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:
- They can rely on their own investments in licensing (§ 1337(a)(3)(C)); or
- 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.
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