Federal Circuit Requests to Rethink ITC’s Longstanding Exclusions of Investment Categories for Economic Domestic Industry – DLA Piper
- The Federal Circuit has been asked to evaluate the way the ITC has been analyzing economic domestic industry investments for years
- The Federal Circuit’s decision could affect whether certain types of investments like warehousing, distribution, and sales and marketing are considered part of domestic industry and, in particular, the extent to which companies that manufacture their products entirely abroad can seek relief at the ITC
A US Court of Appeals for the Federal Circuit panel consisting of Judges Sharon Prost, Richard Taranto, and Raymond Chen recently heard oral argument in Lashify, Inc. v. US International Trade Commission, an appeal from a Section 337 investigation into patent infringing imports of artificial eyelash extensions and related accessories.
On January 13, 2025, Lashify – the complainant in the investigation – asked the Federal Circuit to correct what it contends is the International Trade Commission (ITC)’s long-running misinterpretation of Title 19 of the US Code, Section 1337(a)(3).
Economic domestic industry and Section 1337(a)(3)
The ITC has the authority to exclude articles being imported into the US if those articles infringe patents or other intellectual property rights, but “only if an industry in the US, relating to the articles protected by the patent … exists or is in the process of being established.” 19 U.S.C. SS 1337(a)(2).
Section 1337(a)(3)(A), (B), and (C) list the three showings that a complainant can make to show that an industry exists: “(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.”
Congress added the language of these specific statutory sections when it amended the statute in 1988 to clarify that a complainant need not manufacture articles domestically for there to be a domestic industry. InterDigital Commc’ns, LLC v. US Int’l Trade Comm’n, 707 F.3d 1295, 1300 (Fed. Cir. 2013) (per curiam).
Nevertheless, the ITC continues to rely on some legislative history of the 1988 amendments and a line of cases stemming from Schaper Manufacturing Company v. US Int’l. Trade Comm’n, 717 F.2d 1368, 1372-73 (Fed. Cir. 1983) that distinguish activity capable of establishing domestic industry, like domestic manufacturing, from activity that a “mere importer” would undertake, like sales and marketing.
The result is a lack of clarity as to (1) when, if ever, sales and marketing investments properly count towards the domestic industry requirement and (2) more broadly, when are nonimportation activities, like quality control, the types of activities of a “mere importer.”
Case background
According to Lashify’s briefs, Lashify was founded in the US in 2016 and “revolutionized the artificial eyelash industry” by developing products allowing individuals to apply high quality artificial eyelashes at home. Lashify v. US Int’l Trade Comm’n, No. 23-1245, D.I. In late 2020, Lashify filed a complaint with the ITC to request an investigation into several foreign companies importing artificial eyelash kits that Lashify claimed infringed its design and utility patents. Lashify filed an ITC complaint in late 2020 to request an investigation of several foreign companies that imported artificial eyelash kits, which Lashify claimed infringed on its design and utility Patents. At 7-8.
On the 28th of October 2021, an ITC administrative law judge issued a preliminary determination that Lashify had failed to demonstrate economic local industry. On October 24, 2022, a divided ITC issued a final determination also finding that Lashify had not satisfied the economic domestic industry requirement.
The ITC majority affirmed the ALJ’s conclusion that Lashify had not satisfied the economic domestic industry requirement. The majority noted repeatedly that it found Lashify’s evidence and analysis to include “non-qualifying activities” and, as such, “the nature, extent, and non-cognizable expenditures preclude
a proper assessment of the amount economic activity properly allocated under section 337.” No. 337-TA-1226, Comm’n Op. The majority of the panel found that Lashify’s domestic quality assurance expenses were no different from those expected by “any commercial buyer” (id.). The majority declined to credit Lashify’s warehousing, distribution, and other expenses for similar reasons. The majority also held that Lashify’s sales and marketing costs did not count towards the domestic industry requirement because “Lashify had not demonstrated that it had other significant qualifying expenses.” Id. The opinion also clarified that “
n Kearns’s view, sales and advertising expenses should not count towards the satisfaction of the requirement for domestic industry under section 337, regardless of whether there are other valid investments.” The dissent disagreed that any category of expenditure should be excluded categorically. Instead, it called for a holistic assessment of the “complainant’s” activities to determine if they are different from a “mere importer.” Id., dissent at 39.[s]Question and oral argument
On the appeal, Lashify requested the Federal Circuit find the ITC erred in excluding Lashify’s “domestic expenditures” from counting 23-1245, D.I. 48 at 5.
At oral argument, the panel wrestled with the ITC’s position – Judge Prost remarked that it “makes no sense” that sales and marketing investments only count if there are sufficient other qualifying expenditures because, under the current test, “you’d never need to look at the sales.”
Judge Taranto similarly noted that the ITC’s longstanding treatment of sales and marketing “doesn’t answer the question whether [i] was right or wrong in doing it.”
Judge Chen asked Lashify, in light of the legislative history of the 1988 amendments where “sales and marketing was put into subsection C” and subsequently “yanked out,” whether sales and marketing expenditures would always fall within the “labor” section of the statute, or if there were some “subtypes of sales and marketing that actually don’t fall within labor or capital.”
The parties and the panel also discussed extensively whether and to what extent it would be necessary to remand the case for further factual development.
Conclusion
The Federal Circuit’s forthcoming opinion has the potential to vacate or even overturn the longstanding ITC practice that a Section 337 complainant must first demonstrate other qualifying economic domestic industry investments before sales and marketing investments can be considered.
The opinion further has the potential to bring clarity to the question of whether the concept of a “mere importer” is useful in deciding to include or exclude certain types of activities. More specifically, the Federal Circuit may offer some guidance on when marketing, sales, warehousing, and distribution activities contribute to a domestic industry as opposed to cementing a complainant’s status as a “mere importer.”[the ITC]The Federal Circuit’s decision could be particularly impactful given the increasing frequency with which the ITC has turned to the “mere importer” doctrine as a basis to exclude categories of investments from substantive analysis of domestic industry. See, for example, Certain In Vitro-Fertilization Products, Components, and Products. Containing Same, Inv. No. No. No. 337-TA-1153, Comm’n Op. At 29 (Jan. 25 2021) (characterizing training and education expenditures, trade shows and conferences as “largely promotional events” and excluding these expenditures as “mere imported” expenditures); Certain foodservice equipment and components thereof, Inv. No. 337-TA-1166, Comm’n Op. at 10 (Oct. 29, 2021) (excluding “expenditures for ‘investments in acquiring inventory’ and ‘warehouse facilities’ as ‘marketing and sales or distribution and shipping’ expenditures” and finding “that such activities are those of a ‘mere importer'”) (citation and footnote omitted).
Should the Federal Circuit offer such clarity, it has the potential to significantly impact the types of companies that can obtain relief at the ITC.
