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High Court May Put Limits on Foreign Reach of U.S. Patents

 A case that the U.S. Supreme Court agreed to hear Monday may make it tougher for companies to use American patent law to collect damages for overseas conduct, as the justices examine a Federal Circuit ruling that held a company liable for shipping only a single component abroad.

The high court granted a petition by Life Technologies Corp., which supplied an enzyme to a facility in the U.K. that manufactured allegedly infringing DNA test kits sold worldwide and argued that the appeals court's decision finding it liable "dangerously expands the extraterritorial reach of U.S. patent law."

The case, in which patent owner Promega Corp. won a $52 million verdict, involves a statute holding that it is an act of infringement to supply from the U.S. "all or a substantial portion of the components" of a patented invention so as to "actively induce" the combination of the components outside of the U.S.

The Federal Circuit held in the case in 2014 that a single commodity component can be a "substantial portion" if it is a sufficiently important part of the invention, but Life Tech argued that the statute clearly refers only to the quantity of the components, and that a single component should not give rise to a finding of infringement.

By deciding whether shipping a single component abroad is enough for infringement, or whether a company needs to supply the bulk of them, the high court will determine the level of potential infringement exposure companies face when exporting components.

"Global operating companies may watch this verdict closely, hoping that 'active inducement' is interpreted narrowly, allowing greater freedom for those companies to export items which may be one component of a patented product," said Case Collard of Dorsey & Whitney LLP.

The case hinges almost entirely on what the phrase "substantial portion" means in the statute. Did Congress intend for it to refer to the importance of the component supplied from the U.S. to an invention made abroad, or was it aiming to limit infringement liability to situations where nearly all of the components of something manufactured outside American borders comes from the U.S.?

The difference is crucial for companies that ship components from the U.S. overseas, since if the Federal Circuit's ruling stands, they could be on the hook for damages they would otherwise not be.

"A U.S. entity could be doing something very small and be held liable for a violation of U.S. patent law based on the bulk of the activity taking place outside of the U.S.," said Kurt Lockwood of Kacvinsky Daisak Bluni PLLC.

There is a general legal presumption that the applicability of American patent law outside the U.S. is limited, and the position taken by Life Tech appears to be more in line with that view. Under their reading of the statute, the law would reach some activity taking place outside the U.S. but a smaller portion.

"The concern here is extending the reach of the provision too far," Lockwood said. "There is more globalization of companies in today's economy, and it’s not uncommon for companies to have manufacturing sites all over the world."

The justices took the case at the urging of the U.S. solicitor general, who said that "the Federal Circuit's holding is incorrect, and it subjects domestic exporters to the threat of liability for supplying a single staple article into the global stream of commerce."

If the Federal Circuit's decision were reversed, it would return the law to where most people thought it was before the ruling: that shipping a single component overseas would not be enough to give rise to induced infringement, said Mark Baghdassarian of Kramer Levin Naftalis & Frankel LLP. That would also be consistent with the Supreme Court's past inclination to limit the overseas reach of U.S. patent law, he noted.

A decision leaving the Federal Circuit's ruling intact could expand infringement liability, clearing the way for patent owners to win greater damages that would include worldwide sales of accused products, not just those in the U.S., he said.

"Should the Supreme Court affirm the Federal Circuit, we very well could be off to the races with a new avenue to collect significantly more damages in certain patent cases," Baghdassarian said.

The Supreme Court has developed a reputation for frequently reversing the Federal Circuit, and the decision to take the Life Tech case suggests it may be inclined to do so again, Collard said. Reversing the Federal Circuit in this case would also be a win for accused infringer Life Tech, and "the Supreme Court has been on a streak friendly to defendants," he said.

Exporting only one component of many should not rise to the level of a "substantial portion" of the components, in the absence of proof that the single component is a particularly significant element, said Jonathan Tropp of Day Pitney LLP.

"Because enforcing the statute as written is both consistent with the court's jurisprudence and protects U.S. manufacturing and export interests at least to some degree, Life Tech may be yet another in the growing line of cases decided by the Roberts court in which the court reiterates that 'promot[ing] the progress of science and useful arts' does not mean enlarging the scope of patent rights," he said, quoting the language from the U.S. Constitution establishing patents and copyrights.

The Supreme Court decided two patent cases in the past term and has agreed to hear three so far in the fall term, illustrating that even after a busy few years on the patent front, the justices have not lost their taste for this area of the law, said John O'Quinn of Kirkland & Ellis LLP.

"Some wondered if the Supreme Court would continue to take up patent cases," he said. This decision "shows that the Supreme Court remains interested in these types of issues."

The case is Life Technologies Corp. et al. v. Promega Corp. et al., case number 14-1538, in the U.S. Supreme Court.