IP Law Daily Holding that pricing negotiations were not ‘sales’ reaffirmed; unenhanced damages award vacated
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Friday, August 5, 2016

Holding that pricing negotiations were not ‘sales’ reaffirmed; unenhanced damages award vacated

By Thomas Long, J.D.

On remand from the U.S. Supreme Court, the U.S. Court of Appeals for the Federal Circuit has reaffirmed that transformer manufacturer Pulse Electronics did not directly infringe patents held by competitor Halo Electronics, with respect to products that Pulse manufactured, shipped, and delivered abroad. The court restated its reasoning from its October 22, 2014, opinion that Pulse’s pricing negotiations with its customer Cisco inside the United States did not constitute "sales" or "offers of sale" for purposes of infringement liability under 35 U.S.C. §271(a). Summary judgment in Pulse’s favor with respect to these products was affirmed. The appellate court also affirmed the district court’s judgment that Pulse was liable for (1) directly infringing the patents-in-suit with respect to products that Pulse delivered in the United States and (2) inducing infringement with respect to products that Pulse delivered outside the United States but that ultimately were imported into the United States as finished end products. However, because in declining to award enhanced damages with respect to products that were delivered in the United States, the district court had applied a test that was rejected by the Supreme Court in a June 13, 2016, opinion, the Federal Circuit vacated and remanded the district court’s unenhanced damages award (Halo Electronics, Inc. v. Pulse Electronics, Inc., August 5, 2016, Lourie, A.).

Background

Halo was a supplier of electronic components. It owned three patents directed to surface mount electronic packages containing transformers for mounting on a printed circuit board inside electronic devices, such as computers and Internet routers.

Pulse also designed and sold surface mount electronic packages. Pulse manufactured those products in Asia. Some of Pulse’s products were delivered by Pulse to customers in the United States, but the majority of them were delivered outside the United States, for example, to contract manufacturers for companies such as Cisco. Those contract manufacturers incorporated the electronic packages supplied by Pulse into end products overseas, including Internet routers manufactured for Cisco, which were sold and shipped to consumers around the world. For those products that Pulse delivered abroad, all purchase orders were received at Pulse’s sales offices abroad. However, Pulse engaged in pricing negotiations in the United States with some customers, including Cisco.

Pulse allegedly knew of Halo’s patents as early as 1998. In 2002, Halo sent Pulse two letters offering licenses to its patents. At that time, Pulse determined that Halo’s patents were invalid in light of prior Pulse products.

In 2007, Halo sued Pulse for patent infringement. Pulse denied infringement and challenged the validity of the Halo patents based on obviousness.

Pulse moved 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 United States. The district court granted the motion, holding that those products were sold and offered for sale outside the United States and beyond the scope of Section 271(a).

After a trial, the jury found that: (1) Pulse directly infringed the Halo patents with respect to products that it shipped into the United States; (2) Pulse induced others to infringe the Halo patents with products that it delivered outside the United States but ultimately were imported into the United States in finished end products; (3) it was highly probable that Pulse’s infringement was willful; and (4) the asserted claims of the Halo patents were not invalid for obviousness. In response to a post-trial motion by Pulse, the district court concluded that Pulse reasonably relied on an obviousness defense that was not "objectively baseless" and therefore held that Pulse’s infringement was not willful. The district court thus did not enhance damages under Section 284. Pulse also moved for judgment as a matter of law of invalidity due to obviousness, which the district court denied. Both parties appealed.

Sale and Offer for Sale

Halo argued that the district court erred in granting summary judgment of no direct infringement with respect to products that Pulse delivered abroad. According to Halo, those products were sold and offered for sale within the United States because negotiations and contracting activities occurred within the United States, which resulted in binding contracts that set specific terms for price and quantity. In Halo’s view, the location of the sale or offer for sale should not be limited to the location of delivery. Halo asserted that it sustained economic harm in the United States as a result of Pulse’s sales.

Sale. The Federal Circuit agreed with Pulse that the district court did not err in determining that U.S. sales did not occur. The products at issue were manufactured, ordered, invoiced, shipped, and delivered abroad. Pulse’s price discussions with Cisco in the United States were merely forecasts and were not a guarantee that Pulse would receive any actual order.

Although the place of contracting could be one of several possible locations of a sale, for purposes of conferring personal jurisdiction, the Federal Circuit had not deemed a sale to have occurred within the United States for purposes of liability under 35 U.S.C. §271(a), based solely on negotiation and contracting activities in the United States, when the "vast majority" of activities underlying the transaction took place wholly abroad, the court said.

The court noted that there was a strong policy against extraterritorial liability in U.S. patent law. That policy was to be taken under consideration when determining whether the activities in the United States were sufficient to constitute a "sale" under Section 271(a).

The Patent Act did not define the meaning of "sale" for purposes of Section 271(a). The ordinary meaning of a sale included the concept of a transfer of title or property. While a sale was not limited to the transfer of tangible goods, but could also be determined by the agreement under which such a transfer occurred, the locus of performance under a contract for sale remained pertinent to the transfer of title or property, the court said. 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 outside the United States, pricing and contracting negotiations in the United States alone did not effect a "sale" within the United States for purposes of Section 271(a), the court concluded.

The court also rejected Halo’s argument that the sales at issue occurred in the United States simply because Halo suffered economic harm as a result of those sales. The incurring of harm alone did not control the infringement inquiry. Moreover, Halo recovered damages for products that Pulse delivered outside the United States but were ultimately imported into the United States in finished end products based on a theory of inducement, the court noted.

Offer for sale. Nor did Pulse offer to sell within the United States the products that Pulse manufactured, shipped, and delivered abroad, the court held. The location of the contemplated sale controlled whether there was an offer to sell within the United States.

The negotiations at issue occurred in the United States, but the contemplated sale occurred outside the United States. Therefore, in the court’s view, Pulse did not directly infringe the Halo patents under the "offer to sell" provision of Section 271(a). Cisco outsourced all of its manufacturing activities to foreign countries, and it was undisputed that the locations of the contemplated sales were outside the United States. There was no evidence that the products at issue were contemplated to be sold within the United States with respect to other Pulse customers.

Accordingly, the court affirmed the grant of summary judgment of no direct infringement with respect to products that Pulse manufactured, shipped, and delivered abroad.

Enhanced Damages

In declining to award enhanced damages due to the lack of willful infringement, the district court applied the then-controlling test stated in In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc), and its progeny ("the Seagate test"). Under Seagate, establishing willful infringement required a two-prong analysis entailing an objective and a subjective inquiry. First, the patentee was required to 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, the patentee was required to demonstrate that this objectively-defined risk was known to the accused infringer or so obvious that it should have been known.

The Supreme Court rejected the Seagate test as "unduly rigid" and inconsistent with "the statutory grant of discretion to district courts" to enhance damages under Section 284. The Court specifically rejected the clear-and-convincing standard of proof, as well as Seagate’s requirement of a finding of "objective recklessness in every case before a district court may award enhanced damages." Rather, the Court said, an infringer’s subjective willfulness may warrant an award of enhanced damages.

The district court awarded Halo $1.5 million in reasonable royalty damages with respect to products that were delivered in the United States. The jury also found that it was highly probably that Pulse’s infringement was willful. The district court, however, determined that the objective prong of Seagate was not met because the obviousness defense presented by Pulse at trial was not objectively baseless.

In light of the Supreme Court’s decision, the Federal Circuit vacated the district court’s determination of no willful infringement. The case was remanded for the district court to exercise its discretion and to decide whether an enhancement of damages was warranted, taking into consideration the jury’s subjective willfulness finding—which was not challenged by Pulse—as one factor in its analysis. In assessing the culpability of Pulse’s conduct, the district court should consider what Pulse knew or had reason to know at the time of the infringement of Halo’s patents, the Federal Circuit explained.

Pulse’s Cross-Appeals

Pulse cross-appealed from the district court’s finding of direct infringement with respect to products that Pulse delivered in the United States and inducement with respect to products delivered outside the United States but ultimately important into the United States in finished end products. Pulse asserted that the district court incorrectly construed certain claim terms. The Federal Circuit found no reversible error in the district court’s judgments and therefore affirmed them.

Pulse also cross-appealed from the judgment that the asserted claims of the Halo patents were not invalid for obviousness. The record evidence indisputably showed that almost all the limitations in the asserted claims were known elements of electronic packages that existed in the prior art, the appellate court noted. However, Pulse did not file a motion during trial under Fed. R. Civ. P. 50(a) 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. Therefore, the district court correctly presumed that the jury resolved all factual disputes relating to the scope and content of the prior art and secondary considerations in Halo’s favor. The determination of no invalidity was affirmed.

The case is Nos. 2013-1472 and 2013-1656.

Attorneys: Craig E. Countryman (Fish & Richardson P.C.) for Halo Electronics, Inc. Mark Lee Hogge (Dentons US LLP) for Pulse Electronics, Inc., and Pulse Electronics Corp.

Companies: Halo Electronics, Inc.; Pulse Electronics, Inc.; Pulse Electronics Corp.

MainStory: TopStory Patent FedCirNews

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