Litigation Expenses Alone Insufficient to Satisfy “Domestic Industry” Requirement Says ITC and Federal Circuit Affirms

Earlier this week the Federal Circuit affirmed an International Trade Commission (“ITC”) decision by refusing to find a patent owner complainant’s litigation expenses satisfied the “domestic industry” requirement of 19 U.S.C § 337. The Court’s decision in John Mezzalingua Assocs. (d/b/a PPC, Inc.) v. International Trade Comm’n, 2010-1536 (Fed. Cir. October 4, 2011) is a blow to ITC complainants, in particular, non-practicing entities intent on relying solely on patent litigation expenses to establish the domestic industry requirement of § 337.

Patent owners are increasingly filing § 337 actions before the ITC seeking an “exclusion order” – an order that blocks infringing products from being imported to the United States. Section 337 is intended to protect domestic manufacturers by excluding importation of infringing products by foreign competitors. Although the ITC cannot award damages for a violation of § 337, an exclusion order is an effective tool for stopping the importation of infringing goods. Indeed, the threat of an exclusion order often provides patentees with a significant bargaining chip during negotiations involving patent disputes.

To obtain an exclusion order, however, an ITC complainant must meet the “domestic industry” requirement. More particularly, the complainant must establish an industry in the United States relating to the articles protected by the patent by satisfying two requirements. 19 U.S.C § 337 (a)(2). First, a technical prong, the Complainant must prove that it or its licensee is practicing at least one claim of the asserted patent. Second, an economic prong, the Complainant must demonstrate, with respect to that patented product, that one or more of the following exists in the U.S.:

(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 § 337 (a)(3).

In Certain Coaxial Cable Connectors and Components Thereof and Products Containing Same, the complainant PPC sought to enforce U.S. Patent No. D440,539 (the “‘539 patent”) which describes an ornamental design for a coaxial cable connector, and exclude multiple foreign manufacturers from importing infringing connectors. Notably, PPC did not manufacture the connectors, own a plant or equipment in the United States, or employ workers in the United States. In an attempt to establish the domestic industry requirement, PPC instead relied on legal expenses it incurred in litigation relating to its enforcement of the ‘539 patent. Specifically, PPC argued that its enforcement was substantial resulting in exploitation by the licensing of its ‘539 patent. Thus, PPC argued it met the domestic industry requirement and deserved the protection of an ITC exclusion order.

The administrative law judge (“ALJ”) at the ITC who initially considered PPC’s argument agreed and issued an Initial Determination of infringement of the ‘539 patent. On review, the Commission considered several factors towards establishing whether the expense activities on behalf of the subject patent were substantial and related to licensing, including: establishing a licensing program; serving cease and desist letters; making a concerted effort to license the patent; filing and conducting a patent infringement litigation; conducting settlement and licensing negotiations before suit was filed or while suit was ongoing; and negotiating, drafting and executing a license.

In its Opinion, the Commission rejected PPC’s argument that it met the domestic industry requirement by incurring litigation expenses relating to asserting and defending the validity of the ‘539 patent. On remand, the ALJ found that while PPC had incurred legal expenses related to the negotiation and drafting of a licensing agreement, and therefore had made at least some investment with respect to licensing of the ’539 design patent, it had failed to establish that litigation expenses relating to that patent were related to a substantial investment in licensing. Specifically, the ALJ found that PPC’s sole license resulted from numerous litigations that had multiple objectives, not all of which were based on the ’539 patent at issue. Ultimately, the ALJ concluded that it would be inappropriate to treat most of the incurred legal fees as an investment in licensing of the ’539 patent.

PPC maintained that these expenses were a “substantial investment in exploitation” in licensing the patent. Earlier this week, the Federal Circuit considered PPC’s appeal of the ITC’s decision and affirmed the finding that, although § 337 does not specify whether litigation expenses incurred in enforcing a patent may be used as evidence to establish domestic industry, litigation expenses alone do not constitute a domestic industry.

Although the Federal Circuit’s ruling firmly establishes that litigation expenses alone are insufficient to meet the domestic industry requirement, it did note that it was not ruling that a single license can never satisfy the domestic industry requirement based on a substantial investment in licensing. The Court posited that a complainant’s litigation expenses may well satisfy § 337’s domestic industry requirement if it can prove the expense activities were substantial, on behalf of the subject patent and related to licensing.

Owen J. McKeon, a former Director in the Gibbons Intellectual Property Department, authored this post.
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