The Commission has once again addressed the economic prong of the domestic industry requirement in a final determination issued in Certain Television Sets, Television Receivers, Television Tuners, and Components Thereof (Inv. No. 337-TA-910) (“Television Sets”) on October 30, 2015. Notably, the Commission clarified (1) when past investments are no longer relevant and (2) when post-complaint activities are relevant.

Background

On January 28, 2014, Cresta Technology Corporation (“Cresta”) filed a Section 337 complaint, alleging infringement of three patents in the importation and sale of certain television sets, television receivers, television tuners, and components thereof. Presiding Administrative Law Judge Dee Lord conducted a hearing in December 2014, and issued the final initial determination (“final ID”) on February 27, 2015, finding no violation of Section 337. Specifically, the final ID found that Cresta had failed to satisfy the economic prong of the domestic industry requirement in accordance with 19 U.S.C. § 1337(a)(3) with respect to both of the two remaining patents in the investigation. The final ID also found that some of the accused products infringed claims of both patents in the investigation, and that all asserted claims of one patent and some asserted claims of the other patent were invalid.

On April 30, 2015, the Commission determined to review the final ID in part. This review encompassed the economic prong of the domestic industry requirement as well as issues of patent validity and infringement. However, the Commission only requested additional briefing on questions relating to validity and infringement. The Commission issued the public version of its final opinion on October 30, 2015, terminating the investigation with a finding of no violation of Section 337. (Our prior blog post regarding the Commission’s clarification in Television Sets of whether service of the complaint meets the knowledge requirement for contributory infringement can be found here.)

The Economic Prong of the Domestic Industry Requirement

The economic prong of the domestic industry requirement is satisfied when “there is in the United States, with respect to the articles protected by the patent . . . (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.” 19 U.S.C. § 1337(a)(3). Subparagraphs (A), (B), and (C) provide alternative bases for satisfaction of the economy prong requirement. With respect to subparagraphs (A) and (B), Cresta relied upon the development and support of its television tuners and, with respect to subparagraph (C), Cresta relied upon engineering and research and development. The final ID held that the evidence relied upon by Cresta to establish its investments in the domestic industry was unreliable and that Cresta’s claimed domestic industry ceased to exist at least six months prior to the filing of the complaint.

The Commission affirmed the final ID’s determination that the economic prong was not met, both because of the unreliability of Cresta’s domestic industry evidence and, independently, because Cresta’s alleged domestic industry did not exist at the time the complaint was filed. While Commissioner Rhonda Schmidtlein agreed with the Commission’s determination regarding the unreliability of the domestic industry evidence, she took issue with the majority’s additional determination that the alleged industry had ceased to exist before the filing of the complaint.

  1. Insufficient Evidence of Investments

The Commission found that Cresta’s evidence of payments to domestic suppliers was insufficient to meet the requirements set out by the Federal Circuit in Lelo Inc. v. ITC, 786 F.3d 879 (Fed. Cir. 2015). (Our prior blog post regarding the Lelo decision can be found here.)  In Lelo, the Federal Circuit found that it was necessary for the complainant to demonstrate the “share of labor or capital cost attributable solely to purchases made by” the complainant. Id. at 884-85. In Television Sets, no evidence was offered concerning the relevant investments of suppliers in Cresta’s products.Television Sets, Comm’n Op. at 64 (Oct. 30, 2015).  As to Cresta’s own investments, the Commission affirmed the ALJ’s findings that the evidence submitted by Cresta was unreliable, noting that “[i]nconsistencies, contradictions and unsupported assertions, such as those discussed by the ALJ, militate against reliance on Cresta’s testimony in regard to the alleged investments and allocations.”  Id. at 65-66.

  1. Failure to Establish that a Domestic Industry Existed at the Time of the Complaint

Cresta alleged that its domestic industry was based on the fabless design, engineering, and support of tuners using the asserted patented technology. The Commission, however, found that the record did not support Cresta’s contention that such a domestic industry existed at the time of the filing of the complaint. In particular, the Commission addressed (1) when past investments are no longer relevant and (2) when post-complaint activities are relevant.

  1. When Are Past Investments No Longer Relevant?

In concluding that the existence of a domestic industry had not been shown, the Commission explained that “[p]ast expenditures may be considered to support a domestic industry claim so long as those investments pertain to the complainant’s industry with respect to the articles protected by the asserted IP rights and the complainant is continuing to make qualifying investments at the time the complaint is filed.”  Id. at 68. The Commission found that the evidence did not support Cresta’s contention that its activities and investments directed to TV-tuner development and software/firmware support had continued until the filing of the complaint. Rather, as found in the final ID, by the time the complaint was filed, “Cresta’s tuner business was in rapid decline . . . and Cresta undertook to end operations and investments in the protected articles.”  Id. at 68. By that time, “all that remained of the tuner-based business was at best a modicum of sales for products . . . .”  Id.

The Commission distinguished the circumstances in the Television Sets investigation from those in past investigations where “the complainant continues to maintain ongoing qualifying activities under section 337(a)(3) at the time the complaint is filed.”  Id. at 69. Examples cited by the Commission in this regard included Certain Battery-Powered Ride-On Toy Vehicles and Components Thereof, Inv. No. 337-TA-314, Order No. 6 at 18-21 (Dec. 5, 1990) (unreviewed in relevant part), where the Commission held that when a complainant continues its operations and improves its products, past expenditures linked to those products are cognizable for purposes of domestic industry; and Certain Electronic Digital Media Devices and Components Thereof, Inv. No. 337-TA-796, Comm’n Op. at 99-102 (Sept. 6, 2013), where the Commission found a domestic industry existed where complainant had substantial past investments in engineering and research and development related to discontinued protected articles and continued to exploit the patent through further development of existing products at the time of the complaint.

  1. When Are Post-Complaint Activities Relevant?

Generally, a domestic industry must exist or be in the process of being established at the time a Section 337 complaint is filed. Thus, the Commission will only consider evidence regarding domestic industry activities that occur subsequent to the filing of the complaint in extraordinary circumstances, i.e., “when a significant and unusual development has occurred after the complaint has been filed.”  Television Sets, Comm’n Op. at 56 (Oct. 30, 2015). Extraordinary developments cited by the Commission prompting an analysis of post-complaint activities included bankruptcy and changes in patent ownership, manufacturing, or licensing activity.  Id. at 56-57.

The Commission found no significant and on unusual development after theTelevision Sets complaint was filed that warranted consideration of post-filing activities. Indeed, the significant and unusual development occurred there prior to the filing of the complaint “when Cresta phased out its tuners, shifted its business focus to patent monetization, laid off its staff, and discontinued investments in developing and supporting protected articles.” Id. at 73. The Commission deemed Cresta’s post-complaint activities to be de minimis, and noted that marketing and sales activities alone cannot satisfy the domestic industry requirement.

  1. Separate Views of Commissioner Schmidtlein

Commissioner Schmidtlein agreed with the Commission’s determination regarding the unreliability of the domestic industry evidence and, on that basis, concurred in the Commission’s determination that Cresta had not satisfied the domestic industry requirement. However, Commissioner Schmidtlein disagreed with the majority’s additional determination that Cresta’s sales of domestic industry products at the time of the complaint were not “qualifying activities” that allowed for consideration of Cresta’s pre-complaint domestic industry investments. In Commissioner Schmidtlein’s view, Cresta’s ongoing activities, which included the continued employment of engineers engaged in technical support of domestic industry products, as well as Cresta’s sales of those products, were sufficient to allow the Commission to consider the domestic industry investments made prior to the filing of the complaint. In this regard, Commissioner Schmidtlein interpreted prior Commission precedent to permit a finding that a domestic industry existed based on a combination of past activities and some current activities related to the domestic industry. Moreover, Commissioner Schmidtlein maintained that Cresta’s shift to a business model focused upon patent monetization, discussed in the majority’s opinion, was irrelevant to the question of whether a combination of past and current activities satisfied the domestic industry requirement.