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Fresh From the Bench: Recent Patent Cases From the ‎Federal Circuit

November 3, 2014

Overview

Halo Electronics – Actions taking place entirely outside of the U.S. do not, in this case, subject the defendant to liability for infringement of two Halo patents. Infringement of those same patents based upon actions in the U.S. is not willful where the defendant had an engineer perform a "cursory examination" of the patents and concluded that the patents were invalid.

Halo Electronics, Inc. v. Pulse Electronics, Inc.
Fed. Cir. Case 2013-1472, -1656 (October 22, 2014)

Halo's patents are directed to surface-mounted electronic packages containing transformers for mounting on a printed circuit board inside computers and internet routers. Pulse designs, manufactures and sells similar products in Asia. Pulse delivers some of those products to customers in the U.S., but most of its products are delivered to customers such as Cisco outside of the U.S. Those customers incorporate the electronic packages supplied by Pulse into end products overseas, which are sold and shipped to consumers around the world.

In 2002, Halo sent Pulse two letters offering licenses to its patents. Pulse had one of its engineers spend two hours reviewing the patents and concluded that they were invalid in view of prior Pulse products. Several years later Halo sued Pulse for infringement and Pulse counterclaimed for infringement of one of its own patents.

The district court construed language from the Halo and Pulse patents and based on the construction of the Pulse patent, the parties stipulated to a judgment of noninfringement of the Pulse patent. The court also granted Pulse's motion for summary judgment that it did not directly infringe the Halo patents by selling or offering to sell products that Pulse manufactured, shipped, and delivered outside the U.S. The parties proceeded to trial and the jury awarded Halo $1.5 million, also finding that Pulse's infringement was willful. However, in response to Pulse's post-trial motion, the district court threw out the verdict of willfulness.

Sale and Offer for Sale

Halo argues that the district court erred in granting summary judgment of no direct infringement as to products that Pulse delivered abroad.

a. Sale of such products

Section 271(a) provides that "whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States . . . infringes the patent." The panel first considers whether the products that Pulse manufactured, shipped, and delivered to buyers abroad were sold within the U.S.

The patent statute does not define the meaning of a "sale" within the U.S. for purposes of § 271(a). The ordinary meaning of a sale includes the concept of a transfer of title or property. Indeed, Article 2 of the UCC provides that "a sale consists in the passing of title from the seller to the buyer for a price." U.C.C. § 2-106; separately defines a "contract for sale" as including "both a present sale of goods and a contract to sell goods at a future time."

The products were manufactured, shipped, and delivered to buyers abroad. Pulse received the actual purchase orders for those products abroad. While Pulse and Cisco engaged in quarterly pricing negotiations for specific products, the negotiated price and projected demand did not constitute a firm agreement to buy and sell, binding on both Cisco and Pulse. Instead, Pulse received purchase orders from Cisco's foreign contract manufacturers, which then firmly established the essential terms including price and quantity of binding contracts to buy and sell. Pulse was paid abroad by those contract manufacturers, not by Cisco, upon fulfillment of the purchase orders. Thus, substantial activities of the sales transactions at issue, in addition to manufacturing and delivery, occurred outside the U.S. Although Halo did present evidence that pricing negotiations and certain contracting and marketing activities took place in the U.S., which purportedly resulted in the purchase orders and sales overseas, such pricing and contracting negotiations alone are insufficient to constitute a "sale" within the U.S. Any doubt as to whether Pulse's contracting activities in the U.S. constituted a sale within the U.S. under § 271(a) is resolved by the presumption against extraterritorial application of our laws.

b. Offer for Sale

The panel then turns to consider whether Pulse offered to sell within the U.S. those products that Pulse manufactured, shipped, and delivered abroad. The location of the contemplated sale controls whether there is an offer to sell within the United States. In order for an offer to sell to constitute infringement, the offer must be to sell a patented invention within the U.S. The panel adopts the reasoning of Transocean Offshore Deepwater Drilling, Inc. v. Maersk Contractors USA, Inc., 617 F.3d 1296 (Fed. Cir. 2010) and concludes that Pulse did not directly infringe the Halo patents by offering to sell the products in the U.S. because Cisco outsourced all of its manufacturing activities to foreign countries, and the contemplated sales were outside the U.S. Likewise with respect to other Pulse customers, there is no evidence that the products at issue were contemplated to be sold within the U.S. The panel therefore concludes that Pulse did not offer to sell the products "within the U.S."

Willfulness

Establishing willful infringement requires a two-prong analysis entailing an objective and a subjective inquiry. First, a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. Second, if the threshold objective standard is satisfied, the patentee must also demonstrate that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer. In re Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc).‎

The district court held that the objective prong was not met because the obviousness defense that Pulse presented at trial was not objectively baseless. The Circuit panel agrees, noting that the court properly considered the totality of the evidence, including the obviousness defense that Pulse developed during the litigation, to determine whether there was an objectively-defined risk of infringement of a valid patent.

Pulse's Cross-Appeal

The panel affirms the judgment that the asserted claims of the Halo patents were not invalid for obviousness because Pulse failed to file a motion on the issue of obviousness before that issue was submitted to the jury and thus waived its right to challenge the jury's implicit factual findings underlying the nonobviousness general verdict.

Concurring opinion

Judges O'Malley and Hughes concur but think the full Circuit should reevaluate the standard for the imposition of enhanced damages in light of 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). While we often don't pay a lot of attention to concurring opinions, this one is of interest because it points out that the willfulness test under‎ § 284, as described in Seagate and Bard, and the old § 285 test under Brooks Furniture, both were predicated on the Circuit's erroneous interpretation of Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc. ("PRE"), 508 U.S. 49 (1993). In Octane, the Court explained that the PRE standard was crafted as a very narrow exception for "sham" litigation" and that the narrow PRE standard "finds no roots in the text of § 285." For the same reason, the Circuit should reconsider "whether those same interpretative errors have led us astray in our application of the authority granted to district courts under § 284." According to the concurrence, "just as the PRE standard finds no roots in the text of § 285, there is nothing in the text of § 284 that justifies the use of the PRE narrow standard."

The concurrence also suggests that, because Octane threw out the requirement that entitlement to attorneys' fees under § 285 must be proven clear and convincing evidence, the Circuit should consider whether willfulness under ‎§ 284 should still have to be proven ‎by that higher standard.

Highmark also rejected de novo review of a fee award under § 285. The concurrence asks whether willfulness under ‎§ 284 ‎should still be subject to de novo review.

Finally, under the plain language of §§ 284 and 285, "the court" decides whether damages are to be trebled or attorney fees are to be awarded. While this issue was not addressed in Octane or Highmark, when the full Circuit reevaluates the proper test for an award of enhanced damages, the concurrence suggests that the Circuit should consider whether § 284 requires a decision on enhanced damages be made by the court, rather than by the jury.

Comment: While this last point in the concurrence flies in the face of the statutory language‎, which specifies that "the court" determine whether increased damages under ‎§ 284 and attorney fees under ‎§ 285 are appropriate, the other arguments in the concurrence are all good ones, and counsel should consider these in presenting future arguments to the district courts and, of course, to the Federal Circuit.

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