http://www.businessweek.com/news/2013-03-25/companies-failed-by-customs-ill-equipped-as-border-police

Bloomberg News

Companies Failed by Customs Ill-Equipped as Border Police

March 25, 2013

Government Fails U.S. Companies as Border Police Protect Patents

A U.S. Customs and Border Protection official inspects trucks entering from Mexico at the Otay Mesa Port of Entry in San Diego. Photographer: Sam Hodgson/Bloomberg

Corning Inc. (GLW:US) has been blocked for more than a year from importing to the U.S. its parts connecting cable wires to televisions, even after a trade judge ruled the components don’t infringe a competitor’s patent.

Apple Inc. (AAPL:US) says a rival’s smartphone was allowed into the U.S. last year when it shouldn’t have been.

Both disputes revolve around the role of U.S. Customs and Border Protection -- an agency better known for securing the U.S. from illegal immigrants, terrorists and drugs -- in parsing patent law and technology. With the U.S. International Trade Commission considering bans on devices by Apple and Samsung Electronics Co., which account for 72 percent of the $51 billion smartphone market, the Corning case highlights the difficulty Customs may have enforcing an order on mobile phones that look alike and have similar features.

“Customs doesn’t feel it’s competent to call balls and strikes in this situation and the ITC doesn’t want the added burden,” said Brian Burke, a former Customs lawyer. now with Rode & Qualey in New York. “Everyone has a complaint they can make about the messiness of this process.”

Jenny Burke, a spokeswoman on trade issues for Customs, said agency officials wouldn’t comment or be interviewed. Peg O’Laughlin, an ITC spokeswoman, said the commission had no comment.

While one of Customs’s missions under trade statutes is to police imports, there are no clear rules on how that process should work, said Burke and other lawyers. ITC decisions expected soon may effect the bulk of a U.S. smartphone market estimated by Neil Shah, an analyst with Strategy Analytics, at $51 billion last year.

No Clear Rules

The demands on Customs to act as patent police have become more of an issue with the ITC dealing with an escalating number of complaints seeking import bans, driven by the fight for market share in mobile phones and other digital technology. Cases at the ITC, an independent federal agency that provides trade advice and rulings to protect the U.S. economy, rose 530 percent from 2000 to 2011,

In addition to cases involving mobile phones, the ITC has put in place more than four dozen import bans on products from light-emitting diodes and DVD players to floor panels and even caskets.

Customs sided with PPC Broadband Inc. in blocking Corning’s imports after the ITC in 2010 granted an order blocking what PPC considered foreign-made knockoffs of its coaxial cable connectors. Corning wasn’t named as a party to the case, yet Customs barred the company’s parts.

Deeper Analysis

Corning Gilbert, the unit that makes the cable connectors, won a February decision from the U.S. Court of International Trade Judge Leo Gordon in New York that it wasn’t infringing the PPC patent and Customs should have done a deeper analysis before banning imports.

PPC, which wasn’t allowed to participate in that case, has gone back to the ITC in Washington to argue the judge in New York got it wrong. Burke is representing the company.

Dan Collins, a spokesman for Corning, said the Corning, New York-based company is “working through the process” with Customs and the ITC to determine whether the company’s cable connectors will be allowed to be sold in the U.S. He didn’t provide an estimate of the company’s lost sales.

Once the ITC issues an exclusion order, each side starts lobbying Customs. The patent owner gives instructions on how to identify the product at the core of the case and explains the invention. The importer presents arguments that it’s changed their product or the patent is limited.

Lobbying Customs

“You’re talking to Customs on the one side and the importer is talking to Customs on the other side and you don’t know what the other is saying,” said Jonathan Engler, a patent lawyer with Adduci Mastriani & Schaumberg in Washington, whose firm handles the most ITC cases. “I don’t think Customs is happy with that, but they are bound by the Trade Secrets Act.”

Working off the ITC case file and information from the parties, advisers within Customs prepare an internal memo that goes out to ports. The companies also visit ports of entry to sway local officials.

Customs last year opened four Centers of Excellence and Expertise in the fields of electronics, pharmaceuticals, automotive and petroleum. One goal of the centers is to develop more expertise in patent cases, Engler said.

When it comes to complex technology like software features on smartphones, Customs decisions can get murky.

HTC Corp. (2498) phones were held up at the border for a couple of weeks in May 2012 after the company was told by the trade commission to remove a feature to detect telephone numbers that infringed an Apple patent. That delay held up plans by carriers to sell the HTC EVO 4G until HTC certified the phone no longer infringed the patent.

Working Through

Apple, in an enforcement action it filed, accused its rival of misleading Customs into green-lighting the phone. The two companies settled their dispute before a decision was made.

“When you’re talking smartphones that are being changed every three months and someone is coming up with new models, it’s a very difficult issue because Customs has to keep up with it,” said Paul Brinkman, a patent lawyer with Quinn Emanuel in Washington who represented HTC in the Apple case. “The phones at issue when Apple and HTC went to trial don’t exist anymore.”

Brinkman’s firm also represents Samsung and Engler’s firm represents Apple. Both lawyers said they wouldn’t comment on the Customs process as it pertains to the dispute between those two companies.

Lawyers including Brinkman and Engler said the trade commission should provide more assistance to Customs.

“The Corning case is an example where things reached their limits and passed their limits of what can be expected of Customs,” Engler said.

“You have Customs basically saying ‘we’re trying to prevent dirty bombs coming in; we have things to do’ and you have the court say ‘you have to stand in the shoes of the commission.’ ”

To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net


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