Substantial Patent Licensing with No U.S. Manufacturing Deemed Sufficient to Seek Remedy at US ITC

bethShaw-0580editConvertedProfile-e1360002102239Featured Regular Expert Column

Beth Z. Shaw, Brake Hughes Bellermann LLP

The Federal Circuit reaffirmed that substantial investment in licensing activities—even without manufacturing in the United States—is enough to bring an exclusion action in the U.S. International Trade Commission (ITC), in denying a petition for panel rehearing and rehearing en banc on January 10, 2013. The Federal Circuit denied Nokia Corp.’s petition for rehearing and rehearing en banc of InterDigital Commc’ns, LLC v. Int’l Trade Comm’n (2010-1093) (per curiam). A panel of the Federal Circuit also issued an opinion to address Nokia’s “much more detailed argument . . . on rehearing” regarding Section 337 and InterDigital’s licensing activities. Section 337, the court held, provides protection for industries that were based on the creation and exploitation of intellectual property even if they do not produce the ultimate products that embody that technology.

InterDigital had previously asked the ITC to investigate whether two of its patents, U.S. Patent Nos. 7,190,966 and 7,286,847, were infringed by Nokia. The administrative law judge (ALJ) at the ITC found that Nokia did not infringe the InterDigital patents and the ITC affirmed. On appeal, the Federal Circuit held that the ITC erred in construing certain claim terms and reversed the ITC’s finding of no infringement. The court also dismissed Nokia’s argument that InterDigital’s patent licensing activities did not satisfy the domestic industry requirement of section 337, holding that patent licensing alone may satisfy this requirement, regardless of whether the objects of the licensing activities are actually made in the United States. The court restated that companies can satisfy the domestic industry requirement through substantial domestic investment in licensing activities, and that there is no requirement that the licensed products are actually manufactured in the United States.

To reach its conclusion, the majority (authored by Judge Bryson and joined by Judge Mayer) construed the text of the statute and also examined the legislative history of Section 337. The court noted that proposals were introduced in Congress to expand the coverage of Section 337 so that it would explicitly provide protection for 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. The statute, the court held, now provides protection for industries that were based on the creation and exploitation of intellectual property even if they did not produce the ultimate products that embodied that technology.

“Under the clear intent of Congress and the most natural reading of the 1988 amendment, Section 337 makes relief available to a party that has a substantial investment in exploitation of a patent through either engineering, research and development, or licensing.”

“The only question,” wrote the court, ‘is whether InterDigital’s concededly substantial investment in exploitation of its intellectual property is ‘with respect to the articles protected by the patent.’” The court held that this requirement is satisfied in this case “because the patents in suit protect the technology that is, according to InterDigital’s theory of the case, found in the products that it has licensed and that it is attempting to exclude.”

The court held that this “is a classic case for the application of subparagraph (C) [i.e., 19 U.S.C. § 1337(a)(3)(C)].” The court noted that between 1993 and 2006, the evidence showed InterDigital invested a total of approximately $7.6 million in salaries and benefits for employees engaged in its licensing activities, and it received almost $1 billion in revenues from portfolio licenses (including the patents in suit) relating to its cellphone technology, which includes about $400 million attributable to licenses to its 3G technology.

Importantly, the ALJ found that InterDigital’s activities involve “substantial investment in . . . licensing.” Apparently, there was no argument to the contrary on appeal regarding InterDigital’s “substantial investment.” The record also revealed substantial investment by InterDigital in research and development that led to the patents in suit. The only question, according to the court, was whether InterDigital’s concededly “substantial investment” in exploitation of its intellectual property is “with respect to the articles protected by the patent.” That requirement was satisfied in this case because the patents in suit protect the technology that is found in the products that InterDigital has licensed and is attempting to exclude.

The court concluded that “section 337 protects American industries, including American industries that are built on the exploitation of intellectual property through engineering, research and development, or licensing.”

Judge Newman dissented, writing that the license that InterDigital seeks to impose on Nokia is not a license to manufacture any patented product in the United States, but merely a license to import products made in foreign countries. Judge Newman disagreed that the purpose of the amendment to Section 337 was to allow such a remedy. Judge Newman examined the legislative record and stated that the purpose of the legislative amendment was to “permit patentees that do not themselves manufacture their patented products, such as universities and others that perform research or engineering, to have access to the Section 337 remedy.” According to Judge Newman, the “amendments did not remove the requirement that ‘articles protected by the patent’ must be produced in the United States; the amendments were designed to enlarge the incentive for domestic production, not to eliminate it.”

Many fear that the decision solidifies grounds for non-practicing entities (also known as patent trolls) to leverage ITC exclusion remedies. Yet, it appears that the underlying law requiring the “substantial investment” in licensing, research, and development will limit the ability of patent trolls to proceed using the ITC as a forum. Nokia will likely file a petition to the Supreme Court.

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