Do you have what it takes to bring suit at the ITC? — Standing and the ITC’s domestic industry requirement

Companies whose intellectual property rights are being infringed by imported products are seeking relief at the U.S. International Trade Commission in ever-greater numbers. In the decade between 1999 and 2008, the number of complaints filed at the ITC increased four-fold. The ITC offers many advantages to a plaintiff (called a “complainant” at the ITC): speedy adjudication, relaxed rules on personal jurisdiction and service of process, no opportunity for a defendant (called a “respondent”) to seek a change of venue, short discovery deadlines, no rule-based impediments to taking discovery abroad, no counterclaims, [1] and broad, vigorous injunctive relief which is enforced by U.S. Customs and Border Protection and the ITC. Although the ITC cannot award damages, such relief may be, and routinely is, sought by the complainant in a parallel District Court action.

Any holder of U.S. intellectual property rights, including common law rights, has the right to bring its cause of action to the ITC, regardless of the complainant’s nationality or place of domicile. But the doors of the ITC are not open to everyone. 19 U.S.C. § 1337, the jurisdictional statute governing so-called Section 337 investigations under which the ITC enforces intellectual property rights against infringing imports, has a standing requirement. [2]

Put simply, Section 337 requires that an ITC complainant show that, as of the time of filing, (a) it maintains a certain level of economic activity within the United States in connection with the asserted intellectual property right, and (b) this economic activity is devoted to exploiting the intellectual property right at issue (in the case of a patent, at least one claim of the asserted patent). Alternatively, the complainant may show that a domestic industry “is in the process of being established.” This standing requirement is called the “domestic industry requirement,” and the two sub-requirements listed above are called respectively the “economic prong” and the “technical prong” of the domestic industry requirement. “Domestic industry” is a term of art that refers to the entity or entities exploiting the asserted intellectual property in the United States – the rights holder, plus its licensees, if any.

Section 337 was originally enacted as part of the Tariff Act of 1930, and the domestic industry requirement is an historical artifact that dates to this period. Section 337 is protectionist legislation, and the domestic industry requirement was included to ensure that the protections afforded by the statute could be enjoyed only by companies providing jobs to U.S. workers. The complainant envisaged was an American manufacturer of hard goods. Accordingly, the domestic industry requirement evaluated the complainant’s economic activity in terms of the level of its investment in plant and equipment and of its employment of labor and capital. Mere sale and distribution of goods manufactured outside the United States did not (and does not) satisfy the domestic industry requirement.

However, the ITC complainant-as-domestic-manufacturer paradigm came to be too restrictive for the realities of an evolving U.S. economy; and in 1988, after a U.S. movie maker trying to protect its copyrighted products lost a Section 337 action on domestic industry grounds, Congress amended the statute to provide that economic activities involving the “exploitation” of the intellectual property right — including engineering, research and development, and licensing — could, if the activities reached the requisite level, satisfy the domestic industry requirement.

Earlier this year, the ITC handed down a controversial decision holding that litigation undertaken in connection with licensing the asserted intellectual property right was a type of “exploitation” encompassed by the statute and that the costs of such litigation could alone, if they reached the requisite level, satisfy the domestic industry requirement. It also held that non-litigation activities related to licensing (e.g., preparing cease-and-desist letters, settlement negotiations leading to a license; and negotiating, drafting, and executing a license) could also, if the requirements of magnitude and nexus were met, satisfy the domestic industry requirement. Some have seen this decision as throwing open the doors of the ITC to non-practicing entities or patent “trolls” whose sole activity consists in suing alleged infringers. One commentator lamented that if litigation costs are permitted to count toward the domestic industry requirement, “access to the ITC [will] functionally require only ownership of a patent and a team of aggressive lawyers engaged in enforcement suits.”

So what does this mean for a would-be complainant that manufactures the products embodying its intellectual property outside the United States – for foreign corporations that do business in the United States and that hold U.S. intellectual property rights or for domestic companies that have off-shored their manufacturing operations? In 2009 eleven foreign companies filed complaints, including companies from Austria, Cayman Islands, Japan, Singapore, South Korea, and Sweden. Among the more prominent foreign companies to have used the ITC are Makita Tool, Samsung, and Takeda Pharmaceutical; and U.S. corporations with offshore manufacturing of the product practicing the asserted patent, for example, the Microsoft Corporation (Inv. No. 337-715) and the Hewlett-Packard Company (Inv. No. 337-723), routinely bring Section 337 actions at the ITC.

Today, the domestic industry requirement is far less stringent than previously. But if the bar has been lowered, it has not disappeared. Though a rarity, there are a handful of Section 337 cases where a complainant has lost its case because it was unable to sustain its burden of showing the existence of a domestic industry. Certainly more numerous, although impossible to quantify, are the companies that have refrained from filing suit at the ITC for fear that they would not meet the domestic industry requirement.

What constitutes the “requisite level” of economic activity, i.e., what is “significant” or “substantial,” is difficult to define with precision because most of the parties’ business information, notably specific dollar amounts and product volumes, is disclosed in only the confidential versions of the ITC’s decisions. Moreover, the ITC makes domestic industry determinations on a case-by-case basis in light of all relevant factors, applying a sliding scale so that even a very small level of activity in the United States may constitute a domestic industry if that activity is an important aspect of the worldwide use of the property right. For instance, there may be a domestic industry based on a complainant’s warranty and repair activity which, though small in absolute terms, is critical to the sale of the products-in-question. Thus, determinations whether a complainant’s economic activity is “significant” or “substantial” depends, among other things, on the industry in question and the complainant’s relative size; there is no minimum monetary expenditure that a complainant must demonstrate to qualify as a domestic industry.

Accordingly, any company whose intellectual property-related activities in the United States go beyond importing, distributing, and selling an imported product is potentially eligible to bring suit at the ITC. With the assistance of ITC counsel knowledgeable in this complex area of ITC jurisprudence, the would-be complainant should carefully catalog and evaluate the various types of expenditures it makes in the United States in connection with the intellectual property in question. Was the product embodying the intellectual property designed in the United States? Is research and development or engineering conducted in the United States? Does the intellectual property holder have an established licensing program with employees in the United States devoted to licensing – or attempting to license – the intellectual property rights? Does the rights holder carry out customer service, warranty, or repair operations, or otherwise service or add value to the imported products in the United States? Finally, has the rights holder, prior to bringing suit at the ITC, engaged in litigation in connection with, or non-litigation activities leading to, licensing of the product? If the answer to any one of these questions is “yes,” and if the activity in question is non-negligible, then the rights holder may have standing to bring suit at the ITC. [3]

ENDNOTES:

[1] While a respondent may assert a counterclaim at the ITC, the counterclaim is immediately removed to district court and is not adjudicated by the ITC.

[2] “[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 or mask work 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.” 19 U.S.C. § 1337(a)(3).

[3] The ITC’s Office of Unfair Import Investigations will meet on a confidential basis with a prospective complainant to review and comment on a draft complainant. The would-be complainant that has doubts about the domestic industry issue can raise them confidentially with OUII at that time and get the benefit (non-binding, of course) of OUII’s evaluation of their case.