Contract Negotiations in the United States Do Not Transform Foreign Manufacture and Sale into Infringement of a United States Patent

Authored by D. Brian Kacedon, Robert C. MacKichan III, and John C. Paul

Abstract

A California federal district court recently awarded summary judgment of no infringement to a Taiwanese manufacturer of component parts used in smartphones and tablets imported by third parties into the United States. Although the Taiwanese manufacturer's sales contracts were executed in the United States, they contemplated strictly foreign manufacture and delivery. The court thus found that the foreign manufacturer and its U.S. subsidiary did not sell or offer for sale the accused products in the United States and could therefore not be liable for direct patent infringement.

In Ziptronix, Inc. v. OmniVision Technologies, Inc.,¹a Taiwanese contract manufacturer and its U.S. subsidiary moved for summary judgment of no infringement because the allegedly infringing activity occurred only in Taiwan, with the exception of negotiations and contracting in the United States. The district court granted summary judgment, finding that even if negotiation and contracting occurred in the United States, there could be no direct infringement under U.S. patent law because the contracts contemplated delivery and performance to take place solely abroad. Additionally, the patent holder failed to present evidence that the Taiwanese manufacturer's customer, OmniVision, committed an underlying act of direct infringement. Thus, the court concluded, the Taiwanese manufacturer and its U.S. subsidiary did not commit or induce infringing acts "within the United States."

Background

Plaintiff Ziptronix, Inc. sued three entities for infringement of patents on technology related to image sensor structures and semiconductor processing for fabricating image sensors. Defendant OmniVision, a Delaware corporation headquartered in California, designs the accused image sensors, which third-parties incorporate into devices such as tablets and smartphones. OmniVision works with a number of manufacturing partners in Asia to produce the image sensors, including codefendants Taiwan Semiconductor Manufacturing Company ("TSMC") and its U.S. subsidiary, TSMC North America ("TSMC NA").

TSMC manufactures the semiconductor wafer components of the image sensors and TSMC NA facilitates sales of the wafers with U.S. customers. A typical transaction proceeds as follows: TSMC generates a price quote, which it provides to TSMC NA for distribution to U.S. customers, like OmniVision. If OmniVision agrees to the quote, OmniVision sends a purchase order to TSMC NA. TSMC NA transmits the purchase order to TSMC, and it manufactures the wafers in Asia. TSMC NA sends an invoice to OmniVision; OmniVision electronically pays TSMC NA in the United States. TSMC NA then transfers a portion of the payment to TSMC in Taiwan. TSMC delivers the completed wafers in Taiwan to either OmniVision or one of OmniVision's vendors. At that point, other vendors in Asia add additional components to the wafers. Once complete, the image sensors are delivered to third-party fabricators for use in final products such as tablets and smartphones. Third parties import into and sell in the United States tablets and smartphones containing the image sensors.

The District Court's Grant of Summary Judgment

Ziptronix alleged both direct and indirect infringement by TSMC and TSMC NA. Direct infringement of a U.S. patent requires accused conduct to occur "within the United States." Because Ziptronix did not dispute that the TSMC entities did not make, use, or import the accused image sensors into the United States, the court's direct infringement analysis focused on whether the transactions between the TSMC entities and OmniVision constituted a sale within the United States. In determining the location of a sale under U.S. patent law, the court explained that it looks beyond the location of negotiation and contracting and considers other factors such as the place of performance. And with respect to offers to sell, the court noted that it focuses not on the location of the offer, but the location of the future sale that would occur pursuant to the offer.

Ultimately, the court held that the place of manufacture and contemplated sale determine whether the TSMC entities sold or offered for sale an accused product within the United States. The court relied on an earlier case that found a sale "within the United States" occurred because delivery and performance were to take place in the United States notwithstanding that contract negotiations took place in Norway. The district court also relied on the presumption against applying U.S. patent law beyond U.S. borders. The court concluded that, at most, the TSMC entities engaged in domestic contracts for foreign sales, which the court found does not constitute a sale "within the United States."

The court next considered whether the TSMC entities engaged in indirect infringement by inducing another's direct infringement. The court emphasized that indirect infringement, which can encompass extraterritorial conduct, requires underlying direct infringement. The court held that TSMC could not have actively induced TSMC NA to engage in direct infringement based on its finding that TSMC NA had not directly infringed. With respect to OmniVision, the court found that there was no underlying direct infringement to support an indirect infringement finding. The court cited Ziptronix's failure to present any evidence that OmniVision uses, offers to sell, or sells the accused image sensors within the United States or imports the accused image sensors into the United States. Instead, the record showed that, as with the TSMC entities, OmniVision's sales occur outside the United States. Finally, the court refused to consider whether the TSMC entities induced infringement by OmniVision's customers because the complaint did not allege this theory of liability.

Strategy and Conclusion

This case demonstrates that upstream actors whose conduct occurs entirely outside of the United States may not, in certain circumstances, be liable for patent infringement in the United States. This case also demonstrates the importance of due diligence in crafting a complaint, including identifying alleged direct infringers when indirect infringement is at issue.

Endnotes

¹The Ziptronix decision can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2014/Ziptronix.pdf.

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