Did the CAFC’s Caltech decision make finding infringing “sales” within the U.S. easier?
Zachary Silbersher
The Federal Circuit issued its precedential decision within the dispute between the California Institute of Technology (“Caltech”) versus both Broadcom and Apple. (Case Nos. 2020-2222, 2021-1527 (Fed. Cir. Feb. 4, 2022)).
The decision is notable for at least three reasons. The Court strengthened the estoppel defense against invalidity arguments that were not, but could have been, previously raised in an IPR. The Court made it more difficult to apply separate and distinct damages models against a component supplier and the end-user device manufacturer. And finally, the Court held that there is no categorical bar against considering domestic sales activities—apart from the locations of actual manufacturer, delivery and contract execution—in the course of determining the location of an accused “sale” under Sec. 271(a). This post addresses the last holding.
Caltech sued both Broadcom and Apple for infringing patents related to error correction coding schemes for wireless chips. Caltech sued Broadcom for sales of its chips, and Apple for sales of devices incorporating those chips. The court awarded nearly $300M in damages against Broadcom, and nearly $900M in damages against Apple.
In defending against these large damages awards, both Broadcom and Apple argued that a large part of their sales are immune from liability for infringement of a United States patent. Rather, they argued, the actual “sales” of the infringing devices occurred abroad, rather than within the U.S. In its brief, Broadcom and Apple argued that the sales of the infringing chips were made pursuant to purchase orders executed abroad by executed by foreign entities, the purchase orders were the only documents defining price and quantity, and the chips were manufactured and delivered outside of the U.S.
Both companies also argued that any domestic marketing or general sales efforts leading up to actual purchase order, manufacture or delivery of the infringing chips are necessarily barred from consideration. This included what the district court found to be “lengthy sales cycle” that led to the chips Broadcom designed and made for Apple’s phones. It also included the master supply agreement negotiated between Broadcom and Apple, which the defendants argued did not include any specific quantity or price terms, and therefore, should be outside the calculus of “where” the infringing sales occurred.
To support their argument, Broadcom and Apple relied upon the prior decision Halo Elecs., Inc. v. Pulse Elecs., Inc., 769 F.3d 1371 (Fed. Cir. 2014). In Halo, the Federal Circuit held,
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. Relying on Halo, the defendants argued that because manufacture, purchase orders and delivery necessarily occurred abroad, that dictated that the chip sales were immune from U.S. patent liability “as a matter of law.”
Along with the Halo decision, several other decisions has served to insulate accused infringers from U.S. patent liability to the extent that manufacture, delivery and/or contract execution occur abroad. For instance, in Texas Advanced Optoelectronic Solutions Inc. v. Renesas Electronics America Inc., 895 F.3d 1304 (2018), the Court discounted considerable evidence of domestic sales activities and negotiations to find that the infringing sales occurred abroad. In Transocean Offshore Deepwater Drilling, Inc. v. Maersk Contractors USA, Inc., 617 F.3d 1296 (Fed. Cir. 2010), the Federal Circuit has held that the location of a “sale” under Section 271(a) can be focused on where the product is delivered, not necessarily where the contract is negotiated and executed. Together, these cases along with other district court cases, have provided some comfort to accused infringers that, as long as product delivery and manufacture occur abroad, liability for patent infringement within the U.S. can likely be avoided.
At first blush, it may makes sense that a sale occurs “abroad” where manufacture, delivery or contract execution occurs in another country. Indeed, it is now common for electronic component and end-user devices to be manufactured abroad using contract manufacturers located in Asia or elsewhere. Because of this, it is equally common for components to be delivered abroad to contract manufacturers in Asia. And likewise, actual purchase orders for those deliveries are often executed by foreign sales offices.
Yet, this obscures the modern sales process for electronics. Companies often deploy considerable resources within the U.S. to secure design wins and negotiate master supply agreements that are specifically aimed at capturing a share of the U.S. market. Yet, leading up to these specific transactions are typically substantial sales and marketing efforts—occurring within the U.S.—to incorporate components into the devices bound for the United States market. This often includes deploying teams of domestic sales personnel to sell to the American market, entering general business agreements in America for end products to be sold in the U.S., complying with American certifications, standards and qualifications to make their products compliant with the U.S. market, and directly providing customer support inside of the United States. These activities are specifically designed to capture a portion of the United States market. Likewise, it is not surprising that the “design cycle” and the sales “win” often takes place in the United States.
The Federal Circuit’s decision in Caltech has arguably pulled back the reasoning enunciated in Halo. Both Broadcom and Apple argued that Halo stood as a “categorical prohibition” against relying upon evidence of a domestic sales cycle to find that an infringing “sale” occurred domestically. Yet, in Caltech, the Court stated that Halo was “not a blanket holding that design wins arising out of a sales cycle can never be domestic transactions.” (Slip Op. at 27). As a result, the Court has held, in a precedential decision, that courts cannot ignore the substantial domestic sales, marketing and design activities—intended to capture a share of the U.S. market—in the course of determining the location of a “sale” under 271(a).
It's not a sea-change in the law, but it’s a boost to patent-holders for electronic components.