Talkin’ Trade: Demystifying the Domestic Industry Requirement

Ropes & Gray’s podcast series Talkin’ Trade explores the world of Section 337 unfair import investigations at the U.S. International Trade Commission. In this episode, IP litigation partner Matt Rizzolo and associates Matt Shapiro, Brendan McLaughlin, and Kelley Chandler break down and explain the ITC’s domestic industry requirement. 

Transcript:

Matt Rizzolo: Welcome back for episode two of Talkin’ Trade. I’m Matt Rizzolo, a partner with the IP litigation group of Ropes & Gray, based in the firm’s Washington, D.C. office. With me today are fellow Ropes & Gray IP attorneys Matt Shapiro, Brendan McLaughlin, and Kelley Chandler. How’s everybody doing? Great—glad to have you all here. And thanks to everyone who tuned in to our first episode. We appreciate your feedback. And for our first time listeners today, you may want to check out episode one for an overview of the ITC. Today, after a quick update on some recent happenings at the Commission, we’re going to take a closer look at one of the most confounding aspects of Section 337 litigation, and one not found in traditional district court IP litigation—this is the so-called domestic industry requirement, which we are here to demystify for you. But before we get into that, Brendan—what’s new at the Commission? 

Brendan McLaughlin: Thanks, Matt. May was a fairly slow month for new complaints at the Commission, with only three being filed. But the big news is that the Commission recently announced a new pilot program, which allows ALJs to issue interim initial determinations on fewer than all of the issues in an investigation. Under the pilot program, an ALJ will be able to hold an early evidentiary hearing and receive briefing on one or more discrete issues prior to the main evidentiary hearing—sort of a supercharged summary determination process. The Commission listed several potential issues appropriate for the pilot program, including infringement, patent invalidity, patent eligibility, standing, or satisfaction of the domestic industry requirement. The Commission expects that interim ID issues will be case-dispositive, or will resolve significant issues in advance of the main evidentiary hearing. The hope is that this may help spur more investigations toward resolution prior to a full evidentiary hearing, conserving private party and Commission resources. ALJs will be able to put issues within the program as they deem appropriate—notably, no ALJ has included specific procedures for doing so in his or her ground rules yet. And the pilot program applies to all investigations instituted from May 12 onward, and for pending investigations, ALJs may exercise their discretion to use the program.

Matt Rizzolo: We plan to keep an eye on how this program develops before the ALJs and the Commission—thanks for the update, Brendan. Turning to our focus for today, last time as I mentioned, we briefly touched on the ITC’s domestic industry requirement, but we’re going to take a deeper dive here into this ITC-specific topic. For starters, Matt, can you talk a bit about why there is a domestic industry requirement for the ITC?

Matt Shapiro: The DI requirement comes directly from Section 337. For patent, copyright, federal trademark and mask works—so-called “statutory IP” cases—a complainant must show the existence of a domestic industry, and for other types of unfair methods of competition—such as trade secret misappropriation and antitrust—complainants must generally show an injury to a domestic industry through unfair acts. The reason the domestic industry requirement exists is that, as we discussed in the first episode, the ITC is a trade agency that is protectionist in nature. It is not going to get involved in any old business dispute—instead, there must be a strong enough interest in protecting industry or investments in the United States. 

Matt Rizzolo: Given that most ITC cases involve patents, we’ll talk primarily about those statutory IP cases today. For example, what does a patent complainant actually need to do in order to satisfy the domestic industry requirement?

Matt Shapiro: Generally, a complainant needs to show one of three things under the statute. And typically, we refer to these three categories as subsections (A), (B) and (C) investments:

• subsection (A) is significant investment in plant and equipment;
• subsection (B) is significant employment of labor or capital; and
• subsection (C) is substantial investment in its exploitation, including engineering, research and development, or licensing.

It’s important to note that a complainant needs to satisfy only one of these three subsections to prove the existence of a domestic industry, and this is called the “economic prong” of the DI requirement. It’s also worth noting that under the statute, not any old expenses can be relied upon—instead, the investments identified by the complainant must be made “with respect to the articles protected by the patent.” They must relate to a patent-practicing article, and this is the article that is used to satisfy the so-called “technical prong” of the DI requirement.

Matt Rizzolo: We’ll get back to the economic prong in a second, but first, Kelley, can you explain the technical prong?

Kelley Chandler: Sure, Matt. So unlike a district court litigation, where plaintiffs only need to prove that the defendant’s products infringe—or in other words, practice—a claimed invention, an ITC complainant essentially needs to prove infringement twice: first, that the respondent’s products infringe; and second, that at least one of its own products practices the asserted patent. A complainant generally tries to show that they have articles protected by the patent in the same way that they try to prove infringement—by showing that its products practice at least one claim of the asserted patent. And the Commission takes this requirement very seriously—Commission Rules require that the complainants file DI claim charts along with the complaint.

Matt Rizzolo: Now, must a complainant show that all asserted claims are practiced under the technical prong?

Kelley Chandler: No, all that is required to satisfy the technical prong is to show that a product practices at least one claim of each asserted patent with authorization from the patent owner. Importantly, that single claim does not even need to be one of the asserted claims, although for efficiency, including claim construction, complainants frequently identify overlapping claims for infringement and the technical prong. In ITC cases, you’ll typically hear the term “domestic industry products” used to refer to the protected articles under the technical prong.

Matt Rizzolo: So Matt, let’s dive back into the economic prong for a minute. How does a complainant go about proving that?

Matt Shapiro: As I mentioned, there are generally three different ways—plant and equipment, labor and capital, or exploitation activities, such as R&D, engineering, or licensing. The economic prong analysis is relatively straightforward under subsections (A) and (B). Under these subsections, the Commission must determine whether the complainant, as of the date of the filing of the complaint, made “significant” investments in the domestic industry products. Under subsection (A), the Commission considers investments in plant and equipment, such as facility lease expenses; and under subsection (B), the Commission considers employment of labor or capital, such as labor cost for U.S.-based workers that manufacture the articles. Under both subsections (A) and (B), the Commission has traditionally looked at investments related to manufacturing, or other value-add activities, such as engineering, assembly, repair, quality control, or customer service. Generally, pure sales and marketing activities are disfavored, though. Satisfying subsection (C), however, requires an extra step—a complainant must show that investments in exploiting the patent, are not only related to the domestic industry product, but also that they share a “nexus” to the patent claims. 

Matt Rizzolo: And subsection (C) also uses the term “substantial investment” instead of “significant,” which is what’s used in (A) and (B). So is there a real difference between “substantial” vs. “significant?” I know one source of frustration around domestic industry is that these seem like pretty squishy terms.

Matt Shapiro: First—no, in practice there really is no difference between “significant” and “substantial” investments. And second, that squishiness is by design. The ITC has made abundantly clear that domestic industry is a flexible, case-specific inquiry, and the level of investment required to satisfy it will vary greatly from case to case depending on the size and nature of the complainant, its products, and its business. But that flexible standard also means that it can be hard to advise clients whether or not particular levels of investments will satisfy DI—there’s simply no bright line rule here.     

Matt Rizzolo: The nexus requirement under subsection (C) is also one that has often tripped up complainants. Can you explain what this nexus requirement really entails?

Matt Shapiro: Because subsection (C) requires that the relied-upon investments involve exploitation of the patent, the Commission requires a connection—or “nexus” between the investments and the patent claims. In other words, the complainant must show that the investment relates to some aspect of the patent claim. The Commission gave a classic example in the 859 investigation—that’s the Certain Integrated Circuit Chips investigation—of the problem addressed by the nexus requirement. Say, for example, the DI product is a car. The asserted patent doesn’t cover the entire car, however—it only covers the tires of the car. But the asserted investments relate only to the engine of that car. For those engine-related investments to qualify under subsection (C), the complainant must explain why those engine-related investments should be credited to the patent for the tires. If it can do so, then there might be a nexus. But, in this example, it is unlikely that the complainant could make such a showing—and there would therefore by no nexus, and no domestic industry. In summary, to demonstrate that a nexus exists, a complainant must present evidence tying its activities to claim limitations—and this can prove difficult.

Matt Rizzolo: Yes, so as I mentioned, the nexus requirement has certainly been a difficult hurdle for some complainants. You just talked about it in the context of engineering and research and development activities, but if a complainant is relying on its own licensing activities to prove up DI under subsection (C), it also needs to show a nexus too, right—I mean, how is that different?

Matt Shapiro: Yes, Matt—for licensing it’s slightly different. The nexus requirement here, which is explained in detail in the Commission’s Opinion in Certain Multimedia Display and Navigation Devices—that’s the 694 investigation—requires that a complainant show three different types of nexus:  

1. the investments relate to the exploitation of the patent;
2. the investments relate to “licensing”; and
3. the investments are domestic.

Showing a nexus to the United States or to licensing activities isn’t typically that difficult. However, in an era where most patent licensing is done on a portfolio-wide basis, demonstrating nexus between a particular patent and general patent licensing activities can be difficult, and is often a stumbling block for complainants relying on patent licensing activities to prove a domestic industry.

Matt Rizzolo: So I’d like to switch gears here, because I think the audience might benefit from a bit of a history lesson on why subsection (C) is different from subsections (A) and (B). Kelley, I know you’ve dug into this, so can you talk about that?

Kelley Chandler: While the ITC’s aim was originally to protect domestic manufacturing, its role has changed a bit with the nature of the economy. Interestingly enough, a lot of this comes from a 1980’s case involving a quintessential 1980’s movie—Gremlins! Warner Brothers brought a copyright complaint at the ITC, seeking to stop widespread copyright infringement of the Gremlins characters. But although Warner Brothers spent lots of money licensing its copyrights in the characters, it didn’t manufacture anything. The ITC found that the licensing program didn’t qualify as a domestic industry. In the years that followed, Congress amended Section 337 when it passed The Omnibus Trade and Competitiveness Act of 1988. These amendments codified, amongst other things, subsections (A) through (C). The new criteria for domestic industry broadened access to Section 337 and created an avenue in the ITC for non-manufacturing entities to obtain relief—specifically, through the addition of subsection (C). As a result, smaller entities with less capital could access the ITC because their domestic industries didn’t have to be based on traditional investments—commercialization through licensing became enough. And for some time, complainants seeking to establish DI through licensing didn’t even need to satisfy the technical prong. This changed in 2014 with the Commission’s decision in the 841 investigation, Certain Computers and Computer Peripheral Devices. Now, any complainant needs to satisfy both the technical and the economic prongs, regardless of which types of investments it is relying on.

Matt Rizzolo: The 1988 amendments also opened up the ITC to non-practicing entities. People are often surprised that NPEs—who by definition don’t have patent-practicing products—can use a forum that was originally intended to benefit American manufacturing. Matt, we’ll talk NPEs in more detail in a future episode, but how can they satisfy the domestic industry requirement?

Matt Shapiro: Generally, two ways: first, “licensing-based DI,” where an NPE relies on its own licensing activities, under subsection (C); or second, “licensee-based DI,” where an NPE relies on its licensee’s domestic investments in a patent-practicing product, under subsections (A), (B) or (C). Now, each comes with its own hurdles. As I mentioned, licensing-related expenses, such as license drafting, licensing negotiation, or even fees that may be paid to outside counsel, can suffice to establish a domestic industry, so long as the tricky “nexus” requirement is met. Now, NPEs with a long-term and well-documented licensing program may have an easier time here. On the other hand, for licensee-based DI, an NPE may avoid having to show this nexus, but the major hurdle here is that the investments and information are coming from a third party. And as a result, an entire case may hinge on having a cooperative third party licensee who is willing to provide confidential technical and economic information to the complainant. Without such information, a complainant will likely have serious issues proving that it satisfied either prong of the DI requirement. And many companies are not particularly interested in cooperating with an NPE, even when faced with an ITC subpoena.

Matt Rizzolo: Thanks. As I mentioned, we’ll talk NPEs and the ITC in the coming months, including about some of the calls to limit NPE access to the ITC. But Kelley, before we wrap up today, we’ve been focusing primarily on the domestic industry for statutory IP cases, such as patents and copyrights. But we’d be remiss if we didn’t at least touch upon so-called “non-statutory” ITC cases, like trade secret misappropriation, false advertising, and the like. How does the domestic industry requirement differ for these types of cases?

Kelley Chandler: Great question—in a number of ways, actually. First, there’s no technical prong requirement. A trade secret complainant, for example, doesn’t need to show that it actually practices or uses the trade secrets. Second, the domestic industry investments don’t need to fall into one of the specific “buckets,” such as plant and equipment, labor/capital, or R&D/engineering. The investments just need to be such that they go beyond those of a “mere importer”—for example, they’re more than basic sales and marketing activities. But the complainant in a non-statutory IP Section 337 case does need to show “injury” to the domestic industry—that the domestic industry has been substantially injured or destroyed by the unfair acts. This can be shown through loss of profits, price erosion, loss of employment, etc. Depending on the case and the facts involved, this “injury” question can be very complex by itself.

Matt Rizzolo: And with that, that’s all the time we have for this episode of Talkin’ Trade. Thanks, everyone. It’s worth noting that we set out today to give you a bit of a crash course on the domestic industry requirement, but there are a lot of facets to this unique—and often frustrating—part of Section 337 litigation at the ITC that can be explored, and we may touch on that some more on a future episode. As always, we appreciate feedback from our listeners—if there’s a topic you would like to hear more about, or if you have ways for us to improve this podcast, we’re all ears, so please let us know. And until next time, I’m Matt Rizzolo. On behalf of Matt Shapiro, Brendan McLaughlin, and Kelley Chandler, thank you all for listening.