The ITC and FTC Take Actions to Address the Toll of NPE Litigation

We have previously posted on proposed federal and state legislation aimed at addressing the toll of “patent troll” litigation by non-practicing entities (“NPEs”) on the U.S. economy. Additionally, a recent Federal Circuit ruling relaxing the standard for finding “an exceptional case” to justify attorneys’ fees in patent infringement actions also appears to have been motivated by need to address NPE litigation. Now the United States trade commissions want to enter the fray. The U.S. International Trade Commission (ITC), through its recent decision  In the matter of Certain Optical Disc Drives, Components Thereof, and Products Containing the Same, limited the ability of licensing entities, whose patent-related activities are purely revenue driven, to bring actions under 19 U.S.C. § 1337(a)(3). Additionally, the U.S. Federal Trade Commission (FTC) has recently been given approval to conduct a study on NPEs to examine how they operate and to what extent they affect competition and innovation.

As an alternative to litigation in federal district courts, patent holders can file a complaint with the ITC under Section 337 of the Tariff Act of 1930 (19 U.S.C. § 1337) for unfair methods of competition based on the importation of articles that infringe a valid and enforceable United States Patent. 19 U.S.C. § 1337(a)(1)(B)(i). The filer must show that an industry relating to the articles covered by the filer’s patents exists or is in the process of being established. 19 U.S.C. § 1337(a)(2). To do so, the filer must show that the development of the patented article involved (a) significant investment in plant and equipment, (b) significant employment of labor or capital, or (c) substantial investment in its exploitation, including engineering, research and development, or licensing. 19 U.S.C. § 1337(a)(3)(A)-(C).

In Certain Optical Disc Drives, Optical Devices filed a complaint under19 U.S.C. § 1337(a)(1)(B) accusing numerous entities of importation into the U.S., sales for importations, or sales within the U.S. after importation of certain optical disc drives that infringed patents owned by Optical Devices. Optical Devices was ordered to move for summary determination on the economic prong of the domestic industry requirement.

In its complaint, Optical Devices identified its business as “licensing patented technology in the consumer electronics industry.” However, as a licensing entity, it attempted to establish the economic prong of the domestic industry requirement under §1337 (A) and (B) by relying solely on the domestic activities and investments of its licensees. Optical Devices also argued that §1337 (C) did not apply to it because that subsection only applied to licensors relying on their own licensing activities for domestic industry.
Respondents argued that Optical Devices licenses are purely revenue driven and it has not shown any of its own activities or investments to establish a domestic industry.

The ITC held that purely revenue-driven licensing activities cannot establish a domestic industry under subsections (A) and (B). First, neither subsection (A) nor (B) make any mention of licensing at all. Only subsection (C) identifies the ability to establish the economic prong through substantial investment in licensing. Revenue-driven licensing expenditures are recognized only under subsection (C). Only when a licensor can demonstrate a genuine connection to product-driven exploitation of the patent may it proceed under subsections (A) and (B). If not, it must show its own patented-related expenditures to meet the requirements of subsection (C). This decision reduces the avenues by which NPEs can pursue litigation to secure return on the patents they hold.

The FTC’s proposed study on NPE corporate structures, litigation efforts, and patent portfolios was recently greenlighted by the White House’s Office of Management and Budget. The two-year study will rely on information requests sent out to NPEs and manufacturers under the FTC’s authority through Section 6(b) of the Federal Trade Commission Act to investigate without a specified enforcement goal. The FTC anticipates using the responses it receives to provide insight about general NPE activity as well as a comparison between a general NPE’s enforcement efforts and those used by manufacturers and other NPEs in the wireless chipset industry. Commissioner Julie Brill expects the results of the study will aid stakeholders in determining next steps, as well as provide support for legislation if Congress does not act before the study is completed.

Gibbons will continue to monitor efforts by the various branches and levels of government to address NPEs.