Has There Been A Sea Change in Eligible Domestic Industries at the ITC That Will Last?

Introduction

For decades, the ITC’s jurisdictional requirement – known as the domestic industry requirement – effectively shut out innovators from availing themselves of the powerful remedies of the forum, in the form of an exclusion order on imports, if those innovators had significant U.S. investments in sales and marketing of their patented inventions, but lacked other U.S. based manufacturing or research expenditures. Instead, the Commission required a complainant to show other qualifying investments, such as research and development or manufacturing, e.g., to support a domestic industry in order to have other functions like sales, marketing, warehousing, etc. be eligible for domestic industry. As a result, until recently, the ITC’s jurisdiction was largely reserved for a small class of large, blue-chip companies who could actually show significant U.S. R&D or manufacturing investment, and their licensors. 

In a closely-watched ITC case, the Federal Circuit has just issued a precedential opinion yesterday in Lashify, Inc. v. US International Trade Commission, CAFC-23-1245, which has turned these decades of Commission precedent on its head. Now for the first time, the Federal Circuit has expressly held that the Commission’s interpretation of Section 337 is incorrect, and has ruled that patent owners can avail themselves of the protections of the forum if they can show significant U.S. expenditures in labor, capital, plant, and equipment related to sales and marketing of products that practice the patents. See CAFC-23-1245 Opinion at 3-4 (“[T]he Commission applied a legally incorrect understanding of the statutory test for the economic-prong requirement.”) 

In rejecting the Commission’s interpretation of Section 337, the Appeals Court held yesterday that the statute has “no carveout of employment of labor or capital for sale, marketing, warehousing, quality control, or distribution.” See id. at 17. The Court further clarified “[n]or is there a suggestion that such uses, to count [as domestic industry investments], must be accompanied by significant employment for other functions, such as manufacturing.” Id. 

It remains to be seen whether this case is only the first in a multi-step dance on appeal, at the Federal Circuit or beyond, or if this decision will be the last word. 

In other ITC appeals, the Federal Circuit has granted en banc review, even though it has stated that “[e]n banc consideration is rare.” See, e.g., https://www.cafc.uscourts.gov/home/case-information/case-filings/petitions-for-rehearing-rehearing-en-banc/. For example, the Federal Circuit granted en banc review in Suprema Inc. v. U.S. Int'l Trade Comm'n, 796 F.3d 1338 (Fed. Cir. 2015), where the underlying three-judge panel was divided. Here, by contrast, Circuit Judge Taranto’s decision is undivided, and joined by the two other members of the panel (Federal Circuit Judges Prost and Chen). 

Underlying Proceedings

In the proceedings below, the Administrative Law Judge (ALJ) determined that there was no domestic industry economic prong, despite finding infringement of Lashify’s design patents. Id. at 11. In particular the ALJ found that, after excluding expenses related to sales, marketing, warehousing, quality control, and distribution, Lashify had not shown that it established “significant employment of labor or capital” in the United States as required under 337(a)(3)(B). 

In its domestic industry analyses, the Commission has historically considered whether expenses would be different than what a “mere importer” would do. In this case, the ALJ found that the expenses were ineligible as resembling those of a “mere importer” and that the sales and marketing expenses were not connected to R&D or manufacturing. Id. at 12. 

On commission review, the majority of Commissioners agreed that the economic-prong was not satisfied for the DI requirement. Id. at 13. Although the Commission agreed on the ultimate outcome of no domestic industry, the Commission’s opinion itself contained several instances of statements made by one or two of the Commissioners writing separately on the issue of sales and marketing expenses, rather than a unified, joint Commission opinion.

On appeal, Lashify argued that “the Commission adopted an interpretation contrary to clause (B), when it held that even large expenditures for domestic employment of labor or capital pertaining to patented articles are insufficient (1) when the labor or capital is used for selling and marketing, unless there exist ‘other qualifying expenditures,’ and (2) when the labor or capital is used for warehousing, quality control, and distribution, if the products ‘are manufactured outside the United States and no additional steps occur.’” Id. at 16 (quoting the Commission Opinion at 31).

Federal Circuit’s Overturning of Commission’s Interpretation of Section 337

On appeal, the Federal Circuit reviewed the ALJ and Commission majority’s interpretation of 337(a)(3)(B), which “excludes several categories of spending from qualifying, standing alone.” Id. at 15. The Federal Circuit agreed with Lashify’s arguments and noted that the “Commission’s rationale is effectively a demand for domestic manufacturing,” which is “contrary to section 337.” Id. at 16-17. 

The Court noted that the statutory text covers significant use of “labor” and “capital” without any limitation on the use, within an enterprise, to which those items are put, i.e., the enterprise function they serve. The Federal Circuit went on to reason that the context of the neighboring clauses (337(a)(3)(A) and (C)) and ordinary meanings of “labor” and “capital” support its conclusion that it is improper to limit expenses on the basis of arbitrary enterprise functions (i.e., whether the expenses are related to US-based R&D and/or manufacturing) when the patent owner already establishes that the expenses are related to the patent(s) at issue. Id. at 18.
 
The Federal Circuit delved deep into the legislative and Congressional history of the statute (pre-1988 Amendments), including a case cited by Representative Kastenmeier in drafting the Section 337 statute. The Court noted that “[t]he language of clause (B) (‘significant employment of labor or capital’) mirrors that used in [prior 1980 ITC case 337-TA-69, Certain Airtight Cast-Iron Stoves], where the Commission considered whether there was ‘a significant employment of land, labor, and capital for the creation of value’ (specifically, ‘value added domestically’) such that a non-domestic-manufacturer could satisfy the domestic-industry test.” Id. (citing Certain Airtight Cast-Iron Stoves, Inv. No. 337-TA-69, 1980 WL 41970 at *5 (Dec. 31, 1980)). The Court noted that in Stoves, “the Commission found that the complainant had established a domestic industry even though the stoves in question ‘arriv[ed] by ship from Norway.’” Id. The Court emphasized that there, the Commission considered evidence that “even in the absence of domestic manufacturing” the “the complainant ‘design[ed] advertising, and print brochures, including a service manual’ and ‘instruct[ed] its dealers on the safe installation’ of its stoves, in addition to repairing and testing the stoves.” Id. The Court found that this prior record, cited by Representative Kastenmeier in drafting the Section 337 statute, “undermines rather than supports the Commission’s reading of clause (B).” Id.
 
For now, the Federal Circuit has remanded this case to the ITC for further consideration on whether the economic prong is met for Lashify’s design patents: 

On remand, the Commission must count Lashify’s employment of labor and capital even when they are used in sales, marketing, warehousing, quality control, or distribution, and the Commission must make a factual finding of whether those qualifying expenses are significant or substantial based on “a holistic review of all relevant considerations,” Wuhan Healthgen, 127 F.4th at 1339. 

Id. at 26 (emphasis added).

Takeaways and Trends 

The Federal Circuit has shown a recent trend in solidifying the eligibility of activities and investments to qualify as a domestic industry at the ITC, through this decision, and e.g., the Court’s recent decision in Wuhan Healthgen Biotechnology Corp. v. ITC, No. 2023-1389 (Fed. Cir. Feb. 7, 2025). In the recent Wuhan Healthgen decision, the Federal Circuit reaffirmed the long-held Commission principle that there is no minimum monetary expenditure required to satisfy the significance analysis of the economic prong. Rather than focusing on a minimum monetary amount, the Federal Circuit reaffirmed that there must be an analysis of the significance of the claimed investments on a case-by-case basis. The Court may continue in issuing rulings affirming the various ways complainants can show the domestic industry requirement in the future.

As noted above, it remains to be seen whether this case is only the first in a series of developments on appeal in this case or in others, or if this decision will be the last word. We will continue to monitor this case, and others, for any further developments, at the appellate level, or the Commission level.

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