In a recent decision, the Commission overruled the ALJ to clarify, and ultimately expand, the universe of investments that complainants can use to meet the economic prong of the domestic industry ("DI") requirement. Certain Solid State Storage Drives, Stacked Electronics Components, And Products Containing Same, Comm'n Op., Inv. No. 337-TA-1097 (June 29, 2018) ("Solid State Storage Drives"). First, the ITC explained that engineering and research and development ("R&D") expenses can be counted without necessarily having a nexus to the asserted patent. Second, the ITC allowed certain third party expenses to be counted toward DI investments.
The DI requirement is one of the key distinguishing features of litigating at the ITC as compared to district courts. The requirement stems from the underlying purpose of the ITC to protect and support the domestic U.S. economy. The DI requirement contains two prongs – the technical prong and the economic prong. The economic prong is captured in 19 U.S.C. § 1337(a)(3), which states:
[A]n industry in the United States shall be considered to exist if there is in the United States, with respect to the articles protected by the patent, copyright, trademark, mask work, or design concerned—
(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.
Typically, it is advantageous for a complainant to count relevant investments under sections (A) or (B) of this statute because these subsections only require the expenses to be related to "the articles protected by the patent." In contrast, section (C) requires the investments to be related to "its [i.e., patent's] exploitation," which is sometimes referred to as a requirement for a nexus between the proffered investments and the asserted patent. Complainants have historically found it more difficult to demonstrate that investments satisfy section (C) because of the requirement to demonstrate the nexus between the investment and the patent.
ALJs have usually only allowed manufacturing and production related expenses to be counted under sections (A) and (B), requiring non-manufacturing expenses to come in under (C). This interpretation of 19 U.S.C. § 1337(a)(3), prevented some complainants from being able to successfully demonstrate a domestic industry and even stopped some would-be complainants from bringing their complaint to the ITC in the first place.
In this investigation, however, the ITC clarified their position. Finding that "the ALJ's ID misinterpret[ed] the text and legislative history of subsections 337(a)(3)(A) and (B), as well as our precedent," the Commission "vacate[d] the ID's analysis and conclusion that subsections 337(a)(3)(A) and (B) 'covered only manufacturing' activities and 'require 'exploitation' of the patent.'" Solid State Storage Drives at 5-6. The Commission concluded that "the text of the statute, the legislative history, and Commission precedent do not support narrowing subsections (A) and (B) to exclude non-manufacturing activities, such as investments in engineering and research and development." Id. at 14. Instead, "the guiding principle is whether the asserted expenditures satisfy the plain language of the statute." Id. Applying this to the facts of the case, the Commission allocated relevant "employee office space for performing engineering related activities" to section (A), and "labor expenses related to its U.S. employees who contribute some portion of their time to product design engineering, development" to section (B). Id. at 15 and 20.
The ITC also provided some guidance for using certain third-party expenses to support the DI requirement. Three years ago, the Federal Circuit disallowed purchases of "off-the-shelf" components from third-party U.S. suppliers to be counted toward the economic prong of DI. Lelo Inc. v. Int'l Trade Comm'n, 786 F.3d 879 (Fed. Cir. 2015). The ITC distinguished the facts in this investigation with those of the earlier Federal Circuit opinion. The ITC explained "the third-party entities here are, in fact, contractors, who provide specialized services, and do not simply sell 'off-the-shelf' products." Solid State Storage Drives at 24. Under this rationale, the ITC allowed counting of expenses paid to contract employees (who were paid by the hour for the actual time they worked in providing the specialized services) and contract manufacturers (who were located in the United States and performed the specialized services in the United States) as DI investments.
Complainants and respondents should be aware that the ITC now permits engineering and R&D expenses to be counted toward sections (A) or (B) of the economic prong of the DI requirement. As a result, complainants may not need evidence of a nexus between such expenses and the patents at issue. Complainants should also be aware they might be able to count certain payments to third parties towards the economic prong of the DI requirement. These clarifications from the ITC lower the bar for certain complainants to meet the DI requirement, and may encourage more patent owners with only engineering and research and development activities in the U.S., but without manufacturing or production here, to bring their patent infringement complaints to the ITC.
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