New England Biz Law Update
Every self-respecting startup harbors dreams of global
domination. Turning such modest ambitions into reality requires international
sales efforts, cross-border distribution capabilities and, for technology
companies, an international patent strategy.
Why? Because a patent extends no further than the borders of
the country that issues it. A United States patent allows its owner control of
manufacture, sale or use of the patented subject matter in (or its importation
into) this country.
But activity without a local nexus lies beyond the patent’s
reach. Problem is, patent costs in the United States pale in comparison to
those in many other countries. While paying a lawyer or patent agent to prepare
the application usually represents the biggest initial expense, official fees –
what patent-granting authorities charge for filing and processing the
application – can be enormous.
Many countries treat their patent offices as profit centers
and charge applicants accordingly, often imposing escalating yearly fees merely
to keep the application alive, along with a succession of service charges that
come due as it progresses. Annual fees continue and continue to escalate, even
after the patent issues. Add to that the cost of mandatory translation into
each country’s language. Foreign patents clearly are not for the financially
faint of heart.
Interesting Twist
There is, however, an interesting twist in the United
States.
In some circumstances, the patent laws have an
extraterritorial reach, covering activity that occurs abroad, but which has an
effect in the United States. Obviously that’s not the same as having a foreign
patent. But if competitors are likely to access foreign markets from the United
States, or if a foreign competitor’s activities implicate United States in some
way, these extraterritorial provisions may be the next best thing.
Indeed, the sheer scale of the United States market for so
many different products makes it almost impossible to shun; just as domestic
companies are well advised to seek international markets, few foreign firms can
achieve significant, sustained growth without sales in the United States.
Section 271(g) – the first of the Patent Act’s
extraterritorial provisions – makes it an act of infringement to import, sell
or use in the United States a product made outside
the United States in accordance with a U.S.-patented process. In other words,
while a United States process patent nominally covers only domestic use of the
process, §271(g) prevents people from circumventing the patent by performing
the process abroad but commercially exploiting its results in the United States.
Let’s say your company is developing fancy new optical
fibers for the telecommunications industry. Device manufacturers process the
fibers and integrate them into optoelectronic components, such as optical
modulators and amplifiers, which may themselves be used in larger pieces of
equipment.
You have United States patents on the fancy fibers
themselves, as well as on techniques for making optoelectronic devices from
them. Let’s also say that the United States market is so large that walling it
off from competitors would, as a practical matter, seriously impair their
ability to compete.
What happens if a competitor in China makes your fiber and
then uses it to fabricate devices destined for sale all over the world? Seems
like you’re in trouble, since all of the relevant activity takes place abroad
beyond the reach of your United States patents. If the virgin fibers
effectively disappear during processing, your fiber patents can’t stop the
devices from arriving. And since device manufacture occurs in China, your
“method” patents won’t help, either – at least not without help from §271(g).
In fact, armed with the rights afforded by this statutory
provision, you can march into court or the International Trade Commission and
demand a halt to importation of the devices based on those method patents.
Section 271(g) will effectively extend their effect to activity occurring
beyond the United States borders.
Exceptions To The Rule
The provision does, however, contain a couple of exceptions.
First, it won’t cover products that are “materially changed by subsequent
[unpatented] processes.” Second, §271(g) won’t cover a product that “becomes a
trivial and nonessential component of another product.”
Let’s take that second exception first. If your competitor
doesn’t ship devices – let’s say optical amplifiers – into the United States,
but instead markets them to Korean switch manufacturers who sell routing
switches to American importers, §271(g) may not apply. It depends on the
application of those two words “trivial” and “nonessential.” Devices that
perform minor functions are more likely to be considered trivial than one
serving as the brains of the switch. A commodity device that can easily be
replaced with others made using non-infringing fibers may be seen as nonessential.
But suppose instead that your Chinese competitor sells
amplifiers to Lucent, which uses them as what we’ll concede to be trivial and
nonessential components of a major telecommunication system. Section 271(g) can
still be used to stop importation of the amplifiers, although not manufacture
of the system, that is, you can sue your competitor but not Lucent.
The other exception to §271(g) means that if your patented
process represents but one minor stage in the fabrication of the device, then
the device’s importation will not constitute infringement. Suppose, for
example, that your company’s patents only cover fibers and the way they’re
made, not device manufacture. Would processing the fibers and assembling them
into devices qualify as a “material change” sufficient to avoid infringement?
Lots of things may happen fibers as they’re made into
devices – they may be photosensitized, exposed to patterned radiation to create
internal gratings, coated, and diced up. Still, if the basic patented structure
of the fiber is preserved in the finished device, there’s a pretty good chance
§271(g) will still apply.
Courts have recently tacked on a third limitation. Section
271(g) applies to methods of manufacture but not to methods of use. It won’t
extend, for example, to methods of designing
or discovering something. For
example, if someone outside the United States uses a U.S.-patented method to
design your fiber (or, in a recent and highly publicized case, to screen for
new drugs), §271(g) can’t be used to stop United States manufacture of the
thus-designed substrate (or thus-identified pharmaceutical). The United States
activity is too many steps removed from what’s actually patented.
Now let’s switch our facts around a bit. Suppose your
company only has patents on amplifiers made with your fibers rather than on the
fibers themselves. What happens if a United States competitor were to export
your fancy fibers for processing abroad into amplifiers that your patents do
cover, that is, would cover had those
amplifiers been made or used in the United States.
In this case, another extraterritorial patent provision –
§271(f) – may apply. This provision also covers situations in which otherwise
infringing activity occurs outside rather than within the United States, but
where products rather than processes are involved. Section 271(f) prevents
competitors from selling unpatented components of a U.S.-patented product so
that they can be combined abroad into that product. Stated differently, this
provision prevents avoidance of United States product patents through the
domestic sale of non-infringing components destined for assembly outside the
United States into the patented product.
The first part of §271(f) covers “inducement” – meaning,
where the component seller brazenly encourages his customers to assemble the
parts abroad. The second part covers instances where the seller isn’t quite
that dumb. In fact, it covers those who sell even a single component of the
invention, knowing and intending for it to be combined abroad into the patented
product.
But in order to avoid covering legitimate activity,
§271(f)(2) has some exceptions. First are those requirements of knowledge and
intention. Of course, the more components of the product that the seller
supplies, the more difficult it will be for him to feign innocence.
Second, the component(s) cannot be “a staple article or
commodity of commerce suitable for substantial non-infringing use.” Sellers of
generic products like resistors and capacitors, for example, shouldn’t feel the
sting of §271(f) merely because someone uses them to build an infringing radio.
But if your company’s fibers have no use other than to make the infringing
amplifiers, their export will have the legal same effect as manufacturing the
amplifiers in this country.
In sum, there are many good reasons for United States
companies to file for foreign patents. Protecting a specific geographic market,
conferring exclusivity on a foreign distributor, and supporting international
licensing efforts are just a few that come to mind. But if the goals are more
diffuse and foreign sales a long way off, one could do worse than an
international strategy that begins and ends at home.
Steven J. Frank is a partner in the Patent
and Intellectual Property Practice Group at Testa, Hurwitz & Thibeault, LLP
in Boston.
