Will the ITC Become A Regular Forum for Non-Practicing Entities to Enforce Their Patents? - ABA YLD 101 Practice Series

By Joseph A. Saltiel and Jennifer K. Gregory

The International Trade Commission (“ITC”) has long been the place where only companies with a domestic industry could seek relief for patent infringement.  In 2009, two different cases pushed the boundaries of the ITC’s domestic industry requirement.  From these cases, it appears that a non-practicing entity (“NPE”), i.e., an entity that does not practice its own patents, can qualify for standing in the ITC under a more liberal interpretation of the domestic industry requirement.  In one case, a sole inventor without any employees and who only engaged in contingent fee patent litigation was able to establish a domestic industry.  In the other case, an NPE qualified for standing in the ITC due to the investments of a long standing licensee which was not paying royalties to the patentee at the time the ITC case was initiated.  Both cases are examined below.

Standing In The ITC - In 2006, the Supreme Court issued its ruling in eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), which clarified the standard for obtaining a permanent injunction in a patent case filed in U.S. District Court.  Before eBay, irreparable harm for patent infringement was presumed, making the grant of permanent injunctions routine.  After eBay, observers believe that NPEs will have a more difficult time in the U.S. District Court obtaining an injunction because irreparable harm to the patentee for patent infringement is no longer presumed.  Hence, for NPEs seeking an injunction, the ITC may be an attractive forum.  In the ITC, monetary damages are not awarded, leaving an exclusion order as the only remedy for a successful patentee.  An exclusion order, which bars the importation of infringing products into the United States, can be temporary or permanent and is issued without the need to prove irreparable harm. 

In the ITC, a patentee can institute an action under 19 U.S.C. Section 1337 (“Section 337”).  19 U.S.C. § 1337 (2006).  In order for a patentee to have standing to bring an action under Section 337, the patentee must show that it has a “domestic industry” because the ITC is designed to protect the interests of companies actively employing people and operating domestically in the U.S.  Id.  A patentee can show it has a domestic industry by satisfying a two-prong test.  19 U.S.C. §1337(a)(1)(B), (a)(2-3).  The first prong, or the “technical prong” of the test, measures the investment a patent holder has made in the United States by exploiting the patent.  Id.  To satisfy this prong, the patentee must show that it has “an industry in the United States, relating to the articles protected by the patent . . . [which is] concerned, exists or is in the process of being established.”  19 U.S.C. §1337(a)(2).  Under the second prong, or the “economic prong” of the test, an industry is considered to exist within the United States if there is “with respect to the articles protected by the patent . . . concerned - (A) significant investment in plant and equipment; (B) significant employment of labor or capital; or (C) substantial investments in its exploitation, including engineering, research and development, or licensing.”  Id. at (a)(3).   

A 1988 amendment to Section 337, allowing non-manufacturing activities such as licensing to qualify as a substantial investment in order to satisfy the domestic industry requirement, paved the way for NPEs to satisfy the two prong test for standing in the ITC.  In the matter of certain digital satellite systems (DSS) receivers and components thereof, Investigation No. 337-TA-392 at 9 (April 2001).  However, the legislative history of this amendment makes clear that “marketing and sales” in the United States alone or “mere ownership of a patent” is not enough.  Id. at 10, n.9.  In 2001, an NPE was able to use the 1988 amendment to establish standing in the ITC because it had five employees responsible for the business of negotiating with prospective licensees and the company had “incurred substantial expenditures relating to litigation of its patent rights.”  Id. at 11.  After this case, it became clear that NPEs can establish standing in the ITC by showing that they had made “substantial investments” and employed individuals to pursue certain licensing activities.

The Sole Inventor On February 19, 2008, Gertrude Rothschild (“Rothschild”), a Columbia University professor, filed a Section 337 complaint with the ITC requesting an investigation into whether certain light emitting diode chips, laser diode chips and products containing the same, including Blu-ray DVD players, mobile phones, and other electronic devices, infringed her U.S. Patent No. 5,252,499 (“the ‘499 patent”).  In the matter of certain short-wavelength light emitting diodes, laser diodes and products containing same, Investigation No. 337-TA-640, Complaint at 1 (February 19, 2008) (“ Rothschild”).  In her complaint, Rothschild alleged that she satisfied the domestic industry requirement of Section 337(a)(3)(C) because of her substantial investment in exploitation, licensing, and enforcement of the ‘499 patent.  Id. at 55.  Specifically, Rothschild alleged that (1) her litigation activities in U.S. District Court to procure licenses for her patent “constitute[d] a substantial investment in enforcing her patent and furthering her licensing program” and (2) her licensees had made a substantial investment in manufacturing and research and development that was sufficient to meet the domestic industry requirement.   Id. at 55, 57.  

Rothschild requested summary determination on the domestic industry issue.  The respondents argued that paying outside counsel to negotiate licenses was not sufficient to establish a domestic industry and that Rothschild’s lack of in house employees prevented her from meeting the domestic industry requirement and establishing standing.  Rothschild, Order No. 72 at 5-7 (May 8, 2009).  The Administrative Law Judge (“ALJ”) sided with Rothschild and granted her motion for summary determination finding that her licensing activity was sufficient to satisfy the domestic industry requirement.  Id. at 13.  The ALJ also found that Rothschild had shown proof of substantial investment in her patent licensing program through the payment of legal fees related to litigation and licensing the patent at issue.  Id. at 5. 

The Office of Unfair Import Investigations (“OUII”), whose staff represents the public interest and takes part in all the ITC proceedings, and one of the respondents filed a petition asking the ITC to review the ALJ’s order finding a domestic industry.  Rothschild, Notice of Commission Determination to Review an Initial Determination Granting Complainant’s Motion for Summary Determination on the Domestic Industry Requirement at 2, D.I. 405001 (June 11, 2009).  In June of 2009, the ITC granted the petition for review and asked the parties to brief four issues, including: (1) whether payments made to outside counsel for exploiting and licensing a patent qualify as an “investment” and (2) whether it matters if an “investment” is performed by in-house employees or outside counsel.  Id.The OUII argued that if payments made to outside counsel qualified as an investment, it would effectively “eliminate the domestic industry requirement or render it meaningless.”  Rothschild, Brief of the Office of Unfair Import Investigations on Issues Under Review at 3 (June 26, 2009).  One respondent argued that Rothschild’s procurement of contingent fee patent litigation should not qualify as an “investment” at all because no money of hers was actually invested.  Rothschild, Panasonic’s Submission on the Issues Under Review at 7 (June 26, 2009).  Rothschild replied that legal fees should qualify as an investment in licensing because they are a “crucial component of the licensing program,” and may often be the product of “failed pre-litigation licensing negotiations.”  Rothschild, Complainant Gertrude Neumark Rothschild’s Submission in Response to the Commission’s June 11, 2009 Notice of Review at 26 (June 26, 2009).  While the parties’ briefs provided an excellent set-up for the ITC to provide clear guidance on when an NPE will have standing in the ITC, the parties settled before oral arguments or any ruling by the ITC, and the investigation was terminated in its entirety by the ITC without providing further guidance on this issue.  Rothschild, Order No. 29 (Dec. 1, 2009). 

The NPE - Saxon Innovations LLC (“Saxon”) is an NPE with five employees that focuses on licensing and litigation activities surrounding the patents in its intellectual property portfolio.  In the matter of certain electronic devices, including handheld wireless communications devices, Investigation Nos. 337-TA-667, -673, Complaint at 31 (December 19, 2008) (“ Saxon”).  On December 19, 2008, Saxon filed a Section 337 complaint in the ITC for patent infringement relating to handheld wireless devices alleged to infringe three different patents.  Id. at 1.  Saxon argued it met the economic prong of the domestic industry requirement because of the activities of its licensee, Motorola.  Saxon, Order No. 49(C), Initial Determination Granting Saxon Innovations, LLC’s Motion for Summary Determination that it has Met the Economic Prong of the Domestic Industry Requirement at 5-6 (October 15, 2009).  Like Rothschild, Saxon moved for summary determination that it had established a domestic industry and thus had standing in the ITC.  Saxon, Notice of Commission Determination Not to Review an Initial Determination Granting Complainant’s Motion that it has Met the Economic Prong of the Domestic Industry Requirement (November 17, 2009).  Here, Saxon argued that its licensee of the patent in suit, Motorola, had made substantial investments in products practicing the patent and that constituted a sufficient nexus with the patent to give Saxon standing under the domestic industry requirement.  Saxon, Order No. 49(C) at 5-6.  The respondents made two arguments in response; both of which were rejected by the ALJ. 

First, in a heavily redacted portion of the order, it appears that the respondents argued that the only license that existed for the patent prior to the suit filed in the ITC was not generating a current stream of revenue, so that licensee could not be used to establish a current “substantial investment” to satisfy the domestic industry requirement.  Id. at 6.  The argument centered on a ten-year-old license agreement that gave Motorola rights to use the patent, but it may have been a cross license or a license taken in settlement of litigation for a one time payment.  Id.The ALJ held that even though a current stream of revenue was required for a licensee to establish domestic industry based on its own licensing activity, current revenue was not required when a complainant relied upon the investment of its licensee to give it standing.  Id. at 17.  Therefore, because Saxon was relying on the investment of Motorola as its licensee to establish standing, a current revenue stream was not required for Saxon to meet the domestic industry requirement.

Second, the respondents argued that Saxon failed to demonstrate the requisite nexus between Motorola’s investments and the patented technology.  Id. at 6.  They argued that Saxon had to show that Motorola’s “substantial investment” was specifically related to the patented technology and not just to products that allegedly practice the asserted patents.  Id. at 7.  The ALJ disagreed and clarified that the “relevant inquiry” is whether Motorola has made a substantial investment with respect to articles protected by the patent, and not whether the investment relates to the specific features of the articles that contain the patented technology.  Id. at 10.  Because its licensee had made substantial investments in products practicing the patent, the ALJ found there was a sufficient nexus with the patent to give Saxon standing under the domestic industry requirement.  The ITC affirmed the summary determination of the ALJ that Saxon met the economic prong of the domestic industry requirement.  Saxon, Order No. 49C (Oct. 15, 2009); Saxon, ITC Determination Not to Review (Nov. 17, 2009). 

Conclusion - These two decisions from the ITC show that NPEs, under certain circumstances, can satisfy the domestic industry requirement for standing.  This, coupled with the speculation that the eBay decision will make it more difficult for an NPE to get injunction in the U.S. District Court, could lead to more NPEs filing complaints in the ITC.  

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About the Author

Jennifer K. Gregory is an associate in Jenner & Block’s Chicago office. Mrs. Gregory is a member of the Firm’s Intellectual Property Practice. Joseph A. Saltiel is a partner in the Firm’s Litigation Department. He is a member of the Intellectual Property, Technology Litigation and Unfair Competition/False Advertising/Lanham Act Practices.

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