ITC suggests 5% Threshold for Domestic Industry Assessment; Order May Impact Tech Companies
Recently, Chief Administrative Law Judge (“CALJ”) Bullock of the U.S. International Trade Commission (“ITC”), in Certain Carburetors and Products Containing Such Carburetors, Inv. No. 337-TA-1123, Order No. 77, suggested that “significant” or “substantial” domestic industry investments must amount to greater than 5% of domestic industry product sales in the United States. The ruling considered, and granted, the respondents’ motion for summary determination that the complainant, Walbro, LLC (“Walbro”), failed to satisfy the economic prong of the domestic industry requirement. This order raises important considerations for parties and practitioners at the ITC related to the forum’s jurisdictional requirement of domestic industry.
Walbro, a large, multinational company, filed a complaint to the ITC, on June 15, 2018, alleging that the respondents unlawfully imported into the United States products that infringed five patents relating to carburetors. The investigation was terminated with respect to one patent, and the allegations as to four patents remained when the respondents moved for summary determination of no domestic industry.
On June 25, 2019, the respondents filed a motion for summary determination that Walbro failed to satisfy the domestic industry economic prong. The respondents also included in their motion a request to stay the procedural schedule. In addition to arguing that Walbro failed to demonstrate its domestic industry investments were quantitatively significant or substantial as required by section 337(a)(3), the respondents also argued that Walbro incorrectly allocated certain domestic industry costs, and that Walbro provided insufficient evidence with respect to certain allocations. Walbro opposed the motion on July 12, 2019. The Commission Investigative Staff did not offer a position.
For the purposes of summary determination, CALJ Bullock assumed that Walbro’s domestic industry allocations were correct, and addressed only the question of whether the alleged domestic industry investments were significant or substantial within the meaning of the statute. At the outset, the CALJ noted that the quantitative analysis required by section 337 requires no threshold amount that a complainant must meet, but instead depends on the facts of each investigation, the articles of commerce, and the realities of the marketplace.
The CALJ first rejected Walbro’s argument that its investments are “significant in absolute terms,” finding that Walbro’s investments “must be viewed in their proper context.” Order No. 77 at 3-4. The CALJ reasoned that here, “context is particularly important” for Walbro, which “is a large, multinational company with worldwide revenue totaling [redacted amount] for the relevant timeframe.” Id. at 4. The CALJ went on to note that “[j]ust as the Commission does not penalize a small business for making only small investments (in terms of dollar amounts), large multinational companies should be expected to invest larger dollar amounts in order for their investments to be deemed ‘significant’ or ‘substantial.’” Id. at 4.
In proceeding to analyze the significance of Walbro’s domestic industry investments, the CALJ noted that there were only “two pieces of data to provide context for Walbro’s investments”—U.S. sales and worldwide sales of domestic industry products—and “Walbro will not have a further opportunity to provide additional evidence.” Id. at 5-6. The CALJ then compared Walbro’s domestic industry investments to its sales of the domestic industry products both in the U.S. and worldwide, finding that the majority of Walbro’s investments constituted an insignificant percentage of its U.S. sales of the domestic industry products. Id. For the single investment category that constituted a percentage the Commission had deemed significant in the past, labor and capital investment for one of the asserted patents, the CALJ determined that the proper context was worldwide sales rather than U.S. sales. Id. In this context, the CALJ concluded the investment did not qualify as significant. Id.
Notably, the CALJ determined that he was unable to locate any opinion in the past four years in which the Commission held that domestic industry investments that represented less than 5% of domestic industry product sales qualified as “significant” or “substantial.” Id. The CALJ further highlighted the difficulty litigants face when assessing whether investments are significant as investment amounts and corresponding percentages are deemed confidential in Commission opinions. As a result, the CALJ’s discussion of domestic industry investments as compared to 5% of sales of domestic industry products provides helpful guidance for parties and practitioners, both in establishing and challenging whether a domestic industry exists in the articles protected by patents asserted at the ITC. However, it is unclear whether the CALJ would have found a domestic industry in this case based on a comparison of domestic industry investments against other pieces of data that the CALJ noted were not available in this case, such as a company’s overall expenditures or foreign expenditures. Id. at 5, n.5.
Given the contextual analysis required by Commission precedent, which stands for the proposition that the domestic industry inquiry is not one-size-fits-all, we do not expect that this 5% threshold of investments compared against sales will become a concrete benchmark that every complainant must meet. Walbro has petitioned for Commission review, and it remains to be seen whether or not, or to what degree, this initial determination will be upheld.
Furthermore, some technology giants and frequent ITC litigants such as Apple sometimes spend less than 5% of net sales on research and development.1 In fact, Apple’s total research and development spend first hit 5% of total net sales in 2016, and in 2014 and 2015, only 3% of Apple’s total net sales was committed to research and development. In addition, this guidance isn’t necessarily a barrier for small and medium-sized companies as their ratio of relevant investments to sales are likely to meet the 5% threshold. However, practitioners and litigants seeking to assert patents associated with comparatively low research and development costs, for example in low technology fields, or domestic industry products with comparatively large worldwide sales will need to carefully consider this order in assessing the viability of their domestic industry case.