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Expenditures on Patent Litigation Do Not Automatically Constitute Evidence of a Substantial Investment in the Exploitation of a Patent

10-1536
October 04, 2011

Decision icon Decision

Last Month at the Federal Circuit - November 2011

Judges: Bryson (author), Linn, Reyna (dissenting-in-part)

[Appealed from: ITC]

In John Mezzalingua Associates, Inc. v. International Trade Commission, No. 10-1536 (Fed. Cir. Oct. 4, 2011), the Federal Circuit affirmed the ITC’s determination that John Mezzalingua Associates, Inc. (d/b/a PPC, Inc.) (“PPC”) failed to satisfy the domestic industry requirement of section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337.

PPC manufactures cable connectors used to connect coaxial cables to electronic devices. PPC filed suit in the ITC, alleging violations of section 337 and asserting infringement of four PPC patents. The instant case involved one of PPC’s design patents, U.S. Patent No. D440,539 (“the ’539 design patent”), which describes an ornamental design for a coaxial cable connector.

Under section 337, PPC was required to establish a domestic industry relating to the ’539 design patent. PPC has granted only one license for the ’539 design patent to Arris International, Inc. (“Arris”) as a result of years of litigation involving PPC, Arris, and Arris’s distributor, International Communications Manufacturing, Inc. (“ICM”) in three different actions, two of which involved the ’539 design patent. PPC argued that the money it spent litigating the patent up to execution of the license should be treated as a substantial investment in exploitation of the ’539 design patent through licensing. The ALJ ruled that PPC had satisfied the domestic industry requirement.

The ITC reviewed the ALJ’s initial determination and reversed the ALJ’s ruling. Although the ITC stated that in some circumstances enforcement-related litigation expenses may support a finding of domestic industry, in this case, the ITC found that PPC had not met its burden to show that its litigation expenses were related to licensing. The ITC remanded the case to the ALJ to allow PPC an opportunity to show what portions of its enforcement-related expenses were related to licensing and to demonstrate that its investment in licensing was substantial. On remand, the ALJ ruled that PPC had not sufficiently tied its litigation costs to licensing and that any investment was not substantial. The ITC adopted the ALJ’s remand opinion without modification and the order became final. PPC appealed.

First, the Federal Circuit addressed the ITC’s argument that PPC did not have standing to appeal. The ITC argued that PPC suffered no injury from the ITC’s decision because the only imported product that was found to infringe the ’539 design patent was also found to infringe one of PPC’s utility patents. Thus, the ITC asserted that PPC lacked standing to appeal. The Court held that just because the infringing product will be excluded regardless of the outcome of the appeal does not moot PPC’s interest in obtaining a broader general exclusion order to exclude all products deemed to infringe the ’539 design patent.

The Court then addressed whether PPC satisfied the domestic industry requirement. The Court agreed with the ITC that expenditures on patent litigation do not automatically constitute evidence of a substantial investment in the exploitation of a patent. Here, the ALJ found that there was no evidence that PPC had engaged in prelitigation licensing efforts. And the Court found that the vague testimony of PPC’s executives did not undermine the ALJ’s finding that PPC failed to show that it sought to license the ’539 design patent to Arris before commencing litigation. Moreover, PPC received a permanent injunction in one case, and the injunction remained in place for two years until PPC licensed the ’539 design patent to Arris. The ITC found that the delay suggested that PPC’s purpose in litigating was not to obtain a license, but rather to stop Arris from manufacturing its infringing products. In light of the record, the Court found that the ALJ reasonably concluded that PPC failed to show that the litigation expenses of the two litigations involving the ’539 design patent were related to licensing.

As for the third litigation, which involved a different utility patent, PPC argued that the enforcement of that patent forced Arris to sign the license to the ’539 design patent and therefore should have been credited toward its investment in licensing the ’539 design patent. The Court disagreed, finding that it did not follow that PPC’s actions in the litigation were directed toward licensing the ’539 design patent.

Although the ALJ found that PPC had incurred some legal expenses related to the negotiation and drafting of the licensing agreement, the ALJ found that that investment was not substantial. Moreover, the ALJ noted that PPC had no formal licensing program and there was no evidence that it had offered to license the patent to any party other than its litigation opponents. Although there is no rule that a single license cannot satisfy the domestic industry requirement based on a substantial investment in licensing, the Court found that the ALJ was entitled to view the absence of other licenses as a factor supporting his decision. Thus, the Federal Circuit determined that the ITC’s conclusion, based on the ALJ’s review of the evidence, was supported by substantial evidence.

Finally, the Court rejected PPC’s argument that the ITC should have credited at least a portion of the salary that PPC paid to the named inventor on the ’539 design patent as an investment in engineering, research, and development, along with PPC’s investment in equipment and facilities to develop the patented design. The ITC found that PPC presented no evidence of any investment in research and development that related specifically to the ’539 design patent. Because PPC had the burden of proof on that issue, the Court held that there was no error in the ITC’s conclusion that PPC failed to carry its burden, and there was no reason to remand for further findings, as suggested by the dissent.

Writing separately, Judge Reyna joined the majority’s opinion, finding that PPC had standing to seek a general exclusion order with respect to the ’539 design patent. But Judge Reyna dissented from the rest of the majority opinion because he believed additional fact-finding was needed to determine whether PPC’s research and development expenditures were a substantial investment in exploitation. Judge Reyna believed that PPC had introduced substantial evidence showing its considerable investment in the research project that necessarily included the work that yielded the patented design. He then stated that there were no facts in the record to support the ITC’s conclusion that time and resources spent by PPC in researching or developing the design of the ’539 patent were minimal and could not constitute a substantial investment. Accordingly, Judge Reyna stated that remand was necessary to conduct further fact-finding as to the extent to which PPC’s research and development efforts may be allocated between the functional and ornamental features of the invention.

Judge Reyna also believed that the ITC erred in its interpretation and application of § 337(a)(3)(C), resulting in its wholesale rejection of litigation expenses for meeting the domestic industry requirement, except in limited circumstances. He stated that Congress did not limit the term “exploitation” to activity only related to one of the named examples listed in the statute. Rather, Judge Reyna believes that Congress left the list open-ended to provide flexibility for what may constitute exploitation. Because the ITC failed to articulate any reasonable basis in the legislative history to justify departing from the plain meaning of the statute, Judge Reyna believed that the ITC’s construction artificially and arbitrarily narrowed the domestic industry requirement. Judge Reyna also disagreed with the ITC and the majority in that, with regard to section 337 investigations, he views the ITC as an intellectual property enforcement forum. Accordingly, Judge Reyna believes that under the broad language of section 337(a)(3)(C), patent infringement litigation is an investment in the exploitation of a patent.

Summary authored by Tina E. Hulse, M.D., Esq.