The U.S. International Trade Commission adjudicates patent disputes under Section 337 of the Smoot–Hawley Tariff Act of 1930 with the power to issue exclusion orders against infringing imports. The trade agency has become an increasingly popular venue for patent litigation because it offers a number of advantages to patent owners over federal district court, including faster procedures and a more drastic remedy.

ITC litigation is not available for all U.S. patent owners, however. Unlike federal court, the ITC requires patent owners to prove not only that their patent was infringed but also that “an industry in the United States, relating to the articles protected by the patent . . . exists or is in the process of being established.”

For an industry to “exist,” the patent owner or a licensee must make “(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” in the United States with respect to an article that practices the patent.

This domestic industry test is a unique and exceedingly peculiar aspect of ITC patent litigation. On the one hand, the test has no justification as a matter of patent policy, which is generally concerned with promoting innovation. If such a requirement also existed for infringement lawsuits in federal court, it would surely be criticized as protectionist and counterproductive. On the other hand, the test is exceedingly lax for a trade law. In other trade remedy regimes, like antidumping and safeguard duties, the domestic industry is the entire group of companies that manufacture the product in the United States, and they have to show injury from imports to get relief.

In its original form, Section 337’s domestic industry test looked a lot more like these other trade remedies. The law only prohibited unfair importation of articles “the effect or tendency of which is to destroy or substantially injure an industry, efficiently and economically operated, in the United States.”

But in 1988 Congress amended Section 337 to eliminate the injury requirement for intellectual property-based cases and to add an explicit reference to non-manufacturing-related activity. The Senate Committee Report for the 1988 amendments notes that “the injury and efficient and economic operation requirements” in the original law “make no sense in the intellectual property arena.” They were removed in order “to strengthen the effectiveness of section 337 in addressing the growing problems being faced by U.S. companies” from infringing imports.

The requirement that a domestic industry “exist” was nevertheless maintained in order to ensure that the ITC would “adjudicate trade disputes between U.S. industries and those seek to import goods from abroad” and that the law would “be utilized on behalf of an industry in the United States.”

A review of the ITC’s patent docket in 2019 shows just how poorly the law’s domestic industry test currently meets its stated goal. The typical ITC case is definitely not a trade dispute between an American company and a foreign importer.

For example, most complainants in ITC patent cases are also importers. In 2019, only 16 of the 45 new complaints involved domestic industry articles that were manufactured in the United States. And 15 of the 45 new complaints were filed by foreign-headquartered companies or their U.S. subsidiaries.

The ineffectiveness of the domestic industry test is due not only to the statutory language but also to the agency’s disinterest in applying the test with reasonable rigor. A couple of highly questionable determinations from 2019 demonstrate this problem well.

In Road Milling Machines (Inv. 1067), the ITC found a domestic industry based entirely on sales and support activity. Germany-based Wirtgen’s U.S. subsidiary engaged in “post-importation modifications, field service and repair, technical support, warranty, and technical training activities.” These were considered sufficient activities to satisfy the domestic industry test “because they are performed over several years and they drive purchasing decisions.” In essence, the company spent so much money trying to sell their products in the United States, that they qualify as an American industry—despite the fact that the product is designed and manufactured abroad and sold around the world. Meanwhile, the respondent in that investigation was U.S.-based Caterpillar.

In Magnetic Tape Cartridges (Inv. 1058), the ITC found a violation of Section 337 where the domestic industry articles were designed and manufactured abroad by the respondent. That investigation was part of a larger dispute between Sony and Fujifilm, two Japanese companies that make, among many other things, competing data storage tapes in Japan. To satisfy the domestic industry requirement, Sony relied on the investments of IBM by virtue of a general cross-licensing agreement between the two companies. Even though IBM doesn’t make magnetic tapes, the company does make tape drives used to read the tapes, and the ITC found that investments toward developing the drive could be counted. The big problem with that approach is that the tapes used in conjunction with IBM’s drives are manufactured under license in Japan—by Fujifilm.

So, the respondent made both the accused articles and the “domestic” articles supposedly protected by Section 337. And the only American industry involved in the investigation had to be hauled in by subpoena to testify against its own licensed manufacturer.

That’s not to say, however, that the ITC never rejects tenuous domestic industry arguments. In Carburetors (Inv. 1123), the complainant’s product was designed abroad, manufactured abroad, and sold abroad to other foreign manufacturers who export lawn equipment to the United States. The respondents accused of infringement, on the other hand, included some of the largest American retail chains. The agency found no domestic industry on the grounds that the complainant’s U.S. investments were minuscule compared to its sales revenue for the relevant products.

In its final opinion, however, the Commission criticized “certain statements in the [administrative law judge’s initial determination] that may be interpreted as requiring a minimum investment threshold.” Specifically the ALJ had said that he “was unable to locate any opinion in the past four years in which the Commission has held that an investment amounting to less than 5% of sales qualified as ‘significant’ or ‘substantial.'” The Commission vacated that statement in favor of a “flexible approach,” leaving open the possibility that such minuscule amounts of investment might actually qualify in a future case.

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