In the Tradition of Gilda Radner, the Court of Appeals for the Federal Circuit Proclaims "Never Mind" in Zoltek II

by Sheppard Mullin Richter & Hampton LLP

[author: Louis D. Victorino]

The United States Court of Appeals for the Federal Circuit (CAFC) recently issued a so-called en banc (all judges of the court) decision with great importance to Federal Government contractors. In Zoltek Corp. v. United States, Fed. Cir., No. 2009-5135, March 14, 2012 ("Zoltek II"), the Court redefined the scope of the statute underlying the Federal Acquisition Regulation (FAR) "Authorization and Consent" clause, 28 U.S.C. §1498. In so doing, the Court confirmed Federal Government contractor immunity from patent infringement suits in instances where the patent infringement may have occurred in whole or in part outside of the United States. The more fundamental holding of the case was to reverse its own prior decision in the same case (“Zoltek I”), in which the CAFC had held that §1498 does not waive Federal Government patent immunity from certain patent infringements occurring in part outside the United States.

Zoltek Corporation (Zoltek), is a U.S. corporation headquartered in St. Louis, MO, and is the assignee of rights in a U.S. patent related to manufacturing processes and methods used for the production of carbon fiber sheets. Two types of fiber carbon products allegedly were manufactured through the use of methods covered by the Zoltek patent. The allegedly infringing resulting products were used by Lockheed Martin Corporation (Lockheed) in the manufacture of F-22 jet aircraft, designed and built, of course, under a U.S. Government contract. The carbon fiber products were manufactured from fiber carbon components in one instance manufactured in Japan and finished in the U.S. and in a second instance manufactured entirely in Japan and imported into the U.S.

In its original complaint, Zoltek sued the United States under 28 U.S.C. §1498(a) in the United States Court of Federal Claims (COFC) alleging, in relevant part, that its patent was infringed because the F-22 related carbon fiber products were used or manufactured by or for the U.S. without a license or other legal right. No claims were asserted against Lockheed. In relevant part, 28 U.S.C. §1498(a) provides:

(a) Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture.

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For the purposes of this section, the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or any person, firm, or corporation for the Government and with the authorization or consent of the Government, shall be construed as use or manufacture for the United States.

The U.S. (Government) moved for summary judgment on this portion of the Zoltek lawsuit based on the language of sub-section (c) of 28 U.S.C. §1498. That sub-section provides, in total, "[t]he provisions of this section shall not apply to any claim arising in a foreign country." The Government argued that this section precluded recovery by Zoltek under its "methods" patent claims because some or all of the infringement occurred in Japan and, thus, arose "in a foreign country." The COFC held, in part, that §1498 did not waive Government's sovereign immunity to all infringements (direct infringements but not indirect infringements) but ultimately denied the Government's motion. Both parties appealed the court's decision on various grounds.

On appeal, the CAFC held, in its first decision in the Zoltek matter, that a "direct infringement" of a patent under 35 U.S.C. §271 was a predicate for Government liability under §1498(a). The CAFC further held that a "process" asserted to be covered by a method patent cannot give rise to an infringement "within" the United States unless each and every step of the process is performed in the U.S. Since some or all of the processes at issue in the litigation occurred in Japan, the §1498(a) remedy was not available. Zoltek Corp. v. United States, 442 F.3d 1345, 1350 (Fed. Cir. 2006) ("Zoltek I"). The CAFC did not address contractor patent infringement immunity under §1498(a). The case was remanded to the COFC for further proceedings. Id. at 1353.

On remand, Zoltek sought leave to amend its complaint to add an infringement claim against Lockheed based on 35 U.S.C. §271 and sought, further, to have the matter transferred to a federal district court in Georgia. The Government argued that §1498(a), while not waiving sovereign immunity for Zoltek's patent claims, nevertheless provided Lockheed immunity from Zoltek's suit and, therefore, there was no jurisdiction in the federal district court in Georgia. The COFC rejected the Government's arguments and found that it was in the interest of justice to transfer the case to Georgia. Subsequently, the COFC certified for appeal to the CAFC the issue of Lockheed immunity under §1498(a).

In considering the merits of the appeal, the CAFC came to a disturbing conclusion regarding the implications of its prior decision in Zoltek I. It stated the issue as follows:

In confronting the question of whether a contractor acting under Government authority could be held liable for patent infringement, in a situation in which we had previously held the Government not liable for the allegedly infringing actions of its contractor, we realized that one of two consequences would result. Either we had to conclude that a patentee’s well-pleaded complaint of infringement in the United States of a United States patent in these circumstances fails to state a cause of action against both the Government and the Government’s contractor, or we would have to override the long-standing understanding of the statutory framework that a contractor working for the Government is immune from individual liability for patent infringement occurring in the course of conducting the Government’s contract.

Zoltek II, at page 8.

The CAFC concluded, with one dissent, that neither of these options was acceptable and, instead, ruled to overturn its earlier decision in several respects. First, the Court ruled that the COFC and the CAFC's earlier decision had wrongly relied on case law to conclude that §1498(a) covered only direct infringements and not indirect infringements. The CAFC reviewed the prior case law relied upon in Zoltek I and found that statements used by the COFC to reach its decision regarding the scope of §1498(a) were dicta. Second, the CAFC found that unauthorized "sales" and "use" of products incorporating patented technology were indirect patent infringements falling within the coverage of §1498(a). Finally, the CAFC reversed its prior holding that all steps in a "process" or "method" patent must be infringed in the United States for §1498(a) to apply.

The practical result of Zoltek is that very few sales to the U.S. Government by contractors and subcontractors of products or services that infringe patents will not be covered by §1498(a). The Court's holding that indirect patent infringements are covered by §1498(a) largely achieves this result since §1498(a) states:

For the purposes of this section, the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or any person, firm, or corporation for the Government and with the authorization or consent of the Government, shall be construed as use or manufacture for the United States.

28 U.S.C. §1498(a) (emphasis added). This language, together with the Court's holding that not all processes in a process or method patent need be performed in the U.S., encompasses the overwhelming majority of patent infringement cases covered by §1498(a). If a product or service of a contractor is produced through the unauthorized use of a U.S. patent with the authorization and consent of the Government, any resulting patent infringement action must be brought against the Government in the United States Court of Federal Claims. This is, of course, the result that most government contractors believed to be the case prior to the Zoltek I decision.

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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