Brian Drozd 1

I. Introduction2

When handling an investigation in front of the International Trade Commission3 (“Commission”), one should not neglect the duty of candor. The duty is especially important at the Commission because (1) submissions are relied upon and taken at face value by the Commission; (2) the fast paced nature of § 337 proceedings requires expedient, full, and good faith disclosure of material information; and (3) submissions are not heavily scrutinized because the proceedings have a shorter timeframe than trials. Given the importance of the duty of candor, this article explores the Commission's historical treatment of the duty of candor, practitioner obligations, and sanctions in the event of breach.

II. The History of the Duty of Candor

Before 1988, the duty of candor was not explicitly defined in a rule; instead, it only existed implicitly.4 However, the Commission adopted an explicit rule after its 1988 landmark decision in Certain Indomethacin, ITC Investigation No. 337-TA-183.5 In Indomethacin, the Commission refused to impose sanctions for a complainant's improper conduct because “the Commission did not articulate a duty of candor prior to [complainant's] allegedly wrongful conduct.”6 In the first concurring opinion, Vice Chairman Brunsdale, Commissioner Liebeler and Commissioner Cass stated “it would be helpful, both to the Commission and to future complainants, for the Commission to clearly articulate the duty of candor that is owed to the Commission.”7 Following this lead, in the second concurring opinion, Commissioners Eckes, Lodwick and Rohr explained the duty of candor:

the duty of candor . . . is violated when there is clear and convincing evidence of: (1) a failure to disclose material information, or a submission of false, material information; and (2) an intent to mislead the Commission. A nondisclosure or false statement is "material" when there is a substantial likelihood that a reasonable decisionmaker would have considered the nondisclosed or false information to be important in deciding whether to institute an investigation, not whether the information would have been dispositive. The "intent to deceive" element includes gross negligence. Materiality and intent are interrelated: the more important an omission or misrepresentation, the less intent need be shown.8

Accordingly, shortly after this decision, the Commission adopted Interim Rule 210.5, explicitly setting forth the duty of candor required to the Commission in all phases of § 337 proceedings and, in the event of breach, providing for non-monetary sanctions. Then, in 1994, the Commission replaced Interim Rule 210.5 with the present rule, 19 C.F.R. § 210.4 (“Rule 210.4”), to include both monetary and non-monetary sanctions when a practitioner violated the duty of candor.9

II. Practitioner's Obligation of the Duty of Candor

The duty of candor owed to the Commission is described by Rule 210.4.10 Specifically, Rule 210.4(b) requires practitioner verification of all submissions to the Commission.11 By verifying such submissions, the practitioner attests pursuant to Rule 210.4(c) that (1) the submissions are not presented for an improper purpose (e.g. to harass, delay proceedings, or increase the costs of the proceedings); (2) the legal contentions are not frivolous (i.e. all legal contentions are warranted by existing law or by valid argument for extension, modification, or reversal of existing law); (3) the contentions have evidentiary support; and (4) the denials of factual contentions are warranted on the evidence.12

In complying with these provisions, the practitioner should undertake reasonable avenues of investigation before filing suit.13 For example, in an investigation alleging patent infringement, an attorney should abide by the following reasonable practices: (1) construe patent claims following standard construction canons,14 (2) analyze claims independent of the client; (3) gather credible evidence of the accused device,15 and (4) compare the evidence on the accused device with reasonably construed claims. In determining reasonableness, the Commission will take into account the degree of difficulty of analyzing the accused products or processes. If a practitioner does not follow reasonable practices, the Commission may rule the practitioner was negligent and, therefore, breached his or her duty of candor.

III. Sanctions for Breach of the Duty of Candor

A. The Breach

In the event that a party violates Rule 210.4(c),16 the Commission may impose appropriate sanctions upon that party, subject to the conditions stated in Rule 210.4(d) and Rule 210.25. For example, sanctions are proper for a frivolous representation or submission, a Rule 210.4(c)(2) violation. However, a representation need not be frivolous in its entirety in order for an Administrative Law Judge (“ALJ”) to determine that Rule 210.4(c) has been violated because, if “any portion of any representation” is “frivolous, misleading, or otherwise in violation of [Rule 210.4(c)], a sanction may be imposed.”17

When determining whether Rule 210.4(c) has been violated, the Commission usually asks whether the practitioner's representation “was objectively reasonable under the circumstances.”18 In some cases, the ALJ requires the practitioner to “show cause” as to why sanctions should not be imposed.19

B. Sanction Proceedings

Sanction proceedings are initiated either (1) by the initiative of any of the parties, or (2) on the Commission's or ALJ's initiative. First, any party may file a motion for sanctions. This motion shall describe the specific conduct alleged to violate Rule 210.4(c) and shall be served against the party alleged to have filed a frivolous submission. 20 If the submission is not withdrawn within seven days (called the “safe harbor” period),21 only then may the sanction motion be presented to the ALJ or the Commission.

Secondly, the ALJ or the Commission may issue an order, sua sponte, for sanctions. This order describes the specific conduct that appears to violate Rule 210.4(c)23 and directs the violating party to “show cause” as to why it has not violated this Rule.24

If, after giving notice and a reasonable opportunity to respond,25 the ALJ or the Commission determines that Rule 210.4(c) has been violated, the ALJ or the Commission shall impose “an appropriate sanction” upon the responsible party.26 The “responsible party” may include not only a client's counsel but also the client.27 Further, a law firm shall be held jointly responsible for violations committed by its partners, associates, and employees.28 When imposing sanctions on a party, the ALJ or the Commission shall describe the violating conduct and explain the sanctioning basis.29

C. The Scope of Sanctions

Generally, Rule 210.4 limits the scope of sanctions to what is “sufficient to deter repetition of such conduct or comparable conduct similarly situated.”30 Specifically, subject to the limitations of Rule 210.4(c), Rule 210.4(d)(2) details what sanctions may consist of: non-monetary directives and monetary sanctions, including penalty fees, reasonable attorney's fees, or other expenses reasonably incurred as a direct result of the violation.31 Monetary sanctions are, however, discretionary. The intended purpose of such sanctions is to deter improper conduct, not to provide compensation.

If a motion requests attorney's fees, the ALJ may issue an order to determine if attorney's fees are appropriate. If the Commission agrees with the order, then the Commission will return the case to the ALJ to quantify the amount of attorney's fees to award. This amount is based on a reasonable amount of attorney hours multiplied times a reasonable hourly rate.32

IV. Exemplary Cases

A. Salinomycin

In Salinomycin,33 the ALJ recommended that the Commission impose sanctions on complainant and his counsel for bringing a frivolous action to the Commission. Specifically, there was no “objectively reasonable” basis for maintaining that the patent-in-suit was (1) not invalid for failing to disclose the best mode and (2) not unenforceable for knowingly concealing the best mode from the U.S. Patent and Trademark Office.34 This case confronted two main issues: the “safe harbor” rule and a determination of attorney's fees and costs.

First, complainants argued that respondent's motion, which was filed after an ALJ ruling, is in violation of the “safe harbor” rule because complainants did not have a chance to withdraw the submission at issue-a clear purpose of the “safe harbor” rule. In disagreeing with this argument, the ALJ noted that respondents sent complainants a letter prior to the ALJ determination informing complainants that they would seek attorney's fees if the suit continued. The ALJ indicated that respondents fulfilled the “safe harbor” provision with this letter because it was the “substantial equivalent” of a timely motion for sanctions.35

Next, in deciding attorney's fees, the ALJ applied the “objectively reasonable under the circumstances” standard rather than either the strict standard applied in patent cases36 or the “sham” litigation standard explained by the Supreme Court.37 Accordingly, the ALJ decided that complainant's conduct was to “squelch legitimate competition,” which clearly was not “objectively reasonable.”38 In order to “deter such conduct,” the ALJ recommended that the complainant and counsel pay twice the respondent's attorney fees and costs.39

B. Hardware Logic Emulation Systems

In Hardware Logic Emulation Systems,40 respondents mooted the investigations by ceasing importation of the accused device, but did not withdraw their invalidity defenses or provide any evidence to support such defenses.41 Accordingly, the ALJ found that respondents violated Rule 210.4(c) by asserting defenses (1) without presenting evidentiary support and (2) for the improper purpose of burdening complainants with the expense to prove their patents were valid and infringed.42 Consequently, the ALJ ordered respondents to pay for complainant's attorney fees and other expenses incurred in responding to respondents' frivolous defenses.43

On appeal, however, the Commission reversed the ALJ's decision.44 As stated under Rule 210.4(d)(1), a motion for sanctions “must describe the specific conduct alleged to violate [Rule 210.4] (c).”45 Additionally, under the “safe harbor” rule, once a motion for sanctions has been served on a party, that party has an opportunity to withdraw the disputed papers to avoid sanctions.46 Here, complainant's motion was directed toward respondents' papers in the Prehearing Statement and because respondents timely withdrew such papers, they could not be sanctioned.

After this decision, the Commission strictly applied the “safe harbor” rule in order to preserve the rule's purpose.47 Indeed, a strict adherence to procedural requirements benefits “the Commission and the parties by promoting transparency, objectivity and predictability in the application of the Commission's rules regarding sanctionable conduct.”48

C. Concealed Cabinet Hinges

In Concealed Cabinet Hinges,49 respondents filed a motion for terminating the investigation. They asserted that the complainants violated the duty of candor with false statements, omissions, and misrepresentations of fact in their complaint. The Commission, along with the ALJ, agreed to dismiss the complaint because the client actively participated in the misconduct.50

As far as sanctioning counsel, the Commission acknowledged that allocating fault between client and attorney was challenging. However, counsel was at least responsible for drafting a misleading complaint.51 The Commission publicly remanded the attorney52 and issued a notice to attorneys: “counsel has an affirmative duty to make certain that the client understands (1) the legal significance of the factual allegations in the complaint, and (2) the consequences to the client and its case if the allegations prove to be baseless.”53

V. Conclusion

The duty of candor is important to the fair, orderly, and quick disposition of cases before the Commission. Yet, the Commission has shown it is equally important that built-in procedural protections, such as the “safe harbor” rule, are strictly interpreted and applied. Since the 1994 adoption of Rule 210.4, the Commission has heavily enforced the rules regarding the duty of candor. Accordingly, neither practitioners, clients, nor law firms should overlook or neglect the duty of candor, because at stake are the dismissal of the case and/or severe monetary sanctions.