United States: Intellectual Property - Patents - The World In U.S. Courts: Summer-Fall 2018

Last Updated: December 6 2018
Article by   Orrick

Dutch Parent Exercises Insufficient Control over US Subsidiary to be Deemed its "Alter Ego"

Britax Child Safety, Inc. v. Nuna International B.V., US District Court for the Eastern District of Pennsylvania, July 26, 2018

The plaintiff Britax alleged that a competitor, a Dutch company called Nuna and its US subsidiary, committed patent infringement in connection with the sale of child's car seats. Nuna (Netherlands) argued that it should be dismissed from the case because it was not subject to the Court's jurisdiction.

The Court observed that specific personal jurisdiction (jurisdiction based on a defendant's contacts with the forum) is analyzed under a three-part test: "(1) whether the defendant purposefully directed its activities at residents of the forum state; (2) whether the claims arise out of or relate to those activities; and (3) whether assertion of personal jurisdiction is reasonable and fair." Notably, the Court also stated that, in the context of a patent infringement claim, "the specific jurisdiction analysis centers on the nature and extent of the commercialization of the accused products or services by the defendant in the forum."

Britax first argued that Nuna had "purposefully directed" its actions at Pennsylvania through operation of a website in The Netherlands that promoted Nuna products worldwide and was accessible in Pennsylvania. The Court stated that operation of a website could support jurisdiction only where evidence showed "direct targeting of the forum," and that was not the case. Indeed, Nuna stated that it did not itself "operate" or manage sales over the website but had contracted those functions to a third party. Finally, the Court noted that even if Nuna's sole employee, as alleged, worked in the forum district "eight to twenty days a year," Britax could not satisfy the requirement that its claims have arisen out of those contacts.

Britax also argued that Nuna's US subsidiary, over which jurisdiction was clear, was merely an "alter ego" or "agent" of its parent and so the former's presence in Pennsylvania should be attributed to the Dutch company. The Court explained that a parent's control over a subsidiary could be so strong as to require the subsidiary's independent corporate status to be disregarded but, citing a ten-factor test, only if "clear and convincing evidence" shows that the "parent company is operating the day-to-day operations of the subsidiary such that the subsidiary can be said to be a mere department of the parent." Britax had not made allegations sufficient to meet that standard, but the Court permitted discovery to be taken to discover further facts.

[Editor's note: The Britax Child Safety case is also addressed in the Personal Jurisdiction/Forum Non Conveniens section of this report.]

Personal Jurisdiction Over Brazilian Company Upheld Despite Role of Third Party in Conduct Targeting the US

M-I Drilling Fluids UK Ltd. v. Dynamic Air Ltda, US Court of Appeals for the Federal Circuit, May 14, 2018

M-1 Drilling is a UK company that owns five US patents relating to the disposition of waste from undersea oil wells. It sued Dynamic Air, the Brazilian sub of a US company, for infringement, based on the installation of allegedly infringing products on US-flag ships engaged in oil exploration off the coast of Brazil. Personal jurisdiction was based on Federal Rule of Civil Procedure 4(k), under which personal jurisdiction may be based upon a defendant's contacts with US as a whole, as opposed to contacts only with the forum State, where the plaintiff has brought claims under a federal statute and the defendants' contacts with any one State are insufficient to support jurisdiction in that State. The trial court had dismissed the case because the decision to employ the US flag vessels was made unilaterally by the Brazilian oil company, Petrobras, not by the defendant.

The Court of Appeals for the Federal Circuit, which reviews all appeals of patent infringement cases, observed that the Due Process Clause of the US Constitution only permitted personal jurisdiction to be asserted where "(1) the defendant purposefully directed its activities at residents of the forum; (2) the claim arises out of or relates to the defendant's activities with the forum; and (3) assertion of personal jurisdiction is reasonable and fair." The first factor was critical here, and the Court of Appeals stated that, with respect to patent infringement claims, "the jurisdictional inquiry is relatively easily discerned from the nature and extent of the commercialization of the accused products or services by the defendant in the forum." Whether Dynamic Air had installed machinery on US flag vessels at the direction of Petrobras was found not a defense to personal jurisdiction, especially where Dynamic Air continued its conduct in the face of objections by M-I Drilling. The Court of Appeals also observed that, while Petrobras may have specified the location of Dynamic Air's performance, Dynamic Air had itself chosen to utilize the allegedly infringing products.

The Court of Appeals next determined that the assertion of personal jurisdiction over Dynamic Air was "reasonable and fair," noting that the determination required application of a five-factor test evaluating: "(1) the burden on the defendant; (2) the forum's interest in adjudicating the dispute; (3) the plaintiff's interest in obtaining convenient and effective relief; (4) the interstate judicial system's interest in obtaining the most efficient resolution of controversies; and (5) the shared interest of the states in furthering fundamental substantive social policies." The first three factors "strongly favored" a finding of fairness because the plaintiff is a US company seeking to enforce its US patents and the burden of international litigation has been reduced by advances in electronic communication. The fourth and fifth factors were deemed largely irrelevant because the case proceeded under Rule 4(k), in which contacts with the entire US were relevant and there was not competing interests of different US States to be considered. The Court of Appeals also concluded that relations between the US and Brazil would not be injured if the case were to proceed. Because this was not one of the "rare cases" in which jurisdiction over a defendant with sufficient US contacts was nonetheless deemed unfair, the case was sent back to the trial court for further proceedings.

[Editor's note: The MI Drilling Fluids case is also addressed in the Personal Jurisdiction/Forum Non Conveniens section of this report.]

Appointment of US Distributor Showed Targeting of US Market Sufficient to Support Personal Jurisdiction Under Rule 4(k)(2)

RegenLab USA LLC v. Estar Technologies Ltd., US District Court for the Southern District of New York, August 15, 2018

RegenLab is the US affiliate of a Swiss manufacturer of medical devices. It sued Estar, an Israeli company, and Eclipse, Estar's sole US distributor, among others, alleging patent infringement. The defendants moved to dismiss for lack of personal jurisdiction.

As a preliminary matter, the Court observed that personal jurisdiction in patent cases is determined by the law of the US Court of Appeals for the Federal Circuit, which first looks to whether the forum State's "long-arm" statute has been satisfied, and then whether the exercise of personal jurisdiction is consistent with the Due Process Clause of the US Constitution. The Court found the New York statute (which differs in some respects from the Constitutional test) to be satisfied, and so turned to the requirements of the Due Process clause.

Federal Circuit law imposes a three-part Due Process test to establish that specific personal jurisdiction exists: "(1) whether the defendant purposefully directed activities at residents of the forum; (2) whether the claim arises out of or relates to those activities; and (3) whether assertion of personal jurisdiction is reasonable and fair." The "purposeful direction" prong of the test implicated the "stream-of-commerce" theory of personal jurisdiction, which focuses on the presence in the forum of products that are the subject of suit. Noting that the "precise requirements" of that theory remained "unsettled," the Court concluded that the test required at a minimum some "targeting" of the forum by the defendants. It found no such "targeting" by Ester merely from evidence that Ester's distributor, Eclipse, hired New York sales representatives and made substantial sales into the State. Likewise, emails between Ester and three New York doctors were dismissed as "isolated" and insufficient to show "purposeful direction."

Alternatively, the plaintiff argued that personal jurisdiction could attach to Ester under the "federal long-arm statute," Federal Rule of Civil Procedure 4(k)(2), which requires that the claim arise under federal law (which was the case) and that the assertion of jurisdiction satisfy Due Process. Notably, in a Rule 4(k)(2) analysis a defendant's contacts with the US as a whole, not merely the forum State, are considered. The Court found this alternative formulation of the Due Process requirement satisfied by Estar's employment of an exclusive US distributor and its shipment of products to the US for resale. Jurisdiction was also "fair and reasonable—another Due Process requirement—mainly because New York had an interest in protecting its residents from patent infringement, the litigation would not be unduly burdensome for Estar given modern communication options, and no institutional considerations suggest that New York would be a poor forum. A final requirement of Rule 4(k)(2) is that the defendant not be subject to personal jurisdiction in any one State. The Court noted a difference among courts as to which party bore the burden of making this showing and concluded that Ester would be required to identify any other State where suit is possible if it wished to avoid application of the Rule, a point which Ester had not yet addressed.

[Editor's note: The RegenLab USA case is also addressed in the Personal Jurisdiction/Forum Non Conveniens section of this report.]

Personal Jurisdiction in Texas Exists Where Chinese Cell Phone Manufacturer Distributed All its Products Through a Texas-Based US Subsidiary

Seven Networks, LLC v. ZTE (USA), Inc., US District Court for the Northern District of Texas, May 30, 2018

Seven Networks holds US patents designed to improve the battery life of cell phones. It sued the Chinese cell phone manufacturer ZTE and its US subsidiary in Texas for patent infringement. ZTE China moved to dismiss based on a lack of personal jurisdiction.

The District Court observed that personal jurisdiction must satisfy the requirements of both State law and the Due Process Clause of the US Constitution, but that only the latter test mattered in the present case because Texas law permits jurisdiction to be asserted to the full extent permitted by the Constitution. The District Court also noted that jurisdiction would have to be assessed under the "stream of commerce" theory applicable to products sold outside the forum but allegedly causing in-forum injuries as a result of movement through the distribution chain. The requirements of the "stream of commerce theory" are unsettled, and in this patent infringement case were to be decided under the law existing in the US Court of Appeals for the Federal Circuit. The District Court characterized Federal Circuit law as permitting jurisdiction to attach where "the manufacturer purposefully shipped products through an established distribution channel with the expectation that those products would be sold in the forum." It found that test to be met in this case because ZTE China's US subsidiary—created specifically for distribution of products in the US—was based in Texas and from there distributed products to destinations in Texas and elsewhere.

The District Court also found that this was not one of the "rare cases" in which a defendant's contacts with the forum were sufficient but other factors would cause the assertion of jurisdiction to "violate traditional notions of fair play and substantial justice." ZTE was correct in stating that it would be burdened by litigation in the US, but the District Court found these burdens substantially minimized by modern electronic communication, especially for a multinational corporation, and in any event outweighed by the "substantial interests" of the US and Texas in prohibiting patent infringement within their borders.

[Editor's note: The Seven Networks case is also addressed in the Personal Jurisdiction/Forum Non Conveniens section of this report.]

In Patent Infringement Suit Between Two US Companies Selling a Component to Apple for Use in iPhones, 98.8% of Infringing Sales Excluded Because Patent Holder Could Not Establish that They Reflected US Domestic Sales

Texas Advanced Optoelectronic Solutions, Inc. v. Renesas Electronics America, Inc., f/k/a Intersil Corporation, US Court of Appeals for the Federal Circuit, July 9, 2018

TAOSI, a US manufacturer of ambient light sensors for electronic devices, sued a US competitor, REAI, for patent infringement and related violations after discussions over a potential merger ended. The trial court found in favor of TAOSI but excluded from damages 98.8% of REAI's relevant sales, which occurred outside the US. REAI appealed the finding of liability but TAOSI cross-appealed, arguing among other issues that its damages had been improperly limited.

The Court of Appeals noted that the Patent Act provides for damages "adequate to compensate for the infringement," and that the statute has no extraterritorial effect. Thus, "substantial activities regarding sales" were required to occur in the US for the sales to constitute US transactions capable of infringing. The case principally involved REAI's sales of sensors to Apple, which were incorporated into cell phones manufactured in China. To determine whether those transactions were US domestic, the Court examined the trial record and found little supporting an inference of US activity. Specifically, for example, REAI asserted that negotiations and some product testing occurred in the US, but the record showed that "manufacture and packaging" occurred outside the US, as were the locations to which products were shipped. Moreover, REAI did not establish even that it reached a "general business agreement" in the US regarding the sales, let alone an enforceable contract for the sale of a specific number of units. Nor were price negotiations conducted in the US. The potential significance of at least some of the infringing products returning to the US in finished iPhones was not discussed in the opinion.

Supreme Court Holds that Damages Based on Export of Infringing Product from the US did not Implicate Potential Extraterritorial Application of Patent Act

WesternGeco LLC v. ION Geophysical Corp., Supreme Court of the US, June 22, 2018

WesternGeco LLC owns patents for a system used to survey the ocean floor. ION Geophysical Corp. began selling a competing system that was built from components manufactured in the US, shipped to companies abroad, and assembled there into a system indistinguishable from WesternGeco's. WesternGeco sued for patent infringement and after trial the jury found ION liable and awarded WesternGeco damages in royalties and lost profits. ION moved to set aside the verdict, arguing that WesternGeco could not recover damages for lost profits because the damages provision of the Patent Act does not apply extraterritorially. The District Court denied the motion, but the Federal Circuit reversed. On review by the US Supreme Court, WesternGeco's award for lost profits was found to be a permissible domestic application of the damages provision of the Patent Act.

The Court first observed that the presumption against extraterritoriality assumes federal statutes "apply only within the territorial jurisdiction of the United States." The two-step framework for deciding extraterritoriality questions asks, first, "whether the presumption . . . has been rebutted." If not, the second step asks "whether the case involves a domestic application of the statute." Courts make the second determination by identifying the statute's "focus'" and then asking whether the conduct relevant to that focus occurred in US territory. If so, the case involves a permissible domestic application of the statute. Although the Court stated it was "usually preferable" to begin with step one, the Court elected to proceed with the second step here, making a determination of the damage provision's extraterritoriality unnecessary.

The Court then determined the statute's "focus"—i.e., "the object of its solicitude"—and in so doing analyzed the provision as it worked in tandem with other provisions of the Patent Act. Section 284, the Patent Act's general damages provision, states that "the court shall award the claimant damages adequate to compensate for the infringement." The focus of that provision is "the infringement." The "overriding purpose" of §284 is to "afford patent owners complete compensation" for infringements. But Section 271 identifies several ways that a patent can be infringed, and the Court noted that to determine §284's focus in a given case, the type of infringement that occurred must be identified. In the case at bar, §271(f)(2) was the basis for WesternGeco's infringement claim and the lost-profits damages that it received. That provision regulates the domestic act of "suppl[ying]" a product from US and thus the provision vindicates domestic interests. In sum, the focus of §284 in a case involving infringement under §271(f)(2) is on the act of exporting components from the United States. Given that, the relevant conduct in the present case clearly occurred in the United States.

In reaching this conclusion the Court rejected ION's argument that the proper focus of the damages provision was the actual award of damages, noting that payment of damages was merely the means by which the statute achieves its end of remedying infringements. The overseas events giving rise to the lost-profit damages here were incidental to the infringement.

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