June 2006

IP Update: Foreign Method Steps

By Lee A. Hollaar

The U.S. Court of Appeals for the Federal Circuit, the court that hears patent appeals, has made it much easier for an infringer of a claim form commonly used for computer-based inventions to avoid liability, and in the process made it advantageous for companies to offshore parts of their operations.

The case is NTP v. Research in Motion, which has had extensive coverage in the press because of the threat to shut down the Blackberry system. But before that, the Federal Circuit had ruled that the method claims of NTP's patents could not be infringed, if any part of the method was performed outside of the United States. The case went forward because the Federal Circuit also held that systems claims in the same patent were infringed because customers in the United States were the ones who used the system.

The lessons are clear. If the patent claims a process and you wish to infringe, just offshore one or more of the steps. But you can't use this trick if the patented process is used to produce a product. A special provision of the patent statutes added in 1988 makes product importation into the United States an infringement. This particular quirk in the law is especially troublesome for computer-based inventions, where the process performs some task, but does not produce a product.

And if you are the United States government, or one of its contractors, it may be even easier to avoid infringement liability by offshoring, because of a second case just decided by the Federal Circuit.

The Court of Federal Claims has exclusive jurisdiction in all patent claims against the United States. Unlike normal infringers who are liable whenever they make, use, offer to sell, sell in the United States, or import into the United States, a patented invention (35 U.S.C. 271), the United States and its contractors are only liable when it is used or manufactured in the United States (28 U.S.C. 1498).

In Zoltek v. United States, a company building a stealth fighter for the United States had a subcontractor in Japan produce materials covered by Zoltek's patent. If the company were not a government contractor, there would be infringement by importing a product made by a patented process. But because the government contractor was not using the patented process to manufacture the materials in the United States, the Court of Federal Claims did not have jurisdiction under Section 1498. The United States and its contractor had found another loophole that the Federal Circuit then upheld.

Congress needs to amend the patent statutes to make it clear that there is infringement of a process patent when its ultimate use within the United States involves steps performed both in the United States and in foreign countries. At the same time, Congress should amend the jurisdiction of the Court of Federal Claims so that the United States and its contractors are liable for anything that would be an infringement were it done by others.

IEEE-USA's Intellectual Property Committee is currently examining the form of such legislation, and will be making Congress aware of the loopholes that have been created, and how they now reward offshoring activities to foreign countries.

Until then, the lessons are clear. If you are a government contractor, produce any materials covered by a process patent in a foreign country. And if there is a patented process that does not produce a product, particularly for a computer-based method, make sure you offshore at least one of the steps to avoid patent liability.

For More Information

The Federal Circuit's opinion in NTP v. Research in Motion can be found at www.fedcir.gov/opinions/03-1615r.pdf. Its opinion in Zoltek v. United States is at www.fedcir.gov/opinions/04-5100.pdf.

Information about the Intellectual Property Committee can be found at www.ieeeusa.org/volunteers/committees/ipc.

Lee Hollaar is a professor in the School of Computing at the University of Utah, where he teaches computer and intellectual property law, and a registered patent agent. He is a past chair of IEEE-USA's Intellectual Property Committee, and the author of Legal Protection of Digital Information (BNA Books, 2002), available online at no cost at http://digital-law-online.info.  Comments may be submitted to todaysengineer@ieee.org.