The Impact of U.S. Patents on International Business

Nov 2004Managing Intellectual Property (MIP), Issue 144, pg. 28

Patent laws are domestic in nature. In principle, a U.S. patent has no extraterritorial effects. A U.S. patent grants a right to exclude others from, inter alia, making, selling, or using a patented article or process within the U.S. territory. Making, selling, or using a U.S.-patented product or process in another countrydoes not, by itself, infringe a U.S. patent.

There is a trend, however, toward expanding U.S. patent laws to incorporate international activities. The bad news for entities doing business outside the U.S. is that they can infringe a U.S. patent even if their activities have only an indirect connection with the U.S. The good news is that they can obtain and use U.S. patents to limit their competitors' activities outside the U.S. In today's global marketplace, U.S. patent holders (whatever their nationality) should take full advantage of this trend, and entities involved in international business should be aware of the potential risk of infringing a U.S. patent. This article reviews the impact of U.S. patents on six international activities.

Exportation of components from the U.S. and global sales of the patented end product

Since 1984, a U.S. patent grants a right to exclude others from supplying or causing to be supplied in or from the U.S. components of a patented invention under certain conditions, as provided in 35 USC 271(f). Section 271(f) has two parts, each defining a separate act of infringement. The first part requires that the components be all or a substantial portion of the components of the invention and that the infringer actively induce the combination of the components outside the U.S. in a manner that would infringe the patent if such combination occurred within the U.S. Under the first part, the components may be staple articles or commodities of commerce which are also suitable for non-infringing use. The second part requires that the components be especially adapted for use in the patented invention and that the infringer know and intend that the components will be combined outside the U.S. Actual combination or assembly of the components (anywhere and by anyone) is not required under the second part (and may not be required under the first part). Under 35 USC 271(f), a manufacturer outside the U.S. could be liable for exporting from the U.S., or causing a supplier to export, a component of a patented end product even if the patented end product is manufactured, sold and used outside the U.S.

Furthermore, patentees can be awarded damages based on sales made outside the U.S. For example, Microsoft shipped outside the U.S. a master version of its Windows software, which was then copied for installation on foreign-assembled computers. AT&T held a patent covering a speech decoder and sued Microsoft under 35 USC 271(f), alleging that the Windows software incorporated the speech decoder. See AT&T v. Microsoft (S.D. N.Y., 2004). Microsoft requested the court to exclude from any damage award the foreign sales of the foreign-assembled computers. The court, however, found that the damages could be based on the foreign sales under 35 USC 271(f).

A patentee can thus rely on its U.S. patent to seek damages for sales outside the U.S., even when the patentee is not competing in the U.S. market. This can be extremely beneficial when the patentee does not hold patents in countries where the sales are made, or when it is inconvenient to sue the infringers in many different countries. With a single patent litigation against the U.S. exporter of the components, the patent holder may recover damages for global salesof the end products incorporating the components. This is another reason why foreign companies, which do not compete on the U.S. market but compete in foreign markets against U.S. suppliers, should consider obtaining U.S. patents.

If a manufacturer outside the U.S. is not exporting or causing the export of the components, but a supplier is performing the exportation from the U.S., the holder of a U.S. patent can enjoin the supplier from exporting components from the U.S. This scenario illustrates how a U.S. patent can impact the supply of components in foreign markets and how a U.S. patent holder may apply pressure on competitors in foreign markets even when the competitors have only an indirect connection with the U.S.

Offers to sell within the U.S. without sales in the U.S.

Since 1996, a U.S. patent grants a right to exclude others from offering to sell within the U.S. a patented invention. Little jurisprudence is available on the "offer to sell" provision, and a number of questions remain open. Specifically, it is not clear (1) what exactly constitutes an "offer," (2) whether a physical embodiment is required to be in existence at the time of the offer, (3) whether an offer requires an ultimate sale, (4) whether the ultimate sale must take place within the U.S., and (5) how to calculate damages to compensate for offers to sell.

With respect to definition, an "offer to sell" within the U.S. probably requires a communication to or from the U.S. that manifests a willingness to enter into a sales contract for the patented invention. Letters containing price quotations and descriptions of the merchandise for sale have been held to constitute an "offer to sell." Mere advertising, however, is probably not an "offer to sell."

Regarding the ultimate sale issue, in Wesley Jessen Corp. v. Bausch & Lomb, Inc. (2003), a Delaware district court held that an unauthorized offer to sell can create a separate cause of action for patent infringement, even without an actual or contemplated infringing sale. Accordingly, there is support for the proposition that entities may infringe a U.S. patent if they offer to sell the patented product in the U.S, even if they make, use or sell the product outside the U.S. For example, a European manufacturer that offers to sell its products via a salesperson residing or traveling in the U.S., or on the Internet via a website accessible to potential U.S. customers, could be liable for patent infringement. Similarly, mailing quotation letters from Europe to potential customers in the U.S. could infringe a U.S. patent. A U.S. patent holder can seek an injunction (and possibly damages) against such offers to sell (assuming that a U.S. court has jurisdiction over the European manufacturer). Such an injunction can be particularly beneficial when the patent holder competes against the foreign manufacturer for sales in the U.S.

On the other hand, other courts have held that an offer to sell made within the U.S., but contemplating a sale of goods outside the U.S., is not within the scope of liability for the "offer to sell" provision. See, for example, Cybiotronics, Ltd. v. Golden Source Electronics, Ltd. (C.D. Cal. 2001); Quality Tubing, Inc. v. Precision Tube Holding Corp. (S.D. Tex. 1999); and Judge Newman's concurring opinion in Rotec Indus. v. Mitsubishi Corp. (Fed. Cir. 2003). These courts found no direct infringement solely premised on an offer to sell, unless the sale contemplated by the offer is or will also be consummated within the U.S.

Importation into the U.S.

Consistent with most patent systems of other countries, importing into the U.S. a patented product is an act of direct infringement. Since 1988, a U.S. patent additionally grants a right to exclude others from importing into the U.S. a product made by a U.S.-patented process (35 USC 271(g)). Accordingly, a business may be liable for direct infringement of a U.S. patent covering a process if it imports into the U.S. a product made by that process, even if the patent does not cover the product itself. The U.S. patent holder may request damages and an injunction against the importation of the product into the U.S., even when the importing entity does not manufacture, offer to sell, or sell the product in the U.S. market.

The case Ajinomoto Co. v. Archer-Daniels-Midland Co. (ADM) (Fed. Cir. 2000) exemplifies this type of infringement. In this case, Genetika patented in different countries a process for preparing bacterial strains. Ajinomoto acquired Genetika's U.S. patent rights. ADM bought bacterial strains made in Sweden by a Swedish licensee of Genetika. ADM imported the strains into the U.S. to produce feed supplements for livestock. Ajinomoto (the U.S. patentee) sued ADM under 35 USC 271(g) for importing a product made by a U.S.-patented process. The Court found that ADM was liable for patent infringement, even though the practice abroad of the patented process was (1) performed by another entity (the Swedish licensee), and (2) authorized by the Swedish license.

A manufacturer that does not itself import into the U.S. (for example the Swedish licensee in the Ajinomoto v. ADM case), but merely sells the product to the buyer/importer (ADM), does not directly infringe the patent. The offending act for direct infringement in this context is the importation into the U.S. However, if the contract between the manufacturer and its buyer includes an indemnification provision, the manufacturer could be liable for the damages awarded to the patentee in an action against the buyer who later imports the product into the U.S. Such a scenario illustrates how a U.S. patent could impact a manufacturer that has only an indirect connection with the U.S. Foreign manufacturers should consider the potential consequences of making a product using a process patented in the U.S., especially when the product may be imported into the U.S.

Inducement of infringement anywhere in the world

Under U.S. law, an entity that induces another to infringe a U.S. patent is liable for indirect infringement (35 USC 271(b)). For there to be impermissible inducement, the entity being induced must directly infringe the patent (for example by making, using, selling, offering to sell, or importing the patented product in the U.S.). One "induces" another by actively and knowingly encouraging and aiding the other's direct infringement of the patent. A central question in inducement cases is often the nature of the relationship between the inducer and the direct infringer. A court is more likely to find inducement when the inducer exercises control over the acts of the direct infringer.

A number of court decisions suggest that activities outside the U.S. may constitute impermissible inducement if the entity being induced directly infringes in the U.S. In other words, a manufacturer outside the U.S. could be liable for inducing another entity to make, use, sell, offer to sell or import a patented product in the U.S. (assuming that a U.S. court has jurisdiction over the manufacturer).

In Crystal Semiconductor Corp. v. Tritech Microelectronics Int., Inc. (Fed. Cir. 2001), the Court agreed that an action for inducement to infringe can be based on acts performed outside the U.S. A manufacturer was accused of infringing a U.S. patent because it had manufactured and sold an audio chip in Singapore to a customer that imported and distributed the chip in the U.S. The Court affirmed the jury's verdict that the Singapore manufacturer was liable for inducing infringement. The court explained that while the Singapore manufacturer did not directly infringe the patent, its action in connection with selling its chip to the distributor constituted impermissible inducement. This case illustrates the extraterritorial reach of U.S. patents. Foreign businesses should be aware that they can be liable under U.S. patent laws even if they do not directly infringe a U.S. patent, but induce infringement by a third party.

Infringement in the U.S. and sales outside the U.S.

As noted above, patentees can be awarded damages based on sales of a patented product made outside the U.S. when the infringer exports from the U.S. acomponent of the product for assembly abroad. This is not the only context in which foreign sales can be taken into account when calculating damages. In general, whenever the patentee can show a reasonable probability that, without the infringement of the U.S. patent, it would have made the foreign sales made by the infringer, the patentee may recover lost profits for the damages resulting from its lost sales in foreign countries. This rule applies even when the patentee does not itself make the patented products in the U.S. The rule can benefit companies holding U.S. patents and that do not necessarily compete in U.S. markets but that compete in foreign markets against U.S. manufacturers. Businesses holding U.S. patents should consider taking advantage of such global recovery because it can avoid the expense and risk of filing multiple law suits in different countries and because it can provide recovery for sales made in countries where no patent protection was obtained.

Purchases from the patentee outside the U.S.

The principle of patent right exhaustion provides that the unrestricted sale of a patented article, by or with the authority of the patentee, "exhausts" the patentee's right to control further sale and use of that article by enforcing the patent under which it was first sold. In other words, an authorized sale of a patented product places that product beyond the reach of the patent. When a patented device has been lawfully sold in the U.S., subsequent purchasers inherit the same immunity under the doctrine of patent exhaustion.

U.S. patent rights, however, are not exhausted by products sold outside the U.S. To invoke the protection of the exhaustion doctrine with respect to a U.S. patent, the authorized sale must have occurred within the U.S. In other words, a lawful foreign purchase from a U.S. patentee does not obviate the need for license from the U.S. patentee before importation of the product into the U.S.

For example, in Fuji v. Dynatec Int. Inc. (Fed. Cir. 2001), Fuji held several U.S. patents covering cameras. Dynatec and the other co-defendants bought cameras from Fuji, some of which were bought in the U.S. and the others outside the U.S. After buying the cameras from Fuji, the defendants imported them into the U.S. Fuji filed an action seeking to stop the importation of the cameras into the U.S. The Court held that Fuji's U.S. patent rights were not exhausted with respect to the cameras sold outside the U.S. and affirmed an order to stop their importation into the U.S. (The court also found that Fuji's U.S. patent rights were exhausted with respect to the cameras sold in the U.S. and vacated an order with respect to these cameras). This case illustrates how purchasers of patented products from a U.S. patentee are not immune from patent liability in the U.S. when they purchase the products outside the U.S. Accordingly, if the purchasers contemplate an importation of the products into the U.S., they should negotiate a license for the U.S. territory with the U.S. patent holder.

Conclusion

In recent years, the U.S. courts and legislature have expanded the international effects of U.S. patents. Today, these effects are significant and must be considered by U.S. patent holders (whatever their nationality) in order to take full advantage of their patent rights, and by entities doing business on a global scale in order to minimize their liability exposure.


© 2004 Philippe Signore, partner at the law firm of Oblon, Spivak, McClelland, Maier & Neustadt, P.C. in Alexandria, VA. Pierre Michon participated in a practical training at the firm.

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