Federal Circuit expands economic prong of Section 337 domestic industry requirement

Lashify alleged, in a Section 337 Investigation at the International Trade Commission, that certain importers of similar products infringed three of its patents: a utility patent (U.S. Patent No. 10,721,984) and two design patents (U.S. Design Patent Nos. D877,416 and D867,664). The ITC found that Lashify failed to satisfy the domestic industry requirement, which is a precondition for relief under Section 337.

The domestic industry requirement has two components: the economic prong, which requires that there be an industry in the U.S. relating to the patented articles, and the technical prong, which requires that the industry’s products come within the scope of the asserted patents. The ITC found that Lashify did not satisfy the economic prong for any patent and that Lashify failed to satisfy the technical prong for the ’984 patent.

In ruling that Lashify did not meet the economic prong, the ITC excluded Lashify’s expenditures on sales, marketing, warehousing, quality control, and distribution. The ITC’s decision was based on its interpretation that these activities alone could not satisfy the domestic industry requirement. Specifically, the ITC reasoned that (1) sales and marketing activities could not be considered because Lashify failed to establish significant qualifying expenses in other areas and (2) expenses related to warehousing, quality control, and distribution were akin to those incurred by mere importers and additional steps were not taken to make items saleable upon arrival in the U.S.

The ITC also ruled that Lashify did not meet the technical prong for the ’984 utility patent because Lashify’s products did not meet the claim limitation of “heat fused,” which the ITC construed to mean “joined by applying heat to form a single entity.” The ITC found that Lashify’s products used glue or other methods to join the artificial hairs, and that the hairs did not form a single entity.

Lashify appealed to the Court of Appeals for the Federal Circuit, challenging the ITC’s interpretation of the economic prong and the claim construction of “heat fused.”

The Federal Circuit agreed with Lashify that the ITC’s interpretation of the economic prong was incorrect, and that the statute did not intend for the ITC to discount significant employment of labor or capital for sales, marketing, warehousing, quality control, or distribution. The Federal Circuit emphasized in its decision that the statutory language of section 337 does not limit the use of labor or capital to specific enterprise functions, noting that the terms “labor” and “capital” carry their ordinary meanings and that there is no exclusion of these activities in the statute. The Federal Circuit also referenced the legislative history and previous Commission decisions, which supported the inclusion of these activities in the domestic-industry analysis.

The Federal Circuit vacated the ITC’s decision on the economic prong and remanded for the ITC to reevaluate Lashify’s claims under the correct legal standard. The Federal Circuit instructed the ITC to count Lashify’s employment of labor and capital even when they are used in sales, marketing, warehousing, quality control, or distribution and to make a factual finding of whether those qualifying expenses are significant or substantial based on a holistic review of all relevant considerations. The Federal Circuit also highlighted that the ITC must make this determination specifically with respect to the two design patents, as the court affirmed the ITC’s claim construction of “heat fused” and the ITC’s determination that the technical prong for the utility patent was not satisfied.