Court Decision on Economic Prong of Section 337 'Potentially Game-Changing,' Lawyers Say
A recent decision by the U.S. Court of Appeals for the Federal Circuit will "substantially upend" the International Trade Commission's established approach to determining whether a company's U.S. operations are part of the domestic industry, lawyers from Ropes & Gray said.
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Matthew Shapiro, counsel at Ropes & Gray, said that the decision is "potentially groundbreaking" and that it likely opens the door to a broader range of patent violation cases from companies "who may have previously been hesitant or were deemed ineligible because of their U.S. presence primarily involved in sales, marketing, or warehousing." Shapiro was speaking on Ropes & Gray's podcast March 12.
In the court's decision, Lashify v. ITC, it found that the ITC had incorrectly denied relief to U.S. company Lashify and that "the Commission applied a legally incorrect understanding of the statutory test for the economic-prong requirement."
Lashify had originally filed the Section 337 complaint in 2020, alleging infringement of four of its patents by nine named respondents, including CVS and Walmart (see 2201250036). The ITC determined that while Lashify had satisfied the technical prong, it had not demonstrated the economic prong, which is the requirement that it have a domestic industry.
The commission characterized Lashify's U.S.-based business as the activities of a "mere importer." Lashify's manufacturing occurs abroad, and the ITC excluded its U.S.-based sales and marketing activities and expenses relating to warehousing, quality control, and distribution from analysis, deeming them to be insignificant.
The Federal Circuit "flatly rejected" the ITC's approach, calling it "counter to the statutory text." It cited the Supreme Court decision Loper Bright to exercise its "independent judgment" about the "correctness" of the ITC's interpretation. The statutory language in Section 337, the court said, concerns "significant employment of labor or capital" and does not contain limitations on how such labor and capital is used.
Shapiro said that the decision may simplify domestic industry analysis in future cases, as "companies won’t need to deduct or de-allocate sales and marketing expenses." He reiterated that the decision may broaden the spectrum of complainants in patent cases because "as long as they can demonstrate 'significant' employment of labor or capital in the U.S. related to the patented articles, these entities may now have a viable path at the ITC."
Mattew Rizzolo, a partner at Ropes & Gray, agreed with his analysis, saying that the decision "has the potential to reshape the landscape of Section 337 investigations at the ITC and patent owners who were previously deterred from filing at the ITC may now find it a more attractive forum." He also speculated that the potential uptick in Section 337 investigations may cause Congress to turn its attention to the ITC as it has been "a lightning rod for criticism and the subject of proposed legislation in the past."