Addressing for the first time whether patent litigation expenses can be used to establish the domestic industry requirement in § 337 investigations, the U.S. Court of Appeals affirmed a determination by the U.S. International Trade Commission (ITC) that the complainant failed to satisfy the requirement based on its litigation activities.   John Mezzalingua Associates (d/b/a PPC, Inc.) v. Int’l Trade Comm’n, Case No. 10-1536 (Fed. Cir., Oct. 4, 2011) (Bryson, J.) (Reyna, J., dissenting-in-part).

This case involved an appeal from an ITC determination that litigation activities (including patent infringement lawsuits) only satisfy the domestic industry requirement if a complainant can prove that those activities are related to licensing and pertain to the patent at issue.  The majority explained that “the Commission reasonably concluded that expenses associated with ordinary patent litigation should not automatically be considered a ‘substantial investment in … licensing,’ even if the lawsuit happens to culminate in a license.”

Viewing the appeal as only raising factual issues relating to the link between various litigation expenditures and licensing,” the majority concluded there was no evidence that PPC had ever engaged in settlement or licensing negotiations either before or during the prior lawsuits in which it had asserted the patent.  The majority noted that because PPC allowed a permanent injunction it received in a prior district court action to remain in place for two years before it entered into a license agreement with the defendant Arris, “that delay suggests that PPC’s purpose in litigating was not to obtain a license, but, rather was to stop Arris from manufacturing infringing connectors.”  The majority also noted that “[t]he fact that litigation adversaries eventually enter into a license agreement does not, as PPC suggests, mean that all of the prior litigation expenses must be attributed to the licensing effort.”

Noting that at least one of the prior litigations did not even involve the asserted patent, the majority found that, “[b]ecause those cases had multiple objectives and were not all based on the [asserted] patent, the administrative law judge reasonably concluded that it would be inappropriate to treat most of the incurred legal fees as an investment in licensing of the [asserted] patent.”  Additionally noting that PPC had only obtained one license to the asserted patent, the majority concluded that the ITC was “entitled to view the absence of other licenses issued or negotiated for the [asserted] patent as one factor supporting his conclusion that PPC’s expenditures relating to licensing were not substantial.”  Finally, the majority found that PPC failed to meet its burden of proving that any of its research and development investments related to designs protected by the asserted patent.

In dissent, Judge Reyna argued for a per se rule that “patent infringement litigation is an investment in the exploitation of a patent” within the meaning of § 337.  The dissent argued the exclusion of litigation expenses not tied to licensing was “manifestly contrary to the statute” (and thus not entitled to deference under Chevron) and that it “impermissibly and arbitrarily limited the reach of § 337 for patent owners.”

Practice Note:   Going forward, a complainant will be well advised to establish that it made efforts to engage in licensing negotiations either before the litigation commenced or in the context of settlement discussions during the course of the litigation if it intends to reply upon litigation expenses to support its domestic industry.  Additionally, permitting a permanent injunction to remain in effect for a significant period of time before negotiating a license will likely be taken as evidence tending to establish that the underlying purpose of that litigation was not to obtain a license, but rather to exclude a competitor.