United States: The ITC Takes An Expansive Approach As To US Subcontracted Components Used In Foreign-Assembled Products For Purposes Of The Domestic Industry Analysis

In Certain Kinesiotherapy Devices and Components Thereof, Inv. No. 337-TA-823, the International Trade Commission (ITC) reaffirmed the principle that a complainant's reliance on purchased U.S. components promotes manufacturing in the United States by the subcontractor as if the complainant itself were producing the components.  Certain Kinesiotherapy Devices and Components Thereof, Inv. No. 337-TA-823, Comm'n Op. at 26-30 (July 12, 2013).   

Under the definitions of Section 337(a), an industry in the United States exists if there is, with respect to the articles protected by the patent,  (A) "significant investment in plant and equipment," (B) "significant employment of labor or capital," or  (C) "substantial investment in [the patent's] exploitation, including engineering, research and development, or licensing." 19 USC § 1337(a)(3)(A)- (C).  However, complainants may rely on foreign production to satisfy this domestic industry requirement, if coupled with activities and investments in the United States.  See Certain Salinomycin Biomass and Preparations Containing Same, Inv. No. 337-TA-370, USITC, ID at 124 (July 1996).  Furthermore, the ITC routinely finds that a complainant's investments in U.S. subcontracted components and services can be relied upon to satisfy the domestic industry requirement. See, e.g., Certain Male Prophylactic Devices, Inv. No. 337-TA-546, Comm'n Op. at 39 (Aug. 1, 2007) (activities to be considered may include those of a complainant's subcontractor); Certain Home Vacuum Packaging Products, Inv. No. 337-TA-496, ID at 143 (Dec. 16, 2003) (complainant subcontracted for engineering services). 

In Kinesiotherapy Devices, the ITC made clear that analysis of the domestic industry issue should be focused on the realities of the marketplace and not be overly rigid when a complainant is relying on foreign production to satisfy the economic prong of the requirement.  In that case, the Commission determined to reverse the Administrative Law Judge's (ALJ) rigid conclusion that the complainants Standard Innovation (US) Corp. and Standard Innovation Corporation (collectively, "Standard Innovation" "Complainants") had not satisfied the economic prong of the domestic industry requirement.  The Commission found that although Complainants' product was assembled in China, Complainants had satisfied the domestic industry requirement based on their expenditures on components produced domestically that are critical to Complainants' product, the We-Vibe.

The ALJ had rejected reliance on such components based on several grounds, including: (1) failure to demonstrate that the components were specifically designed or customized for the complainants' product; (2) they were not relevant to the asserted patent; (3) there was no clear allocation of expenses under prongs A, B, and/or C; and (4) timing of the claimed investments.

First, the Commission stated that there is no requirement that components must be developed or produced specifically for domestic industry products.  The statute indicates that the domestic industry has to exist "with respect to the articles protected by the patent." To require that components be developed for the patented article would go well beyond the statutory language, which requires only that an investment relate to articles protected by the patent.

Second, the ITC found it improper for the ALJ to decline to credit Complainants for color pigments in their We-Vibe product because the color of the product does not relate directly to a claimed feature of the asserted patent.  The Commission found the ALJ's position to be inconsistent with ITC precedent and unduly restrictive.  In Certain Concealed Cabinet Hinges and Mounting Plates, 337-TA-289, the ITC took into account in its domestic industry analysis a non-patented component, which was an optional addition to the imported finished hinges.  In Kinesiotherapy, the record indicated that for the Complainants' We-Vibe product to be commercially marketable, Complainants required the use of certain color pigments.  The ITC opined that although the color pigments are non-patented components, such pigments are important features that enhance the overall functionality of Complainants' product.  As such, the Commission found that Complainants' expenditures on pigments were relevant to proving a domestic industry.

Third, the ALJ incorrectly rejected Complainants' component expenditures because they did not identify what portion of total expenditures were attributable to subcontractors' engineering or research and development costs.  However, ITC precedent does not require an accounting of subcontractors' expenditures by statutory category for the domestic industry analysis, and the ITC has allocated the entire amount of a complainant's purchases from U.S. subcontractors to the domestic industry in past investigations.  See, e.g., Certain Vacuum Packaging Machines, Inv. No. 337-TA-496, ID (Order No. 36) at 143 (Dec. 17, 2003); Certain Methods of Making Carbonated Candy Products, Inv. No. 337-TA-292.  Accordingly, in Kinesiotherapy Devices, the Commission considered Complainants' investments in domestic components critical to the We-Vibe product and related to claims of the asserted patent as evidence of a relevant investment by U.S. subcontractors in plant and equipment under prong A and labor and capital under prong B because the components were manufactured in the United States for incorporation into article protected by the patent, even if the purchase price arguably includes other costs incurred by the subcontractors. 

Finally, the Commission disagreed with the ALJ's refusal to consider expenditures related to Complainants' original We-Vibe product because they occurred more than two years prior to the filing of the complaint.  The record indicated that while product updates added new features, the fundamental product did not change in any way relevant to the patented features, and as such, the Commission found expenses relating to the original We-Vibe product to be relevant to the domestic industry.

As shown in Kinesiotherapy Devices, the ITC has demonstrated that it will apply a fairly flexible standard in assessing the domestic industry requirement related to a complainant's investments in US subcontracted components and services.

PRACTICE TIPS:

• For a complainant to establish the economic prong of the domestic industry requirement when foreign production or assembly is involved, a complainant may rely on its purchases of subcontracted components and services, and there is no requirement that these components must be developed or produced specifically for domestic industry products.
• A complainant may rely on investments related to a non-patented component in establishing the economic prong of the domestic industry requirement when such components are required to make the complainant's product commercially marketable.
• The entire amount of a complainant's purchases from U.S. subcontractors may be allocated to the domestic industry, even if the purchase price includes other costs incurred by the subcontractors, including costs related to manufacturing, product assembly, quality assurance, repair and packaging of imported products, domestic repair and installation activities and domestic product servicing.

FOR OTHER CASES ADDRESSING SUBCONTRACTED PRODUCTION IN SECTION 337 PROCEEDINGS

• Inv. No. 337-TA-496, Certain Vacuum Packaging Products – The ALJ found that complainant satisfied the domestic industry requirement based on engineering services that were subcontracted.  In this case, all of complainants' vacuum packaging machines are made overseas.  However, the ALJ found that complainants' foreign production does not preclude a finding that complainants have satisfied the domestic industry requirement, and took into consideration the domestic activities of complainants' subcontractors.  The ALJ's Initial Determination is available online. 
• Inv. No. 337-TA-546, Certain Male Prophylactic Devices – The Commission reversed the ALJ's determination, finding that the economic criteria for a domestic industry had been met.  The Commission found that the complainant may rely upon the domestic activities of the complainant's subcontractor in establishing the economic prong of domestic industry.  The Commission indicated that if a product is not saleable without domestic activities, this factor supports a finding of a domestic industry.  The Commission Opinion is available online.
• Inv. No. 337-TA-666, Certain Cold Cathode Fluorescent Lamp ("CCFL") Inverter Circuits – The ALJ granted complainants' summary judgment regarding the economic prong of the domestic industry requirement.  Although the production of complainants' products occurs outside of the United States, the ALJ found that complainants may rely on the activities of a subcontractor hired by complainants to produce a component of their products.  The ALJ held that the economic prong of the domestic industry requirement can be established where a complainant bases its claim exclusively on the activities of a contractor.  The ALJ's Initial Determination is available online. 

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