ITC ALJ Breaks New Ground, Further Heightening the DI Requirement for NPEs in § 337 Cases


According to a recent initial determination by an Administrative Law Judge of the International Trade Commission, a purely revenue-driven NPE cannot prove the existence of a domestic industry by relying solely on the activities of its licensees without also proving that it exploits the asserted patents under § 1337(a)(3)(C). Certain Optical Disc Drives, Components Thereof, & Prods. Containing Same, Inv. No. 337-TA-897, Order No. 95 (July 17, 2014) (Lord, ALJ) ("Optical Disc Drives"). 

This ruling, if adopted by the Commission, would leave purely revenue-driven NPEs with two ways to satisfy the economic prong of the domestic industry requirement:

  1. They can rely on their own investments in licensing (§ 1337(a)(3)(C)); or 
  2. They can rely on activities of their licensees (§ 1337(a)(3)(A)-(C)) in conjunction with their own investments in the exploitation of the asserted patents (§ 1337(a)(3)(C)).

Because the complainant in Optical Disc Drives relied entirely on the activities of its licensees and made no attempt to prove up any of its own expenditures, ALJ Lord granted respondents' motions for summary determination on complainant's failure to satisfy the economic prong of the domestic industry ("DI") requirement.  ALJ Lord's initial determination is reviewable by the Commission.

Complainants under Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, must prove that a domestic industry exists with respect to articles protected by the asserted patent(s). 19 U.S.C. § 1337(a)(2). The DI requirement consists of an economic prong and a technical prong. A complainant satisfies the economic prong by demonstrating that there exists in the United States with respect to the products protected by asserted patent(s): (A) significant investment in plant and equipment; (B) significant employment of labor or capital; or (C) substantial investment in the exploitation of the asserted patents through engineering, research and development, or licensing. Id. § 1337(a)(3)(A)-(C). A complainant satisfies the technical prong by demonstrating that its own products, or the products of one or more of its licensees, practice at least one claim of the asserted patent(s).

ALJ Lord found that the complainant in Optical Disc Drives, an NPE called Optical Devices LLC, "exists solely" to engage in revenue-driven licensing practices. Indeed, according to the ruling, Optical Devices itself stated that it "focuses its business on licensing patented technology in the consumer electronics industry." During discovery, Optical Devices produced an Investment Agreement relating to its acquisition of several of the asserted patents. This Agreement included Optical Devices' Business Plan. Though the details of the Investment Agreement and Business Plan are heavily redacted in the initial determination, ALJ Lord stated that they lacked any discussion of production-driven licensing, acknowledged that the time for such production had passed, and stated that the only purpose of the licenses was to obtain revenue.

Optical Devices relied entirely on the activities of its licensees, Sharp and Sony (but primarily Sony), to satisfy the DI economic prong under § 1337(a)(3)(A) & (B). It made no attempt to rely on any of its own expenditures under subsection (C). Sony apparently took a "license" as part of a collaboration with Optical Devices to monetize the asserted patents, but ALJ Lord said the "unmistakable purpose" of this transaction was to create revenue by monetizing the patents, not to bring new products to market. ALJ Lord determined that "Optical Devices' licenses with Sony and Sharp are unambiguously revenue driven in nature and have no relationship of any kind to exploitation of the patented technology through production."

ALJ Lord found that under the plain meaning of the statute, a complainant who seeks to establish a DI based solely on revenue-driven licensing must proceed under subsection (C), which explicitly references licensing, as opposed to subsections (A) and (B), which make no mention of licensing. Licensing can form the basis of a DI under subsections (A) and (B) only where the patentee's licenses are related to product development. ALJ Lord further found that the legislative history underlying the enactment of Subsection (C) in 1988 confirms that it was enacted to protect entities seeking to exploit patented technology. ALJ Lord found her determination to be in accord with the Commission's opinion in Certain Multimedia Display & Navigation Devices, Inv. No. 337-TA-694 (Aug. 8, 2011), which she said requires revenue-driven licensing entities to rely also on their own patent-related expenditures. Finally, ALJ Lord discussed a line of cases beginning with Schaper Mfg. Co. v. Int'l Trade Comm'n, 717 F.2d 1368 (Fed. Cir. 1983), which she said stands for the proposition that in "proper cases," the licensing activities of the complainant will promote manufacturing or other exploitation of the patented technology. Id. at 33-36. ALJ Lord found that this was not a "proper case" under Schaper because Optical Devices' licenses are purely revenue-driven and Optical Devices adduced no evidence of any of its own investment in the development of the patented technology or the exploitation of the asserted patents. 

In noting that the complainant failed to identify a single investigation that squarely addressed this issue, ALJ Lord appeared to acknowledge that her determination, if adopted by the Commission, would set new precedent. Indeed, if affirmed by the Commission, it would continue the trend of recent decisions heightening the DI requirement for NPEs. This trend ranges from the Federal Circuit's decision holding that litigation expenses do not automatically constitute evidence of a DI, see John Mezzalingua Assocs., Inc. v. Int'l Trade Comm'n, 660 F.3d 1322 (Fed. Cir. 2011), to the Commission's recent decision to require complainants proceeding under the licensing portion of subsection (C) to prove the technical prong in addition to the economic prong, see Certain Computer & Computer Peripheral Devices & Components Thereof & Prods. Containing the Same, Inv. No. 841, Comm'n Op. (Jan. 9, 2014). The ruling thus would make the ITC a more inhospitable venue for NPE suits.​