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The 'where' of the sale: Still an essential open question

After the Federal Circuit’s decision in Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd., the question of where a sale occurred for purposes of patent damages is a complex question with an answer that could be worth millions.

Usually, asking someone where they bought something is a simple question with a simple answer. Most people are happy to name the shop or website where they made their latest shopping find. However, after the Federal Circuit’s decision in Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd., (Carnegie Mellon Univ. v. Marvell Tech. Grp. Ltd., No. 2014-1492 (Fed. Cir. Aug. 4 2015)) the question of where a sale occurred for purposes of patent damages is a complex question with an answer that could be worth millions.

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In its decision in Carnegie Mellon, the Federal Circuit reduced a $1.5 billion damages award to Carnegie Mellon University to $278 million and remanded the case to allow the parties to prove where the sale of certain chips that were made and delivered overseas, without ever being physically imported into the United States, actually occurred. (Id., slip op. at 35-36.) Looking to 35 U.S.C. § 271(a), the court emphasized the importance of the location of a sale when determining whether the limitations against the extraterritorial application of U.S. patent laws were satisfied:

Where a physical product is being employed to measure damages for the infringing use of patented methods, we conclude, territoriality is satisfied when and only when any one of those domestic actions for that unit (e.g., sale) is proved to be present, even if other of the listed activities for that unit (e.g., making, using) take place abroad. (Id., slip op. at 37.)

 

Despite the immense importance (and monetary value) placed on the determination of where a sale occurred for purposes of patent infringement damages, the Carnegie Mellon decision leaves the question of how to identify the location of a sale unanswered.  Instead, the court recognizes and echoes the quandary faced by many businesses:

The standards for determining where a sale may be said to occur do not pinpoint a single, universally applicable fact that determines the answer, and it is not even settled whether a sale can have more than one location….Places of seeming relevance include a place of inking the legal commitment to buy and sell and a place of delivery…and perhaps also a place where other substantial activities of the sales transactions occurred. (Id., slip op. at 41 (internal citations and quotations omitted).) 

Absent clear guidance from the court, businesses that service international markets and use overseas production facilities may struggle with gaining a clear view of whether their overseas operations are potentially subject to a domestic patent infringement claim. While the court declined to articulate a controlling definition, it did cite two cases that are likely to feature prominently in future disputes and examinations of the location of a “sale.” In Halo Electronics, (Halo Electronics, Inc. v. Pulse Electronics, Inc., 769 F.3d 1371, 1378-79 (Fed. Cir. 2014)) the Federal Circuit provided some guidance as to what does not constitute a sale: 

Consistent with all of our precedent, we conclude that, 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). (Id. at 1379.)

In view of the particular facts in Halo — where the products at issue were made, shipped, and delivered to customers outside of the United States—the court affirmed that the pricing and contracting negotiations that occurred in the United States were insufficient to be deemed a domestic “sale” for purposes of patent infringement damages. (Id.) The court also held that such negotiations did not constitute an offer for sale under §271 because “the location of the contemplated sale controls whether there is an offer to sell within the United States.” (Id., at 1381 (emphasis original).) At least in the context of an offer for sale, the court took the view that the offer did not contemplate delivery of the products into the United States, it did not constitute a domestic offer for sale.

Another case referenced in the Carnegie Mellon decision provides some clarity at the other end of the spectrum. In Transocean Offshore Deepwater Drilling, the court held that “a contract between two U.S. companies for the sale of the patented invention with delivery and performance in the U.S. constitutes a sale under § 271(a) as a matter of law.” (Transocean Offshore Deepwater Drilling, Inc. v. Maersk Contractors USA, Inc., 617 F.3d 1296, 1310 (Fed. Cir. 2010).) In doing so, the court rejected the argument that the sale took place outside of the United States because all negotiations and execution of the contract occurred in Norway and contemplated for at least some performance outside of the United States. (Id.) 

While the Halo and Transocean decisions provide some guidance to businesses with international operations, most businesses will find that at least some of their overseas operations could be classified as somewhere in between the guideposts in those decisions.  Under the current law, it is unclear when domestically-based discussions and negotiations transition from being insufficient to establish domestic liability to being a domestic “sale”.  Moreover, while it appears that actually executing the agreement in the United States is at least somewhat relevant to the determination of whether a sale occurred, businesses cannot automatically shield themselves from liability by ensuring that all deal signings occur in exotic locations.  In light of the potentially tremendous difference in damages exposure, the question of whether a sale occurred inside the United States or outside its borders is sure to be the subject of significant dispute in the future, and may soon require additional guidance from the courts.

Contributing Author

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Benjamin R. Huber

Benjamin R. Huber is an intellectual property associate in the Charlotte office of Moore & Van Allen PLLC. Mr. Huber focuses his practice in the...

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