What Constitutes 'A Sale' and 'an Offer to Sell'?

In its recent opinion, Halo Electronics, Inc. v. Pulse Electronics, Inc., 2:07-cv-00331 (Fed. Cir. Oct. 22, 2014), the Federal Circuit addressed what activity constitutes a sale or an offer for sale for purposes of 35 U.S.C. '271 and, in an important concurrence, Circuit Judge O'Malley provides a provocative analysis of the standard for enhanced damages under '284 in parallel to recent Supreme Court edicts on the standard for attorneys' fees under '285 and calls upon the Federal Circuit to reevaluate the standard for willfulness.

In Nov. 2012, a federal jury in Nevada awarded Halo $1.5 million for infringement of three of Halo's patents, each entitled 'Electronic Surface Mount Package.' Halo claimed Pulse infringed by making, using or selling surface mount transformers or devices that have an electronic surface mount package. In May 2013, the trial judge ruled on the legal determinations of Pulse's obviousness defense and the objective element of Halo's willfulness claim and entered judgment in favor of Halo, except on the issue of willfulness.

On Oct. 22, 2014, the Federal Circuit (by Circuit Judge Lourie, with Circuit Judges O'Malley and Hughes concurring) affirmed the lower court's holding: 1) Pulse directly infringed U.S. patents owned by Halo with respect to products that Pulse directly imported into the U.S.; 2) that Pulse was liable for indirect infringement by inducement with respect to products that Pulse delivered abroad but which were ultimately imported into the U.S. by others; 3) that such infringement was not willful; and 4) that Pulse was not liable for direct infringement with respect to products that Pulse delivered to its customers abroad.

On appeal, Halo argued that the district court erred in granting summary judgment of no direct infringement with respect to products that Pulse delivered abroad. Halo contended that those products were sold and offered for sale within the United States and that the location of the sale or offer for sale should not be limited by the location of the delivery. The Federal Circuit's decision to affirm the lower court's ruling hinged on the fact that Pulse sold, manufactured, shipped and delivered the accused products wholly outside of the United States, and therefore did not sell or offer to sell the accused products within the United States for the purposes of 35 U.S.C. '271(a). This was despite evidence that Pulse discussed pricing, attended sales meetings, promoted, and offered technical support for the accused products within the United States.

What Constitutes a Sale Under '271?

In analyzing what constitutes a sale within the United States, the Federal Circuit reviewed its own precedent beginning with North American Philips Corp. v. American Vending Sales , Inc., 35 F.3d 1576, 1579 (Fed. Cir. 1994), in which the court held that 'patent infringement occurs where the infringing sales are made' stating:

[T]he 'selling' of an infringing article has both a physical and a conceptual dimension to it. That is to say, it is possible to define the situs of the tort of infringement-by-sale either in real terms as including the location of the seller and the buyer and perhaps the points along the shipment route in between, or in formal terms as the single point at which some legally operative act took place, such as the place where the sales transaction would be deemed to have occurred as a matter of commercial law.

The court rejected Halo's argument that the 'location of the sale [is] limited to the place where legal title passed,' noting that under North American Philips, 'a sale may occur at multiple locations including the location of the buyer for the purposes of personal jurisdiction.' Recognizing the strong policy against extraterritorial liability that exists in patent law, the court noted that although the place of contracting may be one of several possible locations of a sale to confer personal jurisdiction, negotiations and contracting activities were not enough for the purposes of conferring liability under '271(a) when the vast majority of activities underlying the sales transaction took place outside the United states.

Here, the Federal Circuit court concluded:

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).

Pulse's accused products were sold, manufactured, shipped, and delivered to buyers abroad, and all actual purchase orders were received abroad. Pulse was also paid abroad by foreign contract manufacturers upon fulfillment of the foreign purchase orders, and not by its customer Cisco. Based on these facts, the court held that because the substantial activities of Pulse's sales transactions occurred entirely outside the United States they did not constitute a sale for the purposes of '271(a).

What Constitutes an Offer to Sell Under '271?

Halo also argued that Pulse's U.S. activities were at least sufficient to constitute an offer to sell within the U.S. For this issue, the Federal Circuit relied on its prior decision in Transocean Offshore Deepwater Drilling, Inc. v. Maersk Contractors USA, Inc. , 617 F.3d 1286, 1309 (Fed. Cir. 2010), in which it was decided that: 'the location of the contemplated sale controls whether there is an offer to sell within the United States.' In Transocean, an offer was made in Norway by a U.S. company to a U.S. company to sell a product within the U.S., and for delivery and use within the U.S. In that case, the Federal Circuit held that '[i]n order for an offer to sell to constitute infringement, the offer must be to sell a patented invention within the United States.' Id. In the instant case, the court noted that the facts here are opposite to those presented in Transocean and, accordingly, reached the opposite conclusion. The court concluded there was no offer for sale under '271(a) because the location of Pulse's future sales was outside the United States. Thus, Pulse's contract negotiations within the United States were not sufficient to constitute an offer to sell when the contemplated sales were outside the U.S. The Federal Circuit noted further that '[i]f 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.'

Willfulness

The panel then turned to consider whether Pulse's infringement was willful and applied the two pronged analysis under Seagate which requires an objective and a subjective inquiry. The district court held that the objective prong was not met simply because Pulse raised a non-frivolous obviousness defense and the Federal Circuit affirmed the lower court's decision for the same reason.

The Concurrence

In a provocative and cogent concurring opinion, Circuit Judge Kathleen O'Malley joined by Circuit Judge Hughes decried the current standard for willfulness and urged

' the full court to reevaluate our standard for the imposition of enhanced damages in light of the Supreme Court's recent decisions in Highmark Inc. v Allcare Health Management Systems, Inc. , 134 S. Ct. 1744 (2014) and Octane Fitness, LLC v. ICON Health & Fitness, Inc. , 134 S. Ct. 1749 (2014), and the terms of the governing statutory provision 35 U.S.C. '284 (2012).

Judge O'Malley first noted the parallel between the standard for enhanced damages under Seagate and that for attorneys' fees under '285 in Brooks Furniture Manufacturing, Inc., which was overruled by Octane. Judge O'Malley points out that the tests for both enhanced damages and for attorneys' fees under ”284 and 285, respectively, were based on the Federal Circuit's interpretation of the Supreme Court's decision in Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc. (PRE) , 508 U.S. 49 (1993), which the court believed required the two-step objective/subjective inquiry before enhanced damages or attorneys' fees could be awarded.

Because the Supreme Court announced in Octane that the Federal Circuit's interpretation of PRE was wrong and stated that the narrow PRE standard 'finds no roots in the text of '285,' Judge O'Malley reminds us that neither is there anything in the text of '284 that justifies the use of the narrow PRE standard for enhanced damages. Judge O'Malley also notes that the Court in Octane rejected the requirement that litigants prove their entitlement to attorneys' fees by the higher standard of proof 'clear and convincing evidence.' Judge O'Malley notes that as with '285, '284 has no language that would require a higher standard of proof and urges the Federal Circuit to evaluate whether there are any reasons to maintain a standard of proof that is at odds with the ordinary standard in civil cases.

Judge O'Malley also noted that the Supreme Court in Highmark, rejected de novo review of a fee award under '285 and recommends that the court review whether a district court's finding of willfulness should be subject to de novo review. Furthermore, Judge O'Malley, sua sponte, recommends that the Federal Circuit consider whether a decision on enhanced damages be made by the court rather than a jury stating that: '[t]he mere presence of a factual components in a discretionary inquiry does not remove that inquiry from the court to whom congress reposed it.'

Albeit a concurrence, litigants would do well to consider Judge O'Malley's analysis for any future arguments on willfulness.

Veronica Mullally Munoz is a partner with Pearl Cohen Zedek Latzer Baratz in New York. A member of the Board of Editors of this newsletter, she concentrates her practice on patent litigation in the life sciences. She can be reached at [email protected]. Andrew J. Cochran is an associate with the firm. He has experience in patent litigation and prosecution, patent searching, freedom to operate, patentability, and infringement opinions. He can be reached at [email protected].