …the Commission proceedings violate the Constitution in several respects.”  The opinion notes that Ninestar’s constitutional arguments were tardily raised, but exercised its discretion in considering them. 

Ninestar’s constitutional arguments were based on three related positions:  1)  that a non-judicial body cannot be assigned authority to issue a punitive penalty for violation of an administrative order; 2) the statutory penalty is of such magnitude as to be criminal in nature and requires a jury trial with the associated safeguards before being imposed; and 3) that a procedure whereby an administrative agency levies a criminal penalty is an unconstitutional violation of separation of powers.  In comparison with related Securities and Exchange Commission and Federal Trade Commission civil penalty provisions, Ninestar called the ITC statute “an unconstitutional monstrosity.” 

The Federal Circuit rejected the case law relied on by Ninestar, and dismissed Ninestar’s assertions that a jury trial is necessary, referencing a Supreme Court case that specifically states Congress may assign adjudication of public rights to an administrative agency “with which a jury trial would be incompatible, without violating the Seventh Amendment….even if the Seventh Amendment would have required a jury where the adjudication of those rights is assigned instead to a federal court of law instead of an administrative agency.”  Atlas Roofing Co. v. Occupational Safety & Health Review Commission, 430 U.S. 442. 455 (1977).  The Federal Circuit also noted it is “relevant that decisions of the Commission are subject to judicial review, as a safeguard against administrative excess” and affirmed the Commission’s rulings, discerning “no violation of constitutional structure in the Commission’s authority to levy a civil penalty, and no violation of constitutional protections in the procedures followed and the penalty assessed.”

Copyright © 2022 Oblon, McClelland, Maier & Neustadt, L.L.P.