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Reuters
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Impact of Federal Circuit's Lashify Decision on Section 337 Investigations Practical Law The Journal
Section 337 of the Tariff Act (19 U.S.C. § 1337) authorizes the ITC to investigate and take action against unfair import practices, particularly those involving intellectual property (IP) domestic industry requirement is a key element of a Section 337 investigation that must be met before the ITC can issue relief. In investigations involving alleged infringement of federal IP rights, such as patents, copyrights, and trademarks, meeting the domestic industry requirement means showing sufficient US investments in products protected by the IP. While the framework for evaluating the domestic industry requirement has evolved over time, the Federal Circuit's March 2025 decision in Lashify, Inc. v. International Trade Commission considerably changes its direction and likely opens the ITC's door to a broader range of businesses (130 F.4th 948 (Fed. Cir. 2025)). Practical Law asked Matthew Rizzolo of Ropes & Gray LLP to discuss the Lashify decision and its potential implications. (For information on recent changes and horizon issues in ITC investigations under Section 337, see ITC Section 337 Investigations: 2024 Highlights and Insights in the February 2025 issue of Practical Law The Journal; for a collection of resources on Section 337 investigations, see ITC Section 337 Investigations Toolkit on Practical Law.) What is Section 337 of the Tariff Act? Section 337 authorizes the ITC to adjudicate disputes involving unfair acts in the importation of products into the US, including IP infringement. Section 337 investigations are initiated when private parties file complaints with the ITC. If, after conducting an investigation, the ITC finds a violation, Section 337 authorizes it to issue: What is the domestic industry requirement? Although Section 337 investigations are used mainly to remedy infringement of US IP rights, Section 337 is not an IP law but is a trade law administered by a trade body. The domestic industry requirement is an aspect of the law that acts as a gatekeeper, making Section 337's remedies unavailable to US IP owners unless they can demonstrate that a US industry exists or is in the process of being established concerning the relevant articles of commerce (19 U.S.C. § 1337(a)(2)). ITC precedent commonly divides this domestic industry requirement into two prongs: The technical prong. This prong requires that the complainant show the existence of an article — that is, a product (sometimes called the domestic industry product) — that practices the relevant IP asserted in the investigation. The economic prong. This prong requires that the complainant demonstrate sufficient US investments in exploiting the domestic industry product, which may be demonstrated in one or more of three ways: significant US investment in plant and equipment; significant US employment of labor or capital; or substantial US investment in the IP's exploitation, including engineering, research and development (R&D), or licensing. (19 U.S.C. § 1337(a)(3)(A) to (C).) Has Section 337 always had a domestic industry requirement? Yes, but the particular language of the statute has changed over time. Before 1988, complainants in all Section 337 investigations needed to show that the unfair acts at issue destroyed or substantially injured an industry in the US, prevented the establishment of a US industry, or otherwise threatened to do so. In short, a complainant needed to show not just that a domestic industry existed, but also that this industry was being harmed or threatened with harm by the complained-of conduct. Congress amended Section 337 in 1988 to make it easier and less expensive for IP owners to enforce their rights at the ITC. This amendment eliminated the injury requirement in investigations based on infringement of federal IP rights and expressly recited the three qualifying investment categories in clauses (a)(3)(A) to (C) mentioned above. The ITC often applied what became known as a mere importer test to determine that certain domestic activities and expenses, like sales and marketing, could not be used to satisfy the economic prong of the domestic industry requirement. Before this amendment, the ITC evaluated the sufficiency of the asserted investments by considering, among other factors, the proportion of a protected article's total value attributable to domestic activities (known as the domestic value added). The reasoning behind this approach was that importers, who added little value domestically to a product, should not be entitled to relief under Section 337, while complainants who engaged in more meaningful domestic activities should (see Schaper Mfg. Co. v. U.S. Int'l Trade Comm'n., 717 F.2d 1368, 1372-73 (Fed. Cir. 1983)). Relying on Schaper, the ITC often applied what became known as a mere importer test to determine that certain domestic activities and expenses, like sales and marketing, could not be used to satisfy the economic prong of the domestic industry requirement. Did the 1988 amendment substantively change the domestic industry requirement? Yes, it did. One of the first cases in which the ITC addressed new subsection (a)(3) was In re Certain Concealed Cabinet Hinges & Mounting Plates, where the ITC explained that the word 'significant' denoted 'an assessment of the relative importance of the domestic activities.' The ITC noted that while the 1988 amendments did not preclude using 'domestic value added' in evaluating the significance of domestic activities connected with a particular IP right, this test should be tied to 'investment in plant and equipment' or 'employment of labor or capital' as mandated by the new statutory language. (No. 337-TA-289, 1990 WL 10608981, at *10-11 (Jan. 8, 1990) (Comm'n Op.); 19 U.S.C. § 1337(a)(3)(A) to (C).) Over a decade later, in Lelo Inc. v. International Trade Commission, the Federal Circuit essentially affirmed the ITC's post-amendment approach, finding that '[t]he plain text of [Section] 337 requires a quantitative analysis in determining whether a petitioner has demonstrated a 'significant investment in plant and equipment' or 'significant employment of labor or capital.'' This analysis requires measuring investments in relation to a benchmark that allows a comparison of their relative importance to other expenses or activities. The court also emphasized that qualitative factors could not overcome a lack of quantitative significance. (786 F.3d 879, 883-85 (Fed. Cir. 2015).) The Commission's post- Lelo approach in evaluating the significance requirement of the economic prong of the domestic industry requirement is best outlined in its decision in In re Certain Carburetors & Products Containing Such Carburetors. Although recognizing Lelo 's quantitative analysis requirement, the Commission held that there is 'no threshold monetary amount that a complainant must meet' to establish significance. Rather, the inquiry depends on the facts in each investigation, the article of commerce, and the realities of the marketplace, taking into account the nature of the investment and employment activities, the industry in question, and the complainant's relative size. (No. 337-TA-1123, 2019 WL 5622443, at *5 (Oct. 28, 2019) (Comm'n Op.).) Meanwhile, the Commission continued using the mere importer test to exclude sales, marketing, and related expenses from its domestic industry analysis, particularly if the products were manufactured overseas and there were no other significant qualifying expenditures taking place in the US, such as domestic engineering or R&D. Turning to the present, what happened in the Lashify case? Lashify is a US company with headquarters and employees in the US. It distributes, markets, and sells artificial eyelash extensions and related products. Like many US companies, Lashify has certain R&D and sales- and distribution-related activities in the US, but its products are manufactured abroad and imported into the US before shipment to domestic customers. In its Section 337 complaint, Lashify asserted a utility patent (covering heat-fused lash extensions) and two design patents (covering ornamental designs for a storage cartridge and an applicator for artificial eyelash extensions) against several respondent importers of artificial eyelashes. The ITC instituted an investigation on October 23, 2020 (In re Certain Artificial Eyelash Extension Sys., Prods., & Components Thereof, No. 337-TA-1226, 2020 WL 6285221 (Oct. 23, 2020) (Notice)). Initial Determination The initial determination (ID) of the presiding administrative law judge (ALJ) found no violation of Section 337, in part because Lashify did not satisfy the economic prong of the domestic industry requirement for any of its asserted patents. When evaluating whether Lashify had established 'significant employment of labor or capital' under clause (a)(3)(B), the ALJ excluded Lashify's warehousing, quality control, and distribution expenses, reasoning that: There were 'no additional steps required to make these products saleable' upon arrival into the US. The quality control measures were 'no more than what a normal importer would perform upon receipt.' The ALJ concluded that because 'Lashify did not meet its burden to establish significant qualifying expenses in other areas,' sales and marketing expenditures were also excluded from the analysis. (In re Certain Artificial Eyelash Extension Sys., Prods., & Components Thereof, 2021 WL 6211486, at *62, *64 (Oct. 28, 2021) (ID) (internal quotations omitted).) Commission Decision After Lashify petitioned the full ITC for review of the ALJ's findings, the Commission's majority agreed with the ALJ's decision on the economic prong. The majority stated that sales and marketing activities alone cannot satisfy the domestic industry requirement and, citing Schaper Manufacturing, asserted that expenses related to warehousing, quality control, and distribution (regardless of their magnitude) are akin to those expenses incurred by mere importers. Two dissenting Commissioners, however, argued that the language of Section 337 contains no basis for excluding these activities from the domestic industry calculus. (In re Certain Artificial Eyelash Extension Sys., Prods., & Components Thereof, 2022 WL 15498309 (Oct. 24, 2022) (Comm'n Op.).) Lashify appealed to the Federal Circuit, which hears all appeals from ITC Section 337 proceedings (19 U.S.C. § 1337(c)). What happened on appeal at the Federal Circuit? After briefing, the case proceeded to oral argument in January 2025. During the argument, the ITC attorney faced sharp questioning from multiple judges on the panel, with one judge going so far as to state that the ITC's interpretation of the statute 'makes no sense.' Therefore, it was no surprise when, just two months later, the Federal Circuit issued an opinion vacating the Commission's determination on the economic prong of the domestic industry requirement and remanding the matter for further proceedings. Applying the Supreme Court's recent decision in Loper Bright Enterprises v. Raimondo (603 U.S. 369 (2024)), and relying heavily on the language of Section 337, the Federal Circuit held that the categories of labor and capital in clause (a)(3)(B) do not include any implicit limitation as to what function the labor or capital is expended on, holding that there is no: Carveout of employment of labor or capital for sales, marketing, warehousing, quality control, or distribution. Requirement that those expenditures be accompanied by employment for other functions, such as manufacturing. (Lashify, 130 F.4th at 958-60.) The Federal Circuit further clarified that the terms capital and labor as used in clause (a)(3)(B) mean a 'stock of accumulated goods' and 'human activity for producing goods or providing the services' the economy demands. The statute therefore allows a complainant to satisfy the economic prong of the domestic industry requirement by 'showing employment of a large enough stock of accumulated goods or of a significant amount of human activity for producing goods or providing the services in demand in an economy.' (Lashify, 130 F.4th at 959.) Addressing the specific activities at issue, the Federal Circuit held that: Warehousing involves holding a stock of accumulated goods. Quality control and distribution activities involve providing in-demand services, namely ensuring that products of desired quality are provided to customers. Sales and marketing efforts involve providing the services in demand. (Lashify, 130 F.4th at 959.) Although the ITC had argued that the legislative history of the 1988 amendments and prior Federal Circuit precedent supported its decision not to count sales, marketing, and distribution activities as part of the domestic industry, the court rejected these arguments, explaining that: Comments in the legislative history and proposed language concerning sales and marketing were not germane to the particular language of clause (a)(3)(B) at issue and undermined, rather than supported, the ITC's position. The ITC's reliance on the Federal Circuit's pre-1988 precedent in Schaper Manufacturing was not persuasive because that case: addressed pre-1988 statutory language; and was cited by Congress as an example of the ITC's inconsistent and narrow treatment of the domestic industry requirement. (Lashify, 130 F.4th at 960-63.) What are the practical implications of the Federal Circuit's decision? Lashify likely will have two immediate effects on Section 337 investigations, namely to: Simplify the complainant's domestic industry proofs. Complainants will no longer need to omit or separately allocate investment categories that the ITC had previously excluded under the mere importer test. Open the ITC's doors to a broader range of complainants, both large and small, who may have been hesitant to file a complaint because their US activities and personnel and capital investments skewed heavily to sales, marketing, and distribution. These complainants may now have a viable path at the ITC. These likely effects might be unexpected because the Supreme Court's Loper Bright decision, on which Lashify is based, was widely anticipated to be used to restrict federal agency authority. Here, however, the opposite occurred. Effect on Clause (a)(3)(A) Lashify's holding is technically limited to clause (a)(3)(B), which involves labor and capital. However, the Federal Circuit noted similarities between clauses (a)(3)(B) and (a)(3)(A), the latter of which involves plant and equipment investments. The court explained that 'both refer … to concretely identified inputs for an enterprise's functioning (plant, equipment, labor, and capital), but they do not limit what enterprise functions the inputs must be used to perform.' (Lashify, 130 F.4th at 959.) One would expect the Federal Circuit's reading of clause (a)(3)(B) to apply equally to clause (a)(3)(A), meaning that a complainant may include sales-, marketing-, and distribution-related plant and equipment investments, such as warehouses and vehicles, in the domestic industry analysis. Effect on Clause (a)(3)(C) In contrast to the first two clauses, the Federal Circuit distinguished the language of clause (a)(3)(C), which relates to exploitation of IP through engineering, R&D, or licensing. The court noted that this clause does not 'specify particular inputs but instead speaks only of a functionally defined enterprise activity (whatever inputs are used)' (Lashify, 130 F.4th at 959). This enterprise activity includes engineering, R&D, or licensing. Based on this finding, it is expected that the decision will not affect clause (a)(3)(C) going forward. Even if it were to affect the clause (a)(3)(C) analysis, the initial impact would likely be limited because complainants generally: Prefer to rely on clauses (a)(3)(A) and (a)(3)(B) when possible. Tend to use clauses (a)(3)(A) and (a)(3)(B) even when the domestic industry expenses relate to engineering or R&D, as permitted by the Commission's 2018 decision in In re Certain Solid State Storage Drives, Stacked Elecs. Components, & Prods. Containing Same (No. 337-TA-1097, 2018 WL 4300500 (June 29, 2018) (Comm'n Op.); for more information, see Engineering Activities Can Satisfy Economic Prong of Domestic Industry Requirement: ITC on Practical Law). In In re Certain Solid State Storage Drives, the Commission allowed engineering and R&D expenses for plant, equipment, labor, and capital to be counted under clause (a)(3)(A) or (a)(3)(B). The Commission did not address licensing expenses. However, the Commission recently suggested that it may consider revisiting this precedent (see In re Certain Video Capable Elec. Devices, No. 337-TA-1380, 2025 WL 857710, at *6 (Feb. 27, 2025) (Notice)). If it does, then the Lashify decision may have implications for companies asserting domestic industry expenses based primarily on activities covered under clause (a)(3)(C). Effect on Investigations Under Clause (a)(1)(A) The particular domestic industry language at issue in Lashify applies only to Section 337 investigations involving certain IP rights enumerated in the statute, that is, copyrights, patents, registered trademarks, semiconductor mask works, and boat hull designs (19 U.S.C. § 1337(a)(1)(B) to (E)). These IP rights are sometimes called statutory causes of action. Clause (a)(1)(A) applies to other types of unfair acts. These can include non-statutory IP causes of action, such as trade secret misappropriation, common law trademark infringement, and trade dress infringement. For these types of claims, a complainant must show an injury to a US industry. Section 337 does not specify criteria for establishing an industry under clause (a)(1)(A). However, the ITC often considers the same economic criteria that apply to statutory causes of action when determining whether there is a domestic industry for clause (a)(1)(A) claims (see In re Certain Raised Garden Beds & Components Thereof, No. 337-TA-1334, 2024 WL 1434222, at *23 (Apr. 1, 2024) (Comm'n Op.) (counting clause (a)(3)(A) and clause (a)(3)(B) expenses); In re Certain Botulinum Toxin Prods., Processes for Mfg. or Relating to Same & Certain Prods. Containing Same, No. 337-TA-1145, 2021 WL 141507, at *25-26 (Jan. 13, 2021) (Comm'n Op.) (counting clause (a)(3)(C) expenses), vacated on other grounds, Comm'n Order (Oct. 28, 2021)). Although there is a possibility that the ITC may look back to pre-1988 cases for guidance on this part of the statute, its operative language was not changed by the 1988 amendments. Therefore, it seems likely that Lashify will carry at least some persuasive effect in future clause (a)(1)(A) cases. 'Significant' Investments After Lashify, the next battlefield in the domestic industry requirement may shift from which expenses can count to the evaluation of the importance of the expenses themselves. To satisfy the economic prong, investments must be 'significant' under clauses (a)(3)(A) and (a)(3)(B) or 'substantial' under clause (a)(3)(C). As the Federal Circuit reinforced in another recent case, Wuhan Healthgen Biotechnology Corp. v. International Trade Commission, that determination requires a 'holistic' and 'context dependent' review that should not 'hinge on a threshold dollar value or require a rigid formula' (127 F.4th 1334, 1339 (Fed. Cir. 2025)). In other words, just as small dollar value investments may be considered significant in some circumstances (for example, in the small biotech market segment served by the complainant in Wuhan), it is also possible that large investments may be deemed insignificant in other contexts and, therefore, insufficient to satisfy the domestic industry requirement. It is worth noting that there is disagreement among the current ITC Commissioners over how to perform the comparisons required to determine significance. For example, while significance is sometimes measured by comparing the amount invested in the domestic industry products to other domestic investments, Commissioner Jason Kearns has rejected this approach based on concerns that it could put large firms with many product lines at a disadvantage (see In re Certain Power Converter Modules & Computing Sys. Containing the Same, No. 337-TA-1370, 2025 WL 857695, at *57 n.39 (Feb. 26, 2025) (Comm'n Op.); see also In re Certain Automated Put Walls & Automated Storage & Retrieval Sys., Associated Vehicles, Associated Control Software, & Component Parts Thereof, No. 337-TA-1293, 2023 WL 5426449, at *15 n.21 (Aug. 17, 2023) (Comm'n Op.)). A renewed focus on quantitative analysis, coupled with the apparent lack of agreement on how to conduct it, may lead to more disputes over discovery and expert testimony relating to significance. This could negate some of the cost savings and efficiencies otherwise gained from the Federal Circuit's Lashify holding, under which activities such as sales and marketing need not be separately allocated and removed from the domestic industry calculus.
Bloomberg
a day ago
- Business
- Bloomberg
Midwestern Bowling Outfit Pinstripes to File for Bankruptcy
Dining and entertainment company Pinstripes Inc. is considering filing for bankruptcy as soon as next week, according to people with knowledge of the matter. The company, which operates dining, bowling and bocce ball venues, has been holding confidential talks with its lenders and is being advised by law firm Ropes & Gray, said the people, who asked not to be identified discussing a private matter. Chapter 11 bankruptcies allow a company to continue operating while it works out a plan to repay creditors.
