Zoltek v. United States: Patents, the Federal Government, and 271(g)

By Jason Rantanen

Zoltek Corporation v. United States (Fed. Cir. 2012) (en banc in part) Download 09-5135
Majority: Rader, Newman, Lourie, Bryson, Linn, Prost, Moore, O'Malley, Reyna, and Wallach
Dissent: Dyk

Two_F-22_Raptor_in_flyingWe recently discussed the Federal Circuit's en banc opinion in Zoltek v. United States from this past spring in the Contemporary Issues in Patent Law tutorial that I run here at Iowa, and it prompted me to write up a summary.

Zoltek is different from your typical infringement case in that it involves a patent claim brought against the Federal Government for a contractor's actions, and thus liability arises through a separate statutory scheme.  Zoltek is the assignee of a patent relating to methods of manufacturing carbon fiber sheets with controlled surface electrical resistivity.  Lockheed Martin designed and built F-22 fighter jets for the Federal Government; the F-22 contains carbon fiber sheets that allegedly were produced through the method claimed in Zoltek's patents. However, the process for making the sheets was begun in Japan, the partially completed product was imported into the United States, and the process was completed in the United States, which created a significant problem for Zoltek's infringement claim.

In 1996, Zoltek filed a Complaint against the Federal Government in the Court of Federal Claims under 28 U.S.C. § 1498(a).  Section 1498(a) states:

Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner's remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture.

This statute does two things: first, it acts as a waiver of the government's immunity, and second, it operates an assumption of liability by the government, thus insulating the government contractor itself from liability. However, during an earlier stage of this case, the government argued that because the process was partially performed abroad, it did not fall under Section 1498(a).  In a 2006 opinion (Zoltek III), a panel of the Federal Circuit agreed, and held that the scope of 1498(a) was limited to direct infringement under 35 U.S.C. § 271(a).  (That opinion also rejected a Fifth-Amendment takings argument).  Because 271(a) does not include manufacturing processes that are begun abroad and completed in the United States, the court concluded that the United States had not assumed liability under 1498(a).

The practical effect of the Federal Circuit's ruling was that on remand, Zoltek sought leave to amend its Complaint to add a claim against Lockheed for infringement of the patent under 271(g) and to transfer the action to federal district court.  In granting Zoltek's motion, the trial court rejected the Government's argument that 1498(a) insulates government contractors from suit even when the government could not be liable.  The Court of Federal Claims certified for interlocutory review the question "“whether 28 U.S.C. § 1498(c) must be construed to nullify any government contractor immunity provided in § 1498(a) when a patent infringement claim aris[es] in a foreign country.” 

The Federal Circuit did not directly answer that question.  Instead, the new appeal caused it to "re-examine the premises on which our earlier opinion in Zoltek III was based, and to reconsider the consequences of that opinion."  672 F.3d 1314.  In other words, the panel had erred.

Revisiting the issue en banc, the court concluded that the correct interpretation of 1498(a) is that it creates a cause of action for direct infringement that is separate and different from 271(a), and that it could include conduct falling under 271(g).  Infringement under 271(a) is thus not a necessary predicate for liablity under § 1498(a) as the earlier panel had held.  Instead, the court reasoned, the Government's liability "under 1498(a) is linked to the scope of the patent holder's rights as granted by the patent grant in title 35 U.S.C. section 154(a)(1).  As the patent grant has expanded over the years, so too has the coverage of § 1498(a)."  672 F.3d 1323.  Applying this reasoning, the court concluded that the government could be liable here: "we hold that for the purposes of section 1498, the use or importation “within the United States [of] a product which is made by a process patented in the United States” constitutes use of the invention without lawful right because the products embody the invention itself."  672 F.3d 1326.

Judge Dyk, writing in dissent, disagreed both that the court had jurisdiction to address the issue of the scope of 1498 sua sponte, as well with as the court's revised interpretation. 

The scope of 271(g): In concluding that the Government could be liable for Lockheed's conduct, the court held that "[i]f a private party had used Zoltek's patented process to create the resulting product there would be liability for infringing Zoltek's patent right under § 154(a)(1) and § 271(g)."  672 F.3d 1323.  However, 271(g) states that:

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….A product which is made by a patented process will, for purposes of this title, not be considered to be so made after—

(1) it is materially changed by subsequent processes; or
(2) it becomes a trivial and nonessential component of another product.
Here, Lockheed was not importing "a product which is made by a process patented in the United States"; instead, it was importing a nearly-finished component of that process.  I haven't found any cases dealing with this scenario in the regular 271(g) context, so it may be a novel issue.  The court essentially avoids the issue in Zoltek by imbuing the product of the process with the essence of the process itself: "In the context of § 1498, the product of a patented process is not only the product, but also the physical embodiment of the invention."  672 F.3d 1326.  Zoltek itself is of limited use in settling this issue, however, since by the court's express instruction, "nothing in this opinion should be construed to affect our Title 35 jurisprudence."  Id.

15 thoughts on “Zoltek v. United States: Patents, the Federal Government, and 271(g)

  1. You are quite correct that the underlying “goal” of 28 USC 1498 is to remove Title 35 from the lexicon of those who are performing work for the USG under contract and with its authorization and consent. Even so, as the statute is now written the “ball” is about 40 yards short of the “goal line”. As for injunctions, let’s say that eBay virtually ensures they would not issue except in the most mundane and trivial circumstances. I am sure there are some who may wonder “How did this 1498 mess arise in the first place?” Easy. Precedent derives from cases for money damages against the USG long ago decided, not by the district courts, but by the then US Court of Claims. The court had difficulty enough simply spelling “patents”, much less understanding what they were.

  2. Mike, the whole point of 1498 was to allow government contractors freedom to infringe if necessary and to prevent injunctions. Narrowly reading 1498 to restrict its scope so as to not protect government contractors seems penny wise and pound foolish.

    So, the time may come when a contractor simply will not do what the government wants because the they will be holding the bag on infringement damages. Obviously, such narrow reading of the statute to frustrate government procurement cannot be right.

  3. MM, unless I knew you, I would assume that were joking. Whether a product can be made by a different process is irrelevant to the question of whether in fact it was made by the patented process.

  4. My favorite 271(g) loophole was always this one:

    A product which is made by a patented process will, for purposes of this title, not be considered to be so made after—

    (1) it is materially changed by subsequent processes

    As I recall, at least with respect to drugs that are manufactured using a patented process at some point, the CAFC construed the “materially changed” exception to mean, essentially, “if it is shown that the product can be made by another commercially viable method that is not patented, there is no infringement.”

    Now that’s a loophole you can drive a truck through.

    Eli Lilly v. American Cyanamid (CAFC 1996)

  5. Thank you for the citation to your article. While I have read numerous LR and Journal articles associated with 1498, yours was not one that came to light during my literature searches. Having now read it two thoughts immediately come to mind. First, I recommend that the word “gracious” be relegated to the “circular file”. Second, it was indeed a pleasure to read for the very first time a publication that actually thought about what you term “loopholes”. All the prior articles had been focused precisely on what a patentee could not do, completely ignoring what a patentee could do.

    BTW, when dealing with matters such as the preparation of bids in response to government solicitations, you may want to consider whether or not “authorization and consent” is present. I have reviewed hundreds of Requests for Proposals (RFP), and in not one of them are rights such as patents given even a fleeting thought.

  6. Obviously, matters such as this are highly fact dependent. It is worth noting, however, that existing precedent (I do not recall the case(s)) holds that the USG cannot be held liable for contributory infringement, a specific provision under Title 35. Since 28 USC 1498 represents a waiver of sovereign immunity, and since all cases like Zoltek relate to Section 271, then yes, it may very well be possible to construct a persuasive argument that contractor liability is outside the scope of the statutory waiver. This is precisely one of the problems with reading 28 USC 1498 as a waiver of sovereign immunity that is to be narrowly construed. Now, can I posit an example of such a circumstance where this might come into play? At this point I cannot, but if there is one thing I have learned in 33 years of practice it is that off-the-wall factual situations arise with great frequency and offer strategic opportunities for serving a client’s interest. Importantly, the two examples of unaccounted for rights are just off the top of my head. I have little doubt that scouring Title 35 for other articulated rights will yield other others that are not comprehended by the decision in Zoltek.

  7. When I was a law student, a Patently-O article about Zoltek in 2006 inspired me to write an article about this topic. See 36 Cap.U.L.Rev. 1065-1130 (2008). Google the citation, and one of the first links will lead to full-text PDF.

  8. Mike, what if the component sold to the government is used by the government in a direct infringement? The component has no other use. It is not a staple. The contractor is liable for contributory infringement.

    You say that the contractor can be successfully sued without any ability to invoke 1498?

  9. If a plane made for and sold to the United States made by a process that infringes a patent in the United States, whereby the United States has been sued for infringement by the assignees of said patent, crashes in Florida, is the assignee libel for any of the resulting damages?

  10. One quick fact not mentioned above. LMC had two subcontractors, the one noted in the article and a second that constructed the carbon fiber sheets entirely in Japan, and then shipped those sheets to the US.

    As for the case itself, while it certainly gives comfort to those who serve as contractors and subcontractors under US Government contracts (Note: The test in 28 USC 1498 is “used or manufactured by or for the United States”, which in general transpires under a federal contract. Consider, however, that there are other instruments used by the USG that are not deemed “contracts” in the strict legal sense of the term, i.e., grants, cooperative agreements, and “Other Agreements”.), there are other issues lurking in the background that fall outside of current caselaw associated with 28 USC 1498, as well as the substantive provisions of the statute. For example, by the very terms of the caselaw and/or statutory provisions these other issues fall squarely outside the holding in Zoltek. Why is this important? Simple. While contractors and subcontractors may find safe harbor under Zoltek for “ordinary” infringement, the same cannot be said of contributory infringement and provisional rights. Hence, contractors and subcontractors now breathing a sigh of relief will almost certainly find themselves at some time in the future when the facts align with the stars as named defendants in a suit before a US District Court, and barring some linguistic tap dancing by the court, the safe harbor of 28 USC 1498 may very well prove illusory.

    It is also useful to ever be mindful of the fact that 28 USC 1498 also uses the term “authorization and consent”. It remains an outstanding issue if the USG can simply absolve itself any liability by simply refusing to provide “authorization and consent”. While it would be silly for it to refuse to do so, anyone who has ever dealt to any significant degree with the USG well recognizes that “silly” is not beyond the realm of possibility.

    Yet another issue, at least in the case of contracts with the Department of Defense, is a program known as Foreign Military Sales authorized under the Arms Export Control Act. There is existing caselaw derived from decisions of the US Court of Claims that a contract with the USG is not “by for for the USG” because the primary beneficiary of the contract is a foreign entity.

    The bottom line? Zoltek is an important step, but only a first step. If any sense is to be made of 28 USC 1498, the statute must undergo significant modifications to achieve its obvious objective, i.e., the USG steps into the shoes of its contractors and subcontractors and assumes all liability provided now, and possibly hereafter, by Title 35.

  11. This case shows why Newman was right in Akamai.

    The product embodied all the steps. Importing, using, selling that product was a direct infringment.

    Making should be as well, IMHO. Direct infringement, not inducement, even if some of the steps are performed by others and even if some are performed outside the US.

    The person who does the last step completes the process, making the product. It is he who is the direct infringer.

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