Recent Developments in Trade in Chemical Products

International Alert

In the last few years, the chemical industry has become increasingly entangled in international trade issues. While the industry has always had an international focus, recent events have sharpened that focus. 9/11, heightened security concerns over chemical weapons proliferation abroad and at home, and increased competition between U.S. and foreign manufacturers in countries like China, all have contributed to the need for more attention on managing the barrage of trade-related issues that has emerged.

Security concerns are increasingly driving U.S. Customs and export control authorities to increase the stringency of regulation of trade in chemicals. Chemical products are routinely the subject of trade-related litigation, either in the form of anti-dumping (sales at prices below fair value) or countervailing duty (anti-subsidy) cases, or more recently in the form of intellectual property disputes. Finally, multilateral negotiations involving trade in chemicals create opportunities for interested companies to reduce tariffs on products of interest.

We know that you are likely already aware of many of the issues in this Industry Focus. We hope, however, that by presenting the many trade issues impacting your industry, we can advance a more holistic approach to identify and manage these global trade issues as part of an integrated strategy. Undoubtedly some of you will know of issues we have missed. We welcome your responses as part of an ongoing dialogue.

Section 337

Many chemical companies have valuable patents covering manufacturing processes. What happens when that process is used overseas to manufacture an intermediate input or component and then the downstream product made from the input is imported? A recent decision by the top U.S. appellate court for patent cases says that there may be a remedy against the “downstream” import at the U.S. International Trade Commission (“ITC”) that is not available in a normal patent case in federal district court.

Section 271(g) of U.S. patent law allows the owner of a U.S. process patent to sue for patent infringement anyone who imports items made offshore using the patented process. For example, the holder of a patent on a process for manufacturing a chemical, but not on the chemical itself, can obtain damages for, and preclude imports of, the chemical itself, even though it is made overseas, if it was made using the patented process. But two statutory defenses to the Section 271(g) remedy exist: the infringement is not actionable if (1) the imported items are miller & chevalier - 2 - materially changed before they are imported or (2) they are imported as trivial and non-essential components of another product. In Kinik Co. v. ITC, 362 F.3d 1359 (Fed. Cir. 2004), the Federal Circuit Court of Appeals held that these two statutory defenses are not available to foreign infringers in Section 337 unfair import investigations at the ITC. The practical implication of this decision for process patent owners is potentially significant.

Section 337 of the Tariff Act of 1930 allows holders of U.S. I.P. rights to quickly obtain exclusion orders from the ITC barring imports of infringing goods, including those that were made using an infringing process. These ITC orders are generally issued within 12 to 15 months after a complaint is filed, and are enforced by the Bureau of Customs and Border Protection, which physically keeps the goods out of the U.S. Even though the ITC has historically been unwilling to exclude imported products with infringing components that are trivial or non-essential (limiting the importance of the Kinik decision as far as prong 2 of Section 271(g) is concerned), in light of the Kinik decision process patent holders may obtain ITC exclusion orders to protect their domestic rights against imports even when the imported products have been materially altered. For example, a patent holder who owns the process for manufacturing a precursor chemical that is essential in a household cleaner might use Section 337 to halt the importation of the cleaner itself, even though the precursor is materially altered when the cleaner is made abroad. While the U.S. courts cannot help this patent owner stop the infringing foreign process (because of the material change in the ultimate product), the Kinik decision allows the ITC to exclude from the U.S. market the imported product that eventually results from it, material changes aside. Thus, even when courts cannot offer relief, process patent owners may still have a powerful remedy available to them at the ITC.

Customs and Export Regulation

Post September 11, the U.S. Government has significantly increased scrutiny of chemical industry exports and imports for antiterrorism and chemical weapons proliferation concerns. Both on the import and export side, our clients have experienced expanded border inspections, both in scope and number. Further, informal “contacts” by law enforcement officials with the chemical industry have also increased.

On the import side, the Bureau of Customs and Border Protection (“Customs”) has increased inspections of shipments and containers that it considers likely to present a security risk. But as a means of decreasing the risk and costs associated with such inspections, Customs has created several cooperative programs allowing importers to enter shipments into the United States with fewer inspections. The most comprehensive such program is the Customs-Trade Partnership Against Terrorism (“C-TPAT”), a voluntary partnership where private companies share information with Customs on their supply chain security procedures in exchange for a decreased probability of being subject to time-consuming border inspections.. While C-TPAT offers importers the prospect of receiving expedited processing at the border, participants are expected to live up to any commitments made to improve the security of their supply chain procedures. Customs has begun sending teams of officials to verify the accuracy of C-TPAT participants’ representations on their security procedures. Customs’ interest in a company’s security procedures can even extend to the security procedures that the company expects of foreign suppliers and subsidiaries. Thus, it is crucial for C-TPAT participants to draft their C-TPAT applications carefully to ensure that they can meet Customs’ expectations on any security commitments made.

On the export side, heightened scrutiny has resulted in an increase in export enforcement activities. The Commerce Department’s Bureau of Industry and Security (“BIS”) has imposed large fines on chemical companies in recent months related to unauthorized export and re-export of controlled chemicals. For example, on February 24, 2004, three Rohm and Haas subsidiaries, including two located overseas, agreed to pay civil fines of $647,500 for the unauthorized export and re-export of thiodiglycol without approved licenses. The high fines came despite the fact that Rohm and Hass voluntarily disclosed the violations after it acquired Morton International, Inc.. Most of the violations occurred before the acquisition. In September 2003, another chemical company, W.. Grace, agreed to pay $178,000 after a voluntary disclosure related to the unauthorized export of triethanolamine to Brazil, the Dominican Republic, the Philippines, Taiwan, Singapore, and Venezuela. These cases illustrate the increasingly aggressive nature of BIS enforcement actions, even where the parties voluntarily disclose violations and cooperate with the authorities.

These enforcement actions also underscore the importance of properly classifying chemicals for export control purposes and implementing appropriate controls to prevent their unauthorized export. This comes at a time when exporters already face an increasingly complex set of export control requirements stemming from the Chemical Weapons Convention (“CWC”), ratified by the United States in 1997. The CWC obligates all signatories to impose tight restrictions on the export of certain toxic chemicals and their precursors. BIS rules implementing the CWC in 1999 introduced enhanced controls, reporting requirements, and end-use certification requirements on the export of chemicals covered by the CWC.

Trade Litigation

U.S. chemical manufacturers and exporters should note that, with increasing frequency, anti-dumping (“AD”) and countervailing duty (“CVD”) (anti-subsidy) investigations and measures worldwide have significant implications for their business. Although U.S. companies have taken advantage of the protections afforded by U.S. trade laws, the surge of AD and/or CVD investigations in countries such as China and India, targeting foreign exports of chemicals, has the potential to thrust U.S. companies into the unfamiliar role of respondent, often in an uncertain administrative setting.

In the United States, pressures from imports of an ever-widening variety of cheap chemical products have prompted U.S. producers to increasingly seek protection under U.S. AD/CVD laws. Indeed, the most recent investigation, instituted March 31, 2004 in the U.S. involves polyethylene terephthalate (PET) resin imported from frequent AD/CVD investigation targets India, Indonesia, Taiwan, and Thailand. Not surprisingly, the greatest numbers of other recent U.S. chemical-related investigations have targeted imports from China, and the special rules that govern investigations of Chinese imports can result in high duty margins. Investigations have involved products such as barium carbonate, persulfates, polyvinyl alcohol, saccharin, and tetrahydrofurfuryl alcohol. Ultimately, these investigations are a double-edged sword for U.S. interests while they can provide protection for U.S. producers of competing products, they can also produce headaches for U.S. manufacturers who source chemical inputs from the PRC.

Increasing trade remedy investigations involving chemical products by China officials also creates opportunities and risks for U.S. investing and trading interests. In recent months, a top PRC anti-dumping official reluctant to bring anti-dumping cases against U.S. companies because of broader trade concerns was replaced with an official who supports aggressive use of trade miller & chevalier - 4 - remedies. Already cases have been brought in China against imported = chloroform, phenol, Bisphenol A, TDI, MDI and other chemical products. In a likely harbinger of things to come, China instituted a significant investigation into imports of linerboard paper from the United States, Korea, Thailand, and Taiwan on March 31, 2004. While not a chemicals case, this investigation is far larger than past investigations involving imports from the United States. Many cases involving chemical products are rumored to be in the works.

Given China’s past conduct in this area, with more than 75% of Chinese investigations to date involving chemicals and plastics (and the fact that only one of the 28 Chinese investigations instituted to date ended in a price undertaking settlement, and only two were terminated on the basis that the accused imports were non-injurious), U.S. chemical exporters to China should now pay even more attention to avoiding PRC anti-dumping liability. Many respondents have been caught off guard by Chinese AD laws particularly the complex procedures and strict deadlines of Chinese AD proceedings, as well as the tendency of the Chinese government to resort to a seemingly punitive “facts available” analysis. As is the case with trade remedy proceedings elsewhere, there is a clear trend showing that importers who participate fully receive rates which are dramatically lower than those imposed on producers who fail to participate fully.

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