On this episode of Ropes & Gray's ITC-focused podcast series, Talkin' Trade, IP litigators Matt Rizzolo, Matt Shapiro, and Patrick Lavery discuss a groundbreaking Federal Circuit decision in Lashify v. ITC. This pivotal ruling challenges the ITC's longstanding approach to the economic prong of the domestic industry requirement, particularly the treatment of U.S.-based sales, marketing, and distribution activities. Tune in as they explore the implications of this decision for future Section 337 investigations, the potential expansion of complainants eligible to file at the ITC, and the broader impact on patent litigation.
Transcript:
Matthew Rizzolo: Welcome back to Talkin’ Trade, a podcast where we explore the ins and outs of Section 337 investigations at the U.S. International Trade Commission. I’m Matt Rizzolo, and with me today are my long-time co-host Matt Shapiro and a newbie to the podcast, Patrick Lavery, an associate in our New York office. Glad to have you here, guys.
There’s been a lot going on at the Commission lately—we’re down to three Commissioners, there are several high-profile standard-essential patent cases awaiting final decision, everyone’s returned to the office, Humphrey’s Executor might be overturned, just to name a few. But we’ll have to get to some of that stuff in a future episode, because we have a different focus today.
In our last episode, we talked about the repercussions that the Supreme Court’s 2024 decision in Loper Bright Enterprises might have for a variety of Section 337-related issues. One of those areas we discussed that could be affected was the ITC’s threshold domestic industry requirement. And sure enough, Matt, THAT is what we’re here to talk about today.
Matthew Shapiro: That’s right. Today, we have a special episode diving into a really significant recent decision from the Federal Circuit that will undoubtedly impact Section 337 investigations at the ITC for years to come. The court’s decision is Lashify v. ITC, which issued on March 5. This decision substantially upends the ITC’s longstanding treatment of certain types of domestic investments and how it evaluated whether they could properly be considered as part of the “domestic industry” under the statute.
Matthew Rizzolo: Working in both the term “significant” and “substantial” into your introduction of a domestic industry-related decision is pretty next level, I got to say. But to avoid any more of that, I’m going to ask Patrick to give us some context of the case before we talk about the impact of the Federal Circuit’s decision.
Patrick Lavery: Thanks, Matt. The case involves Lashify, an American company that designs and markets artificial eyelash extensions and related products in the U.S. While Lashify’s manufacturing occurs abroad, they have operations in the U.S. related to sales, marketing, warehousing, quality control, and distribution of its products. Lashify filed a Section 337 complaint at the ITC against several respondents, alleging infringement of a utility patent and two design patents.
Matthew Rizzolo: So, if Lashify was the appellant here, I assume they didn’t succeed before the ITC, did they?
Patrick Lavery: That’s right. The ITC ultimately denied a relief, finding that Lashify did not satisfy the economic prong of the domestic industry requirement for any of its asserted patents. The Commission excluded from the analysis Lashify’s U.S.-based sales and marketing activities and expenses relating to warehousing, quality control, and distribution, characterizing these as activities of a “mere importer.” The remaining expenses were found by the ITC to be insignificant, and thus, insufficient to satisfy the economic prong.
Matthew Rizzolo: Okay, Matt, I’ll finally turn it back to you. We’ve sometimes heard the ITC’s prior approach referred to as the “mere importer test.” Can you elaborate on what that entailed?
Matthew Shapiro: Sure—and I know, Matt, you hate the term “mere importer test.” But historically, when the ITC used that, they often determined that certain domestic expenses, like sales, marketing, distribution, and warehousing, cannot be used to satisfy the economic prong, particularly if the products were manufactured overseas and there weren’t significant “other qualifying expenditures” taking place in the United States, such as domestic research and development or engineering. The rationale was these activities didn’t represent a significant domestic “industry” related to the intellectual property, as they are the types of activities that anyone who would be importing products into the United States would engage in.
Matthew Rizzolo: But Section 337 itself doesn’t say anything about sales or marketing activities or refer to activities of those of a “mere importer, does it?
Matthew Shapiro: That’s exactly right, and that’s why the Federal Circuit flatly rejected the ITC’s prior approach, which it called “counter to the statutory text.” Citing the Supreme Court’s Loper Bright decision, which is what we discussed on the prior episode, and stating that it was applying its “independent judgment,” the court held that the statutory language concerning “significant employment of labor or capital” in Section 337 does not contain any implicit limitations or exclusions based on what that labor or capital is being used for.
Matthew Rizzolo: So, what are the key takeaways regarding what types of expenses can now be considered under the economic prong’s labor and capital provision?
Matthew Shapiro: The court was quite clear—if it’s labor or capital, it can count, full stop. The court stated that there is no carveout in Section 337(a)(3)(B) for employment of labor or capital used in sales, marketing, warehousing, quality control, or distribution. Looking to dictionary definitions of labor and capital cited in its 2015 decision in Lelo, the court emphasized that “labor” encompasses all “human activity that produces goods or provides the services in demand in an economy,” and “capital” includes “a stock of accumulated goods.” So, as relevant here, the court specifically noted that warehousing involves holding a stock of goods. And human activities ensuring product quality and engaging in sales and marketing all contribute to providing services in demand.
Matthew Rizzolo: So, with this expansion of the types of investments that can qualify for the economic prong, what are some of the potential impacts of this decision for ITC litigants?
Matthew Shapiro: Put simply, it’s potentially game changing. First, the domestic industry analysis may be simplified in many cases, as companies won’t need to deduct or de-allocate sales and marketing expenses. Secondly, and perhaps even more importantly, this likely opens the ITC’s doors to a broader range of complainants—both large and small—who may have previously been hesitant or were deemed ineligible because of their U.S. presence primarily involved in sales, marketing, or warehousing. Now, as long as they can demonstrate “significant” employment of labor or capital in the U.S. related to the patented articles, these entities may now have a viable path at the ITC.
Matthew Rizzolo: Now, Lashify specifically addressed only Section 337(a)(3)(B), which, as you know, relates to significant employment of labor and capital. Is there any indication that the Federal Circuit’s reasoning might be extended to the other prongs or subsections of the domestic industry requirement, or even to non-statutory IP cases brought under Section (a)(1)(A)?
Matthew Shapiro: So, while you’re correct that the holding was technically limited to the “labor and capital” prong, the Federal Circuit did note the similarity in language to Section 337(a)(3)(A) which concerns “significant investment in plant and equipment.” This suggests that the same reasoning might indeed apply there as well, meaning the function of the plant and equipment may also be less scrutinized than it was before. So, for example, it seems likely that warehouses or distribution facilities or even vehicles might be counted as investments in “plant and equipment.” But it’s less clear whether the reasoning would apply to engineering and research and development activities under subsection (C), which is framed slightly differently—there, the language describes functional enterprise activity, not the inputs, like under subsections (A) and (B). And then, turning to the non-statutory IP cases brought under (a)(1)(A), there’s no language at all in the statute that resembles what was at issue in Lashify—so, it’s too hard to predict.
Matthew Rizzolo: While not the subject of today’s discussion, it’s worth noting, though, that the Commission has taken an expansive view of the injury to a domestic industry requirement for those non-statutory IP claims under (a)(1)(A), but it remains to be seen how the Federal Circuit in the post-Loper Bright world will evaluate the statue and whether it will apply its “independent judgment” to come to a different decision than what the ITC has done in the past. But turning back to the issue at hand, the Federal Circuit’s decision in Lashify also discussed the “significance” language in the statute. How—if at all—does the Lashify ruling affect the evaluation of whether investments are “significant” or “substantial”?
Matthew Shapiro: The court, in Lashify, referenced its recent guidance in Wuhan Healthgen, reiterating that the analysis requires a “holistic review of all relevant considerations” and is “very context dependent.” This means that the focus in disputes over the domestic industry may now shift from which expenses count to the evaluation of the importance of those expenses themselves. Even large amounts of certain types of investments might be deemed insignificant if they aren’t sufficiently connected or important to the domestic industry products, and conversely, smaller investments might still qualify as significant in the right context.
Matthew Rizzolo: Patrick, since I know you’ve gotten really into the weeds of the case, the Federal Circuit’s decision here wasn’t a complete win for Lashify, was it?
Patrick Lavery: That’s correct, Matt—it wasn’t a complete win. The Federal Circuit affirmed the ITC’s finding that Lashify failed to satisfy the technical prong of the domestic industry requirement with respect to its utility patents. This ruling was based on the court’s agreement with the ITC’s construction of the term “heat fused” in the patent claims and the finding that Lashify’s products did not meet that construction.
Matthew Rizzolo: So, what was the ultimate outcome of the Federal Circuit’s decision here?
Patrick Lavery: The Federal Circuit vacated the ITC’s determination regarding the economic prong for all three patents—the utility patent and the two design patents—and remanded the case back to the Commission. The ITC now needs to re-evaluate whether Lashify satisfies the economic prong for the two design patents—since the technical prong failed for the utility patent—by counting their labor and capital expenditures related to sales, marketing, warehousing, quality control, and distribution, and determining if those are “significant.” Lashify will also have the opportunity to present additional arguments and evidence related to the allocation of these expenditures to the design patents.
Matthew Shapiro: Although, I’ll also add that it may be some time before this case goes back down to the Commission. Given its potential impact, it would not be surprising to see an en banc petition filed, and for several amici to weigh in as well. Let’s not forget that the landmark Suprema case from the Federal Circuit was an en banc decision that reversed an earlier panel decision, so it remains to be seen whether this case will “lash” the test of time.
Matthew Rizzolo: Very true, but oh my, your jokes are getting progressively worse. We’re going to be keeping our eye on how Lashify affects the ITC’s docket and the broader impact on future investigations and its case law going forward. It’s clear that the Lashify decision has the potential to reshape the landscape of Section 337 investigations at the ITC and that patent owners who were previously deterred from filing at the ITC may now find it a more attractive forum. And if the cases come pouring in, it wouldn’t be too surprising to see commensurate attention being paid on Capitol Hill as well, given that the ITC has been a lightning rod for criticism and the subject of proposed legislation in the past.
I want to thank you both for joining me today, and on such short notice right after the decision came out—it’s been a fun discussion.
Matthew Shapiro: My pleasure, Matt—great to be here again.
Patrick Lavery: Great to be here, Matt—thank you.
Matthew Rizzolo: That’s all the time we have for this episode of Talkin’ Trade. If there’s a topic that you’d like to hear more about, or you have ideas on ways to improve the podcast, let us know. You can find this and other Ropes & Gray podcasts on Apple Podcasts, Spotify or ropesgray.com/podcasts. Until next time, I’m Matt Rizzolo, and on behalf of Matt Shapiro and Patrick Lavery, thank you all for listening.
