United States: ITC ALJ Potentially Weakens R&D-Based Domestic Industry

On April 26, 2016, International Trade Commission ("ITC") Administrative Law Judge ("ALJ") Lord issued the public version of her final initial determination ("ID") in Certain Electric Skin Care Devices, Brushes and Chargers Therefor, and Kits Containing Same, ITC Inv. No. 337-TA-959 ("Certain Electric Skin Care Devices"). While the ALJ found that a domestic industry exists, she determined that expenditures relating to research and development cannot be counted toward satisfaction of subsections (A) or (B) of the domestic industry requirement—a holding that could potentially weaken trade protections for U.S. industry.

Statutory Framework

The ITC has jurisdiction over cases involving "industr[ies] in the United States, relating to the articles protected by the patent, copyright, trademark, mask work, or design concerned, exists or is in the process of being established." 19 U.S.C. § 1337(a)(2). This requirement is met only if there is: (i) significant investment in plant and equipment; (ii) significant employment of labor or capital; or (iii) substantial investment in its exploitation, including engineering, research and development, or licensing. 19 U.S.C. § 1337 (a)(3).

The Case

On February 18, 2016, the complainant filed a motion for summary determination on the existence of a domestic industry and violation of Section 337 with respect to various defaulting respondents. The ALJ found that a domestic industry exists and that a violation of Section 337 occurred with respect to the importation of the accused infringing products. But the ALJ notably excluded expenditures for research and development from subsections (A) and (B) of 19 U.S.C. § 1337 (a)(3).

The complainant provided evidence of expenditures relating to facilities and personnel utilized for both manufacturing and research and development ("R&D"). The ALJ held that the R&D-related expenditures should not be counted toward meeting the requirement for significant investment in plant and equipment (subsection (A)) or significant employment of labor or capital (subsection (B)). ID at 24-26. The ALJ further explained that "non-manufacturing expenses would need to be backed out of the calculation of qualifying investments under subsection (A) and (B)." ID at 25.

The ALJ supported her strict categorization of domestic industry expenditures using tenets of statutory construction explaining that, because subsection (C) was enacted after subsections (A) and (B), "there would have been no need to enact subsection (C) explicitly to include [investment in engineering, research and development, or licensing] as ones giving rise to domestic industry expenditures ... subsection (C) cannot be superfluous; therefore, expenses for design, engineering and research and development cannot be allocated to [subsections (A) or (B)]." ID at 25.

This holding, however, appears to contradict previous Commission precedent. For example, in Certain Marine Sonar Imaging Devices, Including Downscan and Sidescan Devices, Products Containing Same, and Components Thereof ("Marine Sonar Imaging"), the Commission held that a domestic industry existed under subsection (B) in light of expenditures on employees engaged specifically in research and development. Marine Sonar Imaging, Inv. No. 337-TA-921, Comm'n Op. at 58-64. Given the conflict between these cases (and others), it is likely the Commission will review the ID.

Ramifications

If upheld by the Commission, the ALJ's preclusion of R&D expenditures from subsections (A) and (B) of the domestic industry requirement could have significant ramifications for entities seeking remedies in the ITC. For instance, whereas investments relating to a product covered by the asserted patent are sufficient to satisfy subsections (A) and (B), to meet subsection (C), the investments must also specifically relate to the technology covered by the patent. This additional requirement of subsection (C) alone could potentially keep entities that invest significant capital in U.S. R&D from obtaining protection from the ITC. Moreover, the nuanced differences between "significant" investment (subsections (A) and (B)) and "substantial" investment (subsection (C)) could pose issues for a complainant relying on R&D expenditures to satisfy the domestic industry requirement. Jones Day will continue to monitor Certain Electric Skin Care Devices and will provide updates as they develop.

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