United States: The Extraterritorial Reach of U.S. Patents: Implications for the Global Marketplace

A version of this article was originally published in the third in a series of reports published by BNA International as part of the IP & Technology Programme, May 2006
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

Traditionally, infringement of a U.S. patent was deemed to be limited to activities performed wholly within the United States. In the seminal case of Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518, 532 (1972), the Supreme Court of the United States held that exporting domestically made components of a patented product for assembly abroad was not direct infringement under U.S. patent law. Since then, the U.S. Congress has expanded the statutorily defined scope of infringing activities in the wake of advancing technologies and a burgeoning global marketplace. Recent decisions by the U.S. Court of Appeals for the Federal Circuit (the "Federal Circuit"), such as Eolas Technologies Inc. v. Microsoft Corp., 399 F.3d 1325 (Fed. Cir. 2005), and NTP, Inc. v. Research in Motion, Ltd., 418 F.3d 1282 (Fed. Cir. 2005), have also clarified the reach of U.S. patents within the context of newer technologies with cross-border applications.

While still ultimately hinged on some minimal contacts with the United States, the extraterritorial reach of U.S. patents presents significant implications for the global marketplace, including the computer and software industries. As shown in this article, understanding the boundaries of U.S. patents is critical for avoiding liability and protecting key intellectual property.

Traditional Boundaries

The Patent Act of 1952 provides the foundation for modern American patent law and is codified in sections 1-376 of Title 35 of the United States Code. Section 271(a) of Title 35 identifies acts that constitute direct infringement of a U.S. patent. This section provides that:

"whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States, or imports into the United States any patented invention during the term of the patent therefor, infringes the patent".¹

In addition, sections 271(b) and 271(c) define indirect infringement, creating liability for contributing or inducing acts that constitute direct infringement in the United States. See 35 U.S.C. § 271(b), 271(c).

Historically, activity occurring outside the borders of the United States was beyond the purview of American infringement law. Indeed, the territorial nature of U.S. patents is evident in the plain language of section 271(a). Section 271(a) indicates that direct infringement occurs only if the enumerated acts are "within the United States." Thus, under section 271(a), isolated acts performed abroad do not create liability for direct infringement of a U.S. patent. See Rotec Indus., Inc. v. Mitsubishi Corp., 215 F.3d 1246, 1251 (Fed. Cir. 2000); Ortho Pharm. Corp. v. Genetics Inst., Inc., 52 F.3d 1026, 1033 (Fed. Cir. 1995). But for activities occurring both within and outside U.S. borders, section 271(a) is less clear.

In 1972, the Supreme Court considered the scope of infringing acts under section 271(a) in Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972). The petitioner, Deepsouth Packing Co., sought to export domestically made components of a shrimp-deveining machine for assembly abroad. Deepsouth, 406 U.S. 518, at 520-24. Laitram Corp. held a U.S. patent on the assembled machine. The Court held that exporting U.S.-made components of a patented product for assembly abroad did not constitute direct infringement under section 271(a). Id. at 529-32. The Court reasoned that a patented system is "made" only after final assembly, and, thus, the only potential act of infringement was the final assembly of the deviener system. Since the final assembly was performed outside the United States, the Court found no infringement under section 271(a). Id.

Deepsouth illustrates the traditional view of limiting the scope of a U.S. patent to acts wholly performed in the U.S. As pointed out by the Court, "Our patent system makes no claim to extraterritorial effect; ‘these acts of Congress do not, and were not intended to, operate beyond the limits of the United States’ ". Id. at 531 (citing Brown v. Duchesne, 19 How. 183, 195, 15 L.Ed. 595 (1856)). While these basic principles, as embodied in section 271(a), have not changed, Congress has responded to the growth in the global marketplace and expanded the scope of infringing acts under U.S. patent law.

Legislative Expansion of Section 271

More than a decade after Deepsouth, the United States Congress broadened the scope of infringing activities through legislative amendments to the Patent Act. This expansion was responsive to emerging technologies, such as industrial and pharmaceutical chemicals, optical fibres, and biotechnology. See Kastenmier, Report to accompany H.R. 1931 (Apr. 22, 1987); see also S. Rep. No. 100-83 (1987). It was also responsive to changing market conditions, such as increased world trade, new manufacturing techniques, and the globalisation of production activities. Id. To many, as world trade increased and enterprises spread production activities around the globe, the vulnerabilities of a U.S. patent with limited territorial scope were exposed.

In 1984, Congress added section 271(f) to Title 35 to impose liability for exporting components of a patented invention for assembly abroad. With this change, Congress sought to close a perceived "loophole" in American patent law caused by Deepsouth and to discourage the movement of U.S. manufacturing abroad. See Kastenmier, "Section-By-Section Analysis of H.R. 6286, Patent Law Amendments Act of 1984," Congressional Record of October 1, 1984 at H10525 to H10529. The language of section 271(f) provides:

(1) Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

(2) Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial non-infringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

Accordingly, under section 271(f), a party cannot escape liability by supplying – in or from the United States –components of a patented invention for assembly abroad. Under section 271(f)(1), however, the supplied components must represent "all or a substantial portion" of the components of the patented invention so as to induce the combination outside of the United States. Alternatively, under section 271(f)(2), the supplied components must be "especially made or especially adapted" for use in the invention and not "a staple article of commerce".

In 1998, Congress further added section 271(g) to Title 35 of the Patent Act. This subsection creates liability for importing into the United States or selling, offering to sell, or using in the United States, a product "made by" a process covered by a U.S. patent. Under section 271(g), however, a product is not considered to be "made" by a patented process if it is materially changed or becomes a non-essential component of another product. In particular, section 271(g) provides:

(g) Whoever without authority imports into the United States or offers to sell, sells, or uses within the United States a product which is made by a process patented in the United States shall be liable as an infringer, if the importation, offer to sell, sale, or use of the product occurs during the term of such process patent. In an action for infringement of a process patent, no remedy may be granted for infringement on account of the non-commercial use or retail sale of a product unless there is no adequate remedy under this title for infringement on account of the importation or other use, offer to sell, or sale of that product. A product which is made by a patented process will, for purposes of this title, not be considered to be so made after –

it is materially changed by subsequent processes; or

it becomes a trivial and nonessential component of another product.

Thus, under section 271(g), a party can be liable for infringement for importing into the United States, or selling or using in the United States, a product made by a patented process, regardless of where the process is performed or where the product was ultimately made. Congress added section 271(g) to increase protection of U.S. technology industries, specifically the pharmaceutical and biotechnology industries. See Kastenmier, Report to accompany H.R. 1931 (Apr. 22, 1987). Section 271(g) also sought to conform U.S. patent law to the infringement standards under foreign intellectual-property law. See S. Rep. No. 100-83 (1987).

Modern Interpretations of Section 271

Recent decisions by the Federal Circuit have interpreted the scope of acts deemed infringing under section 271. Among other things, these decisions have clarified the reach of section 271 with respect to technologies with cross-border applications. They have also addressed questions of infringement concerning non-traditional "products" and "components," such as information and computer software.

In Eolas Technologies, Inc. v. Microsoft Corp., 399 F.3d 1325 (Fed. Cir. 2005), the Federal Circuit considered whether section 271(f) encompassed the act of exporting software code for copying and assembly abroad. In that case, Eolas Technologies, Inc. sued Microsoft for infringement of a U.S. patent covering Internet-browsing software. Eolas, 399 F.3d at 1328. Microsoft exported source code for Windows® and Internet Explorer on golden master disks to original equipment manufacturers (OEMs) outside the United States. Id. at 1331. The foreign OEMs replicated the software using the golden master disks and installed the software onto computer hard drives, which were then sold to customers. Id.

On appeal, the Federal Circuit considered whether the exported software code constituted a "component[ ] of a patented invention" for purposes of infringement under section 271(f). Id. at 1338. According to Microsoft, the golden master disks were not a "component" with the meaning of section 271(f). In particular, Microsoft asserted that section 271(f) is limited to "physical" components of machines. See id. at 1340.

In its holding, the Federal Circuit found that the statutory language of section 271(f) is not limited to "machines" or "physical structures". Instead, the Court reasoned that "every component of every form of invention deserves protection" under section 271(f). Id. at 1339. Furthermore, the Court held that software code on a golden master disk could constitute a "component" of a patented computer-program invention since it forms a "component" of a patented process or computer-program product, both of which are statutory inventions under Title 35. Id. The Court, therefore, refused to impose any "tangibility" requirement to section 271(f) and concluded that Microsoft’s act of supplying software code on golden master disks could form the basis for infringement under section 271(f). Id. at 1340-41.

In AT&T Corp. v. Microsoft Corp., 414 F.3d 1366, 1367 (Fed. Cir. 2005), the Federal Circuit again considered the application of section 271(f) to computer-program inventions. In this case, AT&T Corp. alleged that Microsoft infringed a patented invention by exporting master copies of Windows® for replication and subsequent sale abroad. AT&T Corp., 414 F.3d at 1368. The master copies of Windows® at issue included various speech codecs that were alleged to infringe AT&T’s patent when installed on a computer. Id. Microsoft argued that software is intangible and thus not a "component" under section 271(f). Microsoft also asserted that even if software is considered to be a "component," section 271(f) did not apply because the replicated copies of Windows® were made abroad and, thus, were not "supplied" from the United States. Id.

Consistent with Eolas, the Federal Circuit held that software may constitute a "component" of a patented invention for purposes of section 271(f). Id. at 1369. Further, concerning Microsoft’s argument that the components were not "supplied" from the United States, the Court noted that for software components:

"the act of copying is subsumed in the act of ‘supplying’, such that a single copy abroad with the intent that it be replicated invokes § 271(f) liability for those foreign-made copies." Id. at 1370.

Additionally, the Court held that software sent by electronic transmission should not be treated any differently from software sent by disk for the purposes of section 271(f). Id. at 1371. According to the Court, "Liability under § 271(f) is not premised on the mode of exportation, but rather the fact of exportation." Id.

In contrast to the holdings reached in Eolas and AT&T, the Federal Circuit took a more traditional approach when assessing section 271(g) in Bayer AG v. Housey Pharmaceutical, Inc., 340 F.3d 1367, 1368 (Fed. Cir. 2003). In that case, Housey Pharmaceutical, Inc. sued Bayer AG for infringement based on patented screening methods for discovering drugs. Bayer AG, 340 F.3d at 1368-69. Bayer allegedly practiced the screening methods abroad but then imported information gathered from the methods into the United States for drug development. Housey, however, asserted that these acts constituted infringement of the patented-screening methods under section 271(g). Id. at 1369-70.

Strictly reading the statute, the Federal Circuit concluded that section 271(g) addresses only patented manufacturing methods (i.e., methods of actually making or creating a product) and does not encompass methods of gathering information. Id. at 1377. The Court noted that this interpretation was consistent with the legislative history of section 271(g), which, according to the Court, indicated that Congress was "concerned solely with physical goods that had undergone manufacture" and "not mere information." Id. at 1373, 1376. Because Bayer’s acts of identifying and generating information were not considered steps in the manufacture of a final drug product, the Court held that there was no liability under section 271(g). Id. at 1377.

In certain respects, the outcome in Bayer conflicts with that in Eolas and AT&T. In Bayer, the Federal Circuit held that the scope of infringing acts under section 271(g) is limited to tangible or physical products created or made by a manufacturing process. In contrast, the decisions in Eolas and AT&T show a more liberal and, perhaps, modern approach to assessing infringement under section 271. In Eolas and AT&T, the Federal Circuit interpreted section 271(f) as not being limited by a "tangibility" requirement and held that software (whether embodied on a golden master disk or transmitted electronically) could constitute a component of a patent invention. While the types of acts covered by section 271(f) and (g) are different, the application of those sections to "intangible" technology (such as information and software) arguably should be the same. Indeed, in today’s global marketplace, information and software are not only viewed as commodities or products, but also are incorporated as key components of computerised systems and processes. Nonetheless, under current Federal Circuit case law, sections 271(f) and (g) are interpreted differently.

In NTP, Inc. v. Research in Motion, Ltd., 418 F.3d 1282, 1289-90 (Fed. Cir. 2005), the Federal Circuit further considered the scope of section 271(a) regarding activity both inside and outside the United States.² The defendant in that case, Research in Motion, Ltd. ("RIM"), supplies the ubiquitous BlackBerry® system. The BlackBerry® system includes a handheld device or pager, e-mail redirector software, a BlackBerry® Relay device located in Canada, and a wireless network. Id. The Relay sends messages from a mail server over the wireless network to the user’s BlackBerry® device. Id. If the user sends an e-mail over the system, the handheld device sends the message over the wireless network to the Relay in Canada, which then routes the message over the Internet to the redirector software. The redirector software then sends the received message to the destination mail server, leaving a copy of the message on the user’s desktop or server. Id.

NTP asserted five patents against RIM, alleging that the implementation and sale of RIM’s BlackBerry® system for customers in the United States infringed both the system and method claims of its patents. Id. at 1292. RIM countered by arguing that infringement under section 271(a) requires the entire system and method to be within the United States, consistent with the holding in Deepsouth. Id. at 1314. In particular, RIM argued that the BlackBerry® system and process were not "within the United States" because the BlackBerry® Relay is situated outside U.S. borders in Canada. Id. at 1312-14. RIM argued that since the system and process were outside the United States, no liability could attach. Id.

The Federal Circuit, however, determined that Deepsouth did not resolve the issues presented by RIM’s system and process. Id. at 1315. The Court distinguished the BlackBerry® system from that considered in the Deepsouth case, noting that the "both the act of making and the resulting patented invention were wholly outside the United States." Id. Further, the Court noted that the BlackBerry® system is partly within and partly outside the United States and, thus, involves acts crossing U.S. borders. Id.

The Federal Circuit then considered Decca Ltd. v. United States, 210 Ct. Cl. 546, 544 F.2d 1070 (1976), which it found to be more instructive than Deepsouth. Id. at 1315. In Decca, the U.S. Court of Claims held that a radio-navigation system with components located outside the United States is not within the United States for purposes of infringement, unless a control point or station of that system is located within the United States. Decca, 544 F.2d at 1082-83. The system in Decca included various transmitter stations, one located in Norway, for transmitting signals to receivers. Id. at 1077. The Court in Decca did not decide whether the system was "made" in the United States, but it determined that "use" of the patented invention occurs "wherever the signals are received and used in the manner claimed." Id. at 1082-83. In finding infringement, the U.S. Court of Claims found persuasive the fact that the system was controlled from the United States and that "actual beneficial use" of the system was in the United States. Id. at 1083.

In RIM, the Federal Circuit determined whether there was infringement under section 271(a) for the different asserted claim types.³ NTP, Inc., 418 F.3d at 1316. Concerning the system claims, the Court applied the principles of Decca and averred that "use of a claimed system under section 271(a) is the place at which the system as a whole is put into action of service, i.e., the place where control of the system is exercised and beneficial use of the system is obtained." Id. at 1317. The Court found that the BlackBerry® Relay located in Canada did not control the system and, thus, "use" of the system as a whole was not in Canada. Instead, according to the Court, the system as a whole was used in the United States, since U.S. customers manipulate the hand-held devices in the United States and benefited from the use of the BlackBerry® system. Id. The Court, therefore, found that RIM infringed under section 271(a) since the system was "used" in the United States. Id.

Regarding the asserted method claims, however, the Federal Circuit held that "a process cannot be used ‘within’ the United States as required by section 271(a) unless each of the steps is performed within this country." Id. at 1318. According to the Court, "use" of a patented method for purposes of section 271(a) is "fundamentally different" from that for a patented system or device. Id. at 1317. As a result, the Court concluded that RIM’s BlackBerry® processing steps did not constitute "use" within the United States, because RIM’s Relay is located in Canada. Id. Additionally, the Court held that RIM’s performance of certain steps of the method claims, regardless of their location, failed to constitute a sale, offer for sale, or importation of those claims under section 271(a). Id. at 1320-21. The Court, therefore, found no infringement of NTP’s asserted method claims. Id.

Implications and Recommendations

As legislation and case law demonstrate, the exterritorial reach of U.S. patents is evolving and, in many respects, has expanded from that announced in Deepsouth. While still pegged to some activity in the United States, infringement of a U.S. patent may arise even though certain activities occur abroad. See 35 U.S.C. § 271(f), 271(g). Recent case law also exposes the complexities involved in analysing infringement of a U.S. patent when acts take place both inside and outside the United States. For example, Bayer and Eolas show that courts may interpret similar technology differently under the various subsections of section 271. Further, the RIM case shows that system and method claims may be treated differently for assessing infringement by cross-border activities. In addition, RIM indicates that the performance of certain steps of a method claim may not constitute a sale, offer for sale, or importation of the method in the United States under section 271(a). Understanding these differences and the extraterritorial reach of U.S. patents is critical, both for protecting key technology and avoiding liability.

Computerised System vs. Method Claims

As stated above, the RIM decision creates a dichotomy between system and method claims for purposes of infringement under section 271(a). With system claims, "use" of the claimed system for purposes of infringement is tied to the location at which the system as a whole operates. The RIM holding, as well as the decisions in Decca and Hughes Aircraft, indicate that courts may consider the location of "use" to be the location where substantial control of the claimed system occurs.

Infringement based on "use" of method claims, however, appears to be more limited in scope. Under section 271(a), direct infringement of a method claim is avoidable unless each claimed step is performed in the United States. As a result, system claims may provide broader coverage than method claims for certain types of cross-border activities.

In practice, software-related patents often include method claims to protect the functionality of the invention. In view of recent case law, however, enterprises should ensure that system claims are also included in their patents. This could be accomplished by including computerised system claims, which include one or more software modules or components. Such a claim would protect against "use" of the system despite the location of certain components abroad, if the claimed system as a whole is deemed to be substantially controlled within the United States. Enterprises, therefore, should be mindful when forced to choose between method and system claims. Electing only method claims over system claims to obtain broader protection may not be an effective claiming strategy in view of the RIM decision.

Given the case law interpreting section 271(g), method claims must be carefully drafted to protect key technology. The holding in Bayer that infringement of a patented method under section 271(g) requires the actual making or creating of a tangible or physical product is especially significant for software patents. Some software patents may include claims that cover computer-implemented methods that produce information or software in electronic form (e.g., an online music or software-distribution process). One strategy to possibly gain the benefits of section 271(g) is to claim the invention in the form of a more traditional "product-by-process". In such a case, the claim should define a series of steps for making a tangible or physical product, such as information or software stored on a CD-ROM or other storage medium.

Another strategy for protecting software inventions in view of Bayer is to draft method claims limited to steps taken by one entity, such as from a client- or user-side. This strategy may be appropriate for methods involving one or more users or clients located in the United States. Such a claim would protect against "use" of the patented method if each step occurred in the United States, regardless of whether the method produced a tangible or physical product. Additionally, or alternatively, server-side claims may be drafted to cover all of the steps implemented by a server, while avoiding claims of any steps performed by an end-user. Such claims may be enforced against competitors who operate servers in the United States, but perhaps have end-users or customers located abroad.

The Eolas and AT&T decisions also present significant implications. These cases indicate that software may be a "component" of a patented computer-program product or other assembly for purposes of section 271(f). Many software-related inventions involve intangible software code or information. Therefore, attention should be made to draft computerised system claims that incorporate one or more software components, such that the holdings in Eolas and AT&T could be relied on to assert liability under section 271(f) for exporting such components. In particular, one could argue that these components form the claimed system when they are combined or assembled in a computer or other processor for execution and, therefore, fall within the purview of section 271(f).

Arguably, there is also support in Eolas to assert that method claims constitute a "patented invention" capable of assembly abroad and, therefore, may equally enjoy the benefits of section 271(f). For instance, in cases where a computerised method claim is defined with steps or acts implemented by software components, the export of those components for assembly and performance of the method abroad may trigger liability under section 271(f). As stated by the Federal Circuit, "every component of every form of invention deserves protection" under section 271(f). Eolas at 1339.

In view of recent case law, computer-readable medium claims should also be carefully considered. Often, a computer-readable medium claim will be defined as comprising one or more sets or instructions or code, each adapted to perform a specific function. Under section 271(a), liability would exist for selling, offering to sell, or importing into the United States software on computer-readable medium, where that software includes all of the defined sets of instructions or code. Where the software comprises less than all of the defined code, however, a different outcome may exist. Specifically, the computer-readable medium claim is not infringed unless one can show that the conditions of section 271(f) or another subsection are met. If, for example, a software developer exports the various software code, via a master disk or by electronic transmission, and that software constitutes a substantial portion of the code or is especially adapted for combination with the remaining code, then liability for infringement of the claimed computer-readable medium may be argued to exist based on section 271(f). Further, under the AT&T decision, a damages theory may be asserted that is not predicated on the single master copy exported abroad, but on those foreign-made copies intentionally replicated from the master copy.

In addition to protecting technologies, enterprises must be vigilant to avoid engaging in potentially infringing activities. Given the current extraterritorial reach of U.S. patents, enterprises with operations in the United States and abroad must take steps to avoid liability for infringement. For example, software developers may risk infringement liability under section 271(f) for exporting software components for assembly into a final product abroad. Such liability can be imposed regardless of the particular form of the software (e.g., on a master disk or via electronic transmission). One common technique for avoiding liability is conducting a thorough analysis of patents related to key technologies. A clearance search and written opinion(s) on identified patents provide valuable information that can be used in risk analysis and strategic business decisions.

Finally, enterprises must also strive to achieve an increased global awareness for enforcing key intellectual property. That is, enterprises must keep abreast of industry trends and developments on a worldwide basis. The current reach of U.S. patents offers patent holders opportunities to pursue infringement actions against competitors operating inside or outside U.S. borders or both. Attaining global awareness will aid in identifying potentially infringing products in the marketplace and initiating licensing activities or enforcement actions. As recent case law shows, certain activities occurring outside the United States may create liability for infringement under U.S. patent law.

Recent case law and congressional actions demonstrate that the extraterritorial reach of U.S. patents is evolving. In addition, complexities may arise when assessing patent infringement, especially when newer technologies and transnational operations are at stake. Appreciating and strategically leveraging these complexities along with the current reach of U.S. patents are essential for maintaining a competitive advantage in the global marketplace.

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.