May 2012
Imp-Exp Executive Magazine
Authored by Elizabeth A. Niemeyer and Cecilia Sanabria
Patent owners seeking to enforce their patent rights are increasingly turning to the U.S. International Trade Commission (“ITC”) to stop the importation of allegedly infringing goods. If a patent owner proves that there has been a violation of the governing statute, the ITC will exclude the infringing articles from the U.S. market. As U.S. manufacturing is being shipped overseas, such an order is an increasingly powerful remedy in the international business arena.
The ITC offers several desirable benefits over U.S. district court litigation, but proving a violation of the governing statute requires additional proofs. One of those proofs is a showing that there is a “domestic industry” related to the asserted intellectual property (“IP”) right. If a company is sued in the ITC that party should thoroughly explore the patentee’s alleged domestic industry as a defense.
The traditional domestic industry required a showing of a product that was covered by the asserted IP rights (the “technical” prong) and significant investments in the United States related to the covered article (the “economic” prong). A patentee, however, can also rely on licensing activities to establish a domestic industry. That is, a patentee can rely on its investments in trying to license the asserted patents
In the past ten years, institutions of Section 337 Investigations dealing with patent cases at ITC have more than quadrupled. (http://www.usitc.gov/press_room/337_stats.htm.) With the dramatic rise in ITC practice, more non-practicing entities have wanted to take part of the action. Because non-practicing entities generally do not manufacture and are not engaged in research and development of products covered by the patents, a licensing domestic industry creates the possibility for those non-practicing entities to be a complainant. The ITC, however, has been increasingly cautious about which investments count toward a licensing domestic industry, and how it weighs those investments.
The ITC requires a nexus to licensing between the activities and investments upon which a complainant relies and asserted patents and to the United States. Certain Multimedia Display and Navigation Devices and Systems, Components Thereof, and Products Containing Same, Inv. No. 337-TA-694, Commission Opinion (Corrected Public Version) at 7-8 (August 8, 2011). Each of these parameters involves several factors that guide the domestic industry inquiry. Id. at 9-15. After determining the extent to which the investments fall within those statutory parameters, the ALJ must determine whether the qualifying investments are “substantial.” Id. at 8. The analysis is very fact-intensive, and the key to defending against a non-practicing entity’s licensing domestic industry contentions is obtaining discovery on the licensing activities as quickly as possible. If the facts do not support a licensing domestic industry, the entire investigation could be resolved through a motion for summary determination asserting lack of a domestic industry. At a minimum, a strong, supportable argument by a respondent that a complainant lacks a domestic industry would improve that respondent’s position in settlement negotiations.
The ITC looks at several factors in assessing a non-practicing entity’s allegations of a licensing domestic industry. For example, with respect to the nexus required between the asserted patents and the licensing activities, an important question is whether the asserted patent is part of a larger patent portfolio. The Commission has declined to adopt a policy where investments in a patent portfolio are automatically allocated in their entirety to every individual patent in the portfolio. The inquiry is fact-focused and the following factors guide the analysis: (1) the importance of the asserted patent in relation to the patent portfolio; (2) whether the asserted patent was discussed in licensing negotiations; (3) whether the asserted patent has been successfully litigated before by the complainant; (4) whether the asserted patent relates to a technology industry standard, (5) whether the asserted patent is a base patent or a pioneering patent, (6) whether the asserted patent is infringed or practiced in the United States; and (7) market recognition of the value of the asserted patent in some other way. Id. at 10-11. In cases where a complainant has a large patent portfolio, the licensing activities are commonly directed toward the entire portfolio, and the asserted patents may not be mentioned during licensing negotiations or in the licenses granted. In such cases, the ITC may not find the nexus between the licensing activities and the asserted patents. Id. at 18-19.
Regarding the nexus required between the activities or investments and licensing, the ITC considers whether the activities are solely related to licensing or whether they serve multiple purposes. Id. at 14. With respect to non-practicing entities, an important inquiry is whether the activities upon which the complainant relies are related to litigation or to acquisition of the asserted patents.
Litigation activities are not automatically considered a substantial licensing investment. The complainant must establish a nexus between the litigation expense and licensing. Mezzalingua Assoc., Inc. v. Int’l Trade Comm’n, 660 F.3d 1322, 1328 (Fed. Cir. 2011). To do so, the complainant can show that it was engaged in licensing negotiations before the suit was filed, that it made an effort to license the patent, and that the complainant’s established licensing program includes litigation as a step toward executing a license agreement. In The Matter Of Certain Liquid Crystal Display Devices, Including Monitors, Televisions, and Modules, and Components Thereof, Inv. No. 337-TA-749/741, Initial Determination on Violation of Section 337 and Recommended Determination on Remedy and Bond at 228 (Jan. 12, 2012). Also, only activities occurring before the filing of a complaint are relevant to whether a domestic industry exists or is in the process of being established. Id. Thus, the commission has found it inappropriate to consider expenses occurring before the filing of the complaint that are related to the pending investigation in the domestic industry analysis. Id. A complainant can be particularly reluctant to rely on these activities, because it can require the complainant to produce information to support its domestic industry claim that would otherwise be protected from discovery. A respondent, however, should be aggressive in seeking this discovery.
Activities and investments occurring before issuance of the asserted patents can be considered in the domestic industry analysis, but they must be related to engineering, research and development, or licensing within the meaning of Section 337(a)(3)(C). Id. “[I]nvestments related merely to patent ownership do not constitute an investment in a domestic industry.” Id. This is particularly relevant to non-practicing entities seeking to rely on expenditures related to acquiring or prosecuting the patents to establish a domestic industry.
Challenging a non-practicing entity’s domestic industry is not a rigid formula, but rather involves a fact-focused inquiry into the activities and investments upon which the non-practicing entity relies. Full discovery into those activities and investments early on in the investigation can provide the necessary information to determine the viability of a motion for summary determination or other challenges to domestic industry.
Respondents in these cases should keep in mind that this is a developing area of the law. Consequently, respondents should be aggressive and feel free to develop innovative approaches to analyzing the information that supports a complainant’s domestic industry claims based on licensing activities. The Commission has been willing to set a high standard for establishing a licensing-based domestic industry, and respondents should take advantage of that willingness.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
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