Lelo v. ITC: Qualitative Factors Alone Are Insufficient for Domestic Industry

On May 11, 2015, the Federal Circuit reversed the Commission’s finding of a domestic industry in Investigation No. 337-TA-823, because the ITC’s “analysis and determination was based on qualitative factors” alone, without quantitative data showing that the alleged “investment” and “employment” were significant.  Lelo Inc. v. International Trade Com’n, —F.3d— (2015).  The Federal Circuit held that “qualitative factors alone are insufficient to show ‘significant investment in plant and equipment’ and ‘significant employment of labor or capital’ under prongs (A) and (B) of the § 337 domestic industry requirements.”

Background

Standard Innovation Corporation (“Standard Innovation”) filed a Section 337 complaint alleging that respondent Lelo Inc. (“Lelo”) imported “kinesiotherapy devices” (sex toys more commonly known as “vibrators”) and components thereof that infringed Standard Innovation’s U.S. Patent No. 7,931,605.  In support of its domestic industry allegations, Standard Innovation showed that it sourced some parts and components for its devices from third-party suppliers in the United States.  It was unclear from the record how many components were used in the devices overall, or the respective values, prices, and costs of all the components.

ALJ Thomas B. Pender’s Initial Determination (“ID”) in the case found no violation of Section 337, because Standard Innovation failed to satisfy the domestic industry requirement.  ALJ Pender rejected Standard Innovation’s arguments that its U.S. purchase of certain components constituted a significant investment in plant and equipment, or a substantial investment in the exploitation of the patented technology, including engineering, research and development, or licensing.

Specifically, the ALJ concluded that Standard Innovation’s U.S. purchases were not relevant to the prong (A) analysis (“significant investment in plant and equipment”), because Standard Innovation failed to establish what portion, if any, of the purchase price actually contributed to an investment in plant or equipment.  Additionally, the ALJ decided that the components were off-the-shelf items and not relevant to prong (C) (“substantial investment in its exploitation, including engineering, research and development, or licensing”), because there was no proof that the components were developed specifically for Standard Innovation’s devices, or what portion of the purchase price, if any, was allocable to research and development.

The Commission reversed the ALJ’s domestic industry determination, finding that “Standard Innovation has satisfied the domestic industry requirement based on its expenditures on components produced domestically that are critical to [its devices].”  Conceding that “the purchases represented a relatively modest proportion of domestic content,” the Commission found that the “contribution of the components at issue from a qualitative standpoint is indeed significant.”  The Commission “determined that the domestic purchases were significant based entirely on their qualitative contribution to the devices.”  Lelo timely appealed.

Federal Circuit Reverses Finding of Domestic Industry Based Solely on Qualitative Analysis

The Federal Circuit noted that the appeal turned on the single question of whether qualitative factors alone are sufficient to satisfy the domestic industry requirement.  Under the statute, a claimant asserting patent rights at the ITC must establish “with respect to the articles protected by the patent” that there is:

(A) significant investment in plant and equipment;

(B) significant employment of labor or capital; or

(C) substantial investment in its exploitation, including engineering, research and development, or licensing.

The Federal Circuit held that “[t]he plain text of § 337 requires a quantitative analysis in determining whether a petitioner has demonstrated a ‘significant investment in plant and equipment’ or ‘significant employment of labor and capital.’”  The court noted that the terms “significant” and “substantial” indicated the need for a quantitative assessment.

The Federal Circuit also observed that prior investigations confirmed that a Section 337 domestic industry analysis is quantitatively based.  To the extent that other Commission opinions looked to qualitative factors, those opinions “do not stand for the proposition the qualitative data alone can satisfy the domestic industry requirements.”

In rejecting the ITC’s argument that it had previously found domestic industry based on “qualitative factors,” the Federal Circuit pointed to Certain Male Prophylactic Devices, Inv. No. 337-TA-546, USITC Pub. 4005, Comm’n Op. at 24-25 (June 21, 2007), noting that in that case the ITC found “a U.S. value added of 34 percent.”  By contrast, in the Lelo case, the ALJ had determined that the purchase prices for U.S. components “accounted for less than five percent of the total raw cost of the devices.”  The Federal Circuit determined this quantitative level “insignificant,” although it did not address what numeric threshold is sufficient to qualify as significant under the statute.

Applying these principles to the facts in Lelo, the Federal Circuit concluded that Standard Innovation’s “purchase of so-called ‘crucial’ components from third-party U.S. suppliers are insufficient to satisfy the ‘significant investment’ or ‘significant employment of labor or capital’ criteria of § 337 where there is an absence of evidence that connects the cost of the components to an increase in investment or employment in the United States.”  The court highlighted that the “U.S. suppliers are neither contractors nor subcontractors.  They are retailors and the components are off-the-shelf.”  The court found the record devoid of data indicating the share of labor and capital costs attributable to purchases made by Standard Innovation.  The court explained, “[q]ualitative factors cannot compensate for quantitative data that indicate insignificant investment and employment.”