September 12, 2012 Articles

The Heightened Domestic-Industry Standard for NPEs

Nonpracticing entities must weigh the benefits of International Trade Commission relief against the risks of failing to prove the domestic-industry requirement.

By Reza Mirzaie and Irfan A. Lateef

Historically, the International Trade Commission (ITC) has been viewed as the federal agency charged with protecting domestic manufacturing entities from unfair international trade activities, such as the importation of articles that infringe a U.S. patent. To this end, Section 337 of the Tariff Act of 1930, the statute that created the ITC, has always required that ITC complainants show they have a "domestic industry" relating to their patent. Initially, this requirement essentially forced ITC complainants to show they made substantial investments relating to the domestic manufacturing of articles covered by the patent. As a result, holders of U.S. patent rights that do not make any products, often referred to as nonpracticing entities (NPEs), were virtually excluded from seeking ITC relief.

In 1988, however, Congress changed the domestic-industry requirement to open the ITC's doors to some NPEs, provided that the NPEs show a substantial investment in nonmanufacturing "exploitation" of their patents, which includes licensing their patent rights to others. With the rise of NPE patent litigation in the last decade, many NPEs—including those that purchase patent rights for the purpose of enforcing them against manufacturing entities—have sought out the broad exclusionary relief available in the ITC. As a result, courts have had to interpret and apply the amended domestic-industry requirement for NPEs.

Over time, the ITC has set and followed certain trends in deciding which NPE activities are sufficient to show substantial investment in licensing as required under Section 337. Early on, the ITC set forth a seemingly low standard for NPEs to satisfy. Not surprisingly, this resulted in a rise in NPE litigation in the ITC. But more recently, the ITC has clarified and, in fact, raised the standard. As a result, NPEs today must seriously weigh the benefits of seeking ITC relief against the potential risks of failing to prove the domestic-industry requirement.

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