U.S. Patent Law Implications of Transnational Production
By: ADONIS A. NEBLETT & THOMAS R. HIPKINS
July 2006
Have you ever considered supplying raw materials to a foreign manufacturer with instructions for creating a final product? How about selling parts to foreign customers, knowing they will be incorporated into a larger final product? Owners of U.S. patents that cover such final products (“Covered Products”) may have something to say about your plans, even if the Covered Products never enter the U.S. These and other transnational production schemes raise interesting issues under the U.S. patent law.
Sections 271(a)-(c): No Problem Unless Complete Invention is Within the U.S.
Though patent holders commonly resort to sections 271(a)-(c) of the patent statute to establish infringement, these provisions pose little threat to U.S. exporters of raw materials or parts. They apply only when the complete patented invention—not merely parts or raw materials—are either imported into the U.S. or made, used, sold, or offered for sale within our borders. If the Covered Product is never within the U.S. borders, these statutory provisions do not apply.
Section 271(f): Suppliers of Components from the U.S. Take Notice
A patentee’s most potent weapon against many transnational production schemes is the lesser known section 271(f) of the patent statute. Providing raw materials along with manufacturing instructions may implicate the first subsection of section 271(f), while providing parts for incorporation into larger assemblies may implicate the second subsection of section 271(f)(2).
Section 271(f)(1): Actively Inducing from the U.S.
Section 271(f)(1) prohibits supplying “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 in the U.S.
Case law is clear that transnational production schemes in which nothing physical is supplied from the U.S. do not implicate section 271(f)(1). But, more recent cases take a more expansive view, suggesting that one need not supply very much that is physical to trigger section 271(f)(1). Supplying raw materials along with instructions for creating a Covered Product raises two critical issues under section 271(f)(1).
The first issue is whether the raw materials constitute “components.” Would section 271(f)(1) cover a U.S. entity that supplied steel to a foreign manufacturer from the U.S., along with instructions stating, “Make component X out of this steel, and then combine component X with component Y to make Covered Product Z”? Though the Federal Circuit has not weighed in, legislative history suggests that a “component” is something that need only be assembled into the Covered Product. If the Federal Circuit adopts this view, raw materials—materials that must first be fashioned into parts that only later can be assembled—likely would not constitute “components” for purposes of section 271(f)(1).
The second issue is how much of the Covered Product must be made of the supplied raw materials to constitute a “substantial portion.” Would supplying the raw materials that make up 20 percent of the Covered Product’s parts constitute a substantial portion? Fifty percent? Ninety percent? Again, the Federal Circuit has not taken a position. It would be unwise to simply conclude that a scheme was clear of section 271(f)(1) because it involved supplying only an insubstantial portion of a patented invention. Also noteworthy: Section 271(f)(1) can be triggered even if the materials supplied are staple articles.
Section 271(f)(2): Contributing from the U.S.
Section 271(f)(2) prohibits supplying “any component of a patented invention that is [i] especially made or especially adapted for use in the invention and [ii] not a staple article or commodity of commerce suitable for substantial noninfringing use, . . . [iii] knowing that such component is so made or adapted and [iv] intending that such component will be combined outside of the United States in a manner that would infringe” the patent if in the U.S.
Two issues concerning section 271(f)(2) emerge when analyzing schemes that involve supplying a part for incorporation into a larger Covered Product. First, unlike section 271(f)(1), section 271(f)(2) does not include a “substantial portion” requirement. Supplying a part that is incorporated into a machine with a thousand other parts may still trigger section 271(f)(2). Second, section 271(f)(2) exempts staple articles and commodities of commerce. The supplier of a staple article may know that the part will be incorporated into a Covered Product and may even intend such incorporation. One need only avoid actively inducing such incorporation, as active inducement would trigger section 271(f)(1).
The Takeaway
Suppliers of raw materials and components, and their counsel, should be aware of the patent issues raised by transnational production. Moreover, they should keep an eye on pending patent reform legislation. At least one such proposal would repeal section 271(f) altogether, though any repeal would likely apply only prospectively.