Recent (and Anticipated) Developments in the
International Application of US Patent Laws

Thomas C. Carey

By Thomas Carey. Chair of our Business Practice Group

July 2015 IP Update

The international patent system is premised on the notion that each country regulates patent laws and their enforcement within its own borders.  International commerce does not always lend itself to such tidy compartments, however, forcing courts and legislatures to address complex situations.  Two recent decisions of the Federal Circuit Court of Appeals, as well as another case that is ripe for decision by that court, offer new guidelines for patent owners.

Inbound Sales.  Lelo Inc. v. International Trade Commission, decided in May 2015, considered the power of the International Trade Commission (ITC) to ban the import of items made abroad.  That power stems from 19 USC § 1337, which permits the ITC to ban imports of infringing articles that pose significant harm to an industry (actual or nascent) in the U.S.  To demonstrate the existence of a protectable industry, the statute requires the patent holder to prove that there has been substantial investment in plant and equipment; or significant employment of capital or labor; or significant investment in the exploitation of the patent, which may take the form of engineering, R&D or licensing activity.

In Lelo, the patent holder was Standard Innovation Corporation (SIC), whose products were not manufactured in the US.  Instead, they were made in China by a manufacturer that assembled components sourced from many countries.  Four of the components, accounting for about 5% of the total cost of the bill of materials, came from the US.

Lelo, a California corporation, imported a product competitive with SIC’s product and, it turns out, one that infringed SIC’s patents.  SIC sought a ban on the import of Lelo’s product into the US.

The initial review of the matter was conducted by an administrative law judge who held that the ITC lacked the power to ban the import of Lelo’s product because there was insufficient evidence of a US industry that would be harmed by the infringement.  Specifically, there was no proof that SIC’s purchases of US-sourced components were the result of significant capital investment or R&D in the US, or that they resulted in an increase in labor here.

On appeal, the ITC reversed the judge because it deemed the US-sourced components to be qualitatively significant because of “the critical nature of the components to the patented products.”

The Federal Circuit then reversed the ITC, stating that the statute compels a quantitative analysis.  The court referred to a 2007 decision that, where US subcontractors contributed 34% of the value of a product, there was a significant US industry to protect.  That earlier case was distinguished both because of the gap between 34% and 5% and because of the different nature of the sourcing.  The 2007 case involved US subcontractors to a US patent holder.  By contrast, SIC did not subcontract the manufacture of the US components; its Chinese supplier bought off-the-shelf articles from retailers.

Lelo instructs US patentees seeking an ITC ban to present quantitative evidence of a significant investment in plant and equipment or R&D, or significant US labor involved in making the US-based products or components.  Absent proof of an existing or nascent US industry, the ITC is not the place to seek redress for patent infringement.

* * * * *

Outbound Sales.  The Federal Circuit’s July 2015 decision in Westerngeco LLC v. Ion Geophysical Corp. dealt with outbound goods and services. Westerngeco (“Western”) owned several patents on devices used to obtain more accurate seabed surveys than were previously possible.   Western used those devices to perform surveys for oil and gas companies.

Ion Geophysical Corp. and Fugro (USA), Inc. made devices that could be combined to make a competing, and infringing, device.  These companies sold their components to foreign customers who also performed seabed surveys for oil and gas companies.  The components came with instructions on how to combine them to make a device that worked like Western’s.

The purchasers of these components combined them and used them in several seabed surveys in the open seas and in foreign jurisdictions.  Western identified ten surveys performed by customers of the defendants that it alleged would have generated $90 million in profits had it been awarded the contracts.

Section 271(f) of the US Patent Act permits a patentee to sue someone who supplies components of a patented invention from within the US to a foreign purchaser in a manner that actively induces the combination of those components outside the US in a manner that would infringe if they had been combined in the US.   That statute has two subjections: The first applies to sellers of all or a substantial portion of the components of a patented article, and the second to sellers of any component that is especially made or adapted for use in the patented invention and is not a staple article or commodity.

Western sued Ion Geophysical under both subsections of section 271(f) and won a jury award of over $93 million in lost profits and $12.5 million in royalties.

On appeal, a divided panel of the Federal Circuit confirmed most of the results of the trial but reversed the award of lost profits.   The majority was troubled by the extension of US patent law to territory outside of the United States, even though section 271(f) seems to expressly provide for that extension.

According to the majority, section 271(f) does not eliminate the presumption against extraterritoriality, but instead creates a limited exception that applies solely to the export of components from the US.   Quoting an earlier case not dealing with 271(f), the court said that “the entirely extraterritorial production, use or sale of an invention patented in the United States is an independent, intervening act that, under almost all circumstances, cuts off the chain of causation initiated by an act of domestic infringement.”

What bothered the majority, it seems, is the application of the lost profits remedy to the seabed survey contracts, which did not involve the sale of an infringing article by a competitor, but rather the use of that article by the customer of the competition.

The dissenting opinion of Judge Wallach persuasively rebuts the majority opinion.  He pointed out that the usual reticence to enforce US patent laws beyond the shores of the US has less footing when enforcement is sought with respect to activities on the open seas, where no other country’s patent laws might conflict.

In reply, the majority suggests that perhaps the patent laws of the countries of registry of the ships conducting the survey may apply to these activities.  If so, then applicants for patents on devices used primarily at sea would be wise to pursue patent protection in Panama, Liberia, the Marshall Islands, the Bahamas and Cyprus, where roughly 45% of the world’s shipping tonnage is registered.

Western’s $93 million award of lost profits has been reversed and limits have been placed on how far the Federal Circuit will go in approving damages awards under section 271(f).  But important questions remain regarding damages awards in connection with foreign sales.

****************

Worldwide Sales.  Carnegie Mellon University is now sitting on the largest damages award ever from a patent infringement case — $1.51 billion in its case against Marvell Technology Group.  The greater part of this award is based upon Marvell’s overseas sales.

The CMU patents in question are directed to a method of noise detection and correction in reading high-density hard-disk drives.  The patented invention arose out of a research center at CMU that was supported in part by hard-drive manufacturers that contributed $250,000 annually to the center and received in exchange royalty-free licenses to the inventions conceived there.  Marvell did not participate in this effort, choosing to go its own way.  When its own way proved to be less effective, it copied the CMU technology and gained a 60% worldwide market share.  All of Marvell’s manufacturing occurred outside of the United States.

CMU sued Marvell for infringement in 2009.  After a jury trial in 2013, the district court awarded CMU a judgment of $1.5 billion. In coming up with this award (which included enhanced damages for willful infringement), the trial court described the company’s lengthy sales cycle, which involved assisting customers with the implementation of Marvell’s technology into their products:

Almost all of this activity, including sales, marketing, evaluation, testing, and development occurs in Santa Clara, California….. Marvell’s major customers are Fujitsu, Hitachi/IBM, Maxtor, Samsung, Seagate, Toshiba, and Western Digital. All of these customers go through this process with Marvell at its Santa Clara location.

The district court judge justified capturing Marvell’s worldwide sales in his damages award because the chip sales all stemmed from infringing activity that occurred during this sales cycle in California.  This despite the judge’s acknowledgement that all of the chip manufacturing took place in Asia.

Marvell had its own litigation strategy to blame.  Apparently, the company did not introduce any evidence at trial to support its post-trial contention that much of its sales involved chips that never entered the United States.  Marvell had engaged in an “all or nothing” strategy, said the judge, one that turned out badly.

The Federal Circuit heard oral argument in this case on April 7, 2015 and a decision is imminent.  The Federal Circuit has been peppered with amicus briefs in this case, with industry participants lining up behind Marvell and universities supporting CMU.

Marvell has pointed out that Federal Circuit precedent generally forbids the award of royalties on the basis of worldwide sales.  In response, CMU argues that the infringing acts were the R&D and sales activities that occurred in California.  According to CMU, the extensive collaboration with potential customers at Marvell’s facility in California were the infringing activities, and the worldwide sales to those customers are the only sensible way to measure the damages from that US-based infringement.

Marvell argued that the judgment obtained by CMU is unwise from a policy perspective because it will incent US companies to shift their R&D overseas.  CMU replied that in the winner-take-all environment of today’s computer technology, sales are worldwide and it is impossible to track the chips by the countries of their ultimate destination.   Oddly, the universities supporting CMU argue that shifting operations overseas is not a concern because that trend is already well underway.  They also point to the need of industry to maintain ties with US universities, which may anchor some R&D in the United States.

During oral argument, the Federal Circuit acknowledged the novelty of the legal theories being asserted in the case.  If the decisions in Westerngeco and Lelo are any guide, CMU is likely to see its damages award severely curtailed.