16 January 1989

5.12 The Panel noted the differing views of the parties on how an assessment should be made as to whether the differences between Section 337 and federal district court procedures do or do not accord imported products less favourable treatment than that accorded to products of United States origin (paragraphs 3.15-3.20 above). In brief, the United States believed that this determination could only be made on the basis of an examination of the actual results of past Section 337 cases. It would follow from this reasoning that any unfavourable elements of treatment of imported products could be offset by more favourable elements of treatment, provided that the results, as shown in past cases, have not been less favourable. The Community's interpretation of Article III:4 would require that Section 337 not be capable of according imported products less favourable treatment; elements of less and more favourable treatment could thus only be offset against each other to the extent that they always would arise in the same cases and necessarily would have an offsetting influence on each other.

5.13 The Panel examined these arguments carefully. It noted that a previous Panel had found that the purpose of the first sentence of Article III:2, dealing with internal taxes and other internal charges, is to protect "expectations on the competitive relationship between imported and domestic products". ² Article III:4, which is the parallel provision of Article III dealing with the "non-charge" elements of internal legislation, has to be construed as serving the same purpose. Article III:4 would not serve this purpose if the United States interpretation were adopted, since a law, regulation or requirement could then only be challenged in GATT after the event as a means of rectifying less favourable treatment of imported products rather than as a means of forestalling it. In any event, the Panel doubted the feasibility of an approach that would require it to be demonstrated that differences between procedures under Section 337 and those in federal district courts had actually caused, in a given case or cases, less favourable treatment. The Panel therefore considered that, in order to establish whether the "no less favourable" treatment standard of Article III:4 is met, it had to assess whether or not Section 337 in itself may lead to the application to imported products of treatment less favourable than that accorded to products of United States origin. It noted that this approach is in accordance with previous practiceof the CONTRACTING PARTIES in applying Article III, which has been to base their decisions on the distinctions made by the laws, regulations or requirements themselves and on their potential impact, rather than on the actual consequences for specific imported products. ³

5.14 The Panel further found that the "no less favourable" treatment requirement of Article III:4 has to be understood as applicable to each individual case of imported products. The Panel rejected any notion of balancing more favourable treatment of some imported products against less favourable treatment of other imported products. If this notion were accepted, it would entitle a contracting party to derogate from the no less favourable treatment obligation in one case, or indeed in respect of one contracting party, on the ground that it accords more favourable treatment in some other case, or to another contracting party. Such an interpretation would lead to great uncertainty about the conditions of competition between imported and domestic products and thus defeat the purposes of Article III.

(c) Appraisal of Section 337 in terms of Article III:4

Contentions by the United States that more favourable treatment is accorded to imported products

5.15 The United States contended (paragraphs 3.47-3.54; see also paragraphs 2.8(e), (i), (j) and (k)) that Section 337 accords imported products more favourable treatment than that accorded to domestic products in district court proceedings because of:

The Panel examined whether these elements of claimed more favourable treatment could within the meaning of Article III:4 offset any elements of less favourable treatment of imported products alleged by the Community.

5.16 As has already been stated above, an element of more favourable treatment would only be relevant if it would always accompany and offset an element of differential treatment causing less favourable treatment. The Panel had no difficulty in recognising that the economic requirements and the possibility of denial or limitation of relief on public interest or policy grounds could decisively influence the outcome of certain Section 337 cases in favour of imported products, as might the requirement on a complainant to make a prima facie case in a default situation, and that no equivalent advantages are enjoyed by defendants in federal district court litigation in respect of products of United States origin. ⁴ However, the Panel found, on the one hand, that these requirements may involve the respondent in litigation, defence and discovery of business secrets unrelated to the underlying patent issue; and, on the other hand, there is no reason to believe that such dispositive influences would always operate in each individual case where a negative effect on the respondent might result from the operation of an element of less favourable treatment claimed by the Community. Further, the Panel noted that, in each case over which both the USITC and federal district courts have jurisdiction, the complainant has the choice whether to proceed before the USITC or before the regular courts (see paragraph 5.18 below).

5.17 The Panel noted that some of the procedural advantages that, according to the United States (paragraph 3.54), are given to respondents could operate in all cases. The Panel also recognised that the substantive economic requirements put procedural burdens not only on the respondent but also on the complainant, which has the burden of proof on these matters, and that these procedural burdens could operate in all cases. The Panel took these factors into account to the extent that they might be capable of exerting an offsetting influence in each individual case of less favourable treatment resulting from an element cited by the Community.

Contentions by the Community that less favourable treatment is accorded to imported products

5.18 In cases concerning imported products over which both federal district courts and the USITC have jurisdiction, the complainant has the choice of which forum to use, or possibly to initiate a complaint in both fora; no equivalent choice of forum is available to a plaintiff in a case concerning products of United States origin. This option was referred to on numerous occasions by the Community and by third contracting parties making submissions. The Panel found that, given the differences between the proceedings of the USITC and of federal courts, to provide the complainant with the choice of forum where imported products are concerned and to provide no corresponding choice where domestically-produced products are concerned is in itself less favourable treatment of imported products and is therefore inconsistent with Article III:4. It is also a reason why in practice Section 337 is more likely to be employed in those cases where the specific elements that might accord less favourable treatment to imported products are significant. The complainant will tend to avoid recourse to Section 337 in cases where elements of more favourable treatment of the respondent than that accorded in federal district court litigation might play a rôle, for example where public interest or policy considerations might be expected to intervene.

5.19 The Panel considered the specific differences between Section 337 proceedings and those in federal district courts referred to by the Community to assess whether they accord less favourable treatment to imported products than that accorded to products of United States origin in patent-based cases:

(d) Summary of findings under Article III:4

5.20 The Panel found that Section 337, inconsistently with Article III:4 of the General Agreement, accords to imported products alleged to infringe United States patents treatment less favourable than that accorded under federal district court procedures to like products of United States origin as a result of the following factors:

5.21 The Panel considered whether all these differences of treatment could be traced back to one common cause, this being the structure of the USITC which is fundamentally not a court of law but an administrative agency, and whether this structural difference could be said to entail in itself treatment incompatible with the requirements of Article III. The Panel however reached no conclusion in this respect, as this question had not been raised in such general terms by the Community.

(v) Article XX(d)

(a) The conditions attached to the use of Article XX(d)

5.22 Having found the elements of Section 337 summarised in paragraph 5.20 above to be inconsistent with Article III:4, the Panel considered whether these inconsistencies can be justified under Article XX(d). The Panel noted that the parties to the dispute agreed that, for the purposes of Article XX(d), Section 337 can be considered as "measures ...... to secure compliance with" United States patent law. It then examined whether, in respect of the elements of Section 337 found to be inconsistent with Article III:4 of the General Agreement, the conditions specified in Article XX(d) to justify measures otherwise inconsistent with the GATT are met. These are:

5.23 The Panel noted that each of these conditions must be met if an inconsistency with another GATT provision is to be justifiable under Article XX(d). A measure which does not meet any one of these conditions, for example the condition that it must be "necessary to secure compliance" with a law consistent with the GATT, cannot be justified under Article XX(d).

5.24 The Panel noted that in the dispute before it the "laws or regulations" with which Section 337 secures compliance are the substantive patent laws of the United States and that the conformity of these laws with the General Agreement is not being challenged. The Panel then considered whether the inconsistencies with Article III:4 are "necessary" to secure compliance with these laws, this being the issue on which the discussion had mainly concentrated.

(b) The "necessary to secure compliance" condition

5.25 The Panel noted that the United States and the Community interpret the term "necessary" differently. They differ as to whether it requires the use of the least trade-restrictive measure available. They also differ as to whether "necessity" to use measures that accord less favourable treatment to imported products can be created by a contracting party's choice, in its national legislation, of enforcement measures against domestic products that would not be effective against imports (paragraphs 3.59 - 3.61).

5.26 It was clear to the Panel that a contracting party cannot justify a measure inconsistent with another GATT provision as "necessary" in terms of Article XX(d) if an alternative measure which it could reasonably be expected to employ and which is not inconsistent with other GATT provisions is available to it. By the same token, in cases where a measure consistent with other GATT provisions is not reasonably available, a contracting party is bound to use, among the measures reasonably available to it, that which entails the least degree of inconsistency with other GATT provisions. The Panel wished to make it clear that this does not mean that a contracting party could be asked to change its substantive patent law or its desired level of enforcement of that law, provided that such law and such level of enforcement are the same for imported and domestically-produced products. However, it does mean that, if a contracting party could reasonably secure that level of enforcement in a manner that is not inconsistent with other GATT provisions, it would be required to do so.

5.27 Bearing in mind the foregoing and that it is up to the contracting party seeking to justify measures under Article XX(d) to demonstrate that those measures are "necessary" within the meaning of that provision⁶, the Panel considered whether the inconsistencies that it had found with Article III:4 can be justified as "necessary" in terms of Article XX(d). The Panel first examined the argument of the United States that the Panel should consider not whether the individual elements of Section 337 are "necessary" but rather whether Section 337 as a system is "necessary" for the enforcement of United States patent laws (paragraphs 3.57-3.58). The Panel did not accept this contention since it would permit contracting parties to introduce GATT inconsistencies that are not necessary simply by making them part of a scheme which contained elements that are necessary. In the view of the Panel, what has to be justified as "necessary" under Article XX(d) is each of the inconsistencies with another GATT Article found to exist, i.e. in this case, whether the differences between Section 337 and federal district court procedures that result in less favourable treatment of imported products within the meaning of Article III:4, as outlined above (paragraph 5.20), are necessary.

(c) The necessity of the specific inconsistencies with Article III:4

5.28 The United States suggested that Section 337 can be justified because, under United States law, it provides the only means of enforcement of United States patent rights against imports of products manufactured abroad by means of a process patented in the United States (paragraph 3.62). The Panel considered that, even if it were accepted that a different scheme for imports alleged to infringe process patents is necessary, this could not in itself justify as "necessary" in terms of Article XX(d) any of the specific inconsistencies with Article III:4 summarised in paragraph 5.20 above. In any event, the Panel did not consider that a different scheme for imports alleged to infringe process patents is necessary, since many countries grant to their civil courts jurisdiction over imports of products manufactured abroad under processes protected by patents of the importing country. The Panel noted that, in the 1988 Omnibus Trade and Competitiveness Act, the United States has in fact amended its law to this effect (see Annex II).

5.29 The United States also suggested that certain features of Section 337 are necessary in order to permit Presidential review, which is in the interests of respondents (paragraph 3.66). The Panel did not believe that this provided an argument for necessity in terms of Article XX(d), since Presidential review is not necessary in order to secure compliance with United States patent legislation; it is not, of course, available in United States patent litigation involving challenged products of domestic origin.

5.30 The United States suggested that Section 337 is needed because of difficulties with service of process on and enforcement of judgments against foreign manufacturers (paragraphs 3.63-3.65). As regards service of process, the difference in procedures between Section 337 and federal district courts was not itself alleged to be inconsistent with any GATT provision; and the Panel did not see why any of the inconsistencies with Article III:4 are a necessary accompaniment of arrangements for effective service of process where imported products are concerned. However, as noted in paragraph 5.19 above, the Panel found the differences in procedures for the enforcement of judgments to be inconsistent with Article III:4 in that they provide for the possibility of in rem general exclusion orders against imported products when no equivalent remedy is available against products of United States origin; and that they provide for automatic customs enforcement of exclusion orders while the enforcement of a court injunction requires the initiation of proceedings by the successful party.

5.31 The United States stressed the importance to its system of enforcement of in rem orders, and the Panel considered this question at some length. The Panel agreed with the United States that taking action against infringing products at the source, that is at the point of their production, would generally be more difficult in respect of imported products than in respect of products of national origin: imported products are produced outside the jurisdiction of national enforcement bodies and it is seldom feasible to secure enforcement of the rulings of a court of the country of importation by local courts in the country of production. In personam action against importers would not in all cases be an adequate substitute for action against the manufacturer, not only because importers might be very numerous and not easily brought into a single judicial proceeding, but also, and more importantly, because as soon as activities of known importers were stopped it would often be possible for a foreign manufacturer to find another importer. For these reasons the Panel believed that there could be an objective need in terms of Article XX(d) to apply limited in rem exclusion orders to imported products, although no equivalent remedy is applied against domestically-produced products.

5.32 A limited in rem order applying to imported products can thus be justified, for the reasons presented in the previous paragraph, as the functional equivalent of an injunction enjoining named domestic manufacturers. However, these reasons do not justify as "necessary" in terms of Article XX(d) the inconsistency with Article III:4 found in respect of general exclusion orders; this is that such orders apply to products produced by persons who have not been named as respondents in the litigation, while no equivalent measure applicable to non-parties is available where products of United States origin are concerned. The United States informed the Panel that the situations which under Section 337 could justify a general exclusion order against imported products are a widespread pattern of unauthorised use of the patented invention or process and a reason to infer that manufacturers other than respondents to the investigation might enter the United States market with infringing products. However, the Panel saw no reason why these situations could not also occur in respect of products produced in the United States. Nevertheless, the Panel did not rule out entirely that there could sometimes be objective reasons why general in rem exclusion orders might be "necessary" in terms of Article XX(d) against imported products even though no equivalent measure was needed against products of United States origin. For example, in the case of imported products it might be considerably more difficult to identify the source of infringing products or to prevent circumvention of orders limited to the products of named persons, than in the case of products of United States origin. Of course, the United States could bring the provision of general exclusion orders into consistency with Article III:4 by providing for the application in like situations of equivalent measures against products of United States origin.

5.33 As noted above, the Panel found an inconsistency with Article III:4 in the fact that Section 337 exclusion orders are automatically enforced by the Customs Service, whereas the enforcement of injunctions against products of United States origin requires the successful plaintiff to bring individual proceedings. However, in this case the Panel accepted the argument of necessity in terms of Article XX(d). A United States manufacturer which has been enjoined by a federal district court order can normally be expected to comply with that injunction, because it would know that failure to do so would incur the risk of serious penalties resulting from a contempt proceeding brought by the successful plaintiff. An injunction should therefore normally suffice to stop enjoined activity without the need for subsequent action to enforce it. As far as imported products are concerned, enforcement at the border by the customs administration of exclusion orders can be considered as a means necessary to render such orders effective.

5.34 The Panel considered the argument of the United States that many of the procedural aspects of Section 337 reflect the need to provide expeditious prospective relief against infringing imports (paragraph 3.66). The Panel understood this argument to be based on the notion that, in respect of infringing imports, there would be greater difficulty than in respect of infringing products of domestic origin in collecting awards of damages for past infringement, because foreign manufacturers are outside the jurisdiction of national courts and importers might have little by way of assets. In the Panel's view, given the issues at stake in typical patent suits, this argument could only provide a justification for rapid preliminary or conservatory action against imported products, combined with the necessary safeguards to protect the legitimate interests of importers in the event that the products prove not to be infringing. The tight time-limits for the conclusion of Section 337 proceedings, when no comparable time-limits apply in federal district court, and the other features of Section 337 inconsistent with Article III:4 that serve to facilitate the expeditious completion of Section 337 proceedings, such as the inadmissibility of counterclaims, cannot be justified as "necessary" on this basis.

5.35 The United States did not advance, nor was the Panel aware of, any other arguments that might justify as necessary any of the elements of Section 337 that had been found to be inconsistent with Article III:4 of the General Agreement. On the basis of the preceding review and analysis, the Panel found that the system of determining allegations of violation of United States patent rights under Section 337 of the United States Tariff Act cannot be justified as necessary within the meaning of Article XX(d) so as to permit an exception to the basic obligation contained in Article III:4 of the General Agreement. The Panel, however, repeats that, as indicated in paragraphs 5.32 and 5.33 above, some of the inconsistencies with Article III:4 of individual aspects of procedures under Section 337 could be justified under Article XX(d) in certain circumstances.

6.1 To avoid any misunderstanding as to the scope and implications of the above findings, the Panel stresses that neither Article III:4 nor Article XX(d) puts obligations on contracting parties specifying the level of protection that they should accord to patents or the effectiveness of procedures to enforce such protection. The only task entrusted to the Panel was to see whether the treatment accorded to imported products under Section 337 is compatible with the rules of the General Agreement.

6.2 The Panel also wishes to state that, although it found that some elements of Section 337 are inconsistent with the GATT obligations of the United States, it found no evidence that these elements had been deliberately introduced so as to discriminate against foreign products.

6.3 On the basis of the findings set out in paragraphs 5.1 - 5.35 above the Panel concluded that Section 337 of the United States Tariff Act of 1930 is inconsistent with Article III:4, in that it accords to imported products challenged as infringing United States patents treatment less favourable than the treatment accorded to products of United States origin similarly challenged, and that these inconsistencies cannot be justified in all respects under Article XX(d).

6.4 The Panel recommends that the CONTRACTING PARTIES request the United States to bring its procedures applied in patent infringement cases bearing on imported products into conformity with its obligations under the General Agreement.

§337. Unfair practices in import trade.

(a) Unfair methods of competition declared unlawful. Unfair methods of competition and unfair acts in the importation of articles into the United States, or in their sale by the owner, importer, consignee, or agent of either, the effect or tendency of which is to destroy or substantially injure an industry, efficiently and economically operated, in the United States, or to prevent the establishment of such an industry, or to restrain or monopolize trade and commerce in the United States, are declared unlawful, and when found by the Commission to exist shall be dealt with, in addition to any other provisions of law, as provided in this section.

(b) Investigation of violations by Commission; time-limits.

(c) Determinations; review. The Commission shall determine, with respect to each investigation conducted by it under this section, whether or not there is a violation of this section. Each determination under subsection (d) or (e) of this section shall be made on the record after notice and opportunity for a hearing in conformity with the provisions of subchapter II of chapter 5 of title 5. All legal and equitable defences may be presented in all cases. Any person adversely affected by a final determination of the Commission under subsection (d), (e) or (f) of this section may appeal such determination within sixty days after the determination becomes final, to the United States Court of Appeals for the Federal Circuit for review in accordance with chapter 7 of title 5. Notwithstanding the foregoing provisions of this subsection, Commission determinations under subsections (d), (e) and (f) of this section with respect to its findings on the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive articles in the United States, and United States consumers, the amount and nature of bond, or the appropriate remedy shall be reviewable in accordance with section 706 of title 5.

(d) Exclusion of articles from entry. If the Commission determines, as a result of an investigation under this section, that there is violation of this section, it shall direct that the articles concerned, imported by any person violating the provision of this section, be excluded from entry into the United States, unless, after considering the effect of such exclusion upon the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive articles in the United States, and United States consumers, it finds that such articles should not be excluded from entry. The Commission shall notify the Secretary of the Treasury of its action under this subsection directing such exclusion from entry, and upon receipt of such notice, the Secretary shall, through the proper officers refuse such entry.

(e) Exclusion of articles from entry during investigations except under bond. If, during the course of an investigation under this section, the Commission determines that there is reason to believe that there is a violation of this section, it may direct that the articles concerned, imported by any person with respect to whom there is reason to believe that such person is violating this section, be excluded from entry into the United States, unless, after considering the effect of such exclusion upon the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive articles in the United States, and United States consumers, it finds that such articles should not be excluded from entry. The Commission shall notify the Secretary of the Treasury of its action under this subsection directing such exclusion from entry, and upon receipt of such notice, the Secretary shall, through the proper officers, refuse such entry, except that such articles shall be entitled to entry under bond determined by the Commission and prescribed by the Secretary.

(f) Cease and desist orders; civil penalty for violation of orders.

(g) Referral to President.

(h) Period of effectiveness. Except as provided in subsections (f) and (g) of this section, any exclusion from entry or order under this section shall continue in effect until the Commission finds, and in the case of exclusion from entry notifies the Secretary of the Treasury, that the conditions which led to such exclusion from entry or order no longer exist.

(i) Importation by or for United States. Any exclusion from entry or order under subsection (d), (e) or (f) of this section, in cases based on claims of United States letters patent, shall not apply to any articles imported by and for the use of the United States, or imported for, and to be used for, the United States with the authorization or consent of the Government. Whenever any article would have been excluded from entry or would not have been entered pursuant to the provisions of such subsections but for the operation of this subsection, a patent owner adversely affected shall be entitled to reasonable and entire compensation in an action before the United States Claims Courts pursuant to the procedures of section 1498 of title 28.

(j) Definition of United States. For purposes of this section and sections 1338 and 1340 of this title, the term "United States" means the customs territory of the United States as defined in general headnote 2 of the Tariff Schedule of the United States.

§337a. Importation of products produced under process covered by claims of unexpired patent.

The importation for use, sale or exchange of a product made, produced, processed, or mined under or by means of a process covered by the claims of any unexpired valid United States letters patent, shall have the same status for the purposes of section 337 of this title as the importation of any product or article covered by the claims of any unexpired valid United States letters patent.

(2 July 1940, ch. 515, 54 Stat. 724.)

In the summer of 1988, the United States Congress adopted the Omnibus Trade and Competitiveness Act of 1988, which affects the subject matter of the present controversy in four principal ways:

In addition to the four major changes described above, the Omnibus Trade and Competitiveness Act of 1988 made the following changes relevant to the subject of the present Panel report.

Protective Orders on Confidential Information

The practice of the USITC, as described in paragraph 2.8(g) of this Report, is made the subject of an express provision in the statute (Section 337(n)).

Default

In case of a complaint against a particular person, if that person fails to respond, the USITC may now presume the facts alleged to be true; in such cases relief is limited to the party found in default. Previously, the complainant was required to establish a prima facie case (compare paragraph 2.8(e) of the Report). If no respondent appears to contest an investigation, the USITC may now issue a general exclusion order (paragraph 2.8(l) of the Report), but only upon the basis of substantial, reliable, and probative evidence (Section 337(g)). As before, determinations in case of default remain subject to review for public interest considerations and to Presidential review. A party found in default may petition the USITC to eliminate or modify its order.

Abuse of Process or Abuse of Discovery

The USITC is expressly authorised to prescribe by rule sanctions for abuse of process or discovery based on the Federal Rules of Civil Procedure. These would include drawing an adverse inference, striking a pleading, or, in extreme cases, dismissing a complaint or defence (Section 337(h)).

Seizure and Forfeiture of Goods Imported in Violation of Exclusion Order

The USITC is authorised to issue an order for seizure by the Customs Service and forfeiture to the United States of goods subject to an exclusion order when sought to be imported by a person who has previously attempted to import the article in violation of the exclusion order and when notice of impending seizure has been given (Section 337(i)).

Cease and Desist Orders

The new Act makes clear that both cease and desist orders and exclusion orders may be issued by the USITC in the same case (compare Report, paragraph 2.8(l)). The maximum penalty for violation of a cease and desist order is increased from US$10,000 to US$100,000 per day of violation or, in the alternative, from the domestic value of the article to twice its domestic value (Section 337(f)).

Modification and Rescission of USITC Orders

The provisions for modification or rescission are made more specific, placing the burden on the person who has been found to be in violation of Section 337 to establish that relief should be granted (Section 337(k)).

Temporary Exclusion Orders (TEO)

Previously, TEOs were authorised by the legislation at any time during the investigation, and by USITC rule within seven months of initiation of the investigation. Under the new legislation the period is fixed at ninety days (plus an additional sixty days in a "more complicated" case). Further, USITC may make the issuance of a TEO subject to the furnishing of a bond by the complainant (compare Report, paragraph 2.8(n)).

² Report of Panel on United States - Taxes on Petroleum and Certain Imported Substances (L/6175, paragraph 5.1.9), adopted by the Council on 17 June 1987.

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