It is a deceptively simple question with a not so
simple answer. A purely foreign transaction is certainly beyond the reach of
U.S. patent law, but what if part of the transaction occurs within the United
States?
For example, if a company executes a contract in the U.S. to
manufacture and deliver a product overseas, and that product is covered by a
U.S. patent, has the patent been infringed? After decades of confusion in
the courts, the Federal Circuit provided some much needed guidance in its 2014
ruling in Halo Electronics, Inc. v. Pulse
Electronics, Inc., 769 F.3d 1371 (Fed. Cir. 2014), but stopped short
of announcing any bright-line tests.
This article examines the efforts that the
Federal Circuit and district courts have made to resolve this fundamental
question of infringement liability in our increasingly global
economy.
The
Ambiguity in the Law
35 U.S.C. § 271(a) provides in relevant part that
“whoever without authority…offers to sell, or sells any patented invention,
within the United States…infringes the patent.” This begs the question,
however: is it “offer/sell in the United States a patented invention” or
“offer/sell a patented invention for delivery in the United States?” In other
words, does the location of the act of offering, negotiating and/or contracting
control, or does liability turn on the ultimate delivery location of the thing
that was offered or sold? A separate statute – Section 271(f) – makes it an act
of infringement to sell components of a patented invention in the United
States for export and assembly overseas, but does not cover products that
are manufactured entirely in another country.
The Transocean Decision: Foreign Transactions with
Delivery in the United States
The Federal Circuit’s 2010 decision in Transocean Offshore Deepwater
Drilling, Inc. v. Maersk Construction USA, Inc., 617 F.3d 1296 (Fed.
Cir. 2010) provided guidance regarding the scenario of a transaction that takes
place in a foreign country contemplating delivery of a product into the U.S.
With regard to the question of whether an infringing offer to sell had occurred,
the court summarized as follows: “[t]his case presents the question whether an
offer which is made in Norway by a U.S. company to a U.S. company to sell a
product within the U.S., for delivery and use within the U.S. constitutes an
offer to sell within the U.S. under § 271(a). We conclude that it does. …The
focus should not be on the location of the offer, but rather the location of
the future sale that would occur pursuant to the offer.” With regard to the
question of whether an infringing sale had occurred, the court applied similar
reasoning, and concluded that “a contract between two U.S. companies for the
sale of the patented invention with delivery and performance in the U.S.
constitutes a sale under § 271(a) as a matter of law.”
The Halo Decision: Transactions in the
United States with Delivery Overseas
In the wake of Transocean, district courts struggled with how to apply
the Federal Circuit’s holding to the scenario of a transaction that occurs in
the U.S. contemplating delivery of an otherwise infringing product overseas. In
particular, what has continued to cause confusion is defining where a “sale”
occurs geographically for purposes of Section 271(a). A sale can be thought of
as encompassing several distinct steps – negotiation, contract execution,
payment, title transfer, and delivery – not all of which necessarily happen in
the same place.
Although theTransocean court concluded that the negotiation
and execution of a contract in Norway did not insulate the defendant from
“sale” liability where the product was ultimately delivered into the United
States, the court stopped short of adopting a per se rule that the delivery location
controls the outcome in all cases.
The Federal Circuit’s later decision in Halo gives further
guidance, but still does not provide any bright-line rules. In Halo, the defendant
had engaged in U.S.-based negotiations to manufacture allegedly infringing
electronic components overseas and deliver them to foreign device
manufacturers, who in turn incorporated the components into finished products
for sale around the world, including the United States.
The Federal Circuit
concluded that the defendant had not engaged in any infringing “sale” in the
U.S., reasoning that “when substantial activities of a sales transaction,
including the final formation of a contract for sale encompassing all essential
terms as well as the delivery and performance under that sales contract, occur
entirely outside the United States, pricing and contracting negotiations in the
United States alone do not constitute or transform those extraterritorial
activities into a sale within the United States for purposes of § 271(a).”
The Halo court
separately reaffirmed Transocean’s logic
with respect to offers to sell, stating simply “[a]n offer to sell, in order to
be an infringement, must be an offer contemplating sale in the United States.” Halo left
unanswered, however, what test courts should apply to determine what constitutes
“substantial activities of a sales transaction” that would dictate the location
of a sale for purposes of 35 U.S.C. § 271(a).
At least one post-Halo district court case, M2M Solutions LLC v. Motorola
Solutions, Inc., 2016 U.S. Dist. LEXIS 872 (D. Del. Jan. 6, 2016),
concluded that even where there are significantly more U.S.-based sale
transaction activities, the ultimate delivery location is the critical factor
in determining the location of the sale for purposes of infringement. In M2M, the defendant (a
U.S. company) had not only negotiated the sale with another U.S. company in the
U.S., but had also received payment in the U.S.
The products at issue
(electronic components, like in Halo), were manufactured overseas and delivered to a
foreign device assembler (a separate company), who incorporated the accused
components into finished products that were then delivered around the world,
including to the United States. In ruling that the overseas sales were
non-infringing, the court cited several pre-Halo district court rulings for the
proposition that the ultimate delivery location is the principal consideration,
including Ziptronix, Inc. v. Omnivision
Techs., Inc., 71 F. Supp. 3d 1090 (N.D. Cal. 2014) and Lake Cherokee Hard Drive
Techs., L.L.C. v. Marvell Semiconductor, Inc., 964 F. Supp. 2d 653
(E.D. Tex. 2013).
Foreign
Sales with Subsequent Importation into the United States
Even if one adopts the place of delivery as the
critical factor in determining the location of a sale, the liability inquiry
does not end there if the product is subsequently imported into the United
States, and the seller is cognizant of that fact. For example, it is common in
many international transactions to have title pass to the buyer free on board
(FOB) a foreign port just before delivery to the United States. Does the
foreign title transfer insulate the seller from infringement liability?
In North American Philips Corp. v. American Vending Sales,
35 F.3d 1576 (Fed. Cir. 1994), the Federal Circuit held that it
would “exalt form over substance” to say that the FOB location determined the
location of a sale for purposes of Section 271(a). Building on this principle,
the Federal Circuit later held in Litecubes, LLC v. Northern Light Products, Inc., 523
F.3d 1353 (Fed. Cir. 2008), that in a case where “the American customers were
in the United States when they contracted for the accused [products], and the
products were delivered directly to the United States,” the location of the
sale was the United States despite the fact that the products had been shipped
FOB Canada.
Despite these cases, the result can be different where
there is an intermediate foreign purchaser. In MEMC Electronic Materials, Inc.
v. Mitsubishi Materials Silicon Corp., 420 F.3d 1369 (Fed. Cir.
2005), the Federal Circuit considered the question of whether a Japanese
company had engaged in infringing sales where it shipped products FOB Japan to
a Japanese buyer’s U.S. subsidiary.
The court distinguished North Am. Philips,
explaining that under these facts, the “sale” for purposes of Section 271(a)
had already occurred in Japan where the Japanese buyer and seller had
negotiated and executed the contract. The subsequent step of delivering the
products to the U.S. subsidiary (FOB Japan) was therefore not part of the sales
transaction. Here, the court held that “[m]ere knowledge that a product sold
overseas will ultimately be imported into the United States is insufficient to
establish liability under section 271(a).”
Notably, the MEMC court left open the possibility that
the Japanese seller could still be liable forinduced infringement under Section 271(b)
because there were facts to support the conclusion that it was actively
assisting the downstream U.S. company to infringe, rather than merely shipping
out the products with only a generalized awareness of their ultimate
destination. A similar scenario played out in Power Integrations, Inc. v. Fairchild Semiconductor International,
Inc., 711 F.3d 1348 (Fed. Cir. 2013). In that case, Fairchild had
sold accused power circuits to foreign manufacturers for incorporation into
cell phone chargers that were sold around the world. While the Federal Circuit
rejected the plaintiff’s demand for lost profits damages based on all worldwide
sales, it upheld the argument that Fairchild might be liable for induced
infringement stemming from the portion of chargers that were ultimately
imported back into the U.S. by the foreign manufacturers.
Relevant to this
determination was the fact that Fairchild was not only aware of the subsequent
importation, but had indemnified the foreign manufacturers for U.S.
infringement. The Federal Circuit nonetheless denied any award of damages under
the induced infringement theory because the plaintiff had not proven what
percentage of the accused power circuits had actually ended up in the United
States.
Conclusion
So does negotiating and executing a contract in
the U.S. for manufacture and delivery of a product outside the U.S.
infringe a U.S. patent? The consensus answer appears to be “no” in light of
district court cases like M2M, Ziptronix and Lake Cherokee, although the Federal Circuit has yet
to set forth a bright-line test. Other district court cases support the
proposition that, even absent direct liability under Section 271(a) for an
overseas sale, a company could be liable for induced infringement under Section
271(b) if it deliberately conspires to encourage subsequent importation or use
in the U.S.
However, as shown in MEMC and Power Integrations, a bare allegation that the
defendant was aware that some of its products would ultimately wind
up in the U.S. is likely insufficient, and courts will look for proof of
specific encouragement of U.S. importation and use, as well as proof
of the actual quantity of products that ended up in the United
States. Developments in this area of the law should be monitored given
their potential impact on international business transactions.
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