As foreign markets for American-designed products continue to expand, a growing portion of those products never enter the United States. Instead, they are manufactured overseas by contract manufacturers and then directly shipped from the overseas point of manufacture to foreign markets for sale. Nevertheless, a U.S.-based company may find itself on the hook for infringement of U.S. patents if the products are offered for sale or sold from the United States. A recent Federal Circuit opinion provides some guidance to U.S. companies interested in structuring their overseas transactions to avoid the application of U.S. patent law to American-designed products made and sold abroad.

Under U.S. patent law, an act of direct infringement is the making, using, offering to sell, or selling a patented product within the United States, or importing a patented product into the United States.1 The Supreme Court has stated, with one noted exception, that “[i]t is a general rule under United States patent law that no infringement occurs when a patented product is made and sold in another country.”2 Of course, that leaves the question – when is a sale or an offer for sale “within the United States?”

This question has been presented to the Federal Circuit on several occasions. One such case, MEMC Electronic Materials, Inc. v. Mitsubishi Materials Silicon Corporation involved the sale of accused silicon wafers manufactured in Japan.3SUMCO, a Japanese manufacturer, sold the accused silicon wafers to a foreign conglomerate’s Japanese subsidiary.4 The conglomerate’s Japanese subsidiary issued all of the purchase orders to SUMCO, and specified the quantity of wafers to be manufactured for each order.5 After completing an order, SUMCO boxed and labeled the wafers for delivery to the conglomerate’s American subsidiary.6 SUMCO then delivered the boxed wafers to a third-party packaging company at SUMCO’s plant, who in turned shipped the wafers “free on board” – meaning title to the goods passed to the buyer in Japan – to the United States. The accused silicon wafers were never in the actual possession of the Japanese subsidiary.

The patentee alleged that the silicon wafers directly infringed its patents because the wafers were sold and offered for sale in the United States. First, the patentee argued that there was an infringing sale because the American subsidiary was the true buyer of the goods. To support this argument, the patentee pointed to evidence that the buyer required SUMCO to send test data for each order to the American subsidiary, and that the American subsidiary provided the required shipment authorization only after reviewing the test data.7SUMCO also provided technical support for the accused silicon wafers to the American subsidiary.8 Second, the patentee argued that the emails containing the test data constituted offers to sell because they communicated SUMCO’s willingness to ship a specific quantity of wafers, as described by the test data, on a specific date and at a previously agreed-upon price.9

The Federal Circuit rejected both arguments. The court found that there was no offer to sell in the United States because (1) there were no negotiations in the United States between SUMCO and the American subsidiary, and (2) the testing emails were not offers to sell because they did not include a price term and were not sufficiently definite to form a contract even if they had been accepted by the buyer.10 The court also held that there was no sale in the United States because “all of the essential activities” took place in Japan, where the Japanese subsidiary controlled the quantity of wafers ordered, paid for the wafers, and arranged for the separate packaging company to ship the wafers to the United States. Id.

Arranging to manufacture the product overseas and transferring legal title overseas may not be sufficient to avoid U.S. patent law if the buyer negotiates the transaction from the United States. In LiteCubes, LLC v. Northern Light Products, Inc., a Canadian defendant sold and shipped accused products to buyers in the United States.11 The defendant argued that it did not sell the products in the United States because the goods were shipped free on board, and therefore legal title to the goods passed to the buyers in Canada before reaching the United States.12 The Federal Circuit rejected this argument and found that the sales were within the United States because “the American customers were in the United States when they contracted for the accused [products] and the products were delivered directly to the United States . . . .”13

While the location of negotiations is a relevant factor, it is not dispositive. A transaction negotiated overseas may constitute an offer to sell or sale in the United States if the transaction contemplates performance or delivery in the United States. Transocean Offshore Deepwater Drilling, Inc. v. Maersk Contractors USA, Inc. involved a contract for the use of an oil rig in the U.S. domestic waters of the Gulf of Mexico.14 The contract was negotiated in Norway by two foreign companies, and the contract was executed in Norway by their U.S. affiliates.15 The district court granted summary of noninfringement based in part on “the negotiation and signing of the contract [taking] place outside the U.S. . . .”16 The Federal Circuit reversed. With respect to offers for sale, the court explained that “[t]he focus should not be on the location of the offer, but rather the location of the future sale that would occur pursuant to the offer.”17Thus, “an offer which is made in Norway by a U.S. company to a U.S. company to sell a product within the U.S., for delivery and use within the U.S. constitutes and offer to sell . . . .”18 The court also held “that a contract between two U.S. companies for the sale of the patented invention with delivery and performance in the U.S. constitutes a sale under § 271(a) as a matter of law.”19

In the most recent Federal Circuit case to address this issue, the opposite of the facts found by the Federal Circuit in Transocean were presented — there were some negotiations in the United States and there was no delivery or performance in the United States. In Halo Electronics, Inc. v. Pulse Electronics, Inc., the defendant supplied components accused of patent infringement to foreign contract manufacturers. An American company outsourced manufacturing of its products to the foreign contract manufacturers.20 The American company negotiated prices for the components used by the contract manufacturers directly with the foreign component suppliers.21 One of the component suppliers, defendant Pulse, had a “general agreement” with the American company. Although the general agreement “set forth manufacturing capacity, low price warranty, and lead time terms,” the agreement did not “refer to any specific Pulse product or price.”22 The American company would periodically request a quote from Pulse for a specific component, and then negotiate on the price. Thereafter, the American company informed its contract manufacturers of the agreed price for the component, and the share of the company’s demand for the component that it expected the contract manufacturers to purchase from Pulse.23 The contract manufacturers issued purchase orders to Pulse using the agreed price, took delivery of the components, and then paid Pulse for the components. The contract manufacturers would pass on the cost of the components in their invoices to the American company.24

The plaintiff argued that accused components delivered abroad by Pulse to the contract manufacturers were sold or offered for sale within the United States because “negotiations and contracting activities occurred within the United States, which resulted in binding contracts that set specific terms for price and quantity.”25 The Federal Circuit rejected this argument and held 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).”26

Applying the “substantial activities” standard, the Federal Circuit concluded that there was no sale in the United States because the negotiations between the company and Pulse “did not constitute a firm agreement to buy and sell,” and that the only binding contracts to buy and sell were the purchase orders between the foreign contract manufacturers and Pulse. Moreover, the payments on the purchase orders, manufacturing, and delivery all occurred overseas. The Federal Circuit also noted that “[a]ny doubt as to whether Pulse’s contacting activities in the United States constituted a sale within the United States under § 271(a) is resolved by the presumption against extraterritorial application of United States laws.”27 Having found that the sales at issue occurred outside of the United States, the court followed the “reasoning of Transocean and [concluded] here that Pulse did not directly infringe the Halo patents under the ‘offer to sell’ provision by offering to sell in the United States the products at issue, because the locations of the contemplated sales were outside the United States.”28

Although the Federal Circuit’s “substantial activities” test may not be satisfying to business decision makers that desire the predictability of a bright-line rule,Halo Electronics is likely to prove an important template for structuring transactions when avoiding the application of U.S. patent law to foreign sales of products is an important objective. Going forward, American companies can be more certain that sales of products made and sold abroad are not subject to U.S. patent law so long as they act primarily through overseas subsidiaries.