What Does the ITC’s Domestic Industry Test Really Do?

In patent investigations at the International Trade Commission, a violation of Section 337 can only be found if there is patent infringement, importation and "an industry in the United States relating to the articles protected by the patent." This domestic industry requirement exists because Congress wanted the ITC “to adjudicate trade disputes . . . on behalf of an industry in the United States.” But the law’s definition of a domestic industry is so broad that Section 337 mostly just enables an arbitrary subset of patent owners to bypass courts in pursuit of a remedy that isn’t justified by patent policy or trade policy goals.

The Domestic Industry Test

Compared to other trade remedy laws like antidumping or safeguard duties, Section 337 has an extraordinarily lax domestic industry and injury requirement. For one thing, the law does not require that a complainant actually manufacture its products in the United States. Activities like product design, research and development, and even sales and marketing can be used to satisfy the domestic industry requirement.  In some cases, a complainant can pass the domestic industry test even if it produces no product at all.

Designed+by+Apple+in+California.++Assembled+in+China.jpg

This was not always the case. As originally enacted, Section 337 of the Smoot-Hawley Tariff Act of 1930 condemned unfair methods of competition and unfair acts in importation "the effect or tendency of which is to destroy or substantially injure an industry, efficiently and economically operated, in the United States." The ITC applied this requirement by focusing primarily on domestic manufacturing activity that competed with the accused imports.

But Congress made significant amendments to the domestic industry test as part of the Omnibus Foreign Trade and Competitiveness Act of 1988. They removed the injury requirement for IP-based investigations, removed the efficient and economic operation requirement for all investigations, and added a list of non-manufacturing activities that could be counted as qualifying domestic investments.

Under the current law, a Section 337 violation can be found in patent investigations "if an industry in the United States, relating to the articles protected by the patent . . . exists or is in the process of being established." And to determine whether a domestic industry exists, the ITC looks to see if there is, "in the United States, with respect to articles protected by the patent, . . . (A) significant investment in plant and equipment; (B) significant employment of labor or capital; or (C) substantial investment in [the patent's] exploitation, including engineering, research and development, or licensing."

The Purpose of the Test

By enacting these changes, Congress wanted to bring Section 337 more in line with general principles of intellectual property policy. Here's an excerpt from the Senate Committee report:

The fundamental purpose of the amendments . . . is to strengthen the effectiveness of section 337 in addressing the growing problems being faced by U.S. companies from the importation of articles which infringe U.S. intellectual property rights.

. . .

The Committee believes that the injury and efficient and economic operation requirements of section 337, designed for the broad context originally intended in the statute, make no sense in the intellectual property arena.

. . . 

[There is] a public interest in the enforcement of protected intellectual property rights. . . .  The importation of any infringing merchandise derogates from the statutory right, diminishes the value of the intellectual property, and thus indirectly harms the public interest.  Under such circumstances, the Committee believes that requiring proof of injury, beyond that shown by proof of the infringement of a valid intellectual property right should not be necessary. [emphasis added]

But if the goal of ITC litigation is patent enforcement instead of trade protection, why does it have a domestic industry test at all? The report offers this explanation:

This requirement was maintained in order to preclude holders of U.S. intellectual property rights who have no contact with the United States other than owning such intellectual property rights from utilizing section 337.  The ITC is to adjudicate trade disputes between U.S. industries and those who seek to import goods from abroad.  Retention of the requirement that the statute be utilized on behalf of an industry in the United States retains that essential nexus. [emphasis added]

It looks like Congress wanted to make it easier to use Section 337 but not so easy that the ITC would no longer be adjudicating trade disputes on behalf of a U.S. industry.  

Where Things Go Wrong

As applied, the domestic industry test often fails to weed out Section 337 complaints that lack the "essential nexus" Congress intended to maintain. As a result, the ITC regularly adjudicates disputes with no significant relationship to cross-border trade, and the law is often utilized against industries in the United States rather than on their behalf.

This happens in a few specific ways.

One way Section 337 fails to further the interests of domestic industries is by allowing "licensing" activity to satisfy the domestic industry requirement. There are two main problems with this addition.  

For one thing, patent owners who only engage in licensing do not need trade relief. By itself, a trade remedy doesn't actually benefit a patent owner whose sole interest in the patent is licensing royalties. But by allowing such entities to use Section 337, the ITC gives those patent owners the ability to extract an excessive settlement from potential licensees under the threat of an import ban targeting high value products that practice a low-value patent.  Licensing companies can and should take their disputes to court.  

What's more, those potential licensees are very likely to be the actual industry on whose behalf Section 337 is meant to be utilized.

Another way Section 337 is being used contrary to its intended purpose is through the ITC's practice of allowing complainants to prove the existence of a domestic industry by subpoena. That is, the ITC will force an unwilling licensee to participate in the investigation and count that licensee's investments as if they were made by the patent owner.

The law does not require that the domestic industry actually belong to the patent owner—rather, the industry must "relat[e] to the articles protected by the patent," which includes products produced under license. This makes sense when that industry is interested in securing trade relief, because it doesn't really matter whether the patent rights are owned or licensed.  

But if the licensee is being hauled in against its will, it's quite possible that the licensee's interests (that is, the domestic industry's interests) align more closely with respondents arguing that the complainant's patents are invalid or unenforceable. Indeed, it's possible in such a situation for the complainant to be the only party in the dispute that doesn't operate a domestic industry.

A third problem is that the domestic industry products and the accused products don't have to be the same thing. As long as the complainant's product practices the same patent they are accusing the respondent's product of infringing, that's enough to satisfy the domestic industry test.  

In practice, this means that Section 337 is often used against a patent owner's downstream business customers in the U.S. market. Investigations can be brought against cell phones, cable boxes, automobiles and medical equipment on behalf of companies that design software or make computer chips.  

The ITC may be conducting these investigations on behalf of a U.S. industry, but they are not adjudicating "trade disputes" simply because that industry's domestic customers are importers.  Just like with licensing companies, these ITC complaints are designed to secure better business terms with potential licensees or customers who import high value products—not to protect a domestic industry from foreign competition.

How to Fix It

Almost all of the problems with ITC litigation can be fixed by limiting the agency’s jurisdiction to cover only those disputes that can’t be adjudicated in a court of law. There is simply no need for a trade remedy that broadly targets all infringing imports. 

But short of that, there are some targeted reforms to the domestic industry test that would help focus the ITC’s efforts on cases that are the least harmful to domestic industry. For one thing, the ITC should not count the investments of a licensee unless that company (or companies) joins the investigation as a complainant. This would ensure that any resulting trade action is actually serving the interests it is intended to protect. 

In addition, the test could be narrowed to include only those investments that are tied to the production of a product that competes in the U.S. market with the accused articles. That would mean no licensing-only industries and no upstream suppliers looking for an administrative remedy to supplement or bypass federal court.

Image Credit: Richard Allaway