Lelo Inc. v. ITC, No. 13-1582 (Fed. Cir. May 11, 2015)

REYNA, Circuit Judge.

ments of § 337 were satisfied upon a showing of a “significant investment in plant or equipment” and a “significant employment of labor or capital.”¹ See 19 U.S.C. § 1337(a)(3). Because the ITC’s domestic industry analysis and determination was based on qualitative factors, we reverse.

BACKGROUND

tion”), founded in 2004 and headquartered in Ottawa, Canada, is the assignee of U.S. Patent No. 7,931,605 (the ’605 Patent). Standard Innovation markets a line of kinesiotherapy devices that includes three models that it asserts practice certain claims of the ’605 Patent. In September 2009, Standard Innovation formed a U.S. subsidiary, Standard Innovation (US) Corp., (“Standard

ufactures in the United States. Standard Innovation3 sources parts and components for its devices from third-party suppliers in the U.S. and other countries. It contracts Chinese manufacturers to assemble its devices from those parts and components. Once finished, the devices are exported from China to over fifty countries worldwide, including the United States.

It is not clear from the record how many different inputs, parts, or components (collectively “components”) are included in each of the asserted devices. The record also does not contain evidence as to the respective values, prices, or costs of all of the components. The ITC addresses only four components in its domestic industry analysis: a backbone material, a rubber, microcontrollers, and a pigment.² Of those components, the backbone material, rubber, pigment, and the wafers used in the microcontrollers are manufactured in the United States, but the record is not clear whether the U.S. suppliers of the components are also the manufacturers of the components. Apparently, all other components of the devices are produced and sourced abroad.

ple place of business in San Jose, California. Leloi AB is headquartered in Stockholm, Sweden, and is a majority shareholder of Lelo Inc. and Lelo Shanghai Trading Ltd.

I. U.S. DOMESTIC INDUSTRY

Standard Innovation filed a § 337 complaint alleging nents thereof that infringed its ’605 Patent. An ITC Administrative Law Judge (“ALJ”) issued an Initial4 Determination in which he construed three claim terms of the ’605 Patent and determined that all of the accused tain Kinesiotherapy Devices and Components Thereof, Inv. No. 337-TA-823, Initial Determination at 50 (Jan. 8, 2013) (“Initial Determination”). The ALJ rejected LELO’s arguments that the independent claims of the ’605 Patent are invalid as anticipated, obvious, or indefinite under 35

Despite its findings on infringement and validity, the ALJ determined that a violation of § 337 had not occurred because Standard Innovation failed to satisfy the § 337 domestic industry requirements. Id. The ALJ rejected Standard Innovation’s arguments that its U.S. purchase

ment in its exploitation, including engineering, research and development, or licensing,” under prongs (A) and (C), respectively, of the § 337 domestic industry requirement.

tion’s U.S. purchases were not relevant to a prong (A) analysis because Standard Innovation failed to establish

ment. Id. at 73–74. The ALJ also decided that the components were off-the-shelf items and not relevant to prong (C) because there was no proof that the components were developed specifically for Standard Innovation’s devices, or what portion, if any, of the purchase price was allocable to research and development costs incurred in

chases were relevant, they were neither “substantial” nor “significant” under prongs (A) or (C). Id. at 75. The total5 purchase prices accounted for less than five percent of the total raw cost of the devices. Id. at 76.³

II. COMMISSION DETERMINATION

The Commission reviewed the ALJ’s determination, mined that one of the accused devices does not meet the

tions as to claim construction, infringement, and validity.

vation has satisfied the domestic industry requirement mestically that are critical to [its devices].” Id. at 26. The Commission rejected the ALJ’s economic prong analysis because Standard Innovation “established that the components were critical for [its devices], which the ALJ found to be protected by the patent. This is sufficient for us to consider the component expenses in our economic6 mined, however, that Standard Innovation’s sales and marketing data were not relevant to the establishment of a domestic industry under prong (C). Id. at 29–30, n. 8.

The Commission rejected the ALJ’s finding that the purchases were neither “substantial” nor “significant” under prongs (A) or (C). Conceding that the purchases represented “a relatively modest proportion of domestic content,” id. at 34, the Commission determined that the tive standpoint is indeed significant,” id. at 35. The Commission found that the ALJ had failed to give “due consideration to the critical nature of the components to the patented products in the context of the industry and the company.” Id. at 34. The Commission reasoned that the components were “crucial” because the backbone and finishing materials were finalized after extensive effort and experimentation, the backbone material specifically controllers enabled the devices to “function as a vibrator (particularly as a vibrator with multiple modes)” by controlling “motor and mode selection.” Id. at 35–36. The Commission thus determined that the domestic purchases

LELO timely appealed. We have jurisdiction under

DISCUSSION

terminations in accordance with the Administrative Procedure Act (APA), setting aside conclusions found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. 5 U.S.C. § 706(2)(A). We review questions of law, as interpreted and applied by the dence. Finnigan Corp. v. Int’l Trade Comm’n, 180 F.3d7 1354, 1361–62 (Fed. Cir. 1999); Motorola Mobility, LLC v. Int’l Trade Comm’n, 737 F.3d 1345, 1348 (Fed. Cir. 2013).

This appeal turns on the single question of whether qualitative factors alone are sufficient to satisfy the “significant investment” and “significant employment” requirements of § 337. To answer this question, we look first to the plain meaning of the statute. Carcieri v. Salazar, 555 U.S. 379, 387 (2009); Hughes Aircraft Co. v.

A claimant asserting patent rights under § 337 must satisfy the “domestic industry” requirement set out in the

(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.

sis in determining whether a petitioner has demonstrated a “significant investment in plant and equipment” or “significant employment of labor or capital.” First, the terms “significant” and “substantial” refer to an increase in quantity, or to a benchmark in numbers. The plain meaning of an “investment” is “an expenditure of money for income or profit or to purchase something of intrinsic value.” Webster’s Third New International Dictionary 1190 (1986). An “investment in plant and equipment” therefore is characterized quantitatively, i.e., by the amount of money invested in the plant and equipment. Similarly, “capital” is “a stock of accumulated goods” and “labor” is “human activity that produces goods or provides8 the services in demand in an economy.” Id. at 332, 1259. All of the foregoing requires a quantitative analysis in order to determine whether there is a “significant” increase or attribution by virtue of the claimant’s asserted commercial activity in the United States.

Prior ITC § 337 investigations confirm that a § 337 analysis is quantitatively based. The ITC first addressed the relevant domestic industry requirement in Certain Cabinet Hinges, and found that the word “significant” denoted “an assessment of the relative importance of the domestic activities.” Certain Concealed Cabinet Hinges and Mounting Plates, Inv. No. 337-TA-289, 1990 WL 10608981, Comm’n Op. at 11 (Jan. 8, 1990). The ITC reviewed the term “relative importance” in quantitative terms, determining that the complainant’s total dollar amount of investment was not “significant” relative to its overall investment with respect to the articles at issue. Id. at 11–12. In Certain Pressure Transmitters, the ITC determined that the § 337 requirement was satisfied facturing facility, equipment, research and development, and licensing, as well as reviewing the total number of mitters, Inv. No. 337-TA-304, USITC Pub. 2392, Comm’n

tic industry determination on qualitative factors. See, 546, USITC Pub. 4005, Comm’n Op. at 24–25 (June 21, 2007) (“Certain Male Prophylactics”). But the cases it cites do not stand for the proposition the qualitative data alone can satisfy the domestic industry requirements. For ined the economic impact of subcontractor domestic tions reflected a U.S. value added of 34 percent. Id. at 26.9 ing because the domestic industry requirement was not satisfied in those cases and cannot stand for the proposition that qualitative factors alone can support a domestic industry finding. Certain Printing and Imaging Devices and Components Thereof, Inv. No. 337-TA-690, Comm’n Op. at 17 (Feb. 17, 2011); Certain Stringed Musical Instruments and Components Thereof, Inv. No. 337-TA-586, USITC Pub. No. 4120, Comm’n Op. at 17 (Apr. 24, 2008).

The ITC argues that this case is similar to Certain Male Prophylactics, because Standard Innovation’s U.S. purchases of components are similar to “subcontracted components.” Comm’n. Op. at 26. This argument is tractor provided a detailed accounting of the number of hours its employees spent working specifically on the complainants. The data permitted the ITC a basis to compute the magnitude of the “employment of labor.” Id. ing of the amount of investment it made in equipment

In this case, the U.S. suppliers are neither contractors

vestment made in capital or labor as a result of the purchased components. Standard Innovation provides only generic purchase prices it paid for the off-the-shelf items. These pricing data do not reflect the magnitude of labor expended to produce the components, or the amount ard Innovation’s orders. The record contains no data indicating the share of labor and capital costs attributable solely to purchases made by Standard Innovation.⁴ The10 ITC has generally applied prong (B) of the domestic industry requirement to capital investments in domestic facilities. See, e.g., Certain Integrated Circuit Chipsets and Products Containing the Same, Inv. No. 337-TA-428, ALJ Order at 2 (May 4, 2000); Certain Cutting Tools for Flexible Plastic Conduit and Components Thereof, Inv. No. 337-TA-344, ALJ Order at 7 (Feb. 10, 1993).

tion’s investment and employment under prongs (A) and (B) were quantitatively “modest,” Comm’n Op. at 34, which we take to mean “insignificant.” The Commission also found that Standard Innovation did not establish sion’s finding that investment and employment under prongs (A) and (B) were modest and insignificant. The Commission erred when it disregarded the quantitative data to reach its domestic industry finding based on sate for quantitative data that indicate insignificant tion did not establish a “significant” “investment” or “employment” under prongs (A) or (B), and did not set forth evidence of relevant investments under prong (C). Accordingly, Standard Innovation did not satisfy the

foreign activities. Initial Determination at 72. Though important, the ALJ’s analysis is incomplete as it does not account for the value expended on relevant domestic activities, as opposed to total profit or total general administrative costs. In any event, the ITC also failed to allocate profits or revenue attributed to relevant domestic activities. Comm’n Op. at 33–34.

11CONCLUSION

We hold that qualitative factors alone are insufficient to show “significant investment in plant and equipment” and “significant employment of labor or capital” under prongs (A) and (B) of the § 337 domestic industry requirements. The purchase of so called “crucial” components from third-party U.S. suppliers are insufficient to satisfy the “significant investment” or “significant employment of labor or capital” criteria of § 337 where there is an absence of evidence that connects the cost of the components to an increase of investment or employment in the United States.

Because the ITC’s assessment of domestic industry contravenes § 337, we hold that the ITC’s Final Determination was not in accordance with law. Accordingly, we reverse the ITC’s Final Determination.⁵

REVERSED