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IP Alert: Negotiating Contracts in the U.S., by Itself, Does Not Constitute an Infringing Sale

October 24, 2014

Section 271(a) of the U.S. Patent Code makes it an act of infringement to make, use, offer to sell, or sell a patented invention “within the United States.” When a contract for sale is negotiated within the U.S., but the products are delivered overseas, does that constitute infringing activity “within the United States”? On October 22, 2014, the Court of Appeals for the Federal Circuit addressed this question in Halo Electronics, Inc., v. Pulse Electronics, Inc., et al. The court held that engaging in pricing and contracting activities within the U.S., by itself, does not constitute an act of infringement “within the United States” if substantial activities of a sales transaction—including the final formation of a contract, the receipt of purchase orders, and delivery of the patented invention—occur outside the U.S. 

The Halo decision also addresses the standard for willful infringement under 35 U.S.C. 284. Two judges on the three-judge Federal Circuit panel suggested that the current two-prong willful infringement test should be reevaluated in light of recent Supreme Court decisions modifying a similar standard for attorneys’ fees under 35 U.S.C. 285.

Plaintiff Halo asserted that the Pulse defendants infringed three Halo patents relating to electronic circuit board packages. Pulse manufactured all of the accused products in Asia, and most of those products were delivered to customers overseas without ever entering U.S. territory. The terms and pricing of the contracts for sale were negotiated within the U.S. These negotiations did not result in a binding contract between the parties to buy or sell any particular products. Instead, Pulse’s manufacturers would submit purchase orders to Pulse. Once accepted, these purchase orders created a binding contract. These purchase orders were sent, received, fulfilled, and paid for outside the U.S.

The district court held that products delivered to the U.S. did infringe Halo’s patents, and awarded damages. But the district court granted summary judgment of noninfringement for the products that did not enter the U.S. The district court also found that Pulse’s infringement was not willful. Both parties appealed.

On appeal, Halo argued that Pulse’s pricing negotiations and contracting activities occurring within the U.S constituted infringing sales, or at least infringing offers for sale. Halo asserted that Pulse’s negotiations and activities created terms that ultimately resulted in binding contracts for sales. 

The Federal Circuit disagreed, and affirmed the judgment of noninfringement. In arriving at its decision, the court emphasized that there is a strong policy against applying U.S. patent laws extraterritorially. The court recognized that the location of a “sale” can be determined based on the location where parties reach an agreement on a sale. However, in this case, the court noted that substantial activities of the sales at issue occurred overseas. These activities included the final formation of a contract for sale, the receipt of purchase orders, the shipment of the purchased product, the delivery of the purchased product, and the payment under the purchase orders. Considering these factors in view of the strong policy against extraterritorial application of U.S. patent laws, the Federal Circuit concluded that Pulse’s U.S. pricing and contracting activities did not constitute a sale.

Halo also argued that Pulse’s sales occurred “within the United States” because the sales caused Halo economic harm within the United States. The Federal Circuit also dismissed this argument, reasoning that such an interpretation of the term “sale” would confer a worldwide exclusive right to the U.S. patent holder, and therefore would run contrary to the statute. The court observed that Halo recovered damages for Pulse’s infringing products that were ultimately imported into the United States.

The court also rejected Halo’s argument that Pulse’s pricing and contract activities constitute an “offer for sale” within the scope of § 271(a). For an offer to sell to constitute infringement, the offer must be to sell a patented invention within the U.S. In this case, because the court determined that the sale itself was not within the U.S., the negotiations and contract activities relating to those sales could not be considered an infringing offer to sell.

For the Pulse products that did enter the U.S., the Federal Circuit affirmed the district court’s holding of infringement and also affirmed the district court’s conclusion that the infringement was not willful. In its analysis, the Federal Circuit applied the two-pronged willful infringement test set forth in In re Seagate Technology, an earlier Federal Circuit en banc decision. Under the Seagate analysis, to establish willfulness, a patentee must show (1) that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent, and (2) that the infringer knew or should have known of this objectively high risk. 

The court reasoned that Pulse had not acted with an objectively high risk of infringement because it had presented a substantial obviousness challenge to the patent. Although ultimately unsuccessful, this defense was not objectively baseless. Pulse presented evidence that the prior art disclosed each claimed element, that it would have been predictable to combine and modify the prior art to create the claimed technology, and that the prior art introduced at trial was different from that considered by the U.S. Patent and Trademark Office. Pulse also challenged Halo’s evidence of secondary considerations. The Federal Circuit held that Pulse had raised a substantial question of obviousness, and therefore the first prong of the willfulness standard was not met.

Judge O’Malley issued a concurring opinion (joined by Judge Hughes) calling for en banc review of the Seagate willfulness test. She suggested that the court should now reevaluate whether the two-pronged objective/subjective willfulness test is still appropriate in view of the Supreme Court’s recent decisions in Highmark Inc. v. Allcare Health Management System, Inc., and Octane Fitness LLC v. ICON Health & Fitness, Inc. [Note: Both decisions were discussed in a previous Fitch Even IP Alert and during a prior Fitch Even webinar, which is available for viewing until May 29, 2015.] Judge O’Malley noted that the current test for willfulness under § 284 is analogous to the previously prescribed test for attorneys’ fees under § 285. Because the Highmark and Octane decisions deemed the Federal Circuit’s objective/subjective test under § 285 to be too narrow, she postulated that the similar willfulness standard also may be too narrow.

The Halo decision is an important decision in multiple respects. The decision can provide important guidance to those concerned with patent infringement for products that are manufactured and distributed outside of the United States, and it is a possible harbinger of new willfulness law from the Federal Circuit. 

For more information on this decision, please contact Fitch Even partner Michael J. Krautner, the author of this alert.

 

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