NEGOTIATION IN THE U.S. IS NOT SALE OR OFFER FOR SALE WITHIN THE U.S. UNDER §271(a) WHEN SUBSTANTIAL SALES ACTIVITIES OCCUR OUTSIDE THE U.S.
Sadao Kinashi | November 11, 2014
Halo Electronics, Inc. v. Pulse Electronics, Inc. (Precedential Opinion)
October 22, 2014
Panel: Lourie, O’Malley, and Hughes. Opinion by Lourie
Halo Electronics (“Halo”) owns U.S. Patent No.5,656,985 and other patents of electronic packages. Halo sued Pulse Electronics (“Pulse”) for patent infringement. Pulse manufactures, sells and delivers electronic packages only outside the United States [for the purpose of the summary judgment]. All purchase orders were received at Pulse’s sales offices abroad. However, Pulse negotiated with Cisco in the United States regarding the price for Cisco’s foreign contract manufacturers. The district court granted summary judgment of no direct infringement as to the products that Pulse manufactured, shipped, and delivered outside the United States.
CAFC held that the district court did not err in granting summary judgment of no direct infringement because those products were neither sold nor offered for sale by defendant within the United States.
Note) Some other issues are involved in the case, but this report focuses only on the appeal of the summary judgment.
Halo Electronics (“Halo”) is a supplier of electronic components and owns U.S. Patent No. 5,656,985 and other patents directed to electronic packages for mounting on a printed circuit board for computers and internet routers.
Pulse, another supplier of electronic components, makes and sells electronic packages in Asia. Some of Pulse’s products were delivered by Pulse to customers in the United States [these are not at issue here], but the majority of them were delivered outside the United States, for example, to contract manufacturers of Cisco. Those contract manufacturers incorporated Pulse electronic packages into end products overseas, which were then sold and shipped to consumers around the world.
For the products delivered abroad, all purchase orders were received at Pulse’s sales offices abroad. However, Pulse negotiated about prices in the United States with Cisco. Pulse also engaged in other activities in the United States, including meeting regularly with Cisco design engineers, sending product samples, attending sales meetings with its customers, and providing post-sale support for its products.
Cisco outsourced its manufacturing activities to foreign contract manufacturers, but Cisco negotiated with its component suppliers on the prices that its contract manufacturers would pay. As one of Cisco’s component suppliers, Pulse executed a general agreement with Cisco that set forth manufacturing capacity, low price warranty, and lead time terms. However, that general agreement did not refer to any specific Pulse product or price.
Pulse provided Cisco with the proposed price and minimum quantity for each product. After further negotiation, Cisco issued the agreed-upon price, projected demand, etc. Cisco then communicated the price and allocation to its contract manufacturers in Asia, and the contract manufacturers were expected to apply the Cisco price and allocation when ordering components from Pulse and other suppliers.
Upon receipt of purchase orders abroad, Pulse delivered its products from its manufacturing facility in Asia to the contract manufacturers, also located in Asia, which paid Pulse. After the end products were assembled, Cisco then paid the contract manufacturers for the end products.
Pulse moved for summary judgment that it did not directly infringe the Halo patents by selling or offering to sell products that Pulse manufactured, shipped, and delivered outside the United States. The district court granted the motion, holding that those products were sold and offered for sale outside the United States and beyond the scope of § 271(a). Halo appealed the summary judgment.
Halo contended that those products were sold and 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. Halo argued that the location of the sale or offer for sale should not be limited to the location of delivery. Halo also argued that it suffered economic harm in the United States as a result of Pulse’s sales.
CAFC ruled that the district court did not err in granting summary judgment of no direct infringement with respect to those products that Pulse manufactured, shipped, and delivered outside the United States because those products were neither sold nor offered for sale by Pulse within the United States.
(a) Except as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.
CAFC rejected the defendants’ argument that the location of the sale was limited to the place where legal title passed rather than the places of contracting and performance.
According to CAFC, although the place of contracting may be one of several possible locations of a sale to confer personal jurisdiction, CAFC has not deemed a sale to have occurred within the United States for purposes of liability under § 271(a) based solely on negotiation and contracting activities in the United States when the sales transaction occurred wholly outside the United States.
CAFC explained 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).
CAFC noted that while Pulse and Cisco engaged in quarterly pricing negotiations, the negotiated price and projected demand did not constitute a firm agreement to buy and sell, binding on Cisco and Pulse, but Pulse received purchase orders from Cisco’s foreign contract manufacturers, and Pulse was paid abroad by those contract manufacturers, not by Cisco.
CAFC therefore held that the district court did not err in granting summary judgment that Pulse did not sell within the United States those products that Pulse manufactured, shipped, and delivered abroad.
B. Offer for Sale
CAFC has held that “In order for an offer to sell to constitute infringement, the offer must be to sell a patented invention within the United States.” (Transocean, 617 F.3d at 1309). In Transocean, contract negotiations occurred outside the United States for delivery and performance in the United States, and CAFC held that the location of the contemplated sale controlled and that the offer to sell infringed the patent at issue.
CAFC adopted the reasoning of Transocean and concluded 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.
CAFC ruled that, in order to be an infringement, an offer to sell must be an offer contemplating sale in the United States, and that a sale outside the United States is not an infringement of a U.S. patent, an offer to sell, even if made in the United States, when the sale would occur outside the United States, similarly would not be an infringement of a U.S. patent. CAFC therefore held that Pulse did not offer to sell the products at issue within the United States for purposes of § 271(a).
Takeaway and Comments
Sales negotiation of patented product is not a sale or offer to sale under § 271(a), if the product is manufactured, sold, and delivered outside the United States. According to this decision, it is a factor in determining infringement that there is no binding sales contract in United States.
Then, what if ownership of patented products in a foreign country is transferred with a specific binding contract in the United States? Does this constitute a sale within the United States even if the products never get into the United States?
CAFC should have ruled that if the products never get into the U.S., the sale is not a sale within the United States for the purposes of § 271(a).
Shouldn’t the correct test be whether or not the product ever gets into the U.S.?