Feature Comment: Federal Circuit Clarifies and Confirms Foreign Seller Liability

By James G. McEwen[1]

I.        INTRODUCTION

As a practical matter, there are three basic forms of infringement of a U.S. Patent relevant to foreign sellers: direct infringement under 35 U.S.C. § 271(a); induced infringement under 35 U.S.C. § 271(b), and contributory infringement under 35 U.S.C. § 271(c).[2]  The law has generally recognized direct infringement where the foreign seller is directly importing the goods into the United States.  Specifically, 35 U.S.C. §287(a) and 35 U.S.C. §287(c) attach liability for importation of a good or a component of the good, and therefore inducement can also lie where the foreign seller induces the importation resulting in the infringement.  At the same time, there is a limit to which U.S. patent law can reach foreign sellers.  As noted by the Federal Circuit in Rotec Industries Inc. v. Mitsubishi Corp.,[3] extraterritorial activities are not relevant to infringement of U.S. patent.  Thus, there is tension between the desire of patent owners to enforce their U.S. patents against all sellers of infringing goods, and the extraterritorial reach of their patents.

While liability is clear for importation of infringing goods into the U.S., the extraterritorial limit of U.S. patent law is unclear for foreign sellers who sell goods to a foreign distributer.  The typical scenario is as follows: a foreign seller sells an infringing good to a foreign distributer, and the foreign distributer imports and sells the infringing good in the United States.  In this case, the liability of the foreign distributer is clear as the foreign distributor is both importing and selling the infringing good within the U.S.  However, the liability for the foreign seller is less clear.

In general, cases indicate that it is possible for foreign seller to be liable for subsequent importation, but only to the extent that the foreign seller controlled the subsequent importation.  For instance, in International Rectifier Corp. v. Samsung Electronics Co.,[4] Samsung was enjoined from selling an infringing device.  However, Samsung continued selling the infringing device to foreign distributors and customers.  On the issue as to whether Samsung was violating the terms of the injunction by continuing to infringe the U.S. patent, the court found Samsung did not violate terms of injunction by selling infringing device to third party outside of United States.  Specifically, while there was evidence that Samsung was aware of the subsequent importation into the United States, Samsung did not control the third party’s activities or distribution of the infringing article.  Thus, the more control and contacts that a foreign seller has with U.S. customers, the more likely that foreign seller will be liable either for the foreign sale itself, or for inducing infringement within the U.S.

The possibility of foreign seller liability for both direct and induced infringement for foreign sales was recently confirmed in SEB S.A. v. Montgomery Ward & Co.[5]  In SEB, direct infringement was found for a sale of an infringing good which occurred arguably outside of the United States, and induced infringement was found despite a lack of evidence that the foreign seller has actual knowledge of the patent being infringed.  The expanded definition given to inducement represented a change in the law of particular concern to domestic and foreign sellers, and for this reason, various attorney groups are requesting the Federal Circuit revisit the decision en banc.[6]

In SEB, SEB manufactures and sells cooking products in the United States through its subsidiary T-Fal.  SEB also owns U.S. Patent No. 4,995,312 (the ‘312 patent), which is directed to a deep fryer that SEB sells in the U.S. through T-Fal.  Pentalpha is a Hong Kong corporation which also sells cooking products.  Pentalpha manufactured a competing fryer whose design was based upon the SEB deep fryer which Pentalpha purchased in Hong Kong and copied.  Pentalpha then sold the competing deep fryer to Sunbeam Products, Inc. and the remaining defendants, who then sold the fryers in the U.S.  Each sale was free-on-board (fob) Hong Kong and China.  However, each invoice directly revealed a U.S. destination for the shipment and identified a U.S. buyer.  Moreover, each sold fryer was modified to incorporate the respective trademarks used by the U.S. buyers, and the fryer included electrical fittings used in the U.S.

Prior to these sales, Pentalpha had obtained a right-to-use study from a U.S. attorney which found that the Pentalpha fryer did not infringe a U.S. patent.  Notably, the right-to-use study did not cover the ‘312 patent.  Further, when ordering the study, Pentalpha did not reveal to its counsel that the Pentalpha fryer was copied from the SEB fryer.  However, there was no evidence that Pentalpha had ever actually known of the ‘312 patent, and the SEB fryer which Pentalpha purchased in Hong Kong was alleged not to have been marked with the ‘312 patent.

When SEB learned of the infringement, SEB sued Pentalpha and its customers for infringement of the ‘312 patent.  After a trial, the District Court found that Pentalpha had infringed the ‘312 patent both for its sales of its fryer and for inducing infringement by its customers.

Direct Infringement

On appeal, Pentalpha faulted the District Court decision since it did not offer to sell or import the goods as is required under 35 U.S.C. §271(a).  Specifically, Pentalpha relied upon the fact that the invoices indicated that the fryers were all delivered in Hong Kong and China, and that the fob language clearly shows delivery outside U.S.  Thus, there was no sale for purposes of 35 U.S.C. §271(a).

In rejecting this defense, the Federal Circuit acknowledged that the law remains vague as to the extent to which foreign acts can be used to show an offer to sell.  However, the Federal Circuit found that there was no need to resolve the ambiguity in light of the evidence relied upon by the District Court.  Specifically, the Federal Circuit noted that its caselaw clearly indicates that the fob language is not dispositive as to the location for sale and merely relates to the location title changes.[7] In contrast, the evidence showed a number of direct contacts with U.S. customers and that Pentalpha intended to sell the infringing fryers to U.S. customers due to its attaching the U.S. trademarks and electrical fittings.  Further, while the fob language indicated the title change outside of the U.S., this was the only mention of a foreign location.  The remainder of the invoices identified U.S. destinations and purchasers.  Thus, as the only evidence of a foreign location was the fob language which is not dispositive as to the location of the sale, the Federal Circuit held that the record supported a finding that the sales were offers for sale in the U.S. under 35 U.S.C. § 271(a).

Induced Infringement

On appeal, Pentalpha also faulted the District Court’s finding of induced infringement under 35 U.S.C. §271(b).  Specifically, Pentalpha asserted that there was no evidence it knew of the ‘312 patent, and the right to use study did not uncover ‘312 patent.  Without evidence of actual knowledge, Pentalpha asserted that there can be no finding of inducement.  Indeed, Pentalpha pointed to the Federal Circuit’s en banc decision in DSU Med. Corp. v. JMS Co., as specifically requiring that, to show intent, “necessarily” the inducing infringer knew of the patent.[8]

In rejecting this defense, the Federal Circuit noted that, to find liability for inducement, 35 U.S.C. § 271(b) requires the court to determine that the infringer knew or should have known that the infringer’s actions would result in infringement.  As such, the Federal Circuit noted that DSU only addressed the necessary showing for intent to cause infringement.  The knowledge of the patent was uncontested in DSU and therefore the extent to which the inducing infringer must also be aware of the patent itself.  Thus, the Federal Circuit noted that Pentalpha’s reliance on DSU for the purposes of requiring actual knowledge of the patent is misplaced.

Accordingly, the Federal Circuit outlined a test for determine when there is sufficient evidence of knowledge to support inducement.  As a starting point, the Federal Circuit noted that inducement is a specific intent cause of action.  In reviewing the caselaw surrounding the knowledge requirement typically required in specific intent causes of action, the Federal Circuit found that standard is broader than actual knowledge.  Instead, the standard for specific intent causes of action is that of deliberate indifference of a known risk.  The deliberate indifference standard is, according to the Federal Circuit, a form of knowledge since the inducing infringer is actively avoiding what it strongly suspects is true: that its actions are causing infringement by another.[9]   As such, the Federal Circuit found that knowledge can be found two ways: actual knowledge of the infringed patent (as was the case in DSU), and where there is evidence that the inducing party actively avoided a known risk of the existence of the patent.

In applying this new standard, the Federal Circuit next looked to see whether Pentalpha had knowledge through deliberate indifference.  The Federal Circuit found that the evidence showed Pentalpha had copied the SEB design.  Further, while Pentalpha hired outside counsel to perform the right-to-use study, Pentalpha specifically did not inform the counsel that it copied the design from SEB which would have increased the chance that the outside counsel would have uncovered the ’312 patent.  Further, Pentalpha was headed by President John Sham, who was a prolific inventor and had detailed knowledge of U.S. patent law. Importantly, President Sham had worked on other projects with SEB in which SEB patented the resultant product.  Lastly, Pentalpha provided no evidence that it reasonably believed the fryer was not patented.[10]  Thus, the Federal Circuit found that SEB had presented evidence that Pentalpha was aware that SEB likely had a patent on the fryer it copied, and Pentalpha did not present sufficient evidence that it reasonably could have believed that the fryer was not patented.  Therefore, the Federal Circuit found that Pentalpha had induced infringement through its sale of the Pentalpha fryers.

Conclusions

The Federal Circuit in SEB further confirms that foreign sellers can indeed be found liable for infringing U.S. patents through offers for sale.  As demonstrated in SEB, the more contacts the foreign seller has with the ultimate U.S. consumer, the more likely that the foreign seller can found liable for infringing under 35 U.S.C. §271(a). The mere reliance on purely contractual terms to make the offer purely extraterritorial, without evidence that the seller has little or no control over the ultimate destination, will not likely help the foreign seller avoid liability for direct infringement.  Additionally, SEB confirms that purposely failing to investigate a potential infringing situation will not provide a defense to induced infringement.  In both situations, the Federal Circuit will not allow a foreign seller to escape liability through technical points of contact or law, and instead will look to the substance of the transactions to determine if, ultimately, the foreign seller is availing itself of another’s U.S. patent.  Thus, the Federal Circuit upheld the general legal principle that the law requires persons to act responsibly, and such responsible behavior does not extend to pretending to be unaware of risk.


[1] James G. McEwen is a partner at Stein McEwen, LLP.  The opinions in this article do not represent the official positions of Stein McEwen, LLP. This paper is based upon a presentation given March 26, 2010 at the International Conference For the Hongik MIP Inauguration.

[2] This is not to say that liability cannot lie in other sections.  For instance, under 35 U.S.C. § 271(g), the seller can be liable where the seller is also a manufacturer and the claim is for the manufacturing method.

[3] 215 F3d 1246; 55 USPQ2d 1001 (Fed. Cir. 2000).

[4] 70 USPQ2d 1124 (Fed. Cir. 2004).

[5] 93 USPQ2d 1617 (Fed. Cir. 2010).

[6] Specifically, the American Intellectual Property Law Association and the Federal Circuit Bar Association are requesting the rehearing.

[7] Litecubes, LLC v. N. Light Prods., Inc., 523 F.3d 1353, 86 USPQ2d 1753 (Fed. Cir. 2008).

[8] 471 F.3d 1293, 1304 (Fed. Cir. 2006) (en banc).

[9] As examples, the Federal Circuit pointed to United States v. Carani, 492 F.3d 867, 873 (7th Cir. 2007) (“Deliberate avoidance is not a standard less than knowledge; it is simply another way that knowledge may be proved.”); Woodman v. WWOR-TV, Inc., 411 F.3d 69, 84 n.14 (2d Cir. 2005) (“We note that a party’s knowledge of a disputed fact may also be proved through evidence that he consciously avoided knowledge of what would otherwise have been obvious [to] him.”).

[10] At most, the evidence showed that the copied fryer was not marked with ‘312 patent.  However, the lack of marking was understandable since the fryer was purchased in Hong Kong as opposed to the United States.

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