A recent Federal Circuit decision involved a non-infringing product that had never entered the United States. Nonetheless, the court ruled that infringement of United States patents may have occurred. How could this be?

The product was commissioned by a Danish company, manufactured by a contractor in Singapore, leased (while being made) to a subsidiary of a Norwegian company, and modified while in Singapore specifically to avoid infringing U.S. patents. While the lawsuit unfolded, the product was still in Singapore.

The trial court found that no infringement could arise under these facts and granted summary judgment to the defendant shipping company. On appeal, the Federal Circuit established a precedent in finding that these facts could support a claim of infringement.

The product in question was no trifle: it was an oil drilling platform. This platform had dual sets of equipment used to lower drilling casing and equipment into the sea in a coordinated fashion that accelerated the deep-sea drilling process. The concept had been developed by Transocean Offshore Deepwater Drilling Inc. and protected by a family of patents that Transocean enforced with vigor.

In 2005 Maersk A/S, a Danish company, contracted with a shipbuilder to make a similar rig in Singapore. Later, Statoil ASA, a Norwegian company, negotiated to use Maersk’s rig, and the two companies had their US subsidiaries (Maersk USA and Statoil Gulf of Mexico LLC) sign a contract in Norway whereby Maersk USA would lease the rig to Statoil Gulf of Mexico.

The contract specifically called out Transocean’s U.S. patents. Maersk USA retained the right under the contract to make alterations to the rig “in view of court or administrative determinations throughout the world.”

One of these determinations arose when Transocean asserted the same patent claims in this case against another competitor, GlobalSantaFe Corp. (GSF). Transocean prevailed in that case and the court issued an injunction requiring GSF to install a casing sleeve to render the equipment non-infringing.

Before delivering the rig to Statoil, Maersk USA learned of the injunction against GSF and modified the accused rig with the same casing sleeve to avoid infringing Transocean’s patents. Nonetheless, Transocean sued Maersk USA for infringement.

Until the Patent Act was amended in 1994 to conform to certain treaty requirements, it would have been impossible for Transocean to succeed in its suit against Maersk. But in that year section 271 of the Patent Act was amended to make it an act of infringement to “offer to sell” a patented product “within the United States” without authority from the patentee.

Transocean, unlike earlier cases [1], clearly involved an offer for sale. The key issue presented was the statutory limitation “within the United States.” Does this limitation apply to the offer or to the sale? In other words, must the offer be made in the United States, or does the statute cover offers made anywhere in the world as long as the sale would result in the product being delivered to the United States?

A second question of interest was the legal effect of the modification to the drill rig made to comply with the GSF injunction. If the drill rig was made to be non-infringing before it ever entered U.S. waters, how could infringement occur?

The Federal Circuit answered these questions clearly. It held that an “offer to sell … within the United States” occurs when a company makes an offer, whether inside or outside of the United States, to sell a product that the buyer will use in the United States.

While the Federal Circuit observed that both of the contracting parties were U.S. corporations, it is not clear that this is relevant to the analysis. If the contract had been directly between Maersk A/S and Statoil ASA, the result would likely have been the same: There would still be an offer for sale, and it would be “within the United States” because the contract envisioned use of the rig in U.S. territorial waters.

As to the second question, regarding the effect of modifying the rig to be non-infringing before delivery in the United States, the Federal Circuit held that the “offer” was of the rig as specified in the contract – namely, an infringing rig. Thus, the fact that the actual rig sold was non-infringing was irrelevant.

The Federal Circuit reversed the judgment in favor of Maersk and sent the case back to the trial court, where it now awaits further proceedings. This case has the potential to address an unanswered question about another aspect of “offer for sale”: What damages can be obtained if the only infringing activity is an offer, and the sale is not infringing? (Injunction would not be a useful remedy because the rig is not infringing.) This is a difficult question because the infringer has not profited from the sale of an infringing product.[2]

Transocean is one of several recent cases providing guidance for the extraterritorial application of U.S. patent law. In Microsoft v. AT&T Corp, the Supreme Court held that the export of software from the U.S., to be combined overseas with hardware for sale overseas, could not infringe a U.S. patent that covered the combination of the hardware and software.

In Litecubes v. Northern Products, Inc., however, the Federal Circuit held that a foreign company cannot avoid liability by transferring title to U.S. customers overseas and shipping the infringing products into the United States.

A pattern is emerging: The ultimate destination of the products being sold holds the analytic key. Formalities such as transfer of title and nationality of the parties are likely to be ignored. Thus, offers made anywhere in the world might give rise to liability if they could result in the use of products in the U.S. where such use would infringe U.S. patents.

“Offer to sell” liability is a concept endorsed in a multilateral treaty[3], so the same result may apply in many other countries. Thus, a U.S. manufacturer offering to sell a product in the U.S. to an agent of a UK-based customer may be infringing a UK patent, even if no U.S. patent coverage applies. In fact, relevant UK law is not tied to contract law; offers may result from advertising alone.

For these reasons, manufacturers need to be aware of the patent landscape of the countries where their prospective customers are likely to use products, and even where they advertise their products for sale.

[1] In 2000, the Federal Circuit addressed the scope of the “offer to sell” language, holding that the existence of an offer must be determined by reference to contract law (rather than, for example, mere advertising). The panel decided that no offer had been made from the United States. In her concurrence, Judge Newman suggested that even if an offer had been made in the United States, the fact that the product would be manufactured and delivered overseas would preclude liability under the “offer to sell” clause. This analysis seems to have anticipated the later case law.

[2] In Transocean, the Federal Circuit noted that the measure of damages would be different under such circumstances, citing a law review article for this proposition. The article suggests that the remedy would depend upon the nature of the parties and the product, and might be either a reasonable royalty or, in some cases, damages measured by price erosion caused by the infringing offer.

[3] The Uruguay Round’s Trade-Related Aspects of Intellectual Property Agreement (TRIPs), which resulted in the Uruguay Round Agreements Act, H.R. 5110, 103d Cong. (1994).