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Quantity, Not Quality, the Key Factor in IPR Import Restriction Case, Court Says

Tuesday, May 19, 2015
Sandler, Travis & Rosenberg Trade Report

The U.S. Court of Appeals for the Federal Circuit recently threw out import restrictions imposed by the International Trade Commission against certain kinesiotherapy devices and components thereof. Those restrictions were imposed in 2013 after the ITC found that the complainant met the domestic industry requirements of Section 337 of the 1930 Tariff Act based on qualitative factors, but the CAFC states that it is quantity, rather than quality, that matters.

Complainant Standard Innovation Corporation is headquartered in Canada and its U.S. subsidiary was formed to distribute its products in the United States. Standard Innovation does not manufacture in the U.S.; instead, parts and components are sourced from third-party suppliers in the U.S. and other countries, Chinese manufacturers are contracted to assemble the devices from those parts and components, and the finished devices are then exported from China to over 50 countries worldwide, including the U.S.

The ITC’s presiding administrative law judge determined that there was no violation of Section 337 because Standard Innovation failed to satisfy the domestic industry requirements. Section 337 requires a claimant asserting patent rights to establish, with respect to the article 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 the exploitation of the article, including engineering, research and development, or licensing. Among other things, the ALJ rejected Standard Innovation’s argument that its purchase of four components manufactured in the U.S. was substantial or significant under prongs (A) and (C), noting that the total price of these purchases accounted for less than five percent of the total raw cost of the devices.

The ITC reversed the ALJ, ruling that Standard Innovation had satisfied the domestic industry requirement based on its expenditures on the U.S.-made components. While conceding that these purchases represented a relatively modest proportion of domestic content, the ITC determined that these components are critical to the patented devices and that as a result their contribution from a qualitative standpoint is significant. Because the devices were protected by the patent at issue, the ITC issued (a) a general exclusion order prohibiting the unlicensed entry of infringing devices and (b) cease and desist orders prohibiting the respondents, all of which are located in the U.S., from importing, selling, marketing, advertising, distributing, offering for sale, transferring (except for exportation), and soliciting U.S. agents or distributors for infringing devices in the U.S.

Stating that this appeal turns on the single question of whether qualitative factors alone are sufficient to satisfy prongs (A) or (B) of the domestic industry requirement, the CAFC determines that they are not. The plain text of the statute requires a quantitative analysis, the court states, and the ITC erred in disregarding the lack of evidence of any investment made in capital or labor as a result of the components purchased in the U.S., which were bought off the shelf. Because Standard Innovation also did not set forth evidence of relevant investments under prong (C), the court concluded that it did not satisfy the domestic industry requirement.

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