United States Court of International Trade
Second Remand Results Sustained
Before the court in CS Wind Vietnam Co., Ltd. and CS Wind Corporation (collectively “CS Wind”), Court No. 13-102, Slip Op. 15-45, was U.S. Department of Commerce’s (“Commerce”) Final Redetermination Pursuant to Court Order, ECF No. 82 (“Second Remand Results”). The court had remanded to Commerce for reconsideration or further explanation of its calculation of the surrogate financial ratios used in determining the antidumping (“AD”) duty margin for plaintiffs CS Wind Vietnam Co., Ltd. and CS Wind Corporation (collectively “CS Wind”). CS Wind Vietnam Co. v. United States, Slip Op. 14-128, 2014 Ct. Int’l Trade LEXIS 129 (CIT Nov. 3, 2014) (“CS Wind II”). Commerce’s revised calculations were supported by substantial evidence, and the Second Remand Results were sustained.
Commerce was attempting to derive reasonable surrogate financial ratios from the financial statement CS Wind selected and was afforded wide discretion in calculating normal value. The dispute in this case centered on the inclusion of erection and civil expenses within jobwork charges, because it was unclear whether those expenses were also third-party expenses which would be properly included in overhead, and what offsets were applicable. Jobwork expenses normally refer to the costs paid to third parties to whom raw materials are sent to manufacture finished goods and thus do not include the cost of raw materials (which are captured elsewhere) or direct labor (which is not utilized because the third party’s labor is used).
When Commerce included overhead expenses, it typically offset those expenses with related income line items. Here, although Commerce offset “Jobwork Charges (including Erection and Civil Expenses)” with “Sales of Jobwork,” it did not offset them with “Erection Income” and “Civil Income.” The remand was issued to address the surrogate values and any offsets that could be applied. During the first remand, Commerce aggregated “Sales of Jobwork,” “Erection Income,” “Civil Income,” “Sale of Finished Goods,” “Scrap,” “Miscellaneous Income,” and “Services income from TSP activities.” Based on these changes, the overhead and SG&A expense ratios changed from 21.71% and 10.42% to 20.22% and 10.50%, respectively. Based on all of the changes made in the First Remand Results, the AD duty margin was reduced to 17.07%. While the court found this methodology reasonable, the court asked for another remand to explain how and why certain items were included in “Jobwork”. In this remand review CS Wind argued that Commerce improperly calculated the surrogate financial ratios, specifically overhead expenses, using Ganges Internationale Private Limited’s (“Ganges”) April 1, 2010–March 31, 2011 financial statement.
Both CS Wind and defendant-intervenor Wind Tower Trade Coalition (“WTTC”) contested Commerce’s Second Remand Results and argued that Commerce should have excluded “Sales of Finished Goods” and “Scrap” from the calculation of the erection/civil income ratio. To support the inclusion of “Sales of Finished Goods,” Commerce reasoned that because Ganges’ financial statement states that the finished goods manufactured by Ganges include “production done by 3rd parties on a jobwork basis,” it was reasonable to include “Sales of Finished Goods” in the total revenue associated with jobwork. As for “Scrap,” Commerce argued that because Ganges did not list scrap as a raw material input, but instead included scrap as inventoried items (“stocks”), scrap sold must have been generated during the manufacturing of finished goods. According to Commerce, because the company’s manufacturing process included jobwork done by third parties, revenue derived from scrap generated during that process was similarly associated with jobwork. The court agreed with Commerce’s conclusions. According to the court, “[t]he revenue accruing from the sale of finished goods and scrap is thus associated with jobwork, but was not captured in “Sales of Jobwork.” Therefore, Commerce’s inclusion of “Sales of Finished Goods” and “Scrap” in the total income associated with jobwork was supported by substantial evidence.” Slip Op., p. 13.
As for direct labor and raw materials ratio, Commerce created a separate ratio for these items which were not associated with total jobwork expenses in Ganges’statement. Using a 3rd party for production, would not require the need for direct labor or raw material items. The problem with Ganges’ financial statement was that it did not identify the value of each income line item attributable to jobwork. Commerce thus needed to devise a methodology to distill the income related solely to jobwork. Accordingly, in its Second Remand Results, Commerce calculated a ratio of raw materials and direct labor expenses to the sum of raw materials, direct labor, energy, and overhead expenses. Commerce argued that it sought to exclude only raw materials and direct labor because the other expenses suggested by CS Wind (energy, overhead, SG&A, and profit) were indeed associated with total jobwork expenses. Again, the court sustained Commerce’s conclusions on this point, and thus sustained the entirety of the remand results.
United States Court of Appeals for the Federal Circuit
Federal Circuit Reversed ITC 337 Decision
In Lelo, Inc., Leloi AB v. United States International Trade Commission et al., Court No. 2013-1582 (May 11, 2015), the Federal Circuit reviewed the International Trade Commission’s Final Determination finding that the domestic industry requirements of § 337 were satisfied upon a showing of a “significant investment in plant or equipment” and a “significant employment of labor or capital.”
Standard Innovation markets a line of kinesiotherapy devices that includes three models that it asserts practice certain claims of the U.S. Patent No. 7,931,605’605 Patent. In September 2009, Standard Innovation formed a U.S. subsidiary, Standard Innovation (US) Corp., (“Standard U.S.”) to distribute products in the United States. Standard Innovation markets a line of kinesiotherapy devices that includes three models that it asserts practice certain claims of the ’605 Patent. In September 2009, Standard Innovation formed a U.S. subsidiary, Standard Innovation (US) Corp., (“Standard U.S.”) to distribute products in the United States. It contracts Chinese manufacturers to assemble its devices from those parts and components. Once finished, the devices are exported from China to over fifty countries worldwide, including the United States.
The ITC addressed only four components in its domestic industry analysis: a backbone material, a rubber, microcontrollers, and a pigment. Of those components, the backbone material, rubber, pigment, and the wafers used in the microcontrollers were manufactured in the United States, but the record was not clear whether the U.S. suppliers of the components are also the manufacturers of the components. Apparently, all other components of the devices were produced and sourced abroad. Lelo Inc. is a California corporation having its principle place of business in San Jose, California. Leloi AB is headquartered in Stockholm, Sweden, and is a majority shareholder of Lelo Inc. and Lelo Shanghai Trading Ltd. (collectively “LELO”). LELO imports three kinesiotherapy devices into the United States. Standard Innovation filed a § 337 complaint alleging that LELO imported kinesiotherapy devices and components thereof that infringed its ’605 Patent.
The Administrative Law Judge (ALJ) construed three claim terms of the ’605 Patent and determined that all of the accused devices meet at least one claim of the ’605 Patent. Yet while the ALJ found infringement of the patents, he determined that there was no 337 iolation because Standard failed to satisfy domestic requirements. The ALJ rejected Standard Innovation’s arguments that its U.S. purchase of the four components constituted a “significant investment in plant and equipment,” or a “substantial investment in its exploitation, including engineering, research and development, or licensing,” under prongs (A) and (C), respectively, of the § 337 domestic industry requirement. Specifically, no proof was provided to show what part of purchase price was towards domestic investment in plant or equipment; nor was there proof that the components were made specifically for Standard Innovation. The ITC affirmed all but one 337 patent claim, but then reversed the ALJ’s findings regarding the 337 domestic industry requirement, finding that the investments in off-the-shelf products were modest but significant. Moreover, the ITC reasoned that the components were “crucial” because the backbone and finishing materials were finalized after extensive effort and experimentation; the backbone material specifically allowed for beneficial flexibility and resilience; and the microcontrollers enabled the devices to “function as a vibrator (particularly as a vibrator with multiple modes)” by controlling “motor and mode selection.” The ITC thus determined that the domestic purchases were significant entirely based on their qualitative contribution to the devices.
However, the Federal Circuit did not agree. The Federal Circuit found that section 337 required a quantitative approach to the domestic industry requirement to determine whether there is a significant increase or attribution by virtue of the claimant’s asserted commercial activity in the United States. Here, because the U.S. suppliers were neither contractors nor subcontractors, there was no evidence of any investment made in capital or labor as a result of the purchased components. They were retailors and the components are off-the-shelf. Standard Innovation provided only generic purchase prices it paid for the off-the-shelf items. This pricing data did not reflect the magnitude of labor expended to produce the components, or the amount the suppliers invested in their equipment to fulfill Standard Innovation’s orders. The record contained no data indicating the share of labor and capital costs attributable solely to purchases made by Standard Innovation. The Federal Circuit agreed with the ITC’s finding that investment and employment under prongs (A) and (B) were modest and insignificant. However, the Federal Circuit found that the ITC erred when it disregarded the quantitative data to reach its domestic industry finding based on qualitative factors. Qualitative factors cannot compensate for quantitative data that indicate insignificant investment and employment. Therefore, Standard Innovation did not prove “significant” “investment” or “employment” under prongs (A) and (B), and did not provide investments necessary to satisfy prong (C). For these reasons the ITC’s decision was reversed.