Welcome to the latest issue of the Section 337 Update. This newsletter is designed to provide you with practical updates and developments on Section 337 proceedings before the U.S. International Trade Commission.

ITC Seeks to Clarify Parameters for Licensing-Based Domestic Industries

As companies seeking to qualify as domestic industries based on their licensing activities continue to test the outer limits of Section 337 of the Tariff Act of 1930, as amended (19 U.S.C. §1337), the U.S. International Trade Commission (“ITC”) is seeking guidance with respect to this hotly contested issue.

In Certain Coaxial Cable Connectors and Components Thereof and Products Containing Same, Inv. No. 337-TA-650, the ITC requested public comment on the issue of using licensing expenditures to satisfy the domestic industry requirement. The Coaxial Cable investigation was instituted in May, 2008, alleging infringement as to four patents, including U.S. Patent No. D440,539 ("the ‘539 patent”). On October 13, 2009, Administrative Law Judge Gildea issued his final initial determination wherein he held, among other things, that the complainant satisfied the domestic industry requirement for the ‘539 patent. The ALJ’s finding largely hinged on the expenditures made by the complainant in connection with litigation and other measures taken to enforce the ‘539 patent. The initial determination is available online.

On December 14, 2009, the ITC issued a notice of its determination to review portions of the initial determination, including the ALJ’s finding that the complainant satisfied the domestic industry requirement. To assist in its review, the ITC requested that the parties and members of the public comment on the interpretation of section 337(a)(3)(C) as it pertains to licensing.

Section 337(a)(3)(C) states, in relevant part, that a domestic “industry in the United States shall be considered to exist if there is in the United States, with respect to the articles protected by the patent, copyright, trademark, mask work or design concerned... substantial investment in its exploitation, including engineering, research and development, or licensing.”

In its notice, the ITC was particularly interested in receiving comment on three questions: (1) whether all types of spending made in connection with licensing efforts are properly considered an investment under section 337(a)(3)(C) and whether some types of spending may be entitled to more weight than others; (2) whether the use of the term “exploitation” in section 337(a)(3)(C) indicates that greater weight should be given to licensing efforts directed to bringing a covered article into the marketplace, as opposed to efforts made to get an existing producer to take a license for a product already in the market; and (3) to what extent legal fees paid in connection with litigation against targeted licensees and/or infringers represent investments under section 337(a)(3)(C). The deadline for written comments was January 13, 2010.

Four non-party submissions were made in response to the ITC’s request for comment.

  • Cisco Systems, Inc., Google, Inc., and Verizon Communications Inc. (the “Cisco Group”) (submission available online)
  • Samsung Electronics America, Inc., Samsung Electronics Co., Ltd., Samsung Semiconductor, Inc., Samsung Telecommunications America, LLC, Hewlett Packard Company, Dell Inc., ASUS Computer International, Inc., ASUSTek Computer, Inc., and Transcend Information, Inc. (the “Samsung Group”) (submission available online)
  • Hogan & Hartson (law firm) (submission available online)
  • Tessera, Inc. (submission available online)

In their submissions, both the Cisco and Samsung Groups take the position that licensing may be relied on to satisfy the domestic industry requirement only to the extent that it is directly tied to the exploitation of the patents through adoption or commercialization of the patented technology by others who are not already practicing the patent. In other words, according to the Cisco and Samsung Groups, licensing is not an investment under section 337(a)(3)(C) where it is a mere exercise of a patent owner’s right to exclude others from using its patented technology. Rather, licensing must constitute a substantial investment in the propagation of the covered technology.

Consequently, the Cisco and Samsung Groups assert that licensing expenditures arising out of litigation or other types of enforcement should carry little, if any, weight in the domestic industry analysis. This is because such expenditures seek to stop or tax the use of patented technology rather than promote its development or commercialization. The Cisco and Samsung Groups argue that this is particularly true where legal fees are paid in an attempt to license the technology to an existing producer for a product it already makes. In its submission, Hogan & Hartson concurs that legal, litigation and post-litigation expenses alone are insufficient to satisfy the domestic industry requirement because such forms of investment do not contribute to U.S. economic activity, technology, or jobs relating to the patent.

In reaching their positions, the Cisco and Samsung Groups, as well as Hogan & Hartson, rely on the purpose, language, and legislative history of section 337(a)(3)(C). The commenters claim that the purpose of section 337 was to extend protection to, and thereby encourage, patent owners engaged in the adoption and development of new technologies. Furthermore, they all assert that the legislative history shows that Congress did not intend for section 337(a)(3)(C) to open the ITC to mere patent owners, which would be the result if a complainant were permitted to rely solely on investments made in litigation and other types of enforcement.

Finally, the Cisco and Samsung Groups state that the meaning of the word “exploitation” is directed to the development or use of the technology covered by the patent, not the assertion of the legal-exclusivity right granted by the patent. The two commenting groups contend that this definition is consistent with the other terms used in section 337(a)(3)(C): “engineering” and “research and development.”

Tessera proposes a different conclusion. In its submission, Tessera asserts that the ITC should consider and give equal weight to all forms of licensing investment, including expenditures in support of efforts to bring a protected article to market and efforts seeking to require producers to take a license for already existing products, as well as legal fees paid in litigation. In support of its stance, Tessera points to the importance of licensing revenues as a source of funding for engineering and development to entities that do not engage directly in manufacture. Tessera also claims that Section 337(a)(3)(C) set a lower bar than the other sections regarding investment in plant, equipment, labor and/or capital in part by requiring only a substantial, as opposed to significant, investment. Tessera finds further support for its position in the line of ITC precedent that has found the domestic industry requirement to be satisfied by complainants whose primary domestic industry consists of licensing activity.

Like the other commenting groups, Tessera believes that its position is bolstered by the ordinary, common meaning of the terms in the statute and the legislative history of Section 337. According to Tessera, all forms of licensing and legal fees fall within the ordinary and plain meaning of the relevant portion of the statute, which Tessera claims requires only “an expenditure of money for income or profit, to take advantage of or utilize the granting by a patent holder to another of any of the rights embodied in the patent.” (Internal quotations omitted.) With respect to the legislative history, Tessera contends it shows that Congress intended the ITC to protect all forms of licensing.

Similar Proceedings Related to the Licensing Prong of Domestic Industry

This is not the first time that the ITC has sought to address such issues. In Certain Short-Wavelength Light Emitting Diodes, Laser Diodes and Products Containing Same, Inv. No. 337-TA-640, ALJ Luckern found a domestic industry based on complainant’s substantial legal fees to outside counsel that resulted in a handful of license agreements with royalty payments. Judge Luckern’s Initial Determination is available online. The Commission determined to review the initial determination on June 11, 2009 and also requested that the parties brief questions relating to whether payments made to outside counsel for licensing qualify as an investment under Section 337(a)(3)(C), whether investments associated with licenses entered into prior litigation should be entitled to more weight than licenses entered to settle litigation, and whether it matters if investment is performed by in-house employees or outside counsel. The investigation was terminated on December 9, 2009 when the complaint was withdrawn as to Toshiba and Panasonic, the two respondents that were prepared to go to trial. All other named respondents had previously been terminated by settlements and consent orders. Thus, the Commission had lost the opportunity to explain its position on this issue.