Extraterritorial Jurisdiction of IP Laws

“The traditional understanding [is] that … patent law operates only domestically and does not extend to foreign activities.” Lexmark Int'l v. Impression Prods., 816 F.3d 721, 764 (Fed. Cir. 2016) (internal citation and quotations omitted). One such example is patent exhaustion, which states that a patent owner's right to control a patented article is eliminated after a first authorized sale, thereby enabling a party to use or resell a product without the threat of infringement. Id. at 739. However, a recent case from the U.S. Court of Appeals for the Federal Circuit (en banc) has shifted the reach of U.S. patents overseas. In Lexmark, the court held that patent exhaustion does not apply to foreign sales and a patent owner can preserve its patent rights — and thus prevent the exhaustion of patent rights — by imposing clearly delineated restrictions at the time of sale. Id. at 735, 754, 773-74. (This case was appealed to the U.S. Supreme Court, and a decision is expected soon.)

As background, Lexmark sold two forms of cartridges, one at full price and another at a discounted price with conditions that prevented the resale and reuse of these latter cartridges. Id. at 727. Certain companies overseas acquired empty cartridges of the second type and refilled them for resellers such as Impression. Id. at 728. Impression, then imported these foreign-purchased cartridges into the United States. Id. Lexmark sued Impression for patent infringement of these imported cartridges. Id.

The Lexmark decision exposes numerous companies to patent infringement liability, including foreign resellers and U.S. companies that rely on foreign companies to procure and manufacture products that are imported into the United States. It is conceivable that a U.S. company importing a product comprised of hundreds of components acquired abroad might be sitting on a Trojan horse where the patent holder could sue for infringement on one component. As a result of Lexmark, U.S. companies will be forced to re-evaluate their contracts with suppliers to ensure: 1) each component is properly purchased from the patent owner; and 2) there are no contractual restrictions on the use of the component downstream (and actually affirmatively state so if possible). This could entail paying a higher price for the component.

The Federal Circuit also has provided guidance on when there is a foreign sale or offer for sale to invoke U.S. patent infringement liability. In Halo Elecs v. Pulse Elecs., 831 F.3d 1369 (Fed. Cir. 2016), the Federal Circuit held that there was no foreign sale where products were “manufactured, shipped, and delivered to buyers abroad” and orders for those products were received abroad. Id. at 1378-79. This was despite pricing negotiations and marketing activities occurring in the United States that resulted in those foreign orders. Id. at 1378. Nor did the Federal Circuit find any offer for sale because “the locations of the contemplated sales were outside the United States.” Id. at 1380.

In view of Halo and prior precedent, a U.S. company would be well advised to determine whether its foreign activity (e.g., procurement, manufacturing and distribution) properly falls into this seemingly narrow exception to “sales” and “offers to sell” under U.S. patent law. This is especially true for those companies that generate substantial revenue from “foreign sales.” Nevertheless, Halo leaves open that under a different fact pattern, where additional activity occurs in the United States, foreign sales could be captured by U.S. patent law. For instance, in FlowRider Surf v. Pacific Surf Designs, No. 15cv1879, 2016 U.S. Dist. LEXIS 153560 at 19-20. (S.D. Cal. Nov. 3, 2016), although the court technically denied the discovery of foreign sales, it still permitted the plaintiff to discover whether the defendant was improperly classifying these sales under Halo, because the defendant did not state how it was “defining foreign sales and offers to sell.” This case proves the point that it is better to audit foreign conduct prior to U.S. litigation, where it will be susceptible to costly and resource intensive scrutiny.

The Foreign Catch

Trademarks have not escaped the foreign claw either. In Trader Joe's v. Hallatt, 835 F.3d 960, 970-72, 975 (9th Cir. 2016), the Ninth Circuit found that Lanham Act claims were sufficiently alleged based on products purchased in the United States and resold in Canada because of reputational harm flowing from the Canadian sales to U.S. trademarks. One could potentially argue that this case has a unique set of facts, where the defendant “chose to name his [Canadian] store Pirate Joe's, suggesting that he knowingly treads on Trader Joe's goodwill and pirates Trader Joe's' intellectual property … [and one of defendant's] employees allegedly admitted that we're pirating Trader Joe's, sort of.” Id. at 974 (internal quotations omitted). This case should cause companies to re-evaluate their conduct in other countries to determine whether any foreign activity could be construed as causing reputational harm to another's brand or trademarks in the United States. Normally, a company operating in a foreign country would only be concerned about complying with that country's laws; however, Trader Joe's highlights the need to have uniform procedures across all countries to ensure the same high standards are followed throughout the product life cycle.

The extraterritoriality of copyrights has also been pushed. In Geophysical Servs. v. TGS-Nopec Geophysical Servs., 2017 U.S. App. LEXIS 4286 at 26-27.(5th Cir. March 10, 2017), the Fifth Circuit affirmed that there is no claim for contributory copyright infringement because the “direct infringement … occurred entirely extraterritorially” despite the eventual importation of the alleged copied material to the United States.. A contrary result for foreign conduct was reached for trade secrets. In Certain Rubber Resins and Processes for Manufacturing Same, Inv. No. 337-TA-849, the full International Trade Commission (ITC) issued a 10-year ban on products developed based on trade secrets misappropriated in China. The Federal Circuit affirmed under Fed. Cir. R. 36 without opinion. Sino Legend (Zhangjiagang) Chem. v. ITC, 623 F. App'x 1016 (Fed. Cir. 2015). The Supreme Court denied certiorari. Sino Legend (Zhangjiagang) Chem. v. ITC, 137 S. Ct. 711 (2017).

Foreign Conduct Matters

These cases demonstrate that foreign conduct can still be ensnarled by U.S. IP laws. And it is critical for companies operating overseas to apply the same U.S. principles consistently abroad in dealing with their resellers, partners, suppliers, and other entities in the manufacturing and distribution chain. This includes drafting uniform guidelines, procedures, and contracts that clearly delineate the expectations and responsibilities of the parties. Companies should further understand their own product life cycle and every entity the affects that cycle to ensure there is no gap. To do otherwise would expose such companies to U.S. IP liability and potentially significant damages.

*****
Andrew P. MacArthur is counsel and Ralph A. Dengler is a partner at Venable in New York. This article also appeared in the New York Law Journal, an ALM sibling of The Intellectual Property Strategist.

In today's global economy, manufacturing and distribution chains typically are spread across multiple countries. A product now passes through several (and sometimes related) companies as it is sold and resold overseas before possibly being imported back into the United States. This dynamic and complex relationship from the incarnation of product to eventual world-wide sale often creates tension with U.S. laws that regulate domestic conduct.

Intellectual property laws, which are central to innovation, product development and protection, are no stranger to this tension. IP owners naturally want to assert their rights to exclude others, and when necessary, identify potential liability and maximize damages relating to foreign activity. But accused infringers try to resist this “reach” to ensure a U.S. IP-acquired right does not surreptitiously become world-wide protection, especially when no equivalent foreign protection exists, or it is weakly enforced. Recent U.S. cases have created benchmarks of patent, trademark, copyright, and trade secret liability for foreign activity, and businesses should take heed.

The U.S. Patent Claw

“The traditional understanding [is] that … patent law operates only domestically and does not extend to foreign activities.” Lexmark Int'l v. Impression Prods. , 816 F.3d 721, 764 (Fed. Cir. 2016) (internal citation and quotations omitted). One such example is patent exhaustion, which states that a patent owner's right to control a patented article is eliminated after a first authorized sale, thereby enabling a party to use or resell a product without the threat of infringement. Id. at 739. However, a recent case from the U.S. Court of Appeals for the Federal Circuit (en banc) has shifted the reach of U.S. patents overseas. In Lexmark, the court held that patent exhaustion does not apply to foreign sales and a patent owner can preserve its patent rights — and thus prevent the exhaustion of patent rights — by imposing clearly delineated restrictions at the time of sale. Id. at 735, 754, 773-74. (This case was appealed to the U.S. Supreme Court, and a decision is expected soon.)

As background, Lexmark sold two forms of cartridges, one at full price and another at a discounted price with conditions that prevented the resale and reuse of these latter cartridges. Id. at 727. Certain companies overseas acquired empty cartridges of the second type and refilled them for resellers such as Impression. Id. at 728. Impression, then imported these foreign-purchased cartridges into the United States. Id. Lexmark sued Impression for patent infringement of these imported cartridges. Id.

The Lexmark decision exposes numerous companies to patent infringement liability, including foreign resellers and U.S. companies that rely on foreign companies to procure and manufacture products that are imported into the United States. It is conceivable that a U.S. company importing a product comprised of hundreds of components acquired abroad might be sitting on a Trojan horse where the patent holder could sue for infringement on one component. As a result of Lexmark, U.S. companies will be forced to re-evaluate their contracts with suppliers to ensure: 1) each component is properly purchased from the patent owner; and 2) there are no contractual restrictions on the use of the component downstream (and actually affirmatively state so if possible). This could entail paying a higher price for the component.

The Federal Circuit also has provided guidance on when there is a foreign sale or offer for sale to invoke U.S. patent infringement liability. In Halo Elecs v. Pulse Elecs. , 831 F.3d 1369 (Fed. Cir. 2016), the Federal Circuit held that there was no foreign sale where products were “manufactured, shipped, and delivered to buyers abroad” and orders for those products were received abroad. Id. at 1378-79. This was despite pricing negotiations and marketing activities occurring in the United States that resulted in those foreign orders. Id. at 1378. Nor did the Federal Circuit find any offer for sale because “the locations of the contemplated sales were outside the United States.” Id. at 1380.

In view of Halo and prior precedent, a U.S. company would be well advised to determine whether its foreign activity (e.g., procurement, manufacturing and distribution) properly falls into this seemingly narrow exception to “sales” and “offers to sell” under U.S. patent law. This is especially true for those companies that generate substantial revenue from “foreign sales.” Nevertheless, Halo leaves open that under a different fact pattern, where additional activity occurs in the United States, foreign sales could be captured by U.S. patent law. For instance, in FlowRider Surf v. Pacific Surf Designs, No. 15cv1879, 2016 U.S. Dist. LEXIS 153560 at 19-20. (S.D. Cal. Nov. 3, 2016), although the court technically denied the discovery of foreign sales, it still permitted the plaintiff to discover whether the defendant was improperly classifying these sales under Halo, because the defendant did not state how it was “defining foreign sales and offers to sell.” This case proves the point that it is better to audit foreign conduct prior to U.S. litigation, where it will be susceptible to costly and resource intensive scrutiny.

The Foreign Catch

Trademarks have not escaped the foreign claw either. In Trader Joe's v. Hallatt , 835 F.3d 960, 970-72, 975 (9th Cir. 2016), the Ninth Circuit found that Lanham Act claims were sufficiently alleged based on products purchased in the United States and resold in Canada because of reputational harm flowing from the Canadian sales to U.S. trademarks. One could potentially argue that this case has a unique set of facts, where the defendant “chose to name his [Canadian] store Pirate Joe's, suggesting that he knowingly treads on Trader Joe's goodwill and pirates Trader Joe's' intellectual property … [and one of defendant's] employees allegedly admitted that we're pirating Trader Joe's, sort of.” Id. at 974 (internal quotations omitted). This case should cause companies to re-evaluate their conduct in other countries to determine whether any foreign activity could be construed as causing reputational harm to another's brand or trademarks in the United States. Normally, a company operating in a foreign country would only be concerned about complying with that country's laws; however, Trader Joe's highlights the need to have uniform procedures across all countries to ensure the same high standards are followed throughout the product life cycle.

The extraterritoriality of copyrights has also been pushed. In Geophysical Servs. v. TGS-Nopec Geophysical Servs., 2017 U.S. App. LEXIS 4286 at 26-27.(5th Cir. March 10, 2017), the Fifth Circuit affirmed that there is no claim for contributory copyright infringement because the “direct infringement … occurred entirely extraterritorially” despite the eventual importation of the alleged copied material to the United States.. A contrary result for foreign conduct was reached for trade secrets. In Certain Rubber Resins and Processes for Manufacturing Same, Inv. No. 337-TA-849, the full International Trade Commission (ITC) issued a 10-year ban on products developed based on trade secrets misappropriated in China. The Federal Circuit affirmed under Fed. Cir. R. 36 without opinion. Sino Legend (Zhangjiagang) Chem. v. ITC , 623 F. App'x 1016 (Fed. Cir. 2015). The Supreme Court denied certiorari. Sino Legend (Zhangjiagang) Chem. v. ITC , 137 S. Ct. 711 (2017).

Foreign Conduct Matters

These cases demonstrate that foreign conduct can still be ensnarled by U.S. IP laws. And it is critical for companies operating overseas to apply the same U.S. principles consistently abroad in dealing with their resellers, partners, suppliers, and other entities in the manufacturing and distribution chain. This includes drafting uniform guidelines, procedures, and contracts that clearly delineate the expectations and responsibilities of the parties. Companies should further understand their own product life cycle and every entity the affects that cycle to ensure there is no gap. To do otherwise would expose such companies to U.S. IP liability and potentially significant damages.

*****
Andrew P. MacArthur is counsel and Ralph A. Dengler is a partner at Venable in New York. This article also appeared in the New York Law Journal, an ALM sibling of The Intellectual Property Strategist.