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American Intellectual Property Law Association

Extraterritorial Reach of U.S. Patents:Foreign Sales and Offers for Sale

2015 AIPLA Mid-Winter IP Practice in Japan Committee Pre-Meeting

Naoki YoshidaPartner, Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

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Halo Electronics v. Pulse Electronics

• Halo Electronics, Inc. v. Pulse Electronics, Inc., Case No. 2013-1472, -1656 (Fed. Cir. Oct. 22, 2014).

• Halo owns patents directed to surface mount electronic packages containing transformers for mounting on a printed circuit board inside computers and internet routers.

• Pulse, another supplier of electronic components, designs, makes and sells surface mount electronic packages.

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Halo Procedural Background

• District Court (D. Nev.):– Halo sued Pulse for infringement of Halo’s patents.– Dist. Ct. granted Pulse’s summary judgment that there

was no direct infringement because Pulse did not sell or offer to sell the accused surface mount electronic packages within the United States.

• Federal Circuit:– Halo appealed.– Fed. Cir. addressed the “sale” and “offer for sale”

aspects of Section 271(a), and affirmed the Dist. Ct. judgment of non-infringement.

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Halo Facts

• Supply Chain of Pulse’s Product – Pulse manufactured its surface mount electronic

packages in Asia.– Pulse delivered some of its products to customers in the

United States, but delivered the majority of them outside the U.S. to contract manufacturers for Cisco.

– The contract manufacturers incorporated the electronic packages into end products, such as network routers, overseas and sold and shipped to consumers around the world.

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Halo Facts (con’t)

• Pulse’s Business Activities– Pulse received purchase orders for products delivered

abroad at Pulse’s sales offices abroad.– Pulse engaged in pricing negotiations in the U.S. with

customers such as Cisco. – Pulse’s employees in the U.S. approved prices quoted to

foreign customers on some occasions.– Pulse attended sales meetings with its customers and

provided post-sale support for its products.

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Halo Facts (con’t)

• Pulse’s Business Activities with Cisco– Cisco outsourced its manufacturing activities to foreign contractors but

negotiated with Pulse the prices that its contractors would pay when purchasing electronic packages.

– Pulse met regularly with Cisco and sent product samples to them for pre-approval.

– Pulse executed with Cisco a general agreement that set forth manufacturing capacity, low price warranty, and lead time terms without reference to any specific Pulse product or price.

– Cisco sent a request for quote to Pulse and Pulse responded with the proposed price and minimum quantity for each product.

– Cisco then communicated the price and percentage allocation for each product to its contract manufacturers in Asia, and the contract manufacturers applied the Cisco price and allocation when ordering components from Pulse.

– Pulse received the purchase orders abroad.– Upon receiving the orders, Pulse delivered the electronic package products from

its manufacturing facility in Asia to Cisco’s contract manufacturers located in Asia, which then paid Pulse.

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Halo Facts (con’t)

ASIA U.S.

Pulse

Cisco’s Contractors

Cisco

Customers

Customers

Customers

Negotiated

Sold

Sold

Sold Shipped

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Halo Federal Circuit Opinion

• Fed. Cir. analyzed if Pulse’s activities constituted a sale or an offer for sale in the United States under § 271(a).

• The Court held that the products Pulse made, shipped, and delivered abroad were neither sold nor offered for sale by Pulse within the United States.

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Sale

• Fed. Cir. reviewed cases addressing a “sale” in the context of personal jurisdiction and concluded that a “sale” may occur at multiple locations (a location of a seller or a buyer, a location of a legal operative act, etc.)

• “Although the place of contracting may be one of several possible locations of a sale to confer personal jurisdiction, we have not deemed a sale to have occurred within the United States for purposes of liability under § 271(a) based solely on negotiation and contracting activities in the United States when the vast majority of activities underlying the sales transaction occurred wholly outside the United States.”

• “one must examine whether the activities in the United States are sufficient to constitute a ‘sale’ under § 271(a), recognizing that a strong policy against extraterritorial liability exists in the patent law.”

• A “sale” in the context of personal jurisdiction may be different from a “sale” for purposes of liability under § 271(a), and you must analyze what activities took place in the United States.

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Sale (con’t)

• The patent statute does not define the meaning of a “sale” within the United States for purposes of § 271(a).

• “[T]he ordinary meaning of a sale includes the concept of a transfer of title or property.” – NTP, Inc. v. Research in Motion, Ltd., 418 F.3d 1282, 1319 (Fed. Cir. 2005).

• Article 2 of the Uniform Commercial Code provides that “[a] ‘sale’ consists in the passing of title from the seller to the buyer for a price.” U.C.C. § 2-106

• A sale is “not limited to the transfer of tangible property” but may also be determined by “the agreement by which such a transfer takes place,” but the location of actual or anticipated performance under a “contract for sale” remains pertinent to the transfer of title or property from a seller to a buyer.

• A sale may be a transfer of tangible property or/and an agreement, and the location of actual or anticipated performance under a contract for sale is pertinent to the transfer of property.

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Sale (con’t)

• “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).”

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Sale (con’t)

• In this case:– Pulse’s products were manufactured, shipped, and delivered to

buyers abroad and were at no point, in transit or otherwise, in the United States.

– Pulse received the actual purchase orders for those products abroad.

– Pulse and Cisco entered into a general business agreement in the United States, but the agreement did not refer to, and was not a contract to sell, any specific product.

– Pulse and Cisco engaged in pricing negotiations in the United States, but the negotiated price did not constituted a firm agreement to buy and sell, binding on Pulse and Cisco.

– Pulse received purchase orders from Cisco’s foreign contractors, which then firmly established the essential terms (including price and quantity) of binding contracts to buy and sell.

– Pulse was paid abroad by the contractors, not by Cisco.

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Sale (con’t)

• Fed. Cir. held that:– Substantial activities of the sales transactions at issue, in addition to

manufacturing and delivery, occurred outside the United States.– Pricing negotiations and certain contracting and marketing activities

took place in the United States, which purportedly resulted in the purchase orders and sales overseas, but such pricing and contracting negotiations alone are insufficient to constitute a “sale” within the United States.

– “Any doubt as to whether Pulse’s contracting activities in the United States constituted a sale within the United States under § 271(a) is resolved by the presumption against extraterritorial application of United States laws.”

• citing Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 454–55 (2007).

– Fed. Cir. rejected Halo’s argument that the sales occurred in the United States simply because Halo suffered economic harm as a result of those sales.

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Offer for Sale

• Fed. Cir. stated its analysis with the definition of an “offer for sale.”• An “offer for sale” generally occurs when one communicates a

manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.

• “the location of the contemplated sale controls whether there is an offer to sell within the United States” and that “[i]n order for an offer to sell to constitute infringement, the offer must be to sell a patented invention within the United States.” – Citing Transocean Offshore Deepwater Drilling, Inc. v. Maersk Contractors

USA, Inc., 617 F.3d 1296, 1309 (Fed. Cir. 2010) (holding that there was infringement based on the offer to sell because contract negotiations, although occurred outside the United States, were for delivery and performance in the United States.)

• An offer for sale under § 271(a) is determined based on the location of the contemplated sale.

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Offer for Sale (con’t)

• This case involves opposite situation from Transocean:– The negotiations between Halo and Cisco occurred in the United

States, but the contemplated sale occurred outside the United States.

• Fed. Cir. held that:– “Pulse did not directly infringe the Halo patents under the ‘offer to sell’

provision by offering to sell in the United States the products at issue, because the locations of the contemplated sales were outside the United States.”

– An “offer to sell, in order to be an infringement, must be an offer contemplating sale in the United States. . . If a sale outside the United States is not an infringement of a U.S. patent, an offer to sell, even if made in the United States, when the sale would occur outside the United States, similarly would not be an infringement of a U.S. patent.”

– Fed. Cir. appears to hold that this interpretation is consistent with the presumption against extraterritoriality.

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Practice Tips - Foreign Sales or Offers for Sale

• Investigate a supply chain, business and transactional activities early– Supply chain

• Any direct or indirect sale into the United States?• Who sells what to whom, and who buys what from whom?

– Business and transactional activities• Any tangible property transferred in the United States?• Any contract negotiated and/or formed in the United States?• Where is the location of actual or anticipated delivery and performance under a contract for sale?• Any offer contemplating sale in the United States?

• Consider providing these information to patentee– Demonstrate reduced damages base– Assist with potential settlement

• Consider summary judgment • For international transactions, you can minimize infringement liability

based on sale and offer for sale under § 271(a) by:– Avoiding a transfer of a tangible property and contract formation in the United

States and an offer contemplating sale in the United States, and– Arranging the location of actual or anticipated delivery and performance under a

contract for sale to be abroad.

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Extraterritoriality – Historical Perspective

• Brown v. Duchesne, 60 U.S. (19 How.) 183 (1856)– Found no infringement by an unauthorized use of U.S.-patented sail

boat parts on board a foreign vessel docked in Boston because U.S. patent rights did not extend beyond the U.S. boarder in international waters and the parts were placed on the vessel in a foreign port (foreign policy concern).

• 35 U.S.C. § 271(a) (1952)– “(a) Except as otherwise provided in this title, whoever without authority

makes, uses or sells any patented invention, within the United States during the term of the patent therefor, infringes the patent.”

• Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972)– Found no infringement of a U.S. patent directed to a shrimp peeling

machine when individual components of an accused shrimp peeling machine were exported from the United States to be assembled in a foreign country.

• The general rule against extraterritoriality

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Extraterritoriality – Historical Perspective (con’t)

• But the tide shifted.• 35 U.S.C. § 271(f) (1984)

– An exception to the general rule.– A reaction by the United States Congress to Deepsouth by creating

infringement liability for those who makes unpatented components in the United States and export them for combination abroad in a matter that would infringe a U.S. patent.

• Eolas Technologies, Inc. v. Microsoft Corp., 399 F.3d 1325 (Fed. Cir. 2005)– Held that a U.S. patent was infringed under § 271(f) when golden

master disks containing software were exported and their copies were used to install the software on PCs overseas.

• Union Carbide Chemicals & Plastics Technology Corp. v. Shell Oil Co., 425 F.3d 1366 (Fed. Cir. 2005)– Held that § 271(f) applies to method claims

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Extraterritoriality – Historical Perspective (con’t)

• Microsoft Corp. v. AT&T Corp., 127 S. Ct. 550 U.S. 437 (2007)– Exporting golden master disks containing software (Microsoft

Windows) to be copied abroad for installation onto foreign-manufactured PCs was not infringement of a U.S. patent under § 271(f) because Windows in the abstract, without physical embodiment, does not qualify as a “component” under § 271(f) and the foreign-made copies of Windows actually installed on the PCs were not supplied from the United States.

– “Any doubt that Microsoft’s conduct falls outside § 271(f)’s compass would be resolved by the presumption against extraterritoriality.”

• Cardiac Pacemakers, Inc. v. St. Jude Medical, Inc., 576 F.3d 1348 (Fed. Cir. 2009)– Ruled that § 271(f) does not apply to method claims.

• Courts are returning to the presumption against extraterritoriality and will increasingly rely on it to limit the extraterritorial reach of U.S. patents.

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Thank you!

Naoki YoshidaTokyo Office Managing PartnerFinnegan, Henderson, Farabow, Garrett & Dunner, LLPShiroyama Trust Tower, 33rd Floor3-1, Toranomon 4-chomeMinato-ku, Tokyo 105-6033 JapanTel: (81) 3-3431-6517E-mail: naoki.yoshida@finnegan.com