United States: Pricing And Contracting Negotiations Do Not Constitute Or Transform Substantial Extraterritorial Activities Into A Sale Or Offer To Sell Under § 271(a)

In Halo Electronics, Inc. v. Pulse Electronics, Inc., Nos. 13-1472, -1656 (Fed. Cir. Oct. 22, 2014), the Federal Circuit affirmed the district court's judgment that Pulse Electronics, Inc. ("Pulse") did not sell or offer to sell products that Pulse manufactured, shipped, and delivered outside the United States, and that Pulse's alleged infringement with respect to products that Pulse sold and delivered in the United States was not willful.  As to Pulse's cross-appeal, the Federal Circuit affirmed the judgment of direct infringement of Halo Electronics, Inc.'s ("Halo") patents with respect to Pulse's products delivered in the United States, inducement with respect to products that were imported into the United States by others, and noninfringement of Pulse's U.S. Patent No. 6,116,963 ("the '963 patent").  The Federal Circuit also affirmed the judgment that the asserted claims of the Halo patents were not invalid for obviousness.

Halo, a supplier of electronic components, owns three patents directed to surface mount electronic packages.  Pulse, another supplier of electronic components, designs and sells surface mount electronic packages and manufactures them in Asia.  While Pulse delivers some of its packages to the United States, the majority are delivered outside the United States to contract manufacturers for companies such as Cisco, which incorporate the packages into their products and ship them to consumers around the world.  Pulse's sales offices abroad received purchase orders for Pulse packages delivered abroad; however, Pulse engaged in pricing negotiations with contract manufacturers, approved certain foreign pricing, and engaged in other activities in the United States.  When Pulse received purchase orders abroad, Pulse delivered the package products to Cisco contract manufacturers in Asia.  The contract manufacturers then paid Pulse.  After assembling the end products, the contract manufacturers sent invoices to Cisco, and Cisco paid the contract manufacturers for the end products. 

After an initial unsuccessful attempt to license the Halo patents to Pulse in 2002, Halo sued Pulse for patent infringement in 2007.  Pulse denied infringement and challenged the validity of the Halo patents.  The district court granted Pulse's motion for SJ that it did not infringe the Halo patents by selling or offering to sell packages that Pulse manufactured, shipped, and delivered outside the United States.  At trial, the jury found that Pulse directly infringed the Halo patents with the products that it shipped into the United States, that Pulse induced others to infringe the Halo patents with the products that were ultimately imported into the United States in the finished end products, that this infringement was probably willful, and that the asserted Halo patent claims were not invalid for obviousness.  In response to Pulse's post-trial motion, the district court later found that Pulse's infringement was not willful.  The district court denied Pulse's motion for JMOL of invalidity for obviousness of the asserted Halo patent claims as waived.  Halo appealed and Pulse cross-appealed.

"[W]e 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."  Slip op. at 11.

On appeal, the Federal Circuit affirmed all of the district court's holdings.  The Court first reviewed the grant of SJ of no direct infringement with respect to products that Pulse manufactured, shipped, and delivered abroad.  Halo argued that Pulse's activities with respect to these products directly infringed its patents because negotiations and contracting activities that occurred in the United States, which later resulted in binding contracts, constituted a sale or offer for sale under § 271(a).  According to Halo's reasoning, the location of the sale or offer for sale should not be limited to location of delivery of the products.  Pulse countered that the products were sold or offered for sale outside the United States because these products were manufactured, ordered, invoiced, shipped, and delivered abroad, and the discussions that took place in the United States were mere forecasts.  Pulse contended that Halo's position improperly expanded the scope of § 271(a) beyond the United States. 

The Federal Circuit agreed with Pulse.  The Court first examined whether the products that Pulse manufactured, shipped, and delivered abroad were sold within the United States under § 271(a).  On this point, the Court stated that "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."  Slip op. at 11.  The Court explained that a sale did not take place within the United States because all substantial activities with respect to these products took place outside the United States.  The quarterly negotiations between Pulse and Cisco in the United States "did not constitute a firm agreement to buy and sell," and were "insufficient to constitute a 'sale' within the United States," even if those negotiations later led to purchase orders and sales overseas.  Id. at 12-13.  Further, the Court emphasized the presumption against extraterritorial application of U.S. laws, stating:  "The presumption that United States law governs domestically but does not rule the world applies with particular force in patent law."  Id. at 13 (quoting Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 454-55 (2007)).  Additionally, the Court rejected Halo's argument that the sales occurred in the United States because Halo suffered economic harm from the sales, reasoning that such logic impermissibly enlarged the geographical scope of § 271(a). 

The Federal Circuit next considered whether Pulse's activities within the United States constituted an offer to sell, described by the Court as "an offer contemplating sale in the United States."  Id. at 16.  Because Pulse's negotiation activities in the United States contemplated sales outside of the United States, the Court held that Pulse did not offer to sell the products for the purposes of § 271(a).  Therefore, the Court affirmed the SJ of no direct infringement by Pulse based on products manufactured, shipped, and delivered abroad.

Next, the Court addressed willfulness, applying the two-pronged Seagate analysis.  The Court affirmed the district court's holding that the objective prong of the willfulness inquiry was not satisfied, stating that the district court "properly considered the totality of the record evidence, including the obviousness defense that Pulse developed during the litigation, to determine whether there was an objectively-defined risk of infringement of a valid patent."  Id. at 18.  The Court held that, although Pulse was ultimately unsuccessful in challenging the validity of the Halo patents, it did raise a substantial question as to their obviousness.

The Federal Circuit considered Pulse's cross-appeal as to certain claim constructions and the judgments of infringement of the Halo patents and noninfringement of Pulse's '963 patent, but found no reversible error.  The Court also explained that Pulse had waived its right to challenge the factual findings that the jury relied upon in its verdict of nonobviousness with respect to the Halo patents because Pulse failed to file a motion for JMOL on the issue of obviousness during trial before the issue was submitted to the jury.  Therefore, the Court held that the district court was correct in presuming that the jury resolved all factual disputes relating to the scope and content of the prior art and secondary considerations in Halo's favor.  The Federal Circuit therefore affirmed the district court's judgment that the asserted claims of the Halo patents were not invalid for obviousness.

In their concurrence, Judges O'Malley and Hughes agreed with the majority's decision to affirm all aspects of the district court's decision but urged a reevaluation of the standard for enhanced damages in light of Highmark, Inc. v. Allcare Health Management Systems, Inc., 134 S. Ct. 1744 (2014), and Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014), and the terms of the governing statutory provision, 35 U.S.C. § 284 (2012).  The concurrence observed that the Court's standard for the award of enhanced damages under § 284 has closely mirrored its standard for the award of attorneys' fees under § 285.  Because the Supreme Court has determined that the Federal Circuit's standard for determining whether to award attorneys' fees was wrong, the concurrence reasoned that the Federal Circuit should also consider "whether those same interpretative errors have led us astray in our application of the authority granted to district courts under § 284."  O'Malley Concurrence at 3.

Judges: Lourie (author), O'Malley (concurring), Hughes (concurring)

[Appealed from D. Nev., Judge Pro]

This article previously appeared in Last Month at the Federal Circuit, November 2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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