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VOICES FROM THE INDUSTRY: Weak dollar can actually help Hoosier manufacturers

April 21, 2008

As the U.S. dollar continues to weaken against foreign currencies, it actually benefits many Indiana companies that are actively pursuing sales abroad.

M a n u fa c t u r e r s should pursue crossborder sales and supply-chain relationships to capitalize on the improved price points resulting from the lower dollar. However, manufacturers should be aware of the reach of U.S. patent law, which U.S. courts are regularly extending to cover activities performed outside our borders.

Capitalizing on conditions

Although the weaker dollar inflates costs of imported raw materials, organizations providing specialty manufacturing and processing equipment can benefit from the devalued dollar by offering product at prices foreign competitors cannot match. Thus, U.S. manufacturers can win out over foreign competitors based on price and innovative manufacturing equipment components and design.

However, the rapid pace of globalization and increased size of emerging foreign markets has reduced the relative economic power of the U.S. market. This has intensi fied U.S. markets and government interest in expanding the territorial reach of U.S. law to impose patent-infringement liability on intra-territorial manufacturing operations.

Historically, the reach of U.S. patent law has not crossed the nation's borders, but with the increased effect of globalization in the manufacturing sector, U.S. Courts are extending their reach.

Patent-savvy global marketplace

Previously, U.S. infringement was avoided by shifting some portion of equipment manufacturing or final assembly outside the country. Exporters could bypass infringement of competitors' U.S. patents by avoiding the manufacture, sale, offer for sale or use of patented equipment on U.S. soil.

However, in the late 1960s, Deepsouth Packing Co. successfully avoided infringement of a competitor's patent by manufacturing parts for the patented machine in the United States and shipping them abroad in separate boxes for assembly by foreign customers.

That lawsuit went to the Supreme Court, which held that Deepsouth's tactics avoided infringement because Deepsouth didn't manufacture the patented invention in the U.S. and "a combination patent protects only against the operable assembly of the whole and not the manufacture of its parts."

In response to Deepsouth, Congress enacted a new section of the patent statute that established infringement liability for the defendant's behavior in Deepsouth. Under that revision, liability results from:

Supply in or from the U.S. of all or a substantial portion of the components of a patented invention and active inducement of another to combine those components to produce the patented invention outside the country; or

Supply in or from the U.S. of any component of a patented invention that is knowingly and specially made or adapted for use in the invention and intent that the component will be combined to provide the patented invention outside of the U.S.

Since that Congressional extension of liability, federal courts have increasingly imposed extra-territorial effect of U.S. patent rights to prevent activity in crossborder supply chains and manufacturing and assembly operations.

Recent federal legal decisions stand out as harbingers of future infringement analysis of cross-border supply chain and assembly operations. Together, Eolas Technologies Inc. v. Microsoft Corp. and AT&T Corp. v. Microsoft Corp. stand for the principal that exportation of software code may constitute patent infringement.

Recommendations

When evaluating multi-national and cross-border opportunities, analyze from defensive and offensive positions.

Defensively, recognize and plan for the fact that where certain components are assembled or operations are performed is no longer determinative of whether parties may be liable for U.S. patent infringement.

Furthermore, companies that license their equipment-control software for incorporation into equipment assembled or manufactured abroad should evaluate the scope and limitations of their indemnification provisions. Supply-chain and manufacturing contracts should be reviewed with an eye toward clarifying the type and amount of indemnification limits needed to maintain good relationships while minimizing potential liability for foreign use of U.S.-manufactured components.

From an offensive posture, organizations should acquire patents in foreign jurisdictions where their supply-chain partners and customers, and those of their competitors, are located. This ensures the U.S. won't be the only jurisdiction where relief for patent infringement can be sought.

The weaker U.S. dollar has significant benefits to manufacturers who exploit cross-border supply chain relationships and establish themselves in foreign markets. By recognizing potential opportunities while evaluating potential patent infringement issues, U.S. manufacturers can maximize profit and minimize risk.

McCarthy is of counsel in the Intellectual Property Department in Indianapolis-based Barnes & Thornburg LLP's Washington, D.C., office. Views expressed here are the writer's.
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