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 the Transocean 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 for induced 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.
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.