Analysis: The Federal Circuit’s Transocean Decision on Offer-To-Sell Infringement

by Quinn Emanuel Urquhart & Sullivan, LLP

Offer-to-sell liability under U.S. patent laws has not historically been a topic of much discussion among patent litigators. See 35 U.S.C. § 271(a) (“…whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States, …, infringes the patent.”). Perhaps this is because reasonable royalty damages are difficult if not impossible to measure in the offer context (what would one pay in a hypothetical negotiation for a license to offer an infringing device for sale but not actually sell it). Recently, however, practitioners and academics alike have taken notice of offer-to-sell liability, particularly in light of the 2010 decision, Transocean Offshore Deepwater Drilling, Inc. v. Maersk Contractors USA, Inc., 617 F.3d 1286 (Fed. Cir.). Of particular interest is to what extent does “offer-to-sell” infringement extend the reach of U.S. patent law to conduct or persons outside the U.S.?

In Transocean, the offer was to construct and deliver a massive, floating oil drilling rig for use in the U.S. Gulf of Mexico. The terms of the offer were made and communicated outside the U.S., and the resulting contract provided that the oil rig could be modified prior to delivery to avoid patent infringement (which is precisely what happened). The Federal Circuit held that the offer to sell an infringing oil rig was sufficient to warrant a finding of patent infringement because the location of the “contemplated” sale was within the U.S. Id. at 1308.

Nearly a century ago, Judge Learned Hand held — under the then-existing patent laws — that it was not an infringement “for the defendant to take away from the plaintiff a contract calling for a door covered by the patent, and later to change the structure so that it did not infringe.” Van Kannel Revolving Door Co. v. Revolving Door & Fixture Co., 293 F. 261, 262 (S.D.N.Y. 1920). Interestingly, this is precisely the type of conduct found to infringe in the Transocean decision under the subsequently enacted “offer to sell” provision of the U.S. patent law. Curiously, however, under today’s version of § 271(a) as interpreted by the Federal Circuit in Transocean, the conduct described by Judge Hand is an infringement only if the location of the contemplated sale is within the U.S. According to the Transocean decision, offer-to-sell infringement is defeated when the contemplated sale is outside the U.S. See, e.g., Ion, Inc. v. Sercel, Inc., 2010 WL 3768110 (E.D. Tex.). In this situation, the “offeror” may actually follow through with its promise made to a U.S. customer to supply an infringing article and still avoid liability, provided it makes and then delivers the article outside the U.S.

The drilling rig ultimately delivered in the Transocean case was not infringing, having been modified before delivery. Thus, under the precedent set by the case, liability for offer-to-sell infringement does not require that an infringing article ultimately be delivered. By analogy, in the hypothetical scenario where the offeror makes an offer to a U.S. customer to supply an infringing article but intends to make and deliver it abroad, the device ultimately delivered is likewise not infringing (because one is not liable for direct infringement for making and selling an otherwise infringing article if it is done outside the U.S.). It is difficult to reconcile why this scenario would not trigger liability whereas liability is triggered when the offeror offers a patented article for sale but either (i) never delivers it or (ii) pulls a bait-and-switch of the type Judge Hand described back in 1920 and that actually occurred in the Transocean decision.

In Transocean, the U.S. Court of Appeals for the Federal Circuit held that “the location of the contemplated sale controls whether there is an offer to sell within the United States.” 617 F.3d at 1309. This holding means that a foreign manufacturer can engage in promotional activities within the U.S. (including by direct solicitation) and present offers to sell an infringing article to a U.S. company — yet still avoid liability so long as the ultimate delivery and performance take place abroad. This is because, under the Transocean decision, the location of the advertising and solicitation activities is apparently deemed irrelevant, the court having opted instead for a bright-line rule that bases the existence of offer-to-sell liability solely on the location of the contemplated sale.

In reaching its decision, the Federal Circuit noted that an offer to sell under § 271(a) is to be analyzed using traditional contract principles. Oddly, however, the “offer for sale” analysis in the Transocean decision lacks any discussion of traditional contract principles. Id. at 1308. Had the Federal Circuit actually considered traditional contact principles, the outcome may have been different, because traditional contract principles dictate that place of performance is not a necessary term for forming a valid offer sufficient to create the power of acceptance in another. For instance, the Uniform Commercial Code provides that “[a]n agreement for sale which is otherwise sufficiently definite […] to be a contract is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties.” U.C.C. 2-311(1). In fact, § 2-311 makes specific reference to details of shipment: “Unless otherwise agreed, […] specifications or arrangements relating to shipment are at the seller’s option.” Id. at 2-311(2). Thus, the Transocean decision would appear to detract from traditional notions of contract law by relying nearly exclusively on the place of performance in determining whether offer-to-sell infringement has occurred even though “place of performance” is not a term that is required to be stated for an offer to be valid and capable of acceptance.

Some Practical Thoughts on How to Determine the Place an Offer Is Made
The U.S. patent laws regulate conduct rather than the goods themselves (i.e., in personam vs. in rem). Infringement liability is therefore directed to “activities” performed by or at the direction of human beings (selling, making, using, offering, importing). Thus, it is the infringing offeror’s conduct that is to be regulated. And in view of the presumption against extraterritorial application of the U.S. patent laws (see Microsoft Corp. v. AT&T Corp., 550 U.S. 437 (2007)), for there to be offer-to-sell infringement, the act of “offering” an infringing item for sale should take place within the U.S. Under this construct, the physical location of the offeror would determine whether the “offer to sell” is made within the U.S. Accordingly, if an offer is made to sell an infringing article by a sales agent physically present in the U.S.—whether made to customers located outside or inside the U.S.—it is an infringement. On the other hand, if an offer is made to sell an infringing article by a sales agent not physically present in the U.S.—whether to customers located inside or outside the U.S.—it is not an infringement.

The case of in-person offers is straightforward: the offer is made in the place where the offeror communicates the offer to the offeree, wherever that may be. In the case of a telephone offer, the analysis is not as easy: the offer could be deemed made either (i) at the place where the offeror is located and makes the offer or (ii) at the place where the offeree is located and receives the offer. But, under the construct that the intent of the patent law is to regulate the infringer’s “conduct,” the answer would be the place where the offeror is located, as it is the offeror’s conduct that is to be regulated in this situation. Similarly, in the context of an e-commerce transaction, the rule would be that the location of the person/entity responsible for sending the electronic communication (i.e., the person/entity legally bound by acceptance of the offer) should control. In this manner, the patent law is properly drawn to the location of the infringing conduct rather than the location (or contemplated location) of the infringing article.

While not a perfect fit for all circumstances, by looking to where the offeror is located, this approach focuses more directly on the “conduct” that is to be regulated within the U.S. borders than does the Transocean approach. Transocean’s focus on the location of the ultimate sale seems to overlook that it is the act of “offering” that is to be regulated under the statute, not the physical delivery or possession of the sold good (which is already regulated under the “import” and “use” infringement provisions). In addition, as an independent basis for liability, an “offer for sale” should not be dependent in any way on an actual sale—whether consummated or merely contemplated—and therefore the place of performance or delivery should not dictate whether the offer is infringing. In Transocean, all of the infringing offeror’s conduct took place in Europe, yet infringement was still found to exist. Such a result is difficult to square with the presumption that U.S. patent laws should not regulate extraterritorial conduct.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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