Outside Looking In
What foreign manufacturers need to know about the reach of U.S. courts.
Amir Ghavi Esq., Lovells LLP
Despite the well-publicized economic downturn, the United States remains the world’s most prolific market for medical devices, accounting for nearly half of the world’s sales. This expansive and lucrative market, however, does not come without its responsibilities. Selling medical devices to the U.S. market means subjecting your company and its employees to intellectual property and commercial laws of the United States.
Legal proceedings in the United States can be costly, time-consuming and often frustrating. Mindful of this, many non-U.S. medical device manufacturers choose not to participate in the U.S. market, knowing that, at least with respect to intellectual property, those rights can only be enforced within U.S. geographical borders. Companies employing this strategy believe they are effectively immune from lawsuits in the United States as long as their companies are not based in, do not have any employees in, and do not direct or sell products in the United States.
One persistent question common among those companies is: At what point do my incidental interactions with the United States rise to the level where I may be sued in a U.S. court? Conversely, many U.S.-based device manufactures ask how they may be able to bring these non-U.S. companies to court for alleged violations of U.S. intellectual property law. The United States Court of Appeals for the Federal Circuit, the highest authority in the United States on patent law cases (excluding the U.S. Supreme Court), recently has shed light on those questions in the case Synthes v. GM dos Reis.1 The Synthes case implies that non-U.S. based companies may not be able to rest easy. It found that a handful of minor interactions with the United States by a Brazilian company were sufficient to subject the company to jurisdiction in a federal court.
How Are Non-U.S. Companies Sued in U.S. Courts?
To bring a proper lawsuit to a U.S. federal court, the aggrieved entity needs to be able to prove several elements, the most important of which are a cognizable claim and a court with proper jurisdiction over the defendant. In the context of intellectual property, the claims may consist of patent, trademark, copyright infringement or theft of trade secret. With respect to the party bringing the lawsuit, the claims are typically easy to discern. It is the raison d’etre of the lawsuit.
Which court has proper jurisdiction, however, can be a more difficult issue to determine when the defendant is a non-U.S. party. In order for a U.S. court to properly adjudicate a matter, and bind the parties, it must first have what is called “personal jurisdiction” over the parties. This legal concept refers to the court’s power to render a binding judgment against a party. Personal jurisdiction may be “general” or “specific.” General jurisdiction may be found where the target of the suit has systematic and regular business activity in the state of the federal court, whereas specific jurisdiction must relate the cause of action in the suit to “minimum contacts” with the forum state.
Personal jurisdiction in federal courts was created by congressional statute, and its limits are defined by notions of fairness found in the U.S. Constitution’s due process protections. In order to maintain fairness, the party over whom jurisdiction is sought must have purposefully directed its activities toward the United States. For example, fairness dictates that a party from Tibet that has never set foot in the United States, nor otherwise had any contact with the United States, could not properly be sued in a U.S. federal court. On the other hand, U.S. courts would find it a fair and proper application of jurisdiction to adjudicate in a U.S. federal court case against a multinational company headquartered in Dublin, Ireland, with several offices in the United States, hundreds of employees across several states and millions of dollars in product sales to American consumers. The difficulty, of course, comes when a case falls between those two extremes. The Synthes case, decided in April, provides additional guidance by interpreting how much activity in the United States is sufficient to support personal jurisdiction by a federal court over a non-U.S. company for patent infringement.
Synthes v. GM dos Reis—Trade Shows May Confer Jurisdiction
Trade shows are a staple of modern-day commerce. They present opportunities for companies to demonstrate their latest products or services to a wide audience that includes prospective customers, consultants, the press and even competitors. With this in mind, the Brazilian medical device manufacturer GM dos Reis (GMReis) embarked to San Diego, Calif., to exhibit its products at the 2007 American Academy of Orthopaedic Surgeons (AAOS) annual meeting.
GMReis designs, manufactures and markets orthopedic and neurological medical devices, including locking bone plates for the foreign market. On this occasion, GMReis had brought with it five samples of locking bone plates to exhibit, but not sell, at the AAOS meeting. Mindful that the firm had not applied for, much less received, proper U.S. regulatory approval, GMReis prominently displayed signs that indicated the products were not for sale in the United States. As an extra precaution, GMReis declined to provide pricing. While at its booth, GMReis was surprised to receive a summons and complaint filed for a proceeding against it in a California federal court.
The complaint alleged patent infringement and was filed by Synthes Inc., a global medical device manufacturer based in West Chester, Pa., that produces and markets instruments and implants. Synthes’ offerings include bone plates for human skeletal fixation, correction and regeneration. As a part of its intellectual property portfolio, it owns U.S. Patent No. 7,128,744 (the Synthes patent), which is directed to “a bone plating system and method for fracture fixation of bone.”
The business conflict here is obvious. GMReis manufactures and sells bone plates that are arguably covered within the terms of Synthes’ U.S. patent. The complaint had a single count: “GMReis has been and still is making, using, offering for sale, and/or importing into the United States products, systems and/or apparatuses that infringe the [Synthes] patent, all in violation of [U.S. patent law].” The applicable section of patent law provides that “whoever 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[e], infringes the patent.”2 However, remember that U.S. patents are generally only valid and enforceable within the geographic bounds of the United States3; a U.S. patent holder has no right to prevent a Brazilian device maker from selling devices in Brazil (or anywhere outside of the United States). GMReis was relying on this basic concept to shield itself from liability in the United States. The company had never sold its locking bone plates for use on humans in the United States.
One defense mounted by GMReis was that it was not subject to personal jurisdiction in the California federal court. GMReis explained to the court that it is a Brazilian company, without offices, employees or assets in California or the United States. While the company sells its products in Brazil, South America, Europe and Asia, it does not sell its locking bone plates in the United States.
In fact, GMReis had never sold any products in California and had only completed one sale in the United States—a non-human device to a veterinary medical supply company located in Massachusetts. GMReis products are not approved by the U.S. Food and Drug Administration (FDA) for use by humans in the United States. GMReis explained that it exhibited at the meeting to reach non-U.S. surgeons attending the show. GMReis further attested it did not sell nor use any of the sample locking bone plates while at the AAOS meeting and returned to Brazil with all of the plates. As noted above, the CEO went one step further to prominently display that the products were not approved by the FDA and not for sale in the United States, nor did it list or discuss prices at AAOS.
Synthes countered that there existed proper jurisdiction because GMReis had imported the plates into the United States, and by virtue of exhibiting at the trade show, implicitly offered to sell locking plates that infringe Synthes’ patent rights. Synthes alleged that, as a result of GMReis’s activities, it suffered and continued to suffer damages, including “impairment of the value” of the Synthes patent. Synthes requested that the court enter judgment that GMReis infringed the Synthes patent and also prevent GMReis from any future infringing activity. In essence, such an order would block GMReis from importing the locking bone plates into the United States and also would prohibit it from marketing, advertising or selling those products in the United States.
As is typical in a federal intellectual property lawsuit, the court ordered that GMReis produce documents to Synthes relating to the extent of GMReis’ general contacts with the United States. Through this process, Synthes learned that GMReis had attended several other trade shows since 2003, albeit not relating to locking bone plates. In addition to attending trade shows, Synthes learned that GMReis also had purchased a manufacturing machine and parts for a product unrelated to the suit from the United States for use in Brazil. GMReis also regularly purchases a product in the United States for resale in Brazil. Lastly, following the AAOS meeting, GMReis’ Web site received two inquiries from U.S. entities, seeking whether GMReis products would be available for sale in the United States. GMReis promptly responded that its products were not FDA approved and that it did not intend to sell its products in the United States in the future.
GMReis convinced the federal trial court that, as it relates to the locking bone plates, it did not have sufficient purposeful contacts with the United States for there to exist jurisdiction on them. The federal trial court agreed, dismissed Synthes’ suit and entered judgment for GMReis. However, Synthes appealed the decision.
On appeal, Synthes argued GMReis is subject to personal jurisdiction because it alleges that GMReis imported products into the United States that infringe the Synthes patent, and that GMReis used and offered to sell infringing products when it displayed and promoted the locking bone plates at the AAOS meeting.
GMReis replied that it never imported, used or offered for sale the allegedly infringing bone plates in the United States. As a result, GMReis argued it cannot fairly be said that it purposefully directed its activities at residents of the United States. It also argued that bringing sample locking bone plates into the United States and displaying them at a trade show without identifying a price for them did not constitute an import, use or offer to sell. It argued its extensive and well-documented efforts to avoid affecting, or being perceived as entering, the U.S. market negated any potential finding of purposeful availment of the United States. Without purposeful availment of the United States, GMReis argued there would be no fair basis to confer jurisdiction. Given everything, GMReis contended it would be unjust and violate due process to subject it to the court’s jurisdiction.
Relevant case law in this area is mindful of basic notions of fairness. It requires that defendants must have minimum contacts with the forum in which they are being sued. In order to find “minimum contacts,” there must exist some act by which the defendant purposefully avails himself of the privilege of conducting activities within the forum—and invoking the benefits and protections of the forum’s laws. This requirement ensures the defendant will not be pulled into a jurisdiction solely as a result of random, fortuitous or attenuated contacts.
The appeals court found in this case that GMReis’ contacts with the United States included attendance at trade shows, purchases of parts and a machine, the sale of a product for a veterinary application to one customer and a pair of consultations about product development. These were not enough in the court’s eyes to constitute continuous and systematic general business contacts. However, the court did find that GMReis’ importation of bone plates, even only to show at the trade show, supported a finding that GMReis purposefully availed itself of the United States’ jurisdiction. Because the bone plates are at issue in the patent infringement suit, the court reasoned that GMReis’ actions in bringing the plates to exhibit at the trade show were enough to establish the minimum contacts required and that finding personal jurisdiction against them would be fair.
Notably, the court considered whether its decision would have the effect of chilling trade show attendance by non-U.S. companies. It ultimately decided that U.S. doors are open to trade and commerce, but if a party brings allegedly infringing products to a trade show, then jurisdiction could exist over the party.
Take-Away Lessons for Non-U.S. Companies
It is hard to know for certain, but it seems unlikely that the court would have found jurisdiction against GMReis had it not brought samples of the locking bone plates to the 2007 AAOS meeting. The case does not mean, however, that exhibiting at trade shows is the only activity that may land a non-U.S. manufacturer—thought to be outside of U.S. jurisdiction—squarely within it.
The Synthes case reminds us that the reach of U.S. law, and specifically U.S. intellectual property law, can be much broader than it may seem on the surface. Companies should be mindful of the extent of U.S. jurisdiction when planning and executing their plan to expand geographic reach. This includes marketing and advertising, especially as it relates to corporate Web sites. As with the case of GMReis, nuances in U.S. law can inadvertently create headaches for companies that could have otherwise been avoided by careful planning and knowledgeable counsel.
Ideas for U.S.-Based Companies
For U.S.-based companies seeking to halt infringing activity by a non-U.S. company, the courts have provided a basic checklist of activity to look for.
Examples include whether the non-U.S. company maintains offices or subsidiaries in the United States; has distributors, licensees, or employees in the United States; or sells or directs products to the U.S. market. If the answer to any of these is yes, then a federal court should have jurisdiction. If, as in the Synthes case, none of those contacts with the United States exist, then the prospective plaintiff must dig deeper.
A second-level analysis may require hiring a private investigator to research the extent of the non-U.S. company’s activities in the United States. Depending on the outcome of the investigation, knowledgeable legal counsel can advise what steps, if any, may be taken to properly bring the potential defendant within the jurisdiction of a federal court.
Companies doing business both in the U.S. and outside of it should remain mindful of the scope of a U.S. federal court’s jurisdiction. While it may not make sense to alter a company’s business plan or growth strategy based on jurisdictional issues alone, it does certainly help inform a business’s risk management. In the least, it also helps to avoid an unpleasant surprise like being served with a lawsuit while attending a trade show.