Lelo Inc. v. ITC - Federal Circuit Decision

Earlier this week, the Federal Circuit decided Lelo Inc. v. International Trade Commission, No. 2013-1582. The Federal Circuit ruled the plain text of 19 U.S.C. § 1337 requires the ITC to perform a quantitative analysis to determine whether a complainant has demonstrated a significant investment in plant and equipment or significant employment of labor or capital necessary to establish the economic prong of domestic industry when the complainant relies on Section 337(a)3(A) or Section 337(A)(3)(B), respectively.

Key Takeaways

• A determination of whether a complainant has demonstrated a significant investment in plant and equipment or significant employment of labor or capital necessary to establish the economic prong of domestic industry under Section 337(a)(3)(A) or Section 337(A)(3)(B) requires a quantitative analysis.
• The ITC may not rely on qualitative factors alone in assessing whether a complainant established a domestic industry based on significant U.S. investment in plant and equipment or significant U.S. employment of labor or capital.
• Quantitative data must not be disregarded in favor of finding a domestic industry based on qualitative factors. “Qualitative factors cannot compensate for quantitative data that indicate insignificant investment and employment.”
• A complainant relying on a domestic industry product assembled or manufactured abroad using components purchased from U.S. suppliers must present evidence connecting the cost of the components to an increase in U.S. investment or employment.

Background: The underlying investigation, Certain Kinesiotherapy Devices and Components Thereof, Inv. No. 337-TA-823, began when the patent owner, Standard Innovation Corp. (“Standard”), a Canadian company, filed a patent infringement complaint under Section 337 against Lelo AB, Lelo Inc., and Lelo Shanghai Trading Ltd. (collectively, “Lelo”). Standard assembles kinesiotherapy devices in China that incorporate several domestically-manufactured components, which Standard purchases from third-party U.S. retailers. Standard distributes and sells the finished products in the U.S. through its subsidiary, Standard Innovation (US) Corp. Standard’s complaint alleged that the importation into and sale in the U.S. of competing devices by Lelo infringed U.S. Patent No. 7,931,605 (“the ’605 patent”).

The ITC Proceedings: In his initial determination, ALJ Pender found that Standard failed to meet the economic prong of the domestic industry requirement. Although the domestic industry products on which Standard relied are assembled in China, Standard argued that the cost of several domestically-manufactured components, purchased by Standard from U.S. retailers, was sufficient U.S. investment in plant and equipment to establish an economic domestic industry under Section 337(a)(3)(A). The ITC’s Office of Unfair Import Investigations argued the same activity by Standard constituted substantial investment in exploitation under Section 337(a)(3)(C). While ALJ Pender found some of the U.S.-made components to be critical to the domestic industry products and directly related to claimed features in the ’605 patent, he ruled there was no basis to attribute the expense of the components to either domestic industry prong. Standard had provided no explanation as to how its expenditures on those components contributed to an investment in U.S. plant and equipment and, because the components were not developed specifically for the domestic industry products, he found there was no basis to attribute their expense to U.S. engineering or research and development. ALJ Pender also found Standard’s U.S. expenditures accounted for less than 5% of the total cost of the product and thus were neither significant nor substantial.

The Commission reversed ALJ Pender’s determination regarding Standard’s investment in plant and equipment, stating that “there is no requirement that the components must be developed or produced specifically for the domestic industry products” and that Standard’s investment in those components were “indicative of the investments” that the component manufacturers expended to produce the components in the U.S. The Commission emphasized that qualitative considerations should be given weight in a “value added” analysis – that is, a comparison of what value the U.S. activity and investment adds to a domestic industry product manufactured overseas. The Commission accordingly found the contribution of the U.S.-made components “from a qualitative standpoint is indeed significant,” despite constituting a “relatively modest proportion of domestic content.” The Commission did not address whether Standard had shown a domestic industry through substantial investment in the exploitation of the ’605 patent.

The Federal Circuit Decision: On appeal, the Federal Circuit considered whether qualitative factors alone are sufficient to satisfy the “significant investment” and “significant employment” requirements of Section 337(a)(3)(A) and (B). The Court found that “the 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 or capital,’” and that the terms “significant” and “substantial” “refer to an increase in quantity, or to a benchmark in numbers.” Accordingly, the Court ruled that qualitative factors “cannot compensate for quantitative data that indicate insignificant investment and employment.”

In reaching this conclusion, the Federal Circuit reviewed instances where the ITC has previously considered qualitative data, but determined those cases did not support a ruling that qualitative data alone is sufficient to meet the domestic industry requirement. Among the cases considered was Certain Male Prophylactic Devices, Inv. No. 337-TA-546 (cited by the ITC as an analogous case), and in finding that case unpersuasive, the Federal Circuit noted that the domestic operations at issue in Male Prophylactic Devices reflected a domestic value added of 34%, far in excess of the less than 5% added value Standard established. The Court further held that, in order for a complainant to rely on components purchased from a third-party U.S. supplier, the complainant should provide evidence “that connects the cost of the components to an increase of investment or employment in the U.S.,” because the mere purchase of such components is not sufficient.