Lelo Inc. v. International Trade Commission

United States Court of Appeals
for the Federal Circuit
______________________
LELO INC., LELOI AB,
Appellants
v.
INTERNATIONAL TRADE COMMISSION,
Appellee
STANDARD INNOVATION (US) CORP.,
STANDARD INNOVATION CORPORATION
Intervenors
______________________
2013-1582
______________________
Appeal from the United States International Trade
Commission in Investigation No. 337-TA-823.
______________________
Decided: May 11, 2015
______________________
HECTOR JULIAN RIBERA, Fenwick & West LLP, Moun-
tain View, CA, argued for appellants. Also represented by
MARION N.G. MILLER; LAUREN ESTELLE WHITTEMORE,
San Francisco, CA.
MICHAEL HALDENSTEIN, Office of the General Counsel,
United States International Trade Commission, Washing-
ton, DC, argued for appellee. Also represented by DOMINIC
L. BIANCHI, JAMES A. WORTH.
2 LELO INC. v. ITC
PAUL WHITFIELD HUGHES, Mayer Brown LLP, Wash-
ington, DC, argued for intervenors. Also represented by
GARY HNATH; ROBERT P. LORD, LISA E. MARGONIS, TAMMY
J. TERRY, CARLYN ANNE BURTON, Osha Liang LLP, Hou-
ston, TX.
______________________
Before MOORE, CLEVENGER, and REYNA, Circuit Judges.
REYNA, Circuit Judge.
Appellants appeal the finding of the U.S. Internation-
al Trade Commission that the domestic industry require-
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
Standard Innovation Corporation (“Standard Innova-
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
U.S.”) to distribute products in the United States.
Neither Standard Innovation nor Standard U.S. man-
ufactures in the United States. Standard Innovation
1 Certain Kinesiotherapy Devices and Components
Thereof, Inv. No. 337-TA-823, Comm’n Op. at 2 (June 17,
2013) (“Comm’n Op.”)
LELO INC. v. ITC 3
sources parts and components for its devices from third-
party suppliers in the U.S. and other countries. It con-
tracts 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 ad-
dresses 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 compo-
nents. Apparently, all other components of the devices
are produced and sourced abroad.
Lelo Inc. is a California corporation having its princi-
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.
(collectively “LELO”). LELO imports three kinesiothera-
py devices into the United States.
I. U.S. DOMESTIC INDUSTRY
Standard Innovation filed a § 337 complaint alleging
that LELO imported kinesiotherapy devices and compo-
nents thereof that infringed its ’605 Patent. An ITC
Administrative Law Judge (“ALJ”) issued an Initial
2 We refer to these components in general terms be-
cause Standard Innovation has requested that detailed
information about the components remain confidential.
4 LELO INC. v. ITC
Determination in which he construed three claim terms of
the ’605 Patent and determined that all of the accused
devices meet at least one claim of the ’605 Patent. Cer-
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
U.S.C. §§ 102, 103, 112. Id. at 79.
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
of the four components constituted a “significant invest-
ment in plant and equipment,” or a “substantial invest-
ment in its exploitation, including engineering, research
and development, or licensing,” under prongs (A) and (C),
respectively, of the § 337 domestic industry requirement.
Id. at 71.
Specifically, the ALJ concluded that Standard Innova-
tion’s U.S. purchases were not relevant to a prong (A)
analysis because Standard Innovation failed to establish
what portion, if any, the purchase price actually contrib-
uted towards a domestic investment in plant or equip-
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
the development of the components. Id. at 74–75.
Further, the ALJ determined that even if the pur-
chases were relevant, they were neither “substantial” nor
“significant” under prongs (A) or (C). Id. at 75. The total
LELO INC. v. ITC 5
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,
revised one of the ALJ’s claim constructions, and deter-
mined that one of the accused devices does not meet the
claims of the ‘605 Patent. Comm’n Op. at 2. The Com-
mission affirmed the remainder of the ALJ’s determina-
tions as to claim construction, infringement, and validity.
Id. at 2.
The Commission, however, reversed the ALJ’s domes-
tic industry determination, finding that “Standard Inno-
vation has satisfied the domestic industry requirement
based on its expenditures on components produced do-
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 economic
prong analysis.” Id. at 27–28. The Commission deter-
3 The ALJ made numerous other quantitative find-
ings that paint a more complete picture of Standard
Innovation’s domestic investments, e.g., per-unit costs of
the microcontroller and other components, per-unit costs
of the domestically-sourced components compared to per-
device revenue, total sales of the devices, and Standard
Innovation’s aggregate domestic investments. Initial
Determination at 76. These findings have, however, been
marked confidential. This Court has repeatedly explained
that over-marking information as confidential places
significant limits on this Court’s ability to address the
relevant issue in a public opinion. We note that these
findings show, at most, modest investments.
6 LELO INC. v. ITC
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
“contribution of the components at issue from a qualita-
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
allowed for beneficial flexibility and resilience, the micro-
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
were significant entirely based on their qualitative contri-
bution to the devices.
LELO timely appealed. We have jurisdiction under
28 U.S.C. § 1295(a)(6).
DISCUSSION
Under 19 U.S.C. § 1337(c), we review ITC Final De-
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
ITC, de novo and questions of fact for substantial evi-
dence. Finnigan Corp. v. Int’l Trade Comm’n, 180 F.3d
LELO INC. v. ITC 7
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.
Jacobsen, 525 U.S. 432, 438 (1999).
A claimant asserting patent rights under § 337 must
satisfy the “domestic industry” requirement set out in the
statute and establish, “with respect to the articles pro-
tected by the patent,” that there is:
(A) significant investment in plant and equip-
ment;
(B) significant employment of labor or capital; or
(C) substantial investment in its exploitation, in-
cluding engineering, research and development, or
licensing.
19 U.S.C. § 1337(a)(3).
The plain text of § 337 requires a quantitative analy-
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 provides
8 LELO INC. v. ITC
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” in-
crease 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
based on evidence concerning revenue spent on a manu-
facturing facility, equipment, research and development,
and licensing, as well as reviewing the total number of
people employed at its facility. Certain Pressure Trans-
mitters, Inv. No. 337-TA-304, USITC Pub. 2392, Comm’n
Op. at 14 (Mar. 19, 1990).
The ITC has argued it has previously based a domes-
tic industry determination on qualitative factors. See,
e.g., Certain Male Prophylactic Devices, Inv. No. 337-TA-
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
example, in Certain Male Prophylactics, the ITC exam-
ined the economic impact of subcontractor domestic
operations noting that, among other things, those opera-
tions reflected a U.S. value added of 34 percent. Id. at 26.
Other cases relied on by Appellant are similarly unavail-
LELO INC. v. ITC 9
ing because the domestic industry requirement was not
satisfied in those cases and cannot stand for the proposi-
tion 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 In-
struments 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
unavailing. In Certain Male Prophylactics, the subcon-
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.
at 25. In addition, the subcontractor provided an account-
ing of the amount of investment it made in equipment
that its employees used to perform the contracted ser-
vices. Id.
In this case, the U.S. suppliers are neither contractors
nor subcontractors. They are retailors and the compo-
nents are off-the-shelf. There is no evidence of any in-
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
the suppliers invested in their equipment to fulfill Stand-
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 The
4 The ALJ apparently attempted to address this is-
sue by subtracting an approximate amount spent on
10 LELO INC. v. ITC
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).
The Commission determined that Standard Innova-
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
prong (C). Id. at 29–30, n.8. We agree with the Commis-
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
qualitative factors. Qualitative factors cannot compen-
sate for quantitative data that indicate insignificant
investment and employment. As such, Standard Innova-
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
domestic industry requirement of § 337.
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 ad-
ministrative costs. In any event, the ITC also failed to
allocate profits or revenue attributed to relevant domestic
activities. Comm’n Op. at 33–34.
LELO INC. v. ITC 11
CONCLUSION
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 re-
quirements. The purchase of so called “crucial” compo-
nents from third-party U.S. suppliers are insufficient to
satisfy the “significant investment” or “significant em-
ployment 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 Determi-
nation was not in accordance with law. Accordingly, we
reverse the ITC’s Final Determination. 5
REVERSED
5 On appeal, LELO also challenges the ITC’s Final
Determination on claim construction and indefiniteness.
Because our holding on the domestic industry require-
ment resolves this appeal, we do not reach those issues.