On January 10, 2013, the Federal Circuit in InterDigital Communications v. ITC denied a combined petition for panel rehearing and for rehearing en banc, holding that InterDigital’s patent licensing alone met the domestic industry requirement of § 337 of the Tariff Act of 1930, 19 U.S.C. §§ 1337(a)(2) and 1337 (a)(3).1 On its face, this decision seems to open the floodgates for non-practicing entities (NPEs) to file lawsuits in the International Trade Commission (ITC). However, a close reading of the Court’s opinion and the legislative history of § 337 indicates that this is not the case.
InterDigital v. ITC
To initiate a proceeding before the ITC, the patent owner must establish the existence of a domestic industry “relating to the articles protected by the patent...”2 Evidence of domestic industry may be satisfied by (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.3 The issue before the Federal Circuit was whether InterDigital’s licensing activities fell within the scope of § 337(a)(3)(C).
Nokia argued that the ITC and the Federal Circuit panel misconstrued the statutory language “relating to the articles protected by the patent” in § 337(a)(2) and “with respect to the articles protected by the patent” in § 337(a)(3).4 Nokia contended that this statutory language meant that the only licensing activity that matters, for purposes of establishing domestic industry, is activity “with respect to the articles protected by the patent.” Nokia further argued that this licensing activity must be tethered to a tangible good and that the technology covered by the patent must be put into practical use.5
The Federal Circuit panel, in its August 1, 2012 opinion,6 ruled 2-1 against Nokia, explaining that the 1988 amendment to § 337 allowed InterDigital’s domestic licensing activities to give the company standing to file a complaint with the ITC.7 The Court held that it is not necessary that the party manufacture the product that is protected by the patent, nor is it necessary that any other domestic party manufacture the protected article.8 As long as the patent covers the article that is the subject of the exclusion proceeding and as long as the party seeking relief can show that it has a sufficiently substantial investment in the exploitation of the intellectual property to satisfy the domestic industry requirement of the statute, that party is entitled to seek relief under section 337.”9
“Substantial Investment” Requirement
The key phrase in the Federal Circuit’s analysis of § 337(a)(3)(C) is “substantial investment.”10 In this case, InterDigital invested a total of approximately $7.6 million in salaries and benefits for employees engaged in its licensing activities, had 24 revenue producing licensees, and received almost $1 billion in revenues from portfolio licenses (including the patents in suit). This clearly showed a “substantial investment.” However, this begs the question: where is the line for “substantial investment” drawn?
Unsurprisingly, the answer is not a bright-line rule. In performing the “substantial investment” analysis, the ITC has adopted a flexible approach. The type of efforts that are considered a “substantial investment” under § 337(a)(3)(C) will vary depending on the nature of the industry and the resources of the complainant.11 Some factors that might be relevant in determining whether or not a complainant’s investment is substantial are (1) the existence of other types of “exploitation” of the asserted patent such as research, development, or engineering, (2) the existence of license-related ancillary activities such as ensuring compliance with license agreements and providing training or technical support to its licensees, (3) whether complainant’s licensing activities are continuing, and (4) whether complainant’s licensing activities are those that are referenced favorably in the legislative history of §337(a)(3)(C).12
Does this Decision Open the Floodgates for NPEs?
If substantial investment in licensing meets the domestic industry requirement, has the Federal Circuit opened the floodgates for NPEs to obtain relief at the ITC? While there is no commonly held definition of an NPE, the ITC has attempted to separate NPEs into two categories.13
Category 1 NPE:
• Manufacturers whose products do not practice the asserted patent
• Inventors who may have done research and development, but do not make a product covered by the asserted patents
• Research institutions, such as universities and laboratories
• Start-ups that possess IP rights but do not yet manufacture a product that practices the patent
Category 2 NPE:
• Companies whose business model primarily focuses on purchasing and asserting patents.
The Federal Circuit’s decision in InterDigital v. ITC centered on Congress’ intent to make relief in the ITC available only to Category 1 NPEs.
Prior to 1988, § 337 of the Tariff Act of 1930 required proof of the existence (or prospect) of a domestic industry manufacturing the articles protected by intellectual property before the ITC could bar the import of infringing products.14 Objections were raised that § 337 “did not provide protection for innovators who did not actually produce goods in this country, but who were injured by the importation of goods that incorporated the technology that they had invented or sought to license.”15 Congress proposed to expand the coverage of § 337 to protect American industries “that did not manufacture products but were engaged in engineering, research and development, or licensing of the technology that others used to make products.”16 Those proposals resulted in the current language of § 337(a)(3)(C), which makes relief in the ITC available to a patent owner despite not actually producing goods relating to the patent, provided there has been a “substantial investment in its exploitation, including engineering, research and development, or licensing.”17
Congress’ intent to open up the ITC to the Category 1 NPEs listed above is specifically reflected in the comments of Representative Kastenmeir who noted that the change to § 337 will “enable universities and small businesses who do not have the capital to actually make the good in the United States to still have access to the ITC forum for the protection of their rights.”18 In contrast, Congress specifically drafted the current language of § 337(a)(3)(C) to avoid the use of the ITC by “foreign patent holders” to exclude foreign or American competitors from obtaining access to the U.S. market.19 Only those foreign patent holders who had made a substantial investment in facilities or activities including research and development, licensing, sales, and marketing would fall within the scope of the statute.20 While the legislative history does not directly mention the Category 2 NPEs listed above, an analogy can be drawn between those Category 2 NPEs and the “foreign patent holders” specifically excluded from § 337(a)(3)(C). This analogy is reflected in the ITC’s application of § 337(a)(3)(C).
The ITC has held that revenue-driven licensing activities should be given less weight in the “substantial investment” analysis than production-driven licensing activities.21 The ITC defined production-driven licensing activity as activity “which encourages adoption and use of the patented technology to create new products and/or industries,”22 and revenue-driven licensing activity as activity “which takes advantage of the patent right solely to derive revenue by targeting existing production.”23 This is known as the “production/revenue dichotomy.”
The “production/revenue dichotomy” weighs against Category 2 NPEs. The business model of Category 2 NPEs suggests that the entity will typically assert patents against existing industry and products.24 This is especially so at the ITC, given that the ITC cannot award money damages directly.25 At the ITC, a Category 2 NPE’s best chance to recoup their investment in the lawsuit would be to target mature products with which the respondents have the most to lose, and then extract settlement payment with the imminent threat of an exclusion order.26 The ITC’s “production/revenue dichotomy” will continue to have a deterrent effect on such rent-seeking activities.27
For Category 1 NPEs, like InterDigital, the Federal Circuit’s decision has affirmed that the ITC is an open and available forum. For Category 2 NPEs, the Court has firmly held the door shut.
1 InterDigital Commc’n., LLC v. Int’l Trade Comm’n, No. 2010–1093, 2013 WL 124064 (Fed. Cir. Jan, 10, 2013).
2 19 U.S.C. § 1337(a)(2).
3 19 U.S.C. § 1337(a)(3).
4 InterDigital Commc’n., LLC,2013 WL 124064, at *3.
6 InterDigital Commc’n., LLC v. Int’l Trade Comm’n, 690 F.3d 1318 (Fed. Cir. 2012).
7 InterDigital Commc’n., LLC,2013 WL 124064, at *6.
10 Id. at *2.
11 Certain Multimedia Display and Navigation Devices and Systems, Components Thereof, and Products Containing Same (“Multimedia Display and Navigation Devices”), Inv. No. 337-TA-694, USITC Pub.4292, Comm’n Op., at 15(Nov. 2011).
12 Id at 16.
13 FACTS AND TRENDS REGARDING USITC SECTION 337 INVESTIGATIONS 2 (2012), available at http://www.usitc. gov/press_room/documents/featured_ news/337facts.pdf.
14 See, e.g., Certain Miniature, Battery-Operated, All-Terrain, Wheeled Vehicles, Inv.No. 337-TA-122, USITC Pub. 1300 (Oct. 1982), aff’d, Schaper Mfg. Co. v. U.S. Int’l Trade Comm’n, 717 F.2d 1368 (Fed. Cir. 1983).
15 InterDigital Commc’n., LLC,2013 WL 124064, at *3.
17 19 U.S.C. § 1337(a)(3)(C).
18 InterDigital Commc’n., LLC,2013 WL 124064, at *4.
21 Multimedia Display and Navigation Devices at 25.
22 Id. at 25 n.20.
24 Wei Wang, Non-Practicing Complainants at the ITC: Domestic Industry or Not?, 27 Berkeley Tech. l.J. 409, 439 (2012).