In Halo Electronics, Inc. v. Pulse Electronics, Inc., 2013-1472, - 1656 (October 22, 2014), the Federal Circuit concluded that there was no direct infringement when substantial activities of a sales transaction – including the final formation of a contract for sale and delivery and performance under that contract – occur entirely outside the United States, pricing and contract negotiations within the United States do not transform those extraterritorial activities into a sale within the United States under 35 U.S.C. § 271(a). This decision will help provide businesses with further clarity as to the level of domestic activities permitted without incurring liability for direct infringement of a United States patent.
Pulse, a supplier of electronic components, manufactures and sells surface mount electronic packages in Asia. The majority of these products were delivered to customers outside the U.S., and were subsequently incorporated as a component of a product by the customer or a contract manufacturer before being sold and shipped to consumers around the world. Although Pulse received purchase orders at its sales offices abroad for all products delivered abroad, Pulse also was engaged in various activities in the United States, including price negotiations, meetings with customer design engineers, delivery of prototypes for pre-approval, sales meetings, and post-sales support.
Halo filed suit in 2007, alleging Pulse infringed its patents. Pulse denied infringement and challenged the validity of the Halo patents on obviousness and other grounds. Pulse also moved for summary judgment on the grounds that it did not directly infringe the Halo patents because a majority of its products were manufactured, shipped, and delivered outside the United States. The district court agreed with Pulse, and Halo appealed.
Section 271(a) provides in relevant part that “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States … infringes the patent.” 35 U.S.C. § 271(a). The ordinary meaning of “sale” includes the concept of the title of transfer or property and may occur at multiple locations. To determine whether a sale has occurred within the United States under Section 271(a), an examination must be made of whether the activities in the United States are sufficient to constitute a “sale.” Here, the Federal Circuit concluded that pricing and contracting negotiations alone were insufficient to constitute a “sale” within the United States when there were substantial activities of the sales transactions, manufacturing, and delivery occurring outside the United States. The court cautioned, however, that the decision did not reach the issue of whether a sale would have occurred within the United States if there had been a definitive, binding contract for sale.
The Federal Circuit also considered whether Pulse’s activities within the United States were sufficient to constitute an “offer to sell.” An “offer to sell” generally occurs when there is a sufficient communication of willingness to enter into a contract so as to justify another person in understanding that his assent will form the binding contract. The court previously has held that “the location of the contemplated sale controls whether there is an offer to sell within the United States.” Transocean Offshore Deepwater Drilling, Inc. v. Maersk Contractors USA, Inc., 617 F.3d 1296, 1309 (Fed. Cir. 2010). In Transocean, the court held that contract negotiations occurring outside the United States for delivery and performance within the United States were an infringing offer to sell the patent at issue. The court reasoned that the negotiations here involved the opposite situation, concluding that in order to be an infringing offer to sell, an offer must contemplate sale in the United States.
The court referred to the presumption against extraterritorial application of United States laws to further support its analysis of whether a sale or offer to sell was within the United States for purposes of Section 271(a) liability. In particular, the court noted that the Supreme Court stated that the proper remedy for preventing the selling of a patented invention in foreign countries lies in obtaining and enforcing foreign patents.
The court’s decision in Halo provides further guidance to businesses and practitioners evaluating potential liability under Section 271(a). Whether an offer to sell occurs within the United States is largely controlled by the contemplated location of the sale itself – not the location of the parties or the negotiations. Similarly, whether a sale occurs within the United States is determined by where there are substantial activities of the sales transaction at issue – such as manufacture, import, or delivery of an infringing product. Although, the negotiation of a sale within the United States may be insufficient to result in a sale or offer to sell under Section 271(a), particularly in those instances that the actual sale is entirely outside the United States, companies should be mindful that it remains unclear whether there can be liability under Section 271(a) if a binding contract entered into within the United States for a sale that is otherwise entirely extraterritorial.