Court of Appeals Clarifies Patent Act Jurisdiction Where Substantial Activities in Sales Transactions Occur Outside U.S.

The World in U.S. Courts: Winter 2015 - Intellectual Property (Patent)

Halo Electronics, Inc. v. Pulse Electronics, Inc., U.S. Court of Appeals for the Federal Circuit, October 22, 2014

Both the plaintiff Halo and the defendant Pulse are manufactures of electronic components containing transistors that are mounted on printed circuit boards and incorporated into products such as computers and Internet routers. As relevant here, Halo sued Pulse for patent infringement, and the question for the Court of Appeals was whether the worldwide supply chain and distribution of Pulse products rendered the subject transactions a “sale” or “offering for sale” of infringing products “within” the U.S., which would be necessary for the case to proceed.

At issue were Pulse products manufactured, ordered, invoiced, shipped, and delivered to customers outside the U.S. However, price negotiations and negotiations over the terms of master agreements for subsequent sales took place in the U.S. The Court of Appeals first concluded that, on those facts, a “sale” had not occurred within the U.S. It noted differences between the concept of the “sale” of a product when used as a basis to find patent infringement as opposed to when used as a basis to assert personal jurisdiction over a defendant, and also sought expressly to implement the “strong policy against” the extraterritorial application of U.S. patent law. The Court of Appeals held “that, when substantial activities of a sales transaction, including the final formation of a contract for sale encompassing all essential terms as well as 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” so as to violate the Patent Act. As relevant here, the Court of Appeals noted that: purchase orders for the Pulse products were issued outside the U.S.; the U.S. contracting did not constitute an agreement to sell “any specific product”; quarterly U.S. price negotiations did not constitute a firm offer to buy and sell, and led to non-U.S. purchase orders that formally established pricing and other terms; and payment for the products was made outside the U.S. The Court of Appeals also rejected Halo’s argument that a “sale” in the U.S. should be found because it allegedly suffered its financial injury in the U.S., adding that Halo had recovered damages from non-U.S. sales of electronic components ultimately imported into the U.S. in finished products based on a theory of inducement.

The Court of Appeals next considered whether the facts constituted the “offering for sale” of the products in the U.S. Here, the Court of Appeals concluded that the critical location for purposes of an “offer” was where the sale was to occur. Thus, even though in this case an offer to sell was allegedly communicated in the U.S., the fact that the sales were to occur outside the U.S. took the transaction outside the U.S. patent laws.

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