Closing the Bayer Loophole: An Analysis of Extraterritorial Patent Infringement Claims Under § 271(g)

Written By: Sounghun Lee Edited By: Esther Mulder Editorial Policy Introduction Traditionally, a U.S. patent could only be infringed by activities performed wholly within the United States. In 1972, the Supreme Court held in Deepsouth Packing Co. v. Laitram Corp. that exporting domestically made components of a patented product for assembly abroad was not a direct infringement under U.S. patent law.[i] In an effort to account for the growing global marketplace, Congress has revised and expanded the definition of “infringing activities” to include extraterritorial activities. This is reflected in 35 U.S.C. § 271, which generally outlines circumstances in which patents are infringed. In particular, § 271(g) provides the authority to enforce a U.S. process patent by prohibiting the importation of products made outside the U.S. that would otherwise violate the patent.[ii] It is important to note that § 271(g) only covers a patent over processes and not the products themselves.[iii] In Bayer AG v. Housey Pharmaceuticals, Inc., the defining case for § 271(g) jurisprudence, the Federal Circuit held that to have a claim under § 271(g), an imported product must be physical and tangible,[iv] without clearly defining which products are “physical and tangible”. This uncertainty is especially problematic with reference to new technologies. For example, it is unclear whether information contained in electronic signals is considered a physical and tangible product, and this leaves opportunities for infringers to take advantage of the gaps in case law. In light of these ambiguities, understanding the boundaries of § 271(g) is crucial in the age of advancing technologies and the burgeoning global economy. This Comment discusses the extraterritorial reach of § 271(g) and the shortcomings of the two decisions made by the Federal Circuit on this issue. Additionally, this Comment analyzes recent district court cases regarding the question of whether data or information contained in electric signals embedded in physical articles should be considered physical tangible products under § 271(g). The Bayer decision and the physical and tangible product requirement In 2003, the Federal Circuit confronted the question of whether § 271(g) covered intangible information. In Bayer, Housey was the assignee of U.S. process patents that could produce relevant information for drug manufacturing. Bayer subsequently produced drugs by using this patented process overseas and sold the drugs in the U.S. Id. at 1369. Housey contended that the information Bayer produced using the patented processes claimed in the Housey patents was a product, the importation of which violated Housey’s patents. Id. at 1370. The Federal Circuit dismissed Housey’s claims, agreeing with the district court that “in order for a product to have been “made by a process patented in the United States”, it must have been a physical article that was “manufactured” and that the production of information is not covered.” Id. at 1377. The Bayer decision to limit the applicability of § 271(g) left owners of U.S. patents for processes that yield intangible information powerless to sue competitors who used their patents abroad. For example, imagine a hypothetical U.S. patent that determines whether a patient has a certain disease. If an unlicensed competitor outside the U.S. receives a sample from a patient, carries the analysis abroad and communicates the result to the doctor and patient in the U.S., the competitor does not infringe § 271(g) under Bayer since she imports only an intangible information: the result of the assay.[v] Commentators have widely criticized the shortcoming of Bayer, lamenting that the lack of foreign protection of research tools would undermine the domestic protections for research tools.[vi] The NTP decision and its effect on the holding in Bayer The Bayer decision was revisited two years later when the Federal Circuit reached a similar decision in NTP, Inc. v. Research in Motion, Ltd.[vii] In NTP, NTP filed suit against RIM alleging that the BlackBerry system infringed NTP’s system and process claims, by sending e-mail messages from Canada to the U.S. Id. at 1287, 1289-90. NTP owned patents covering systems and methods for enabling mobile users to send and receive e-mail over wireless communication networks. Id. at 1287-89. In reversing the district court, the Federal Circuit held that NTP’s claims were directed to methods for the “transmission of information,” which does not entail the manufacturing of a product. Therefore, § 271(g) is inapplicable to the asserted method claims. Id. at 1323-24. It is notable that the NTP holding rejects the patent violation claim on the grounds that no patented production process was violated, NTP, 418 F.3d 1323-24, whereas Bayer rejected the patent claim on the grounds that no physical article was manufactured from the patented process. Bayer, 340 F.3d at 1377. The NTP court did not directly hold that email itself was a physical product; it simply agreed with Bayer’s holding that the “email packets,” which include the addresses and the inputted message flowing from the server to the receiver, do not have a tangible structure, even if they do have a tangible result. The court held that a “tangible result” is not enough for § 271(g) as previously stated in Bayer. Id. at 1323-24. Therefore, the NTP court indirectly confirmed Bayer’s requirement that the product must not only have tangible result but also be physical, and added another requirement that the patent itself must describe a production process. This requirement has weakened the under-protection problem established by Bayer by allowing even more ways for parties without patent rights to carry out patented processes. Under NTP, an infringer can even use a patented method of transmission to import goods or data into the U.S. without having rights to use the patented process. This leaves a significant loophole in the U.S. patent protection system. In the era of rapidly developing global economy and information technology, the transmission of data plays a significant role in economic activities of many enterprises. This fact is highlighted by the currently ongoing litigation between Realtime Data and about 40 major players in the U.S. financial industry, in which Realtime Data alleges that the defendants infringed Realtime’s market data compression and transmission patent.[viii] The method of distributing physical goods or transmitting electronic data can both be of significant value, and the NTP decision allows individuals to take advantage of these method patents overseas without proper licenses. The NTP court tried to respond to the physical and tangible requirement of Bayer by addressing the scope of § 271(a).[ix] The court held that “[t]he use of claimed system under § 271(a) is the place at which the system as a whole is put into service, i.e., the place where control of the system is exercised and beneficial use of the system obtained.” NTP, 418 F.3d at 1317. Therefore, a system patent can be infringed under § 271(a) even if a component of the system is located overseas, as long as the beneficial use of the system is obtained and control of the system is exercised in the U.S. The court then differentiated the process claims, holding that “a process cannot be used “within” the United States as required by § 271(a) unless each of the steps is performed within this country.” Id. at 1318. In NTP, the court found that a BlackBerry user located in the U.S. who retrieves emails controls the system and receives its beneficial use in the U.S. Therefore, even if the server was located in Canada, RIM could infringe NTP’s system claim in the U.S. under § 271(a). Id. at 1317. Some argue that the NTP court’s distinction between system and process claims under § 271(a) can provide remedy to the under-protection problem created by the Bayer decision.[x] To illustrate this point, consider the hypothetical disease-screening patent introduced above, and also assume that the patent contains a system claim that composes of a doctor, a patient, the person who carries the screening, and the sample from the patient. As discussed above, if an unlicensed competitor carries the analysis abroad and communicates with the doctor and patient in the U.S., the competitor does not infringe § 271(g) under Bayer since she is only importing intangible information. However, she would infringe the system claim under § 271(a) according to NTP, since the parties in the U.S. that stand to gain beneficial use of the system also exercise overall control of the claimed system and gain beneficial use of the system. Still, this NTP solution is insufficient to provide an adequate remedy to the narrow scope of the Bayer decision. First, the solution cannot protect the method claims that were already filed with the USPTO that do not include system claims. Second, the solution merely suggests that inventors draft their patents using system claims; however some inventions are difficult to be drafted in the form of system claims rather than method claims. In many cases, method claims are the only types of claims that an inventor can obtain, given the context of their inventions. Indeed, the Federal Circuit ruled in IPXL Holdings v. Amazon.com that a system claim that includes a method step is invalid as indefinite.[xi] The IPXL decision prevents an inventor to draft her invention that is predominantly a method as system claim so as to protect the patent from § 271(a) infringement as per NTP. Subsequent district courts’ decisions and the computer-readable media requirement In light of the Federal Circuit’s ambiguity on what is a physical and tangible product, parties in district court cases have argued that electronic signals, once embedded in a physical object such as a hard drive, must be considered a physical product. The basis for this argument comes from Microsoft Corp. v. AT&T Corp., which concerned potentially infringing computer software which was installed overseas.[xii] Even though the Microsoft decision is not directly relevant to § 271(g), the Supreme Court held that software can be a physical component, and so by analogy also a physical product when stored as machine readable object code, e.g., burned on a CD-ROM or written to a server hard drive. Id. at 451-52. Taking the Microsoft decision as instructive, the district courts in California have found infringements on cases in which the products at issue were not tangible in the traditional sense, and creatively shaped their opinions as to not disturb Bayer and NTP. In CNET Networks, Inc. v. Etilize, Inc., the patent at issue claimed methods and systems for automatically creating an electronic catalog of product information gathered from various Internet websites.[xiii] The Northern District of California held that the electronic catalog is a “product” within § 271(g), reasoning that an electronic catalog that is transmitted into the U.S. from abroad was a tangible product since it has a “physical, tangible embodiment once [the information] is expressed and stored on computer readable media in the form of magnetic fields on a hard drive”. Id. at 994. The court differentiated this case from Bayer by holding that the plaintiff’s patent was “directed toward product catalog stored on computer readable media,” and the product “is a physical article no different from a product catalog manufactured and assembled on paper bound with stitching, glue or staples.” Id. The CNET court therefore established that the product specified in the patent must be conceived as the catalog stored in the electronically readable media, not the catalog in abstract. This decision provided ways for inventors to protect their inventions from overseas infringement under § 271(g) by including a step that embeds the information into a readable media. The CNET decision was confirmed two years later by the Central District of California in Ormco Corp. v. Align Tech.[xiv] In Ormco, the patent claim directed to a three dimensional (“3D”) digital model of teeth. The 3D digital model was sent from foreign subsidiary to competitor’s headquarters in the U.S., and the court inquired whether the model was a product under § 271(g), and therefore infringed the patent. The court did not explicitly state that the 3D model was a physical product, but held that the defendant had failed to establish that the 3D model was not a “product made” under § 271(g). Id. at 1076. The computer readable media solution as provided in the CNET decision can remedy the loophole established by Bayer’s physical and tangible requirement. Under CNET, if the patent in suit in Bayer had contained an embedding process into a computer readable media, the cross border transmission of such data would have infringed the patent. This allows patent drafters of intangible data to circumvent the Bayer requirement and protect the patents from overseas infringement. Although CNET and Ormco significantly improved the protection of U.S. patents from extraterritorial infringements from the status quo shaped by Bayer, they also raise new issue regarding the product claim requirement in NTP. The NTP product requirement provides that the patent at issue must describe a production process. This requirement, along with CNET’s computer readable media requirement, raise a question of how detailed the process of embedding in computer readable media needs to be. The claims in the patent in suit in CNET described a “method of creating a product catalog stored on computer readable media by aggregating product information from a plurality of product information sources.”[xv] The claim further described electronically grouping, comparing, parsing and generating product information and storing the same in the media in fairly detailed steps. However, if the crucial step in CNET was the embedding process onto a physical article, is it sufficient for a patent to merely state that the information is being embedded or should the patent also have a detailed step by step description of the physical embedding process as the ’426 patent did? The district court’s decision in Yangaroo Inc. v. Destiny Media Tech. Inc., is instructive on this question.[xvi] In Yangaroo, the patent claimed a method and system for secure distribution of encrypted data files over a computer network. Id. at 1035. The plaintiff argued that the process of encryption produced a new data file, and since the data file is stored on a physical object, the file qualifies as a “product made” under § 271(g). The court did not address whether the encryption of existing data file amounts to manufacturing a physical product, but stated that, like the NTP claims, the patent only describes a method of distributing content, not a production process. Id. at 1038. This decision shows that the claim has to be explicit on the recording step, in that the claim clearly demonstrates the intention to produce a physical article. However, the question on how detailed the recording step needs to be is still largely unanswered. This issue is critical since it can determine the level of extraterritorial protection of many existing patent claims. The Federal Circuit should therefore clearly define the level of detail required for the physical embedding process. Conclusion In summary, the Federal Circuit in Bayer required that an imported product made by a process patented in the U.S. must be physical and tangible to be eligible for an infringement claim under § 271(g). The Federal Circuit added another requirement in NTP that the process patent must describe a production process, not a distribution or transmission process. The NTP decision on § 271(a) infringement tangentially remedied the under-protection problem of the Bayer decision, but their holding was insufficient since it only addressed system claims. The subsequent decisions by the district courts of California in CNET and Ormco remedied the Bayer problem by holding that digital information stored in computer readable media is a physical product covered under § 271(g), thereby circumventing Bayer’s physical and tangible requirement and increasing the extraterritorial protection of process claim. However they still left uncertainty regarding NTP’s production claim requirement. A district court’s decision in Yangaroo established that the drafters of process claims must be explicit about the intention to create a physical article by describing the recording process. However, the question of how much detail the recording process has to be described in is still largely unanswered. Going forward, the Federal Circuit should clearly define a “physical and manufactured product” as used in Bayer or affirm CNET’s computer readable media requirement to remedy the under-protection problem established by the Bayer decision. If the Court affirms, it should also clearly instruct the degree of detail the recording step must be described in, such that existing patent owners and drafters of new patents can accordingly protect themselves from extraterritorial infringements.

[i] Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518, 520-24 (1972).

[ii] “Whoever without authority imports into the United States or offers to sell, sells, or uses within the United States a product which is made by a process patented in the United States shall be liable as an infringer, if the importation, offer to sell, sale, or use of the product occurs during the term of such process patent.” 35 U.S.C § 271(g).

[iii] In U.S. patent law, a method, also called “process”, is one of the four principal categories of things that may be patented, through “utility patents”. The other three are a machine, an article of manufacture, and a composition of matter. In this Comment, the terms “method” and “process” are used interchangeably.

[iv] Bayer AG v. Housey Pharmaceuticals, Inc., 340 F.3d 1367 (Fed. Cir. 2003).

[v] Timothy R. Holdbrook, Extraterritoriality in U.S. Patent Law, 49 Wm. & Mary L. Rev. 2119, 2140-41 (2008).

[vi] See, e.g., Matthew Barthalow, Bayer AG v. Housey Pharmaceuticals: Protection for Biotechnological Research Tools Under Section 271(g) Found Wanting, Pierce Law Review (2005).

[vii] NTP, Inc. v. Research in Motion, Ltd., 418 F.3d 1282 (Fed. Cir. 2005).

[viii] Realtime Data, LLC d/b/a IXO v. Morgan Stanley, et al., Case No. 11 Civ. 6696 (KBF).

[ix] “[W]hoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.” 35 U.S.C. § 271(a).

[x] Brian D. Coggio & Eric Brandon Fugett, Strategies to Strengthen Your Patent: a Novel Claim-drafting Approach. Fish & Richardson, http://www.fr.com/Strategies-to-strengthen-your-paten/.

[xi] IPXL Holdings v. Amazon.com, 430 F.3d 1377, 1384 (Fed. Cir. 2005).

[xii] Microsoft Corp. v. AT&T Corp., 550 U.S. 437 (2007).

[xiii] CNET Networks, Inc. v. Etilize, Inc., 528 F.Supp.2d 985, 987 (N.D. Cal. 2007).

[xiv] Ormco Corp. v. Align Tech., Inc. 609 F.Supp.2d 1057 (C.D. Cal. 2009).

[xv] U.S. Patent No. 7,082,426, Claim 1.

[xvi] Yangaroo Inc. v. Destiny Media Tech. Inc., 720 F.Supp.2d 1034 (E.D. Wis. 2010).