September 27, 2010

Previously published on September 24, 2010

The ITC's authority to enforce patents against infringing imported products is based on an U.S. international trade statute - Section 1337 of the Tariff Act of 1930, as amended (19 U.S.C. §1337), colloquially known as "Section 337." As such, the statute requires proof that a domestic industry will be protected by any remedy issued by the ITC. The statute describes what is satisfactory proof of the existence of such a domestic industry. In the case of patent owners relying on their practice of the patent, the statute requires proof of "significant investment in plant and equipment" or "substantial employment of labor or capital" in the United States with respect to articles protected by the suit patent. In the case of non-practicing entities, the statute requires proof of "substantial investment" in the United States in the exploitation of the suit patent by engineering, research and development, or licensing.

Non-practicing entities have been increasingly attracted to the ITC for patent enforcement in the wake of the Supreme Court's eBay decision, which rendered it difficult for non-practicing entities to obtain injunctive relief in District Court cases. To satisfy the domestic industry requirement, non-practicing entities have invariably asserted substantial investment in a "domestic licensing industry" that seeks to exploit the patent in suit by licensing it to others.

In many of the cases asserting a domestic licensing industry the Complainant is a small entity that does not have a regular licensing program and the existence of a licensing industry has been alleged to exist by virtue of investment in litigation to enforce the patent in suit. Indeed, in at least one case, the alleged domestic licensing industry had obtained no licenses at all, but asserted that the investment in the ITC litigation itself proved the existence of a domestic licensing industry. In the ITC's Coaxial Cable Connectors case, Investigation Number 337-TA-650, the ITC expressly took up the questions as to what was required to prove a domestic licensing industry and whether or not litigation expenses could establish the existence of a domestic industry. In its notice announcing review of these matters, the ITC solicited the views of the public on the matter, including the public's views on the question of:

To what extent do legal fees paid by an intellectual property rights holder in litigation with targeted licensees and/or infringers represent investments in the exploitation of an intellectual property right within the meaning of section 337(a)(3)(C)?

After review, the ITC concluded that litigation costs taken alone do not establish the existence of a domestic industry, but that litigation costs shown to be related to licensing may establish the existence of a domestic licensing industry provided complainant proves that the litigation activity is "related to licensing."

The ITC further explained that a Complainant must also show that licensing activities pertain to the particular patent(s) at issue. Those activities, the ITC explained, "may include, among other things, drafting and sending cease and desist letters, filing and conducting a patent infringement litigation, conducting settlement negotiations, and negotiating, drafting, and executing a license." The ITC cautioned, however, that the mere fact that a license is executed does not mean that a complainant can necessarily capture all prior expenditures to establish a substantial investment in the exploitation of the patent. Rather, "A complainant must clearly link each activity to licensing efforts concerning the asserted patent."

The ITC then set forth its framework for analyzing whether the investments in such a domestic licensing industry are "substantial," as required by the statute to prove the domestic industry element. In this regard, the ITC announced that the appropriate analysis of this matter was contingent upon the particular facts of the case.

That inquiry is a factual one that the Commission can undertake only after the parties present their facts and arguments, including evidence of the actual costs associated with each activity. The Commission may take into account, among other things, the type of activity, the relationship between the activity, licensing, and the patent at issue, and the amount of the investment. The Commission may also consider whether the activity is of a type that Congress explicitly indicated may establish a domestic industry; namely, activities that serve to encourage practical applications of the invention or bring the patented technology to the market. In weighing the evidence, the Commission has previously indicated that whether an investment is substantial 'will depend on the industry in question, and the complainant's relative size.'

On remand to the ALJ to apply the standards to the facts of the case, the ALJ determined that complainant's investments in approximately $27,000 in attorney fees for litigation involving the suit patent (and an additional $15,000 in attorneys fees accorded lesser weight) did not meet the domestic industry requirement - particularly in view of the fact that complainant had no established licensing program, the alleged "licensing industry" had executed only a single license in the patent in suit, and Complainant had not engaged in licensing offers or talks with any entities other than its single licensee. Notably, though, the ALJ characterized the issue as a "close call." The ITC affirmed this determination without opinion on July 12, 2010.

Overall, although the ITC rejected the domestic licensing assertions in the Coaxial Cable Connectors case, the opinion is favorable to non-practicing entities seeking to show that they qualify for relief under Section 337 as a domestic licensing industry. The ITC has made clear that the determination is made based on the facts of each case and that litigation activities alone may suffice to establish the existence of a domestic industry so long as those activities can be shown to be directed to licensing of the patent in suit.