Thursday 23 October 2014

Federal Circuit Clarifies Limits To "Sale" and "Offer For Sale" Infringement In Foreign Transactions

One perplexing issue facing companies involved in product development, manufacture and distribution in multiple jurisdictions is the potential extraterritorial effect of a nation’s patent laws. The U.S. Supreme Court has noted that, “[t]he presumption that United States law governs domestically but does not rule the world applies with particular force in patent law.” Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 454-55 (2007). Yesterday, the Federal Circuit ruled that the sale of a patented component to a foreign buyer and delivered outside the U.S. is not a “sale” or “offer for sale” under the Patent Act, even if price negotations, customer support, and other activities took place in the U.S. Halo Electronics, Inc. v. Pulse Electronics, Inc., No. 2013-1472 and 1656 (Fed. Cir. Oct. 22, 2014). 

Halo was a patent infringement action involving patents for printed circuit board components manufactured and sold by the defendant, Pulse. Contract manufacturers used the Pulse components to assemble products for Cisco, which Cisco then distributed overseas. Although Cisco did not directly purchase the components, it negotiated with Pulse and other suppliers price ranges than would apply to components purchased by Cisco’s contract manufacturers. The actual sales contracts relating to the Pulse components alleged to infringe were negotiated and entered into outside the U.S., and the actual accused components were manufactured, delivered, and assembled into finished products outside the U.S. Nonetheless, significant activity occurred in the U.S.:
However, Pulse engaged in pricing negotiations in the United States with companies such as Cisco, and Pulse’s employees in the United States approved prices that its agents quoted to foreign customers when the quoted prices fell below certain thresholds. Pulse also engaged in other activities in the United States, including meeting regularly with Cisco design engineers, sending product samples to Cisco for pre-approval, attending sales meetings with its customers, and providing post-sale support for its products.

Slip op. at 4-5. The Federal Circuit ruled that this conduct was not infringement under 35 U.S.C. § 271. First, it was not a “sale” in the U.S.: 
Consistent with all of our precedent, we conclude 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).

 Slip op. at 12.  Applying that standard to Pulse, the court found no infringement:
While Pulse and Cisco engaged in quarterly pricing negotiations for specific products, the negotiated price and projected demand did not constitute a firm agreement to buy and sell, binding on both Cisco and Pulse. Instead, Pulse received purchase orders from Cisco’s foreign contract manufacturers, which then firmly established the essential terms including price and quantity of binding contracts to buy and sell. Moreover, Pulse was paid abroad by those contract manufacturers, not by Cisco, upon fulfillment of the purchase orders. Thus, substantial activities of the sales transactions at issue, in addition to manufacturing and delivery, occurred outside the United States. Although Halo did present evidence that pricing negotiations and certain contracting and marketing activities took place in the United States, which purportedly resulted in the purchase orders and sales overseas, as indicated, such pricing and contracting negotiations alone are insufficient to constitute a “sale” within the United States.

 Slip op. at 12-13. For similar reasons, the court further held that the activity was not an “offer for sale,” which also is an act of infringement under § 271(a): 
An offer to sell, in order to be an infringement, must be an offer contemplating sale in the United States. Otherwise, the presumption against extraterritoriality would be breached. 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. We therefore hold that Pulse did not offer to sell the products at issue within the United States for purposes of § 271(a). 

Slip op. at 16. The full opinion is available HERE.


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