By Eric Schweibenz
On October 4, 2011, the Federal Circuit issued a precedential opinion in John Mezzalingua Associates, Inc. (d/b/a PPC, Inc.) v. Int’l Trade Comm’n, No. 2010-1536.  This was an appeal from the ITC’s final determination in Certain Coaxial Cable Connectors and Components Thereof and Products Containing Same (Inv. No. 337-TA-650).  In a Remand Initial Determination (“RID”), ALJ Gildea found that Complainant John Mezzalingua Associates, Inc. d/b/a PPC, Inc. (“PPC”) failed to establish a violation of Section 337 with respect to U.S. Patent No. D440,539 (the ‘539 patent), because PPC did not demonstrate substantial investment in exploitation of the ‘539 patent through licensing efforts, and therefore failed to meet the economic prong of the domestic industry requirement.  The ITC adopted ALJ Gildea’s RID without modification, and the Federal Circuit affirmed the ITC, holding that substantial evidence supported the ITC’s finding that PPC did not meet its burden to show that its litigation expenses concerning the ‘539 patent were related to licensing.

By way of background, the Complainant in this investigation is PPC and the Respondents are Fu Ching Technical Industry Co. Ltd., Gem Electronics, Inc. (collectively, the “Active Respondents”), Hanjiang Fei Yu Electronics Equipment Factory, Zhongguang Electronics, Yangzhou Zhongguang Electronics Co., Ltd., and Yangzhou Zhongguang Foreign Trade Co., Ltd. (collectively, the “Defaulting Respondents”). The investigation was instituted on May 30, 2008.  On October 13, 2009, ALJ Gildea issued his Initial Determination (“ID”) finding, inter alia, that the Defaulting Respondents were in violation of Section 337 by reason of infringement of U.S. Patent Nos. 5,470,257, 6,558,194, D519,076, and the ‘539 patent.  See our November 10, 2009 post for more details.

On December 14, 2009, the International Trade Commission (the “Commission”) issued a notice determining to review the ID in part.  On review, the Commission considered, inter alia, whether PPC had satisfied the domestic industry requirement with respect to the ‘539 patent.   On March 31, 2010, the Commission vacated ALJ Gildea’s finding that PPC had established a domestic industry with respect to the ‘539 patent and issued an order remanding the portion of the investigation relating to the ‘539 patent to ALJ Gildea for further proceedings.   In the Opinion accompanying the remand order, the Commission held that litigation costs taken alone are insufficient to satisfy the domestic industry requirement, but that litigation costs that are actually related to the licensing of the asserted patent(s) may be sufficient.  See our April 16, 2010 post for more details.

In the RID, ALJ Gildea determined that PPC had not sufficiently tied its litigation costs to licensing.  The ALJ further determined that PPC had received only one license for the ‘539 patent, and that only a portion of the license agreement in question actually related to the ‘539 patent.  Moreover, PPC had no established licensing program, let alone a licensing program that encompassed the ‘539 patent.  Finally, PPC had made no efforts to send cease and desist letters or engage in other licensing talks with any persons or entities other than those involved with the single ‘539 patent license.  Thus, while ALJ Gildea found that the issue was a “close one,” he determined that “PPC’s evidence does not demonstrate ‘substantial’ investment in exploitation of the ‘539 patent through its licensing efforts, and therefore does not support a finding of economic domestic industry with respect to the ‘539 patent.”  Accordingly, ALJ Gildea held that PPC had failed to establish a violation of Section 337 by the Defaulting Respondents with respect to the ‘539 patent.  See our June 16, 2010 post for more details. The Commission adopted the RID without modification and the order became final.

On appeal, the Federal Circuit agreed with the Commission that “expenditures on patent litigation do not automatically constitute evidence of the existence of an industry in the United States established by substantial investment in the exploitation of a patent.”  The majority decision disagreed with the dissent that litigation expenses constituted a per se “exploitation of a patent” within the meaning of Section 337(a)(3)(C), and the majority stated that even PPC acknowledged a “requirement to demonstrate a nexus between its litigation expenses and licensing.”  With respect to PPC’s patent litigation in Florida regarding the ‘539 patent, the Federal Circuit noted there was no evidence that PPC had offered to license the patent to the defendant “before commencing litigation, no evidence that PPC had sent a cease and desist letter mentioning the possibility of a settlement, and no evidence that PPC had conducted either settlement or licensing negotiations during the lawsuit itself.”  Additionally, the Federal Circuit took note that PPC sought and received a permanent injunction in the Florida case, and the injunction remained in place for nearly two years before PPC signed an agreement with the defendant that included a license to the ’539 patent, among other patents.  The Federal Circuit observed that such “delay suggests that PPC’s purpose in litigating was not to obtain a license but, rather, was to stop [the defendant] from manufacturing infringing connectors.”  The Federal Circuit also observed that PPC did not sign the agreement that included a license to the ‘539 patent until after PPC obtained a jury verdict against the same defendant in a different litigation that did not involve the ‘539 patent.  The Federal Circuit found no reason to disturb the ALJ’s findings that certain legal expenses specifically related to negotiating and drafting the licensing agreement were “some investment with respect to licensing the ‘539 patent,” but  that such investment was “not substantial.”  Finally, the Federal Circuit stated that while there is “no rule that a single license—such as an exclusive license—cannot satisfy the domestic industry requirement based on a substantial investment in licensing,” ALJ Gildea was “entitled to view the absence of other licenses issued or negotiated for the ’539 design patent as one factor supporting his conclusion that PPC’s expenditures related to licensing were not substantial.”  Based on the above, the Federal Circuit found that substantial evidence supported the Commission’s conclusion on the licensing issue.

Judge Reyna filed a lengthy dissent, which included an analysis of Section 337’s legislative history.  The dissent argued that Congress intended to considerably lower the threshold for domestic industry through amendments in 1988, which provide the present definitions for proving domestic industry, including Section 337(a)(3)(C), which requires a showing that there is: “in the United States, with respect to the articles protected by the patent…substantial investment in its exploitation, including engineering, research and development, or licensing.”  This constitutes a flexible open-ended list, and “standing could exist via any ‘exploitation’ of the patent—i.e., any activity that puts the patent to a productive use or otherwise takes advantage of it.”  The dissent determined that under this broad language of Section 337(a)(3)(C), “patent infringement litigation is an investment in the exploitation of a patent.”  The dissent also raised various policy arguments, stating that “infringement litigation can be a productive and advantageous use of patent rights which better fortify the patentee’s position in the marketplace,” and that “absent PPC’s infringement actions the ’539 patent would never have become sufficiently valuable or marketable for PPC to have obtained the license agreement that it did.”  The dissent concluded that, “litigation undertaken to enforce patent rights and enhance the value of a patent or pave the way for a stronger competitive advantage constitutes an investment in exploitation under section 337(a)(3)(C), regardless of that activity’s relationship to licensing, engineering, research, or production.”   Accordingly, the dissent concluded that the “ITC’s determination to exclude litigation costs untethered to licensing from consideration impermissibly and arbitrarily limited the reach of section 337 for patent owners.”