June 2010

ITC Rejects Technology Community’s Effort to Restrict Non-Practicing Entities’ Ability to Stop Importation of Goods

4 min

Section 337 of the U.S. Tariff Act of 1930 was designed to protect domestic industries from unfair foreign competition.  Thus, interested parties may petition the agency that administers the Act, the U.S. International Trade Commission, to prevent the importation of goods that threaten to destroy or substantially injure a “domestic industry” in the United States.  Over time, the ITC’s definition of “domestic industry” has broadened.  A petitioner to the ITC need not operate a manufacturing plant.  A petitioner need not assemble goods.  A petitioner need not be a U.S. corporation.  Indeed, a petitioner may now simply be a patent holding company with a handful of U.S.-based employees engaged in licensing activities.  Even individual, non-manufacturing inventors may sometimes file a petition at the ITC.

A recent case, Certain Coaxial Cable Connectors and Components Thereof and Products Containing Same, Investigation No. 337-TA-650, confirms the trend towards relaxing the “domestic industry” requirement.  In that case, the petitioner was John Mezzalingua Associates, Inc., d/b/a PPC, Inc. (“PPC”) of East Syracuse, New York.  PPC asserted that the respondents were infringing two utility patents and two design patents.  An administrative law judge (“ALJ”) decided that a domestic industry existed in the U.S., but found no Section 337 violation because the patents were not infringed. In late 2009, the full Commission elected to review the ALJ’s initial decision.  The ITC sought participation from the public on the issue of whether a domestic industry exists when, as here, the petitioner is not practicing the patents in the U.S.  A slew of prominent members of the technology community submitted comments on that issue, including representatives of Samsung, Hewlett Packard, Google, and CISCO.  These representatives sought to impose more substantive obligations on so-called “non-practicing entities” (NPEs) seeking to invoke the ITC’s help in blocking imports – obligations that could make it more difficult for such petitioners to satisfy the domestic industry test.

For its position on domestic industry, petitioner PPC relied predominantly on its litigation activities in the U.S. to establish a domestic industry.  It did not manufacture the patented products.  It had no investment in plant or equipment.  Rather, PPC relied solely on its own activities in licensing and litigating in the U.S.
Over the objections of the technology community, the ITC concluded: 

“That patent infringement activities alone, i.e., patent infringement litigation activities that are not related to engineering, research and development, or licensing, do not satisfy the requirements of Section 337(a)(3)(c).  However, litigation activities (including patent infringement lawsuits) may satisfy these requirements if a complainant can prove that these activities are related to licensing and pertain to the patent at issue, and can document the associated costs.”

The Commission reviewed the legislative history on the domestic industry definition and concluded that Congress did not intend that patent infringement litigation activities taken alone satisfied the statute; however, it found that licensing is an activity that is clearly within the realm of the statute.  Under its reasoning, the domestic industry requirement can cover entities such as universities and other intellectual property owners who engage in extensive licensing of their patent rights, as well as small biotech start-up companies that license their patents in order to generate sufficient capital to manufacture a product in the future.  These and other examples were said by the Commission to constitute instances in which “licensing activities encourage practical applications of the invention or bring the patented technology to the market.”

The Commission noted that the licensing activities must require a “substantial” investment.  That factual inquiry will thus 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 noted that PPC’s litigation activities and costs, including any relevant costs associated with conducting settlement negotiations and drafting and negotiating a license, may be related to licensing if, for instance, (a) the patentee and accused infringer were in licensing negotiations before the suit was filed or while it was ongoing; (b) if the patentee made a concerted effort to license the patent; or (c) if the patentee has an established licensing program.  The Commission remanded the matter to the ALJ.

The bottom line:  If an NPE has secured several licenses prior to commencing litigation at the ITC, it will probably satisfy the domestic industry requirement to permit the ITC to entertain the case.