Is the ITC a fairy godmother?

The CAFC has established a precedent (InterDigital Communications v. ITC) by denying  a combined petition for panel rehearing and rehearing en banc. The court held InterDigital’s patent licensing program is sufficient to meet the domestic industry requirement of § 337 of the Tariff Act of 1930, 19 U.S.C. §§ 1337(a)(2) and 1337 (a)(3). 

Does this decision make the International Trade Commission (ITC) a fairy godmother for non-practicing entities (NPEs)?  

Probably not.

The threshold for filing a case in the ITC is that the patent owner must demonstrate existence of a domestic industry “relating to the articles protected by the patent . . . .” This requirement can be met by showing significant investment in plant and equipment or by showing significant employment of labor or capital or by showing substantial investment in exploitation of articles protected by the patent (e.g.  engineering, R&D, or licensing).

The CAFC was asked to decide whether InterDigital’s licensing activities fell within the scope of the domestic industry requirement § 337(a)(3)(C).

The defendant (Nokia) took the position that the ITC and the CAFC panel improperly interpreted the statutory language “relating to the articles protected by the patent” in § 337(a)(2) and “with respect to the articles protected by the patent” in § 337(a)(3).

According to Nokia, this statutory language means that the only licensing activity in the context of "establishing domestic industry" is activity “with respect to the articles protected by the patent.” Nokia suggested that the licensing activity must be linked to a tangible good and that the patented technology  must be put into practical use.

A split CAFC panel  in an August 1, 2012 opinion, ruled  against Nokia, explaining that § 337, as amended in 1988 gave InterDigital standing before the ITC based upon their domestic licensing activity.

According to the CAFC  it is not necessary that the party manufacture the product that is protected by the patent, nor is it necessary that any other domestic party manufacture the protected article. 

The court held that if the patent covers the article that is the subject of the exclusion proceeding and the party seeking relief shows that it has a sufficiently substantial investment to satisfy the domestic industry requirement, that patent owner is entitled to seek injunctive relief under § 337.

The case revolved around “substantial investment.”  InterDigital invested about $7.6 million in its licensing activities, held 24 revenue producing licenses yielding almost $1 billion in revenues  (not just the patents in suit). The court was satisfied that this was a “substantial investment.” 

However, the court did not elucidate an explicit rule for evaluating “substantial investment” (remember Bilski and the machine or transformation test?).

This is consistent with the ITC's flexible approach in evaluation of “substantial investment”. 

So can we expect a flurry of similar suits in the ITC from NPEs?

Probably not, because the ITC has attempted to deny injunctive relief to NPEs whose business model focuses mainly on purchasing and asserting patents.

The ITC has, at the same time strived to offer relief to: manufacturers whose products do not practice the asserted patent; inventors who do not make a product covered by their asserted patents; research institutions; and start-ups that possess IP rights but do not yet manufacture a product that practices the patent.

So what is behind the ITC's policy which says "If John Doe is trying to license his patent (without marketing a product) we will hear his case, but if Mr, Doe sells his patent to Terminator IP holdings LLC, we will not allow Terminator IP holdings access to this venue?

The answer is that until 1988, § 337 of the Tariff Act of 1930 required proof of the existence (or prospect) of a domestic industry manufacturing the articles protected by intellectual property before the ITC could bar the import of infringing products. This raised  objections that the statute “did not provide protection for innovators who did not actually produce goods in this country, but who were injured by the importation of goods that incorporated the technology that they had invented or sought to license.” Congress responded by expanding the coverage of § 337 to protect American industries “that did not manufacture products but were engaged in engineering, research and development, or licensing of the technology that others used to make products.” That led to the current language of § 337(a)(3)(C), which makes relief in the ITC available to a patent owner based upon “substantial investment in its exploitation, including engineering, research and devel­opment, or licensing.”  even if the plaintiff is not producing goods relating to the patent.

The legislative history of the 1988 amendment to § 337(a)(3)(C) indicates that congress wanted to afford protection to foreign patent holders:  "Only those... who had made a substantial investment in facilities or activities including research and development, licensing, sales, and marketing ...". The legislative history does not directly mention the NPEs whose business model focuses  mainly on purchasing and asserting patents, but the current judicial environment equates them with those “foreign patent holders” specifically excluded from § 337(a)(3)(C) and that is the basis for the ITC’s application of § 337(a)(3)(C).

As a result the ITC holds that revenue-driven licensing activities “which takes advantage of the patent right solely to derive revenue by targeting existing production” should be given less weight in the “substantial investment” analysis than production-driven licensing activity “which encourages adoption and use of the patented technology to create new products and/or industries”  This has come to be known as the “production/revenue dichotomy.”

It is suggested that  “production/revenue enigma” is a more appropriate term. The enigma is that revenue-driven licensing activities which are "targeting existing production” can only be targeting production that came into existence after the priority date of the asserted patent. If the production were "existing" prior to the priority date of the asserted patent, the patent would be invalid.

Congress has recently devoted great effort to revamping the US Patent laws to reflect a "first inventor to file" (FITF) position more consistent with Europe and other jurisdictions.

Certainly under FITF there is a “production/revenue enigma”. The new statutes may have established a "prior use defense" which would allow those entities that were actually producing prior to the priority date some rights. However, there is nothing in AIA which suggests that sale of a patent from the original applicant to another entity should diminish the enforceability of the patent in the hands of its new owner.

Of course, all of this may be moot in many cases. NPEs whose business model focuses  mainly on purchasing and asserting patents are looking primarily for licensing revenue. The ITC cannot make monetary awards, only issue injunctions. In many cases, getting an ITC injunction is not the shortest path to licensing revenue. However, in some cases an ITC injunction might be attractive to an NPE whose business model focuses  mainly on purchasing and asserting patents.

Is it just to deny this type of NPE access to the ITC as a matter of course? Aren't we opposed to overly rigid application of "bright line" rules? Shouldn't each case be judged on its own merits?

In the meantime, Interdigital has a fairy godmother at the ITC. It remains to be seen who else will be blessed with similar judicial magic.