May 13, 2009

Zoltek Warning: Consider Suit Against Government Contractors When Infringement Arises Abroad

8 min

This article was published in the May 2009 IP News and Comment.

The United States Court of Federal Claims (COFC), whose jurisdiction is limited to lawsuits brought against the federal government, has issued a ruling of first impression in a 13-year-old patent case brought by Zoltek Corporation that may have profound implications for government contractors. Zoltek Corp. v. The United States, No. 96-166 C. 

Under 28 U.S.C. § 1498, a patent owner’s remedy when the United States infringes a patent is a suit against the government in the COFC. Section 1498(a) also grants authorization and consent to government contractors, in performance of their contracts, to use or manufacture any patented invention such that only the United States may be liable for infringement stemming from contract performance. The purpose of Section 1498 is to protect government contractors from private infringement actions and to limit the available remedy to suits against the United States in the COFC. The Zoltek decision, however, would allow and require patent owners to file suit directly against government contractors in U.S. district court when the alleged infringement arises in a foreign country—a dramatic shift away from the immunity thought to exist by virtue of the government’s authorization and consent.

In the case, Zoltek sued the government for infringement of a patent that claimed methods of manufacturing carbon fiber products, which were allegedly used by Lockheed Martin to build the B-2 Stealth Bomber and the F-22 Fighter Plane. The latest ruling in this case concerned the portion of the case about the F-22 Fighter Plane, which is made from carbon fibers produced in Japan, allegedly with the claimed methods.

Earlier in the case, the Government moved for partial summary judgment under 28 U.S.C. § 1498(c), which excludes the Government from liability for patent infringement that arises in a foreign country. Zoltek opposed the motion by arguing that Section 1498 should be interpreted consistently with the statute that governs infringement by private parties, 35 U.S.C. § 271(g), which provides a remedy for, among other things, the importation or sale of a product made by a process patented in the United States.  After concluding that the infringement claims arose in a foreign country, the COFC granted the Government’s motion on the basis that the Section 1498(c) negates the operation of Section 1498(a)—the statutory provision that would otherwise provide a remedy against the United States whenever the government infringes a patent. In so ruling, the COFC noted that nothing in the legislative history of Section 271 indicates that Congress intended for “section 1498 to change in congruence with changes in 35 U.S.C. § 271, [and thus] the Court is constrained to hold that section 1498 does not apply to all forms of direct infringement as currently defined in 35 U.S.C. § 271.” In other words, the government’s waiver of sovereign immunity for patent infringement claims under Section 1498 does not necessarily correlate to the available remedies under Section 271 when a patent is infringed by a private party.

While the U.S. Court of Appeals for the Federal Circuit affirmed this outcome, the Circuit did not endorse the COFC’s rationale. Instead, the Circuit held that “direct infringement under section 271(a) is a necessary predicate for government liability under section 1498.” Section 271(a) provides a remedy only for infringement “within the United States” of any patented invention. After explaining that “a process cannot be used ‘within’ the United States as required by section 271(a) unless each of the steps is performed within this country,” the Circuit determined that Zoltek’s patented method of manufacturing carbon fiber products was not used within the United States. In particular, the court concluded that the fibers were manufactured in Japan, and at least one fiber was also formed into sheets in Japan—processes that allegedly infringed the patent.  

Once this portion of its case had been dismissed, Zoltek filed a motion under 28 U.S.C. § 1631 to transfer it to the Northern District of Georgia, where it could sue Lockheed Martin, the government contractor who made the F-22. Section 1631 permits transfer of a civil action between jurisdictions if (1) the transferor court lacks jurisdiction; (2) the transferee court would have had jurisdiction at the time the original complaint was filed; and (3) the transfer would serve the interests of justice. The first factor was already decided by the COFC and affirmed by the Federal Circuit—the COFC did not have jurisdiction over the F-22 portion of the case. 

In opposing the motion to transfer, the Government primarily argued that transfer to the Northern District of Georgia, or any other district court, would be futile because Lockheed Martin, in performance of its government contract, was operating with the Government’s authorization and consent to use any U.S. patent. See Sevenson Environmental Servs., Inc. v. Shaw Environmental, Inc., 477 F.3d 1361, 1367 (Fed. Cir. 2007) (contractor was “entitled to immunity from suit under § 1498(a)” in a suit in district court because its “use of the accused method was both ‘for the Government’ and ‘with the authorization and consent of the Government’”). Thus, the only remedy available for Zoltek would be against the United States. See Section 1498(a) (“the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims...”) (emphasis added). Because the Federal Circuit had already ruled that the United States could not be liable for infringement, the Government contended that there was no remedy available in another court for the alleged infringement. The COFC summarized the Government’s argument as “§ 1498(c) bars jurisdiction in the court and § 1498(a) bars jurisdiction in all other courts.” 

Remarkably, the COFC disagreed and reasoned that the authorization and consent under Section 1498(a) was nullified on the basis that the alleged infringement arose in a foreign country.  Despite specifically acknowledging that the Federal Circuit resolved the appeal without discussing the impact of Section 1498(c) (i.e., the Circuit relied on Zoltek’s inability to satisfy Section 271(a) as the basis for no government liability, not Section 1498(c)), the COFC reasoned that Section 1498(c) “renders inapplicable all of the provisions of § 1498 when claims under § 1498(a) arise in a foreign country,” including Section 1498(a)’s authorization and consent safeguard for government contractors.  More broadly, the court held that “§1498(a) only insulates government contractors from suit when the Government can be found liable.”

Having cleared the way for a private patent infringement action against Lockheed Martin, the COFC then explained that the district court would have jurisdiction—a prerequisite for transfer under Section 1631—if Zoltek amended its complaint (which the COFC promised to allow) to include a claim under Section 271. 

However, because the Federal Circuit had already ruled that Zoltek’s claim could not satisfy Section 271(a), the COFC suggested that Zoltek might amend its complaint to include a claim under Section 271(g). Section 271(g) provides liability when a product that is made by a patented process is imported into the United States.  Therefore, the COFC suggested that Zoltek change its claim from a use of a patented process to the importation, sale, or use of a “product resulting from the process” in order to satisfy the jurisdictional requirement to transfer the case.

Finally, the COFC ruled in favor of Zoltek on the interests of justice factor on the rationale that Zoltek “happens to be the unfortunate plaintiff who first encountered a legislative gap between the definition of infringement under § 1498 and ...  §271 ... [and] this Court is of the opinion that Zoltek is entitled, as should be all plaintiffs, to have its day in some court.”  The COFC concluded that upon a showing that Zoltek has properly framed its F-22 claims in an amended complaint, it would grant Zoltek’s motion to transfer that part of the case to the Georgia court. 

In reaching this result, the COFC appears to have fashioned a remedy for Zoltek where one would otherwise not have existed.  To the extent the COFC’s decision is followed by other judges on the court, government contractors that normally anticipate immunity against patent infringement arising under their performance of a government contract may find themselves subject to a private infringement suit in district court if the infringement arose in a foreign country and is based on the importation, sale, or use of a product resulting from a patented process.   Interestingly, the COFC did not address how an infringement arising in a foreign country (Section 1498(c)), which the court held nullifies Section 1498(a)’s authorization and consent provisions, would impact the inclusion of FAR Clause 52.227-1, Authorization and Consent, in the contract itself.  In such situations, the terms of the contract—not the statute—would provide the contractor with authorization and consent to use a patented invention. 

Moreover, because this was a case of first impression, the COFC afforded considerable leniency to Zoltek in allowing it to amend its COFC complaint to include a claim under Section 271(g) that the COFC does not have jurisdiction to consider.  The implication is that future litigants are now on notice to file patent infringement suits directly against government contractors in district court when they believe the infringement arose in a foreign country and, therefore, may not be permitted to amend their complaints at such a late stage in the litigation.