Foreign F.O.B. Shipment of Infringing Product Does Not Defeat Federal Subject Matter Jurisdiction

F.o.b. or 'free on board' is a shipping method under which goods are delivered at a designated location where legal title (and thus the risk of loss) passes from the seller to the buyer. The Court of Appeals for the Federal Circuit has determined that a trial court does not lose subject matter jurisdiction over a patent or copyright infringement case where all sales of accused products to U.S. customers were made f.o.b. in Canada by a Canadian corporation. Litecubes, LLC v. Northern Light Prods., Inc., ___ F.3d ____ (Fed. Cir. 2008). Whether a defendant 'makes, uses, offers to sell or sells any patented invention, within the United States or imports into the United States any patented invention' is a factual element required to prove patent infringement, but does not affect federal subject matter jurisdiction.

Background

The inventor/owner Carl Vanderschuit and the licensee Litecubes, LLC of U.S. Patent No. 6,416,198 (the ”198 patent') sued Northern Light Products, Inc. (d/b/a GlowProducts.com), a Canadian corporation located in Victoria, British Columbia, for patent and copyright infringement. GlowProducts acquired novelty items from Chinese manufacturers and sold them directly to customers in the U.S. The '198 patent disclosed a lighted artificial ice cube known as the Litecube. Litecubes owned the registered copyright on the Litecube product. After a jury rendered a verdict of willful patent and copyright infringement, the U.S. District Court for the Eastern District of Missouri entered a judgment against GlowProducts.

During the trial, GlowProducts moved to dismiss the case for lack of subject matter jurisdiction (personal jurisdiction was not contested). GlowProducts contended that it did not sell the accused products in the U.S. nor import them into the U.S. because they were shipped f.o.b. in Canada. Glow Products argued that it was the U.S. customers who imported the products into the U.S. because they took title to the products in Canada under the f.o.b. designation. The district court disagreed, finding that GlowProducts did import goods into the U.S. and, therefore, the court had subject matter jurisdiction over the case.

The Federal Circuit Disagrees

The Federal Circuit looked at the matter differently. It stated that in order to prevail, a plaintiff must prove as part of its claim of patent or copyright infringement the fact that the allegedly infringing activity took place in the U.S.; however, failure to do so does not divest the federal courts of subject matter jurisdiction. It is merely one element of the infringement case that the plaintiff must prove.

Under the 'well-pleaded complaint rule,' subject matter jurisdiction for patent infringement exists if 'federal patent law creates the cause of action or the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal patent law.' AT&T Co. v. Integrated Network Corp., 972 F.2d 1321, 1323-24 (Fed. Cir. 1992). Litecubes alleged in its complaint that GlowProducts violated 35 U.S.C. '271 (a) of the Patent Act, by making, using, offering to sell or selling a patented invention in the U.S., or by importing a patented invention into the U.S. As Litecube properly pled every element of a '271(a) claim, and such a claim creates a federal cause of action for patent infringement over which the district courts have subject matter jurisdiction under both 28 U.S.C. ”1331 and 1338(a), subject matter jurisdiction existed from the filing of that well-pleaded complaint. That jurisdiction, the Federal Circuit determined, is not divested because the plaintiff is later unable to prove every element of its claim. It is only necessary to plead an arguable (not a valid) cause of action to establish the court's power to hear the case. Failure to prove an element of the claim alleged in the complaint requires a decision on the merits, not a dismissal for lack of subject matter jurisdiction.

Although there is an exception to that general rule for pleading a federal claim that is 'immaterial and made solely for the purpose of obtaining jurisdiction,' such a dismissal for lack of subject matter jurisdiction is 'proper only when the claim is 'so insubstantial, implausible, foreclosed by prior decisions of [the Supreme Court], or otherwise completely devoid of merit as not to involve a federal controversy.” Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 89 (1998), quoting Oneida Indian Nation of N.Y. v. County of Oneida, 414 U.S. 661, 666 (1974).

Congress can restrict federal jurisdiction by enacting statutory limitations, but the Federal Circuit noted that it is critical to distinguish between a jurisdictional limitation and an element of a claim that must be established on the merits. Courts must be meticulous in determining the difference. The Supreme Court has issued a 'bright line rule': 'If the Legislature clearly states that a threshold limitation on a statute's scope shall count as jurisdictional, then courts and litigants will be duly instructed ' but when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as non-jurisdictional in character.' Arbaugh v. Y & H Corp., 546 U.S. 500, 516 (2006).

Because Congress has not clearly stated that '271's requirement that the infringing act occur in the U.S. is jurisdictional, the Federal Circuit held that it is merely a factual element of the infringement cause of action. This is so even where the limitation concerns the extraterritorial scope of the statute, as long as there is personal jurisdiction over the defendant. Congressional authority to regulate extraterritorial behavior is known in international law as the 'jurisdiction to prescribe' or to extend a state's 'authority to subject foreign interests or activities to its laws.' Restatement (Third) of the Foreign Relations Law of the United States '401 and comment a. The Supreme Court has recognized that the extraterritorial scope of a statute is an element of the claim, not a requirement for subject matter jurisdiction. Lauritzen v. Larsen, 345 U.S. 571 (1953).

Similarly, the Federal Circuit determined that the district court had subject matter jurisdiction over the copyright infringement claim. As the Copyright Act prohibits 'importation into the United States ' of copies ' of a work that have been acquired outside the United States,' without clear provision from Congress that the limitation is jurisdictional, it is an element of the claim, not a requirement for subject matter jurisdiction. The Patent and Copyright Acts should be interpreted consistently on this point. Although the Copyright Act does not apply to situations where all of the accused actions took place outside the U.S., determining where
the actions took place is a factual matter for the jury, not a jurisdictional element.

Moreover, the Federal Circuit found that Litecube proved the 'sale in the U.S.' element of its patent and copyright infringement claims. GlowProducts sold and shipped the accused products directly to U.S. customers. The fact that the goods were shipped f.o.b. in Canada is as irrelevant to determining where the sale took place as to determining whether interstate commerce occurred. A sale may occur at both the location of the seller and the location of the buyer, unlike 'making' or 'using' an infringing product. North American Philips Corp. v. American Vending Sales, Inc., 35 F.3d 1576, 1579 (Fed. Cir. 1994). GlowProducts sold the accused goods within the U.S. when it delivered them directly to American customers in the U.S. As the Patent and Copyright Acts should be interpreted consistently on this point, GlowProducts sold goods infringing both the patent and the copyright in the U.S.

Conclusion

Plaintiffs considering patent or copyright infringement suits against foreign defendants should take care that they can prove all the elements of their claims, including the sale or importation into the U.S. of the accused products. Despite the Federal Circuit's decision, there are a number of protections that a foreign defendant has in situations where the accused infringing activities took place outside the U.S. A foreign defendant can challenge whether the court has personal jurisdiction. It can also bring a Rule 12(b)(6) motion to challenge whether the complaint states a claim, based on the absence of sale or importation of the accused products into the U.S. The foreign defendant can also move for summary judgment where all of the accused actions are extraterritorial and discovery has not revealed any U.S. connection.

F.o.b. or 'free on board' is a shipping method under which goods are delivered at a designated location where legal title (and thus the risk of loss) passes from the seller to the buyer. The Court of Appeals for the Federal Circuit has determined that a trial court does not lose subject matter jurisdiction over a patent or copyright infringement case where all sales of accused products to U.S. customers were made f.o.b. in Canada by a Canadian corporation. Litecubes, LLC v. Northern Light Prods., Inc., ___ F.3d ____ (Fed. Cir. 2008). Whether a defendant 'makes, uses, offers to sell or sells any patented invention, within the United States or imports into the United States any patented invention' is a factual element required to prove patent infringement, but does not affect federal subject matter jurisdiction.

Background

The inventor/owner Carl Vanderschuit and the licensee Litecubes, LLC of U.S. Patent No. 6,416,198 (the ”198 patent') sued Northern Light Products, Inc. (d/b/a GlowProducts.com), a Canadian corporation located in Victoria, British Columbia, for patent and copyright infringement. GlowProducts acquired novelty items from Chinese manufacturers and sold them directly to customers in the U.S. The '198 patent disclosed a lighted artificial ice cube known as the Litecube. Litecubes owned the registered copyright on the Litecube product. After a jury rendered a verdict of willful patent and copyright infringement, the U.S. District Court for the Eastern District of Missouri entered a judgment against GlowProducts.

During the trial, GlowProducts moved to dismiss the case for lack of subject matter jurisdiction (personal jurisdiction was not contested). GlowProducts contended that it did not sell the accused products in the U.S. nor import them into the U.S. because they were shipped f.o.b. in Canada. Glow Products argued that it was the U.S. customers who imported the products into the U.S. because they took title to the products in Canada under the f.o.b. designation. The district court disagreed, finding that GlowProducts did import goods into the U.S. and, therefore, the court had subject matter jurisdiction over the case.

The Federal Circuit Disagrees

The Federal Circuit looked at the matter differently. It stated that in order to prevail, a plaintiff must prove as part of its claim of patent or copyright infringement the fact that the allegedly infringing activity took place in the U.S.; however, failure to do so does not divest the federal courts of subject matter jurisdiction. It is merely one element of the infringement case that the plaintiff must prove.

Under the 'well-pleaded complaint rule,' subject matter jurisdiction for patent infringement exists if 'federal patent law creates the cause of action or the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal patent law.' AT&T Co. v. Integrated Network Corp. , 972 F.2d 1321, 1323-24 (Fed. Cir. 1992). Litecubes alleged in its complaint that GlowProducts violated 35 U.S.C. '271 (a) of the Patent Act, by making, using, offering to sell or selling a patented invention in the U.S., or by importing a patented invention into the U.S. As Litecube properly pled every element of a '271(a) claim, and such a claim creates a federal cause of action for patent infringement over which the district courts have subject matter jurisdiction under both 28 U.S.C. ”1331 and 1338(a), subject matter jurisdiction existed from the filing of that well-pleaded complaint. That jurisdiction, the Federal Circuit determined, is not divested because the plaintiff is later unable to prove every element of its claim. It is only necessary to plead an arguable (not a valid) cause of action to establish the court's power to hear the case. Failure to prove an element of the claim alleged in the complaint requires a decision on the merits, not a dismissal for lack of subject matter jurisdiction.

Although there is an exception to that general rule for pleading a federal claim that is 'immaterial and made solely for the purpose of obtaining jurisdiction,' such a dismissal for lack of subject matter jurisdiction is 'proper only when the claim is 'so insubstantial, implausible, foreclosed by prior decisions of [the Supreme Court], or otherwise completely devoid of merit as not to involve a federal controversy.” Steel Co. v. Citizens for a Better Env't , 523 U.S. 83, 89 (1998), quoting Oneida Indian Nation of N.Y. v. County of Oneida , 414 U.S. 661, 666 (1974).

Congress can restrict federal jurisdiction by enacting statutory limitations, but the Federal Circuit noted that it is critical to distinguish between a jurisdictional limitation and an element of a claim that must be established on the merits. Courts must be meticulous in determining the difference. The Supreme Court has issued a 'bright line rule': 'If the Legislature clearly states that a threshold limitation on a statute's scope shall count as jurisdictional, then courts and litigants will be duly instructed ' but when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as non-jurisdictional in character.' Arbaugh v. Y & H Corp. , 546 U.S. 500, 516 (2006).

Because Congress has not clearly stated that '271's requirement that the infringing act occur in the U.S. is jurisdictional, the Federal Circuit held that it is merely a factual element of the infringement cause of action. This is so even where the limitation concerns the extraterritorial scope of the statute, as long as there is personal jurisdiction over the defendant. Congressional authority to regulate extraterritorial behavior is known in international law as the 'jurisdiction to prescribe' or to extend a state's 'authority to subject foreign interests or activities to its laws.' Restatement (Third) of the Foreign Relations Law of the United States '401 and comment a. The Supreme Court has recognized that the extraterritorial scope of a statute is an element of the claim, not a requirement for subject matter jurisdiction. Lauritzen v. Larsen , 345 U.S. 571 (1953).

Similarly, the Federal Circuit determined that the district court had subject matter jurisdiction over the copyright infringement claim. As the Copyright Act prohibits 'importation into the United States ' of copies ' of a work that have been acquired outside the United States,' without clear provision from Congress that the limitation is jurisdictional, it is an element of the claim, not a requirement for subject matter jurisdiction. The Patent and Copyright Acts should be interpreted consistently on this point. Although the Copyright Act does not apply to situations where all of the accused actions took place outside the U.S., determining where
the actions took place is a factual matter for the jury, not a jurisdictional element.

Moreover, the Federal Circuit found that Litecube proved the 'sale in the U.S.' element of its patent and copyright infringement claims. GlowProducts sold and shipped the accused products directly to U.S. customers. The fact that the goods were shipped f.o.b. in Canada is as irrelevant to determining where the sale took place as to determining whether interstate commerce occurred. A sale may occur at both the location of the seller and the location of the buyer, unlike 'making' or 'using' an infringing product. North American Philips Corp. v. American Vending Sales, Inc. , 35 F.3d 1576, 1579 (Fed. Cir. 1994). GlowProducts sold the accused goods within the U.S. when it delivered them directly to American customers in the U.S. As the Patent and Copyright Acts should be interpreted consistently on this point, GlowProducts sold goods infringing both the patent and the copyright in the U.S.

Conclusion

Plaintiffs considering patent or copyright infringement suits against foreign defendants should take care that they can prove all the elements of their claims, including the sale or importation into the U.S. of the accused products. Despite the Federal Circuit's decision, there are a number of protections that a foreign defendant has in situations where the accused infringing activities took place outside the U.S. A foreign defendant can challenge whether the court has personal jurisdiction. It can also bring a Rule 12(b)(6) motion to challenge whether the complaint states a claim, based on the absence of sale or importation of the accused products into the U.S. The foreign defendant can also move for summary judgment where all of the accused actions are extraterritorial and discovery has not revealed any U.S. connection.