On April 14, 2010, the International Trade Commission (“ITC” or the “Commission”) issued a public version of its much-anticipated opinion in the Coaxial Cable Connectors case. In that decision, the Commission considered whether, and to what extent, litigation expenditures may used to establish a domestic industry based on licensing activities in a Section 337 investigation.

Section 337 prohibits unfair acts of importation of products into the United States. The number of Section 337 complaints filed in the last seven years has almost tripled, reflecting the growing importance of the ITC as a forum for protecting US intellectual property rights.

Complainants in a patent-based Section 337 investigation at the ITC are required to establish that a “domestic industry” exists, or is in the process of being established, relating to the asserted patents. While manufacturing in the United States is one way to satisfy the domestic industry requirement, it is not the only way, as the statute expressly provides for exploitation of a patent through other activities, such as research and development, engineering and licensing.

One recurring issue in recent years is whether litigation expenses can be considered as part of licensing activities to meet the domestic industry requirement. This issue was addressed by the ITC in the Coaxial Cable Connectors investigation.

The Commission instituted the investigation on May 30, 2008, based on a complaint filed by John Mezzalingua Associates, Inc. d/b/a PPC, Inc., alleging violations of Section 337 through the importation of coaxial cable connectors that infringed two utility patents and two design patents.

After an evidentiary hearing in July 2009, the Administrative Law Judge (ALJ) concluded that a domestic industry existed with respect to the ‘539 design patent. This conclusion was based on litigation expenditures related to licensing, as well as the inventor’s salary, time, effort, and use of PPC’s equipment and facilities in developing the invention.

On December 14, 2009, the Commission decided to review the ALJ’s decision. Highlighting the importance of this case, the Commission requested submissions from the public on the issue of whether, and to what extent, litigation expenditures could be considered as part of a domestic industry based on licensing. In response, some argued that litigation expenditures should never be considered, no matter how closely linked to licensing, while others argued that litigation expenditures should always be considered.

The Commission issued its decision on March 31, 2010, and released a public version of its opinion on April 14. The Commission concluded that litigation activities (including patent infringement lawsuits) may be used to satisfy the domestic industry requirement “if a complainant can prove that these activities are related to licensing and pertain to the patent at issue, and can document the associated costs. The same holds true for other types of activities that are allegedly related to licensing.”

In reaching its decision, the Commission considered the text of the statute, as well as the background relating to amendments in 1988 that broadened the domestic industry requirement. The Commission held that “a determination that patent infringement litigation activities taken alone constitute ‘exploitation’ would render the domestic industry requirement a nullity.” Congress clearly did not intend mere patent ownership to constitute a domestic industry, and “[f]iling a patent infringement lawsuit is no more than a small step beyond mere ownership…. 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.”

The ITC noted that the plain language of the statute did not limit the types of licensing activities that the ITC could consider, and that licensing activities that “bring a patented technology to market, as well as licensing activities that ‘take advantage of’ the patent, i.e., solely derive revenue,” could both be considered in determining whether the domestic industry requirement has been satisfied. Depending on the circumstances, other activities that may be considered include drafting and sending cease and desist letters, filing and conducting patent infringement litigation, settlement negotiations, and negotiating, drafting, and executing a license. However, a complainant must clearly link each activity to licensing of the asserted patent.

A complainant must also demonstrate that the investment in exploitation is “substantial.” The Commission held that this is a factual inquiry in which it may take into account, among other things, the type of activity; the relationship between the activity, licensing, and the patent at issue; and the amount of the investment. Determining whether an investment is substantial “will depend on the industry in question, and the complainant’s relative size.”

The Commission remanded the case to the ALJ to determine whether each asserted litigation activity was related to licensing and, if so, whether that activity was specifically related to the ‘539 patent. Litigation activities may need to be “broken down into their constituent parts.” On remand, the ALJ may consider “the presence and number of licenses and the presence of documents or activities soliciting licenses as well as any other relevant evidence to determine whether there has been ‘substantial’ investment in exploitation through licensing.” The ALJ may also consider expenditures relating to cease-and-desist letters, if they were related to licensing.

The ITC’s decision in Coaxial Cable Connectors will have a significant impact on companies and individuals that rely primarily on licensing activities to establish a domestic industry under Section 337, including corporations that have substantial licensing operations, as well as non-practicing entities or “trolls.” Expenditures on litigation and other related activities may be considered as part of the domestic industry, but those expenditures must be truly licensing-related and tied to exploitation of the asserted patent