1

Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

Tom.Jarvis@Finnegan.com

NPEs and the Domestic Industry

Licensing Requirement

Chester Day (Google)

Richard Rainey (GE)

Kathleen Zylan (Cisco)

Tom Jarvis (Finnegan/Moderating)

2

ITC Statistics

• ITC makes distinction between categories of NPEs

– Category 1 NPEs

• do not make a product practicing the asserted patents

• Investments in research, development, or engineering

• Includes universities, companies that failed to commercialize

– Category 2 NPE/PAEs

• do not manufacture products that practice the asserted patents

• business models focused on purchasing and asserting patents

• secondary market for IP rights

3

ITC Statistics

From “FACTS AND TRENDS REGARDING USITC SECTION 337

INVESTIGATIONS” Prepared by the U.S. International Trade

Commission (June 18, 2012)

© 2006 Cisco Systems, Inc. All rights reserved. Cisco Restricted – Attorney Client Privileged; Attorney Work Product 4

ITC 337 Investigations Instituted Per Year

30 35 37

29

56 62

38

2006 2007 2008 2009 2010 2011 2012

ITC Patent Infringement Investigations

Source: RPX Proprietary Research

© 2006 Cisco Systems, Inc. All rights reserved. Cisco Restricted – Attorney Client Privileged; Attorney Work Product 5

NPE CASES INCREASING IN THE ITC

2

4

6

4 4

16

14

2006 2007 2008 2009 2010 2011 2012

NPE ITC Investigations

8 15

97

38 22

232

201

2006 2007 2008 2009 2010 2011 2012

Respondents in NPE ITC Investigations

Source: RPX Research and EDIS

© 2006 Cisco Systems, Inc. All rights reserved. Cisco Restricted – Attorney Client Privileged; Attorney Work Product 6

ITC 337 Investigations Instituted Per Year

28 31 31 25

52 46

24

2 4 6

6

4 16

14

2006 2007 2008 2009 2010 2011 2012

NPE Cases

Non-NPE Cases

7

Statutory Question

• Domestic industry:

– A. significant investment in plant and equipment;

– B. significant employment of labor or capital; or

– C. substantial investment in its exploitation, including

engineering, research and development, or licensing.

• Difference between a “traditional” DI based on

manufacturing and a DI based on licensing?

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Issues

• Manufacturing, Research & Development, and

Engineering Analysis

– Economic Prong: significant investments

– Technical Prong: products practice asserted patent

• Licensing analysis:

– Economic Prong: substantial investments

– Technical Prong: investments related to the asserted

patents

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Certain Multimedia Display and Navigation Devices, Inv. No. 694

– Pioneer asserted 3 patents of a portfolio of more than

1,600 patents.

– The ALJ found no violation, but that the economic prong

of DI was satisfied.

– The Commission reversed the ALJ on DI, holding that:

• US investments relate to the asserted patents and licensing

• For a portfolio license, complainant must show that its

investments are focused on:

– the asserted patent or

– the relative importance or value of the asserted patent

10

Certain Electronic Devices Including Handheld Wireless

Communication Devices, Inv. Nos. 667/673

– NPE complainant alleged DI based on licensee activities.

– The ALJ found on MSD that a DI existed through licensee

R&D, even though that activity was not directly related to

patented features of the products at issue.

– ID non-reviewed by the Commission

– Investigations settled.

11

John Mezzalingua Assocs., Inc. v. ITC, 660 F.3d 1322

(Fed. Cir. Oct. 4, 2011)

• Licensor appealed from the Commission decision

in Inv. No. 650 that it failed to show DI.

• Federal Circuit affirmed, finding expenses incurred

in asserting and defending validity of its design

patent did not constitute a “substantial investment

in exploitation” of its patent through licensing.

• Judge Reyna dissented that the Commission erred

in rejecting litigation expenses.

12

Certain Video Game Systems & Controllers, Inv. No. 743

• The ALJ found no DI, Commission non-reviewed

the ID in relevant part.

• ALJ found no existing DI at the time of the

complaint and no DI in the process of being

established

– complainant had ceased any exploitation of the patent

well before filing the complaint at the ITC

– litigation expenses found insufficient to establish a DI.

• Federal Circuit Appeal pending.

13

Certain Liquid Crystal Display Devices, Including Monitors, Televisions, and

Modules, and Components Thereof, Inv. Nos. 741/749

• 5 patents asserted against multiple parties

• ALJ found a DI, Commission affirmed, finding: • Ongoing licensing programs related to the asserted patents;

• Licensing negotiations focused on the asserted patents

• Only a subset of the patents in the portfolio had accompanying

“claim charts,” including the asserted patents

• Despite apportioning the licensing with respect to other patents,

Commission found investments substantial

• Settled

14

Certain Integrated Circuits, Chipsets, & Products,

Inv. No. 786

• 1 patent asserted against multiple respondents.

• ALJ found no DI; the Commission affirmed, finding:

– Failure to show what proportion of expenses were

foreign versus domestic

– Failure to show how expenses related to the asserted

patent

– Failed to provide sufficient information as to how the

asserted patent fit into overall licensing program.

15

InterDigital Communications, LLC v. Int'l Trade Comm'n,

2010-1093, 2013 WL 124064 (Fed. Cir. Jan. 10, 2013)

• Appeal from Commission decision in Inv. No. 613,

finding no violation - no infringement and no DI.

• The Federal Circuit reversed and remanded on

claim construction, but affirmed on DI.

• Respondent filed a combined petition for panel

rehearing and for rehearing en banc on DI.

16

InterDigital Communications, LLC v. Int'l Trade Comm'n,

2010-1093, 2013 WL 124064 (Fed. Cir. Jan. 10, 2013)

• Federal Circuit denied combined petition; held that

substantial investment in R&D of intellectual

property was with respect to the articles protected

by the patent, within the meaning of Tariff Act’s

“domestic industry” requirement.

• Judge Newman dissented that complainant does

not make the patented invention in the US, and

seeks to impose on respondent that is “not a

license to manufacture any patented product in the

United states; it is a license to import products

made in foreign countries.”

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Nexus between licensing and asserted patents

– Whether the patents at issue are directly connected to a

licensing domestic industry

– Whether the licensee’s efforts relate to a protected article

– Number of patents in the portfolio

– Relative importance/value of asserted patents to the

portfolio

– Successfully litigated by complainant

– Relates to a technology industry standard

– Considered a “base patent” or “pioneering patent”

– Prominence of the asserted patents in licensing

discussions

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Policy Objectives of 337 & Licensing Issues

• Is there a distinction between revenue-driven and

production-driven (industry creating) licensing, and

is such a distinction useful?

• Largest USA companies are selling patents into

the secondary market that will obviously be used

for licensing and litigation

• Licensing market has changed since statute

amended; what actually constitutes a licensing

industry now?

19

Policy Objectives of 337 & Licensing Issues

• Licensing based in research & development spurs

adoption of technology

• Does the value of patents sold (or purchased) in

the secondary market funnel back to the original

entity who performed the research, and thereby

spur further R&D?

• Originally, ITC focused on threats of foreign

competition

20

Policy Objectives of 337 & Licensing Issues

• Are there articles to be protected in a licensing DI,

and does there need to be?

• Has a requirement been read out of the statute?

• What connection to a “real” DI exists in licensing?

• Do the justifications underpinning 337 make sense

in the licensing context, with no connection to

protected articles?

21

Disparity of leverage litigating before the ITC?

• Licensing entities typically have no products,

usually not risk of counter claims or counter suits

• Licensing profit from settlements, not market

exclusivity.

22

Distinctions between NPEs and PAEs

• Distinctions between PAEs and NPEs

– Legal

– Economic

– Is a company who makes products, but not in the U.S.,

but depends on licensing for a DI an NPE or PAE?

• Has the PAE/NPE issue become politicized?

• Have any PAEs obtained an exclusion order?

• Have any NPEs obtained an exclusion order?

23

High Costs of DI Economic Prong Defenses

• Defending against PAE/NPE DI claims

– Expensive

– Risky

– Rarely resolved on summary determination

• Procedural solutions?

24

Possible Procedural Solutions: Pre-Institution

• Ask Commission allow the ALJ to take evidence

on Public interest Issues of licensing DI

• Ask Commission find the complaint deficient if a

licensing DI is insufficiently supported

• Commission could require more details in

complaint, possibly supported by third-party

affidavits

25

Public Interest Issues Implicated by Licensing DI

• Identify injury to the “real” licensing DI

• Evaluate nexus to:

– licensing

– exploitation (revenue driven v. production driven)

– articles (emerging or established industry)

• Consult with other government agencies

responsible for trade policy, protecting competition

and jobs in US economy, and protecting

consumers.

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Possible Procedural Solutions

• Summary determination often delayed or

precluded by unsubstantiated claims of on

activities of licensees • requiring subpoenas to third parties

• Ask the ALJ to accelerate discovery of claims of

investments of licensees, and to stay other

discovery until complete

27

Possible Procedural Solutions

• Early Summary Determination motions on DI

Economic prong issues

• Request oral arguments (mini-hearing)

• Request an accelerated decision

• Require details on allocation of investment per

patent; no allocation, insufficient information to

show DI.

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Possible Procedural Solutions

• Limiting Response to MSD to evidence set forth in

the complaint

• Complainants know their own domestic industry

• Technical prong and/or other technology-related

issues would be minimized, as a pure licensing

claim requires no technical prong of DI.

29

Possible Legislative Solutions

• Redefine the statute to distinguish between

revenue driven and production driven licensing

• Mandate the adequacy of monetary damages

(eBay)

• Irreparable harm + Causal nexus (eBay)

30

Questions/Comments