Revenue-Driven Licensing Activities Fail to Satisfy Domestic Industry Requirement for ITC Action

August 7, 2014

The ALJ terminated the ITC investigation upon granting respondent's motion for summary judgment for lack of domestic industry, finding that the complainant's (a licensing entity) patent-related activities were solely revenue-driven rather than production driven. Optical Disc Drives, Components Thereof, and Products Containing the Same, 337-TA-897 (ITC July 30, 2014, Order) (Lord, ALJ). This distinction was key to the ALJ's ruling.
To satisfy the so-called "economic prong" of the domestic industry requirement under 19 U.S.C. ยง 1337(a)(3), a complainant must show that an industry in the United States exists with respect to the articles protected by the asserted patent in the form of:

(A) significant investment in plant and equipment;
(B) significant employment of labor or capital; or
(C) substantial investment in its exploitation, including engineering, research and development, or licensing.

The legal question at issue was "whether a licensing entity whose patent-related activities are purely revenue driven can choose to prove the existence of a domestic industry under subsections (A) and (B) of section 337(a)(3), avoiding the requirements of subsection (C)." The ALJ answered in the negative, holding that it would be contrary to the statute and case law to allow a purely revenue-driven licensing entity to avoid the requirements of subsections (A) and (B), by asserting a domestic industry under subsection (C).

The ALJ explained the well-established law that where licenses are directed to development or production using patented technology, a licensor can establish a domestic industry by showing the significant expenditures of its licensees under subsections (A) and (B). Citing Certain Variable Speed Wind Turbines and Components Thereof, Inv. No. 337-TA-376, Remand Comm'n Op., 1998 WL 35465896 (Feb. 2, 1998). However, in the absence of production-driven licensing, the case law under subsection (C) requires evidence of a revenue-driven licensing entity's own patent-related activities and expenditures. See, e.g., Certain Multimedia Display & Navigation Devices and Systems, Components Thereof & Prods. Containing the Same ("Certain Multimedia Display"), Inv. No. 337-TA-694, Corrected Comm'n Op. (Aug. 8, 2011).

The ALJ identified two lines of case authority that applied to complainant's establishment of the economic prong of domestic industry: Schaper Manufacturing Co. v. Int'l Trade Comm'n, 717 F.2d 1368 (Fed. Cir. 1983) and Certain Multimedia Display. The Schaper line of cases find domestic industry under subsections (A) and (B) where licensees engage in domestic activities under licenses that relate to development or production of patented articles, whereas Certain Multimedia Display construed subsection (C) to require an entity whose only relationship to the patent is revenue driven to prove substantial qualifying expenditures of its own to establish a domestic industry. See, e.g., Certain Multimedia Display, Corrected Comm'n Op. at 25 (finding no domestic industry based, in part, on the lack of "industry-creating, production-driven licensing activity that Congress meant to encourage").

On summary judgment, the ALJ found no issue of genuine fact relating to complainant Optical Devices' failure to satisfy this economic prong of domestic industry. In its complaint, Optical Devices relied exclusively on its agreements with various licensees, namely Sony Corporation, Sharp Corporation, and Sharp Electronics Corporation, to establish a domestic industry. The ALJ found that these licenses were not directed at "the development or production of patented goods," but rather, were focused on efforts to monetize patents by demanding that companies already manufacturing products enter into license agreements with Optical Devices. Such monetization activities have been classified by the ITC as "revenue-driven." Citing Certain Multimedia Display, Corrected Comm'n Op. at 25 n.20.

Having failed to present evidence of production-driven licensing activities pursuant to Schaper (i.e., production generated by its licensees by virtue of the licensing), the ALJ found that Optical Devices also failed to prove any expenditures of its own relating to the asserted patents pursuant to Certain Multimedia Display.

Accordingly, the ALJ held that the Investigation could not proceed.