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Legal Update

Federal Circuit Provides Guidance on What Constitutes a Domestic Industry Based on Licensing Under Section 337

21 October 2011
Mayer Brown Legal Update

On October 4, 2011, in John Mezzalingua Associates, Inc. v. U.S. International Trade Commission, the Federal Circuit Court of Appeals provided important guidance on what types of licensing activities can constitute a domestic industry under Section 337. 

Section 337 of the Tariff Act of 1930, 19 USC §1337, prohibits unfair acts in the importation of articles into the United States. The majority of cases brought at the International Trade Commission (“ITC” or the “Commission”) under Section 337 involve allegations of patent infringement. A successful patent owner can obtain an exclusion order, enforced by US Customs and Border Enforcement, which blocks the importation of infringing products into the United States. In view of the unique remedies available under Section 337 and the availability of prompt relief—a typical time period for completion of a Section 337 investigation is 15-18 months—recent years have seen a dramatic increase in filings of Section 337 complaints at the ITC.

In order to seek relief under Section 337 in a case involving patent infringement, a complainant must demonstrate that a domestic industry “relating to the articles protected by the patent … exists or is in the process of being established.” One of the ways a complainant can demonstrate the existence of a domestic industry is by showing substantial investment in the exploitation of the patent, including engineering, research and development or licensing. In recent years, Section 337 has been used increasingly by “non-practicing entities” that don’t make products but use their intellectual property in order to derive licensing revenues or damages from infringement litigation.

In John Mezzalingua Associates, the Federal Circuit considered several important issues concerning the evidence required to demonstrate a domestic industry based on licensing activities. In particular, the Federal Circuit considered whether litigation expenses incurred in enforcing a patent may be used as evidence that the required domestic industry exists.

The Federal Circuit agreed with the Commission that “expenditures on patent litigation do not automatically constitute evidence of the existence of an industry in the United States established by a substantial investment in the exploitation of a patent.” In doing so, the court concurred with the Commission’s conclusion that “allowing patent infringement litigation activities alone to constitute a domestic industry would place the bar for establishing a domestic industry so low as to effectively render it meaningless.” Thus, the court declined to adopt a per se rule that patent infringement litigation is an investment in the exploitation of a patent within the meaning of Section 337(a)(3)(C).

However, the Federal Circuit agreed with the Commission that the domestic industry requirement can be satisfied if a complainant is able to demonstrate a “nexus” between its litigation expenses and licensing. Here, the complainant argued that one of its executives had made efforts to settle previous litigation, that members of the industry generally viewed litigation as a necessary precursor to licensing, and that previous litigation had been brought to enforce the patent at issue. 

The Commission found, and the Federal Circuit affirmed, that the complainant’s evidence failed to show the necessary connection between litigation and licensing. The Federal Circuit therefore concluded that the Commission’s determination that the complainant’s activities were not sufficient to constitute a “licensing” domestic industry was supported by substantial evidence.

The Federal Circuit also found that the complainant’s activities were insufficient to demonstrate substantial investment in “engineering, research and development.” The complainant had argued that research and development relating to a utility patent on the same product as protected by the asserted design patent should have been considered as part of the domestic industry. 

The Commission concluded that research and development relating to the development of the structural and functional design of the connectors at issue, rather than to the development of the ornamental design embodied in complainant’s design patent, should not be included as part of the domestic industry. Because the Commission concluded that any time and resources spent in researching or developing the ornamental design itself were minimal, the complainant failed to satisfy the domestic industry requirement based on engineering, research and development.

In his dissent, Judge Reyna thought that the majority took an unduly narrow view of what types of activities relate to licensing of a patent. His position is that “a patent right is … empty without the ability to meaningfully enforce it against infringers.” Accordingly, he would have concluded that “litigation undertaken to enforce patent rights and enhance the value of a patent or pave the way for a stronger competitive advantage constitutes an investment in exploitation under section 337(a)(3)(C), regardless of that activity’s relationship to licensing, engineering, research, or production.” 

Judge Reyna also would have credited the complainant’s time and resources spent on the utility patent as part of the domestic industry, since it involved the same connectors as were protected by complainant’s design patent. He would have remanded for further consideration concerning the relationship between the functional connector invention and the ornamental design for the connector. 

Because Section 299 of the recently enacted America Invents Act makes it more difficult to bring multiparty actions in district court, many commentators believe that an increasing number of patent owners—including non-practicing entities—will choose to litigate their infringement disputes at the ITC, where all companies involved in manufacturing, importing and selling accused infringing products can be joined in one proceeding. The Federal Circuit’s decision in John Mezzalingua Associates is a significant one, insofar as it confirms that licensing activities can be considered as part of a domestic industry under Section 337 if a complainant can demonstrate a “nexus” between those activities and licensing of its patent.

For more information about the topics addressed in this Legal Update, please contact at +1 202 263 3040.

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