Liability for Foreign Manufacturing, and We Are Not Talking About Lead Paint

This article was first published in the September 5, 2007 edition of The Legal Intelligencer.

The flurry of Chinese-manufactured products brought under scrutiny lately has heightened our awareness about overseas manufacturing generally, but to date most of this concern has centered around product liability. An important area for many companies to address, however, is that of liability under U.S. patent law for their overseas activity. Can an Asian manufacturer which sells its raw material to a European buyer who then exports its product to the U.S. be liable under a U.S. patent infringement statute?

Although the U.S. patent laws generally address and govern domestic activity, there is a touch of extraterritoriality which seems to be continuing to grow as more and more U.S. companies look to overseas manufacturing to help them with their bottom line. In particular, multi-national companies should be aware that their overseas activity should be considered a part of their U.S. IP position. This article will touch on why such an awareness can improve a U.S. company’s IP strategy with respect to its activities abroad.

Section 271 of Title 35 of the U.S. Code defines patent infringement under U.S. law and each provision of that section addresses a separate type of infringement that a U.S. patent holder can assert against an infringer. With the internationalization of commerce, the extent to which activity outside of the U.S. can be brought within the ambit of those provisions has become increasingly important.

When most people think of patent infringement, they are thinking of what is known as direct infringement. Direct infringement is addressed in 35 U.S.C. § 271(a), and occurs when an infringing product is made, used, sold, or offered for sale within the U.S. or imported into the U.S.

There are several other types of infringement, however, including those defined in the category of indirect infringement. One type of indirect infringement defined in the statute is contributory infringement. Contributory infringement, like direct infringement, extends only to actions that occur within the United States.

The statute states that a party who offers to sell or sells within the United States or imports into the United States a component of a patented machine, manufacture, combination or composition, or a material or apparatus for use in practicing a patented process, constituting a material part of the invention, knowing the same to be especially made or especially adapted for use in an infringement of such patent, and not a staple article or commodity of commerce suitable for substantial non-infringing use, shall be liable as a contributory infringer. 35 U.S.C. § 271(c).

Thus, the statute makes clear that any liability for contributory infringement must be based on activity “within the United States .” These parts of the infringement statute are fairly clear and well established.

A separate provision, 35 U.S.C. §271(g), was enacted in the late 1980s, and addresses the importation of products made from a process performed abroad if the process performed abroad is that which is claimed in a U.S. patent. Like contributory infringement, the application of this statute is ultimately limited to a defendant who is located in the U.S.

Moreover, although this provision hints at extraterritorial application because it is a U.S. law that affects, to some degree, the activities of a party not in the U.S., the infringing act is limited to the importation of the offending product.

Prior to the enactment of 271(g), a party in the U.S. could import products manufactured abroad using a process claimed in a U.S. patent, and the U.S. patent holder did not have a remedy for infringement of its process patent (of course it would have had a remedy under 271(a) if it had had claims directed to the product itself). Section 271(g) was enacted to provide a remedy to this specific situation.

Although 271(g) was enacted to close this “loophole,” the courts, particularly the U.S. Court of Appeals for the Federal Circuit, took a very strict interpretation of this statute, finding support in both case law and its legislative history, to restrict its extraterritorial effect.

Ultimately, of course, the statute cannot be used to stop overseas activity per se, but rather the importation into the U.S. of products made in an (otherwise) infringing way overseas. It was designed to try to discourage U.S. manufacturers from simply moving their manufacturing from the U.S. to a non-U.S. jurisdiction in order to avoid infringement of the U.S. process patents of its competitors.

There is, however, possible exposure for a non-U.S. manufacturer under another section of the patent infringement statute. This potential exposure is the second kind of indirect infringement, and is known as inducement to infringe. Unlike contributory infringement, the statute for inducement liability does not have a “within the United States ” recitation.

A party is liable for inducement of infringement under 35 U.S.C. §271(b) if a party actively induces infringement of a patent. That’s it. The location of the party who actively induces infringement is not limited to a U.S. jurisdiction. Of course, there are jurisdictional issues with asserting the theory, but the statute defining liability is not limited to U.S. activity alone. Thus, a party who actively induces infringement, even if it does so from abroad, can be held liable for U.S. patent infringement, assuming there is direct infringement in the U.S. (by someone – who may or may not be named in the lawsuit), and assuming the party doing the acts that induce the direct infringement is subject to jurisdiction in a U.S. court.

A proponent of inducement of infringement must also assert that the party inducing infringement had an affirmative intent to induce the direct infringement. A recent decision by the U.S. Court of Appeals for the Federal Circuit explained that this requirement is met with evidence of culpable conduct directed toward another’s infringement, not mere knowledge of another’s infringing activities. The inducer must know of the patent and actively aide and abet the direct infringer’s infringement.

The Southern District of New York addressed this issue in March of this year in Wing Shing Prods. v. Simatelex Manufactory Co., 479 F.Supp2d 388 (S.D.N.Y. 2007). The court granted a summary judgment motion finding a foreign manufacturer liable under section 271(b) because the foreign manufacturer had knowledge that the product it made and sold infringed a U.S. patent and the product was being sold in the U.S.

In a footnote, the court specifically noted that the holding was not expanding the territorial reach of 271(a), but rather was based on 271(b), which requires direct infringement in the U.S. and an affirmative intent to cause the direct infringement. The court noted that not every act by a foreign manufacturer will give rise to liability under 271(b).

The U.S. buyer (retail seller) in that case entered into an agreement with a foreign manufacturer who was to supply coffeemakers that were claimed in the plaintiff’s patent. Although negotiations took place in Hong Kong, the agreement was deemed to have been made in Florida and governed by the laws of Delaware.

The defendant manufactured the coffeemakers in China, transferred the coffeemakers to Hong Kong as designated by the U.S. buyer, and then shipped them to the U.S. The U.S. buyer paid the foreign manufacturer after the coffeemakers had either arrived in a U.S. port or had been placed on U.S. soil.

Further, in an earlier related proceeding the U.S. buyer had been found to directly infringe the plaintiff’s patent. Thus, the foreign manufacturer, who was not present in the U.S., was found to have infringed the plaintiff’s U.S. patent based on its activities in Asia.

Although the facts in every case are unique, this case illustrates that even when activity is performed overseas, a company may be exposing itself or its foreign manufacturer to liability for patent infringement within the U.S. This, of course, is particularly a concern when the foreign manufacturer is a parent, subsidiary, or division of the U.S. company.

It may be that some companies, perhaps even some of your clients, think that their activity on U.S. soil is the only thing that matters with respect to U.S. IP risk exposure, but there is more to it than that. An awareness of potential liabilities that a company creates when moving manufacturing abroad is important to maintaining the bottom line. After all, saving manufacturing costs only to pay them back in an infringement lawsuit is not going to get anyone promoted.

As exemplified in Wing Shing, product liability is not the only exposure a company should be aware of in these situations. All facets of infringement, and particularly inducement of infringement, should be especially carefully considered, on a comprehensive, global level, when a company has manufacturing facilities and subsidiaries in multi-national distribution networks.

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