Source: http://www.ipwatchdog.com/2013/02/15/economic-prong-of-domestic-industry-and-value-added-analysis/id=35320/
Timestamp: 2018-03-18 21:21:53
Document Index: 120022281

Matched Legal Cases: ['§ 1337', '§ 1337', '§ 14', '§ 14', '§ 1337', '§ 1337', '§ 337']

Economic Prong of Domestic Industry And Value-Added Analysis - IPWatchdog.com | Patents & Patent Law
NOTE: This article was first published in “The Paul J. Luckern Summer Associate Edition – 2012, published by the ITC Trial Lawyers Association.” It is republished here with permission.
One of the requirements of finding a violation of section 337 of the Tariff Act of 1930 is that the Complainant must establish that “an industry in the United States, relating to the articles protected by the [intellectual property right] … concerned, exists or is in the process of being established.”1 In particular, the domestic industry requirement is broken up into two prongs: one technical, and one economic.2 “The technical prong concerns whether the complainant practices at least one claim of the asserted patents, while the economic prong concerns domestic activities with respect to the patent or patented article.”3 Satisfying the economic prong of the domestic industry requirement is not necessarily straightforward.4 Specifically, in certain cases, a value-added analysis has been conducted to determine if the economic prong had been satisfied. Ultimately, the analysis turns to exactly what would be considered “significant” and/or “substantial.”
This article will examine the value-added analysis with respect to the economic prong of the domestic industry requirement, basically what is the current standard for what qualifies as significant/substantial investments.5 Moreover, this article will review past decisions, assess current decisions, and attempt to forecast the value-added component of the economic prong of domestic industry.
“To satisfy the economic prong in cases involving alleged infringement of statutory intellectual property rights, section 337(a)(3) requires a complainant to demonstrate that,”6 “with respect to the articles protected by the [intellectual property right] concerned,” it has engaged in one or more of the following activities in the United States:
(C) substantial investment in [the intellectual property right’s] exploitation, including engineering, research and development, or licensing.7
Establishing a domestic industry can become difficult when fewer than all of the activities exploiting a complainant’s intellectual property rights take place in the United States.8 The “economic activities” as listed in section 337(a)(3) perhaps only “constitutes a domestic industry if ‘they are sufficiently related to articles protected by the patent as to constitute an exploitation thereof.”9
II. Defining “Substantial” and “Significant” As It Relates To The Economic Prong
Investigations such as In re Certain Short-Wavelength Light Emitting Diodes, Laser Diodes and Products Containing Same10 show that “there is no bright-line test to determine what constitutes a ‘substantial investment’…and the scope of the domestic industry in an investigation is determined on a case by case basis.”11 Additionally, the showing of the “existence of the domestic industry”12 depends on the size of the complainant.13
Determining whether investments count as “significant” or “substantial” is increasingly more difficult when a major portion of the activities take place outside of the United States.14 These situations have become more prevalent as more manufacturing moves abroad.15 As a result, the Commission typically looks to the nature and significance of the activities completed in the United States.16 One way to determine the “significance” is to complete a comparative value-added analysis.17 The comparative value-added analysis compares the activities completed outside of the United States with that of the activities completed in the United States.18 “In re Certain Microlithographic Machines and Components Thereof, Judge Charles Bullock held that while a comparative analysis applies to the first two tests for whether a domestic industry exists (i.e., “significant investment in plant and equipment’ or ‘significant employment of labor or capital”), a comparative analysis should not apply to the third test (i.e., whether there is “substantial investment” in the exploitation of the intellectual property right at issue). The third test only requires an examination of U.S. activities in absolute terms.”19
A complainant does not have to satisfy all three requirements in section 337 to satisfy the economic prong of the domestic industry requirement.20 In fact, because the statutory requirements are listed in the disjunctive, a complainant only has to satisfy one factor in order to satisfy the economic prong of domestic industry.21 Section 337(a)(3) requires one of the following: “substantial investment in [the intellectual property right’s] exploitation, including engineering, research and development, or licensing.22 While the term “significant” is not defined, taken together and in context with “the design of the statute,” greater clarity can be shed on the true meaning.23
Commentators have suggested that reading sections 337(a)(2) and 337(a)(3)(A) and (B) in conjunction, sheds light on Congress’ true intent as to the domestic industry requirement.24 Specifically, “a complainant’s investment in plant and equipment or employment of labor or capital must be shown to be ‘significant’ in relation to the articles protected by the intellectual property right concerned.”25 As a result, the determination of the “significance” of a complainant’s investment and/or employment activities is not to be established in an “abstract or absolute sense.”26 Rather, the proper analysis is focused on the nature of the activities in relation to the deemed significance “to the articles protected by the intellectual property right”27 (emphasis added). The Commission does not determine whether the economic prong is met based on “any rigid mathematical formula.”28 Instead, the Commission looks to what investment and/or employment activities are “significant” based upon the articles protected by the intellectual property right.29 Specifically, the Commission looks at the “facts in each investigation, the article of commerce, and the realities of the marketplace.”30 The purpose of this examination is to allow the Commission to consider “the industry in question and the complainant’s relative size”31 while keeping in mind the kind of investment and/or employment activities.32 Consequently, “the value-added to the article in the United States by the domestic activities”33 has been historically considered when determining if a complainant has sufficiently proven that its activities are significant in relation to articles protected by the intellectual property right.34
III. The Rise of the Value Added Analysis
As shown above, the traditional meanings of the words “substantial” and “significant” have evolved. In 2011, the Commission decided a seminal case for determining what satisfies the economic prong of the domestic industry requirement. In The Matter of Certain Printing And Imaging Devices and Components Thereof, one of the main disputes was whether the complainant, Ricoh, satisfied the economic prong of the domestic industry requirement.35 The Commission reversed the Judge’s Initial Determination finding that Ricoh had satisfied the domestic industry requirement36 for the ‘343 and ‘690 patents.37 In establishing a domestic industry for these two patents, “Ricoh relied on its expenses related to its C200 series printers and MFPs.38”39 The Judge initially ruled that Ricoh had satisfied the economic prong based on expenses for service and repair that Ricoh had completed in the United States.40 The Judge reached this conclusion partly based on testimony from a Ricoh employee stating that Ricoh “spent on average [***] annually on labor to service and repair C200 series printers and MFPs during its fiscal years 2008 and 2009.”41
However, the Commission ultimately found that Ricoh failed to show evidence to substantiate the nature and significance of its activities with respect to the articles protected by the patent, because Ricoh failed to show exactly how its domestic activities added value to the imported product.42 Furthermore, Ricoh relied “strictly on the service and repair of its C200 series printers and MFPs to meet the economic prong.”43 The Commission stated, consistent with past precedent,44 that Ricoh may satisfy the economic prong of the domestic industry requirement by showing “its service and repair activities and investments are significant with respect to the articles protected by its intellectual property rights”45(emphasis added).
In finding that Ricoh has failed meet the economic prong, the Commission concluded that Ricoh submitted very little evidence, if any, to prove any value added to the finished saleable product by its domestic activities.46 Moreover, Ricoh’s domestic activities failed to adequately show the “nature and relative importance to the articles protected by the patent.”47 Finally, Ricoh did not persuasively prove that its domestic activities in comparison with its foreign activities would illustrate that their domestic labor expenses can be deemed “significant.”48
The Commission only measured Ricoh’s expenditures in an “absolute sense,”49 when evaluating the “significant employment of labor or capital” that Ricoh had put forth.50 The Commission held in previous decisions51 that “the magnitude of the investment cannot be assessed without consideration of the nature and importance of the complainant’s activities to the patented products in the context of the marketplace or industry in question.”52
Interestingly, in Male Prophylactics, the Commission classified the complainant’s activities as significant “where complainant’s lubrication, foiling, testing, and packaging of unfinished imported condoms transformed the product into saleable merchandise, resulted in 34% domestic added value”53(emphasis added).
The decisions in Printing and Imaging and Male Prophylactics seems to strongly imply that a complainant must submit evidence “substantiating the nature and significance” of its activities regarding the protected articles by the asserted patents using a value added approach.54
IV. Impact of Printing and Imaging Devices On the Economic Prong Analysis
Since the Printing and Imaging Devices investigation, there have been a few cases that have adopted the value added analysis.55 One investigation, Inkjet Supplies, has applied the value added analysis.56 In Inkjet Supplies, although Hewlett-Packard argued that it provided enough evidence to satisfy the economic prong of the domestic industry requirement, the staff attorney vehemently disagreed, arguing that Hewlett-Packard failed to provide sufficient evidence to show that its expenditures were either “significant” or “substantial.”57 Hewlett-Packard’s evidence was similar to that presented in Printing and Imaging, in that HP produced documents showing “investments towards sourcing activities, manufacturing administration, control activities, and marketing and sales.”58
In an effort to follow the value added standard that was laid out in Printing and Imaging Devices, HP, supplemented its initial domestic industry evidence, by providing additional concrete evidence showing “U.S. value added by HP to its HP products.”59 The Judge in Inkjet Supplies followed the rule set forth in Printing and Imaging that “under the statute, whether the complainant’s investment and/or employment activities are “‘significant’ is not measured in the abstract or absolute sense, but rather is assessed with respect to the nature of the activities and how they are “‘significant’ to the articles protected by the intellectual property right.”60 The Judge’s final ruling in Inkjet Ink was that HP had successfully met the economic prong of the domestic industry requirement.61
While the sampling size is small with regard to the number of investigations that have used the value added analysis, a paradigm shift seems to be occurring. The Commission has provided a blueprint in both Certain Devices and Imaging62, as well as in Certain Inkjet Supplies63 that a deeper and substantive evaluative process of the economic prong of domestic industry is necessary.
While there are many ways to satisfy the economic prong of the domestic industry requirement, with the decision in Printing and Imaging Devices, the Commission seems to be analyzing economic activity used to support domestic industry with greater scrutiny.64 In particular, complainants will need to show evidence “substantiating the nature and significance” of the articles protected by asserted patents.65 Since the Commission’s decision in Printing and Imaging Devices, it appears the value added analysis will become the prevailing analysis for analyzing whether domestic economic activities will suffice to meet the domestic industry requirement under section 337.
* Summer Associate, Pepper Hamilton LLP, Boston, Massachusetts (2012); BS Electrical Engineering, Rensselaer Polytechnic Institute (2007); JD candidate William & Mary School of Law (2013).
** The author wishes to thank Goutam Patnaik, a partner at the firm of Pepper Hamilton LLP and Melissa H. Davis and Frank D. Liu, senior attorneys, also at the firm of Pepper Hamilton LLP for tremendous guidance and support in preparing this article.
1 19 U.S.C. § 1337(a)(2)
2 See e.g. Certain Variable Speed Wind Turbines and Components Thereof, Inv. No. 337-TA-376, USITC Pub. 3003, Comm’n Op. at 14-17 (Nov. 1996).
3 In the Matter of Certain Printing and Imaging Devices and Components Thereof, Inv. No. 337-TA-690, USITC Pub. 4289, Comm’n Op. (Feb. 2011).
4 Jose M. Recio, A Change in Establishing the Domestic Industry Requirement at the International Trade Commission, 39 AIPLA Q.J. 131, 132 (2011).
5 Printing and Imaging Devices, Inv. No. 337-TA-690, Comm’n Op., at 14.
7 See 19 U.S.C. § 1337(a)(3)
8 William P. Atkins & Justin A. Pan, An Updated Primer on Procedures and Rules in 337 Investigations at the U.S. International Trade Commission, 18 U. Balt. Intell. Prop. L.J. 105, 126 (2010).
9 § 14:4.7 Domestic Industry, PLIREF-PATLIT § 14:4.7 (citing In re Certain Dynamic Sequential Gradient Compression Devices & Component Parts Thereof, Inv. No. 337-TA-335, Pub. No. 2575, 1992 WL 813958, at *98 (Notice of Comm’n Decision to Vacate a Portion of an Initial Determination Concerning Temporary Relief and to Deny Temporary Relief, (Nov. 1992)).
10 In re Certain Short-Wavelength Light Emitting Diodes, Laser Diodes and Products Containing Same, USITC Inv. No. 337-TA-640, Order No. 72 at 7 (May 2009).
19 William P. Atkins & Justin A. Pan, An Updated Primer on Procedures and Rules in 337 Investigations at the U.S. International Trade Commission, 18 U. Balt. Intell. Prop. L.J. 105, 126 (2010)
20 Id. at 122.
21 Certain Variable Speed Wind Turbines and Components Thereof, USITC Pub. 3003, Inv. No. 337-TA- 376, Comm’n Op. at 14-15, (Sept. 1996).
22 19 U.S.C. § 1337(a)(3)
23 See Certain Coaxial Cable Connectors and Components Thereof and Products Containing Same, Inv. No. 337-TA-650, USITC Pub. 4283, Comm’n Op. at 44, (Mar. 2010).
24 Printing and Imaging Devices, Inv. No. 337-TA-690, Comm’n Op., at 15.
28 See Certain Male Prophylactic Devices, Inv. No. 337-TA-546, Comm’n Op. at 39.
29 Printing and Imaging Devices, Inv. No. 337-TA-690, Comm’n Op., at 15.
31 Certain Stringed Musical Instruments and Components Thereof, Inv. No. 337-TA-586, Comm. Op. at 26 32 Id.
33 See, e.g., Certain Concealed Cabinet Hinges and Mounting Plates, Inv. No. 337-TA-289, 1990 ITC LEXIS 3, Comm’n Op. at *32 (Jan. 1990) (“Cabinet Hinges ”) (“‘significance as used in the statute denotes an assessment of the relative importance of the domestic activities”).
34 Printing and Imaging Devices, Inv. No. 337-TA-690, Comm’n Op., at 15. 35 Id. at 16.
36 19 U.S.C. § 1337(a)(3)
37 U.S. Patent Nos. 5,863,690 and 6,212,343
38 Multifunction Printers
39 Id at 14.
40 Id. (“[A]lthough he [Judge] noted that Ricoh’s C200 series printers and MFPs are no longer sold and were never manufactured in the United States.”)
42 Printing and Imaging Devices, Inv. No. 337-TA-690, Comm’n Op., at 17. “For example, complainant submitted no evidence to show how its activities were important to the articles protected by the asserted patents in the context of the company’s operations, the marketplace, or the industry in question, or whether complainant’s undertakings had a direct bearing on the practice of the patent.”
44 Id. “For example, in Toy Vehicles, the Commission found that complainant’s services relating to its patented dual control power pedal units under warranty and as replacement parts was shown to be significant to complainant’s U.S. business. See, e.g., Certain Battery-Powered Ride-on Toy Vehicles and Components Thereof, Inv. No. 337-TA-314, USITC Pub. 2420, Initial Determination at 20-21 (unreviewed in relevant part) (Aug. 1991). Similarly, in Cast Iron Stoves, the Commission found that complainant’s repair and testing activities, preparation of brochures and service manuals, and instruction of dealers on the safe installation of wood burning stoves protected by the intellectual property rights concerned satisfied the economic prong because of the relative importance of these activities to the protected articles, and the significant domestic value added resulting from these activities. Certain Airtight Cast-Iron Stoves, Inv. No. 337-TA-69, USITC Pub. 1126, Comm’n Op. at 10-11 (Jan. 1981). Likewise, in Spray Pumps, the complainant met the economic prong by demonstrating that the frequent warranty servicing required over the lifetime of the pumps protected by the patents added significant value. Certain Airless Spray Pumps and Components Thereof, Inv. No. 337-TA-90, USITC Pub. 1199, Comm’n Op. at 10-11 (Nov. 1981).”
46 Id. at 17.
48 Id. at 18. See Cabinet Hinges, Comm’n Op. at *32 (“‘significance’ as used in the statute denotes an assessment of the relative importance of the domestic activities”); Male Prophylactics, Comm’n Op. at 43 (on “a comparative basis, the domestic activities in which [complainant] invested create ‘value added’ [of 34 percent] to the bulk product imported from China.”)
49 See Certain Male Prophylactic Devices, Inv. No. 337-TA-546, Comm’n Op. at 39.
50 supra Printing and Imaging Devices, Inv. No. 337-TA-690, Comm’n Op., at 17.
51 Id. “For example, in Stringed Musical Instruments, the Commission considered the inventor’s investments in the exploitation of the patent-at-issue in relation to the protected articles “taking into account that [complainant] is an individual and that the market for guitar parts, however defined, is relatively small.” Stringed Musical Instruments, Inv. No. 337-TA-586, Comm Op. at 26. Although that investigation was decided under subsection (C) of the statute, it illustrates the generally applicable principle that whether an investment is “substantial” or ““significant” is context-dependent. Accordingly, the employment of[* * *]in the United States over approximately 18 months may represent a significant employment of labor where it contributes significant value to the product, where it is sizeable in relation to a complainant’s overall product-related expenses and investments, or in another relevant context. The same employment of labor, however, may not be significant in another context.”
52 Id. at 17.
53 Certain Male Prophylactic Devices, Inv. No. 337-TA-546, Comm’n Op. at 41-45.
55 See generally http://www.usitc.gov “United States International Trade Commission” accessed: Aug. 15, 2012.
56 In The Matter of Certain Inkjet Ink Supplies and Components Thereof Order No. 14: Initial Determination Granting Complainant’s Motion For Summary Determination That A Domestic Industry Exists, Inv. No. 337-TA-730, 2011 WL 3813118 (Aug. 2011).
57 Id. at 15. The Staff also argued that HP did not provide “the context-dependent analysis required by the Commission” in Printing and Imaging Devices while relying “solely on the magnitude of tis investments” without supplying proper context.
60 See supra Part II.
62 In the Matter of Certain Printing and Imaging Devices and Components Thereof, Inv. No. 337-TA-690, USITC Pub. 4289, Comm’n Op. (Feb. 2011).
64 See supra Part III.
65 See generally Printing and Imaging Devices, Inv. No. 337-TA-690, Comm’n Op.
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