Can a Taiwan company be held liable for damages under the U.S. Patent Act based on goods it manufactured in China and delivered in Hong Kong, even if it never imports anything to or sells anything in the U.S.?
Yes, despite the fundamental principle that patents are enforceable only within the countries where they are granted, there are circumstances in which U.S. law authorizes liability, either as a direct or indirect infringer, for what appears to be foreign conduct. While proper evaluation of any legal scenario requires consultation with a qualified attorney, this article will briefly summarize a few basic points concerning the extraterritorial reach of U.S. patent law.
Direct Infringement. Any person who imports into the U.S., or makes, uses, sells, or offers to sell in the U.S., a device that uses a valid U.S. patent without the patent owner’s consent, has directly infringed the patent, as described at Patent Act §271(a).
Often it’s unclear where a sale took place. There’s no simple test and it’s not even settled whether a sale can have more than one location. Instead, courts look at various factors, such as where the contract was signed, the goods were delivered and other “substantial activities of the sales transactions.” See, Carnegie Mellon Univ. v. Marvell Tech. Grp. Ltd. (Fed. Cir. Aug. 4, 2015) at slip op. 41.
Thus, in LightCubes v. Nothern Light Products, 523 F.3d 1353 (Fed. Cir. 2008), the court found a supplier sold goods in the U.S., despite delivering them in Canada, because it sold them to U.S. customers, knowing they would be imported to the U.S. In another case, the court found U.S. sales despite delivery in Hong Kong, because the supplier manufactured the goods with North American electrical fittings, affixed U.S. trademarks on them, and stated U.S. destinations on the invoices. SEB S.A. v. Montgomery Ward, 594 F. 3d 1360 (Fed. Cir. 2010), aff’d at Global-Tech Appliances, Inc. v. SEB, 131 S. Ct. 2060 (2011). However, in a third case, a Japanese supplier was not liable under §271(a) when it sold goods to a Japanese customer, despite placing shipping labels on the goods indicating a U.S. destination and otherwise helping the customer to import the goods to the U.S. MEMC Elec. Materials v. Mitsubishi Materials, 420 F.3d 1369 (Fed. Cir. 2005).
Indirect Infringement. In addition to direct infringement, the Patent Act states several theories of indirect infringement liability, including inducing infringement (§271(b)); contributory infringement (§271(c)); and importation of goods made with a patented process (§271(g)), as described below. However, liability under any of those theories also requires proof of direct infringement by someone, such as by the indirect infringer’s customers.
Inducing Infringement. Patent Act §271(b) provides that, “Whoever actively induces infringement of a patent shall be liable as an infringer.” While the statute lacks further detail, courts hold that liability for inducing infringement requires: (i) intent to cause infringement and (ii) affirmative acts to encourage infringement, such as advertising an infringing use, instructing how to commit an infringing use, or exercising control over the design or manufacturing. See Wing Shing Products v. Simatelex Manufactory Co., 479 F. Supp. 2d 388, 410 (S.D.N.Y. 2007) and Honeywell v. Acer America Corp., 655 F. Supp. 2d 650 (E.D. Tex. 2009).
The first factor – intent to cause infringement – may be established by circumstantial evidence, such as failure to investigate, explore design-around solutions, take remedial steps, or seek legal advice; but a finding of inducement may be improper where a product, despite having infringing uses, is also capable of non-infringing uses. See Acco Brands v. ABA Locks, 501 F.3d 1307 (Fed. Cir. 2007) and Warner-Lambert v. Apotex Corp., 316 F.3d 1348 (Fed. Cir. 2003).
Courts have debated whether an entity accused of inducing infringement of a patent must have knowledge of the patent. It may seem obvious that one can’t induce infringement of a patent if one doesn’t know that the patent exists and that’s exactly what the Federal Circuit held in DSU Medical Corp. v. JMS Co., Ltd., 471 F. 3d 1293 (Fed. Cir. 2006). However, the Supreme Court held to the contrary in Global-Tech, supra., 131 S. Ct. 2060, finding “willful blindness” to patents may be sufficient to support induced infringement, even without knowledge of the particular patents. However, the facts in that case were egregious, as the accused purchased a competitor’s product, copied its features, retained an attorney to prepare a “right-to-use” study, without informing the attorney that they copied the competitor’s product, then proceeded to manufacture copy-cat goods and sell them to a company that imported them into the U.S.
The Supreme Court went a step further in Commil USA LLC v. Cisco Sys. Inc., 135 S. Ct 1920 (May 26, 2015), finding good faith belief that a patent is invalid is no defense to induced infringement. Because an invalid patent cannot be infringed, it might seem impossible to induce infringement if one genuinely believes the patent to be invalid. However, the Court noted that patents are presumed valid under the Patent Act and if one believes otherwise one may challenge the patent through an action for declaratory judgment, reexamination, inter partes review, or an affirmative defense of invalidity, but may not simply continue with business and later claim a good faith belief that the patents were invalid.
Contributory Infringement. The statutory basis for contributory infringement is more detailed than for inducing infringement. Patent Act §271(c) provides that whoever sells, offers to sell, or imports in or into the U.S. a device specially made or adapted for practicing a patented process, knowing it is specially made or adapted for use in infringing a patent, shall be liable as a contributory infringer, provided such device constitutes a material part of the product.
Section 271(c) contains an exception for sales of staple articles of commerce capable of substantial non-infringing uses, provided such uses are more than occasional, far-fetched, impractical, experimental, or hypothetical. For example, in Ricoh Co. v. Quanta Computer Inc., 550 F.3d 1325 (Fed. Cir. 2008), Ricoh accused Quanta of contributorily infringing certain patents by selling optical disc drives adapted to perform recording methods using Ricoh’s patents, but the court found no liability, because the drives were also capable of “substantial noninfringing use,” as they could be used to read discs in a non-infringing manner.
Use of Patented Process. Even if a company produces goods overseas that do not infringe any U.S. patents, it may still be liable under Patent Act §271(g) if the goods were made using a process patented in the U.S. and were later imported into the U.S., a provision wielded mostly against pharmaceutical companies.
Thus, in Creative Compounds, LLC v. Starmark Laboratories, 651 F.3d 1303 (Fed. Cir. 2011), a maker of nutritional supplements was found liable under §271(g), because it failed to establish that its production of creatine in China did not involve the plaintiff’s process that was patented in the U.S.; and in Ajinomoto Co. v. Archer-Daniels-Midland Co., 228 F.3d 1338 (Fed. Cir. 2000), a defendant was found liable for producing genetically engineered bacteria in Sweden and importing it into the U.S. However, in Momenta and Sandoz v. Teva, No. 2014-1274 (Fed. Cir. Nov. 10, 2015), a pharma company was sued under §271(g), but prevailed because the patented process did not cover making of the relevant substance (an anticoagulant), but only ensuring that the substance was properly made.
A defendant may be liable under §271(g) only if it imported the goods into the U.S. or knew they would be imported. Thus, in Pfizer Inc. v. Aceto Corp. 853 F. Supp. 104 (S.D.N.Y. 1994), a Chinese manufacturer was sued for making flavor enhancers in China using a process covered by a U.S. patent, but prevailed on summary judgement because it sold the product only in China to another Chinese entity and had no reason to know the product would end up in the U.S., even though its customer sold the product to a third party who imported it to the U.S. See also Tec Air, Inc. v. Nippondenso Mfg. U.S.A., Inc., (N.D. Ill. Jan. 30, 1997) (“[t]he primary target of section 271(g) is not the manufacturer who manufactured the patented process; rather, the primary target is the importer of the patented process.”)
Section 271(g) also contains an exception eliminating liability if, after a product is manufactured using a patented process, it is materially changed by subsequent processes or becomes a trivial or nonessential component of another product. Thus, in Eli Lilly & Co. v. American Cyanamid Co., 82 F.3d 1568 (Fed. Cir. 1996), the Federal Circuit upheld a finding that (a) the defendant had produced an antibiotic using a nine-step process and (b) the plaintiff’s patent covered the fifth step, but (c) the sixth-step materially changed the substance, so there was no infringement under §271(g).
ITC Section 337. Finally, a foreign entity that manufactures or sells infringing goods solely outside the U.S. may also be held accountable through an investigation by the International Trade Commission (“ITC”), under §337 of the Tariff Act, which prohibits unfair methods of competition, such as importation of goods that infringe U.S. patents. Because the ITC has jurisdiction over accused goods, not companies or individuals, it makes little difference whether the goods were imported by the manufacturer or its customers. The ITC may not render money judgments, but it does issue exclusionary orders, blocking the importation of infringing goods (and products they are incorporated in), which can be just as damaging to the foreign seller or manufacturer, even if the goods were only imported by its customer.
Conclusions. It’s a small, interconnected world. Companies that manufacture and sell goods outside the U.S. should not assume they are beyond the reach of U.S. authorities if their products or processes infringe U.S. patents. U.S. patent holders who choose to pursue them may face challenges relating to jurisdiction, venue, service of process, evidence, and cross-border enforcement, but grounds for taking legal actions against such entities may exist.
Foreign companies can take various steps to minimize risks of U.S. patent disputes, performing comprehensive patent searches early and designing around if necessary; obtaining non-infringement opinions from qualified counsel; ensuring that all operations – design, manufacture, sales and delivery – remain outside the U.S.; refraining from assisting others to infringe; and ensuring that products capable of infringing uses are also capable of substantial non-infringing uses. Additionally, companies should ensure that contracts with suppliers contain strong warranty and indemnification provisions and contracts with customers do not. Such precautions will never eliminate risk completely, but they are more prudent than boldly assuming one is beyond the reach of the law.
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If you have any questions or require assistance, feel free to drop me a line at chrisneumeyer (at) asialaw.biz.