US High Court Backs Foreign Manufacturers Over US Patentees

Under Donald Trump, the United States has adopted new, protectionist policies. “America first,” the President has repeatedly and loudly declared. It appears, however, that the US Supreme Court didn’t get the memo. The Court, in a recent patent law case, sided with foreign companies and consumers, at the expense of US patent owners. The unanimous ruling protects international supply chains instead of domestic US manufacturing.

The decision in Life Technologies Corp. v. Promega Corp. [pdf] arose from a dispute over Promega’s patented genetic testing kit. Promega claimed that Life Technologies infringed the patent by assembling these kits in the United Kingdom and selling them to law enforcement agencies outside of the US.

If all of the components of these supposedly infringing kits had been created outside the US, Promega would have had no case. However, Life Technologies made one of each kit’s components in the US and exported that component to its UK facility. Because of this one infringing component, Promega alleged, all the UK kits were infringing under Section 271(f)(1) of the Patent Act. That statutory provision states (in relevant part):

Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention … in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer. [Emphasis added.]

Each kit at issue consisted of five components. Life Technologies argued that just one component couldn’t be a “substantial portion” of this invention’s components.

The Federal Circuit Court of Appeals ruled otherwise. That tribunal, which is often called America’s “patent court,” held that “substantial” means “important,” so if a single component is important enough, that one component is a “substantial portion” of the invention. In this case, where an expert testified that the one infringed component was the “main” or “major” component of the kits, the Federal Circuit found the single infringed component was a substantial portion of the patented kits.

The US Supreme Court reversed. It held, 7-0, that the term “substantial portion” refers to a quantitative measurement, not a qualitative assessment, and that a single component of a multi-component invention can never be a substantial portion of the invention. (When the decision was issued on 22 February, the Court had eight justices, but Chief Justice John Roberts recused himself because he had a financial interest in the case’s outcome.)

Statute and Policy

The high court’s ruling surprised few experts. “It was a relatively straightforward decision, especially when you compare Sections 271(f)(1) and 271(f)(2) of the Patent Act,” said W. Edward Ramage, a partner in the Baker Donelson law firm. “Section 217(f)(2) talks about the case where there is just one component sent overseas. However, Promega didn’t sue under that Section because it contains a special requirement. It mandates that the export of one component creates infringement only if the exported component ‘is especially made or especially adapted for use in the invention and [is] not a staple article or commodity of commerce suitable for substantial noninfringing use.’ Here, the component was a general article of commerce and had substantial noninfringing uses.”

“The Supreme Court’s opinion is persuasive,” said Wayne Stacy, a partner in the law firm of Baker Botts. “The better reading of Section 271(f)(1) is quantitative, not qualitative.”

Not only did the Patent Act’s language favor Life Technology’s position, so too did the policy considerations raised by this case. “The Supreme Court is generally wary of the so-called extraterritorial application of US patent law,” said Prof. Arti Rai of Duke Law School.

Anti-Trumping Rule

By not extending the reach of US patent law in this case, the high court’s decision protected international supply chains. “It allows greater freedom to manufacture globally without fear of US patent infringement liability,” said Rai. She added, “I believe, notwithstanding the current rhetoric in Washington, that global manufacturing can be desirable.”

The Supreme Court’s ruling runs counter to the protectionist aims of the Trump administration. The decision hurts US patent owners, by depriving them of royalty payments when a single component of a patented invention is exported.

The decision aids companies doing business outside the US. Because such companies need not make royalty payments on single components imported from the US, these companies’ costs are reduced – allowing them to sell their products at lower prices and with larger profit margins. The ruling thus encourages US companies to do more manufacturing overseas.

The ruling helps consumers, but only those beyond US borders. That’s because the lower-priced products made outside the US will remain free of US patent restrictions (and thus lower-priced) only if the products remain outside the US. “Importing such products into the US would be direct infringement,” said Ramage.

Murky and Confused

The Supreme Court’s decision in Life Technologies resolved one question about Section 217(f)(1), but left other important aspects of the statute in confusion. The ruling failed to provide any definition for “component,” or any test for determining how many components are in a product.

Lower courts will be forced to wrestle with these issues, likely on a case-by-case basis, while litigants will try to take advantage of these legal uncertainties. For instance, a patent owner relying on Section 217(f)(1) will make legal arguments that maximize the number of exported components in its patented product while simultaneously minimizing the total number of components in the product. Conversely, accused infringers will seek to minimize the number of exported components while maximizing the total number of a product’s components.

After wading through such contradictory analyses, trial courts will need to determine whether the number of exported components is a “substantial portion” of a patented invention. That will be tricky, because the Supreme Court failed to explain what constitutes a “substantial portion.” The Court held that one component of a patented product isn’t enough, but gave no other guidance.

All this uncertainty puts a heavy burden on trial courts. “The number of components needed to infringe has to be decided on a case-by-case basis,” said Stacy. “I think that will become, over time, a jury question. It will come down to a counting exercise: how many components are there in the plaintiff’s product. You could have 15 experts trying their best to answer this, and get 15 different answers.”

The result will be confusion for courts, juries, patent owners and accused infringers. “For years, the Federal Circuit has been trying to construct guidelines and factors in an effort to improve the certainty and predictability in the law. Once again, the Supreme Court overturned those efforts without supplying a substitute, thereby likely reducing certainty and predictability,” said Matthew Siegal, a partner in the law firm of Stroock, Stroock & Lavan.