When It Comes to Domestic Industry’s Economic Prong, Numbers Speak Louder Than Words

Initial Determination on Violation of Section 337 and Recommended Determination on Remedy and Bond, Certain Radio Frequency Identification (“RFID”) Products and Components Thereof, ITC Inv. No. 337-TA-979 (June 22, 2017) (ALJ MaryJoan McNamara)

In a recent Initial Determination, Administrative Law Judge (“ALJ”) MaryJoan McNamara ruled against Complainant Neology, Inc., finding no violation on multiple grounds.  This post focuses on ALJ McNamara’s analysis of the economic prong of the domestic industry requirement.  Her decision is notable because of the number and diversity of economic prong theories Neology advanced, and the ALJ’s focus on the presence or absence of quantitative evidence supporting those theories, further cementing the effect of the Federal Circuit’s 2015 Lelo v. ITC decision.

Neology tried two patents: Nos. 8,325,044 (“the ’044 patent”) and 8,587,436 (“the ’436 patent).  Both were directed to RFID technology, with the ’044 patent focusing on RFID tags, and the ’436 patent focusing on RFID readers.  Respondents did not contest that Neology satisfied the economic prong for the ’044 patent.  Neology had manufactured millions of RFID tags at its 14,000-square-foot facility in California and invested significantly in employment there.

But when attention shifted to the ’436 patent, the tide turned against Neology.  Neology advanced four distinct theories for how it met the economic prong for this patent.  ALJ McNamara rejected three of them and found the fourth “barely” satisfied the economic prong requirement.  (The fourth ground was mooted in light of her invalidity findings regarding the ’436 patent.)

Neology argued that it met the economic prong of the domestic industry requirement through:

  1. Its own investments;
  2. Investments of its licensee;
  3. Investments of its subcontractor; and
  4. Investments of its distributor.

I.  Neology Lacked “Even Minimally Reliable Quantitative, Let Alone Qualitative Evidence” of Its Own Investments That Would Establish Domestic Industry 

Neology first relied on its own investments in developing a 6C-compatible prototype reader in 2006–2009.  But Neology outsourced that development to subcontractors in 2009—six years before the Complaint was filed and three years before the ’436 patent even issued.

Neology emphasized that it maintained ongoing relationships with those subcontractors after 2009, but its expert and fact witnesses could offer only vague statements to this effect.  They insisted that these relationships were “extremely important,” but could not quantify the time that Neology employees spent on subcontractor support, and could name only a few subcontractor employees—none with clear roles—who were dedicated to Neology’s RFID readers.  Indeed, ALJ McNamara determined that Neology “completely ignored the holding in Lelo” and offered “no significant quantitative metric of Complainant’s ongoing investments from 2009-2015.”

Had Neology been able to quantify its continued qualifying investments through the date of the complaint, Neology might have been able to satisfy the economic prong in spite of its earlier departure from RFID production.  Indeed, the economic prong does not require any minimum monetary expenditure, so long as the complainant offers some quantification of its domestic industry.  Without “even minimally reliable quantitative, let alone, qualitative evidence” to support a finding of domestic industry, however, Neology’s first argument failed.

II.  Evidence of Neology’s Licensee’s Investments Was “Simply Lacking in Quantitative Specifics” 

Neology next relied on the investments of its licensee.  This section of the ID was heavily redacted, but appeared to rely on a 2013 settlement that resulted in a licensing and supply agreement between Neology and another party, as well as Neology’s acquisition of certain manufacturing equipment.  But evidentiary problems plagued this argument, as well.

Neology’s witnesses were only generally familiar with the settlement in question; they could not quantify the value of the resulting agreement or items that the licensee manufactured up until the date of the Complaint.  They also could not quantify Neology’s investments in conjunction with its use of the acquired equipment, the current value of the equipment, or even how much of that equipment was still in use after 2012.  Although the witnesses offered anecdotal information about relevant facilities and the employees who worked there, their accounts were “simply lacking in quantitative specifics.”  Again citing Lelo, ALJ McNamara determined that Neology failed to establish domestic industry through its licensee’s activities.

III.  Evidence of Neology’s Subcontractor’s Investments Lacked “Granular Detail”

 Neology’s third argument relied on investments by its subcontractor with which it had two OEM agreements.  One of these agreements was still in force when Neology filed the Complaint, and was allegedly “tailored specifically” to Neology’s requirements and those of its customers.  But the subcontractor had no licensing arrangements with Neology involving the asserted patents or relevant RFID protocols, and “Complainant offered little quantitative evidence with respect to [its] investments.”  Neology provided no solid evidence of how much square footage of its subcontractor’s facility was devoted to work for Neology.  Neology relied on equipment that the subcontractor used for R&D, but did not introduce evidence of the cost of that equipment, or provide any other “granular detail” for relevant R&D, equipment, labor or capital.  Without this “detail,” Neology could not satisfy the economic prong through the subcontractor’s activities.

IV.  Neology’s Distributor’s Investments “Barely” Satisfied the Economic Prong and Were Irrelevant in Light of Invalidity

 Lastly, Neology argued that the investments of its distributor satisfied the economic prong.  ALJ McNamara agreed these investments satisfied at least Section 337(a)(3)(B), albeit “barely.”  The distributor had made significant investments in labor and capital related to the domestic industry products, and had used cost accounting methods within a “reasonable range” in connection with sales to Neology.  Unfortunately, because the patents at issue had both been found invalid, this had no practical effect on the ALJ’s determination.

*          *          *

ALJ McNamara’s decision is subject to review by the Commission and, therefore, is not final.  Still, her decision demonstrates the continuing impact of the Lelo decision on the domestic industry analysis.  Lelo and its progeny make clear that numbers speak louder than words.  In proving the existence of a domestic industry, complainants must demonstrate specific quantitative investments, such as facility space used for the domestic industry products, employees assigned to those products, hours worked on those products, and investments in equipment used for those products.  Qualitative evidence can set the stage for and augment quantitative evidence, but without the numbers, you won’t get far in the ITC.