International Trade Commission Clarifies Section 337′s Domestic Industry Requirement for Patent Licensing Activities.

The availability of an injunctive remedy as a matter of right to a prevailing complainant in a Section 337 action has made the International Trade Commission (“ITC”) an extremely desirable venue in the wake of eBay v. MercExchange. Indeed, injunctive relief is the exclusive remedy provided by the ITC. The domestic industry requirement, however, is a threshold issue which the complainant alleging patent infringement (or certain other intellectual property claims) must satisfy in order to avail itself of the ITC instead of employing the district courts.

Pursuant to Section 337(a)(2), the complainant can establish the domestic industry requirement by demonstrating that “an industry in the United States, relating to the articles protected by the patent, copyright, [or] trademark . . . exists or is in the process of being established.” The complainant can meet the domestic industry requirement in three separate manners by having: A) significant investment in plant and equipment; B) significant employment of labor or capital; or C) substantial investment in exploitation, including engineering, research and development, or licensing. 19 U.S.C. § 1337(a)(3). In the recent decision captioned In the Matter of Certain Multimedia Display and Navigation Devices and Systems, Components Thereof, and Products Containing Same (Aug 8, 2011) (emphasis added), the ITC interpreted the third method, namely, the patentee’s use of patent licensing activities to meet this burden.

This decision elicits a multi-factor test that the ITC will employ to determine whether the complainant’s licensing activities sufficiently constitute a “substantial investment in the exploitation of the asserted patent.” Inv. No. 337-TA-694. In construing the licensing method, the ITC identified three discrete aspects to weigh: 1) the nexus between the licensing activity and the asserted patent; 2) the nexus between the patentee’s activities and licensing in general; and 3) the nexus to the United States. Upon consideration of these three factors, the ITC would then base its determination of whether the investments made were substantial. In applying this rubric, the ITC provided very specific guidance regarding the first prong and the nature of a “substantial investment.”

With respect to the first prong in the context of individual asserted patents included in a large patent portfolio, the ITC provided a non-exclusive list of factors including:

The number of patents in the portfolio;
The relative value contributed by the asserted patent to the portfolio;
The prominence of the asserted patent in licensing discussions;
The scope of the technology covered by the portfolio compared to the scope of the asserted patent;
Whether the asserted patent was discussed during the licensing negotiations;
Whether the asserted patent has been successfully litigated before by the complainant;
Whether the asserted patent relates to a technology industry standard;
Whether the asserted patent is a base patent or pioneering patent;
Whether the asserted patent is infringed or practiced in the United States; or
Whether the market recognizes the asserted patent’s value in some other way.

In this regard, the ITC specifically declined to adopt a policy attributing the entire investment in a patent portfolio to every individual patent in the portfolio. The burden remains on the complainant to demonstrate a nexus according to the factors set forth above.

Regarding the qualitative aspect of the investment, i.e., whether it is “substantial,” the ITC explained that this may depend on the industry and the size of the complainant. Additionally, the ITC may consider:

The existence and other types of exploitation of the asserted patent such as research, development, or engineering;
The existence of license-related ancillary activities such as ensuring compliance with license agreements and providing training or technical support to its licensees;
Whether the complainant’s licensing activities are continuing; and
Whether complainant’s licensing activities are those that are referenced favorably in the legislative history of section 337(a)(3)(C).

Notably, the ITC adopted a flexible approach regarding whether an investment is substantial – no one factor is dispositive – allowing the complainant to overcome a weak showing on one or more of the three prongs by “demonstrating that its activities and/or expenses are of a large magnitude.”

In Investigation No. 337-TA-694, the complainant, Pioneer Corporation, showed a very weak nexus between its licensing activities and the asserted patents. These patents were part of a larger patent portfolio whose technological scope extended far beyond the claims of the asserted patents. Furthermore, the license did not expressly identify the asserted patents as more relevant than any of the other 1600 issued patents and applications that were part of the licensed portfolio, many of which were foreign.

Apart from an occasional reference to the asserted patents during licensing discussions with the respondent, Pioneer made no showing as to their relative importance or value. Pioneer also did not submit evidence of any ancillary activities in the U.S. related to its licensing program, such as license compliance, licensee design assistance or the like. The ITC concluded that Pioneer’s activities related only minimally to licensing the asserted patents in the United States and thus reversed the Administrative Law Judge’s initial determination that a domestic industry existed. In light of this decision, non-practicing entities (patentees who do not manufacture or conduct research and development in the U.S.) will have to reevaluate the manner in which they marshal and present evidence of a domestic industry in future Section 337 proceedings.

As a result of the ITC’s decision in Investigation No. 337-TA-694, companies who license their patents in portfolios face a more difficult challenge satisfying Section 337′s domestic industry requirement with respect to an individual patent. Accordingly, before initiating an ITC complaint, non-practicing entities should carefully consider the nature and extent of potential licenses grants and how patent rights are bundled within the license(s). If a given license includes fewer patents or encompasses discrete product parts, then demonstrating the required nexus between the asserted patents and the license may prove less onerous. As suggested in the ITC’s opinion, licensors may also consider implementing license compliance programs, or investing in some level of technical support for patents specifically licensed in the U.S. Finally, to the extent patentees conduct pre-suit license negotiations, they would be well served by highlighting and specifically documenting the importance of the patents they foresee asserting subsequently in litigation, and the resources allocated to negotiating such licenses.

Ratner Prestia is a full service intellectual property firm specializing in patent and trademark prosecution and litigation matters. RatnerPrestia attorneys handle IP cases from a myriad of fields including pharmaceuticals, biotechnology, computer software, automotive, agricultural chemicals and seeds, consumer electronics, specialty chemicals, and medical devices. For more information concerning Investigation No. 337-TA-694, or about Ratner Prestia’s Section 337 Practice, please contact the authors of this article.