Los Angeles Daily Journal October 25, 2010 Craig Countryman
On Oct. 12, 2010, the U.S. Supreme Court agreed to consider Global-Tech Appliances v. SEB, 594 F.3d 1360 (Fed. Cir. 2010), a patent case involving the doctrine of induced infringement. Inducement is similar to accomplice liability in criminal cases. It subjects an entity that aids and abets another’s infringement to the same liability it would face if it had engaged in the same amount of “direct” infringement itself. And, as with accomplice liability, the law requires the plaintiff to show the inducer acted with intent to encourage another’s direct infringement.
The intent requirement is meant to protect “innocent” parties from incurring liability for acts that might seem lawful. By contrast, direct infringers are in some instances strictly liable for damages because their conduct is thought sufficiently culpable. The different types of conduct warrant the different mental state requirements. As a practical matter, though, one cannot draw too much of a distinction between acts and intent. Ill intent is almost inferred from actions (or the failure to act). So the intent requirement really just ensures the inducer’s conduct is comparable in culpability to the direct infringer’s conduct.
The Federal Circuit has struggled to set the standard for intent necessary to establish inducement. DSU Medical v. JMS Co., 471 F.3d 1293 (Fed. Cir. 2006), held that an inducer must have the specific intent to induce the direct infringer’s acts and have known or should have known that those acts would constitute infringement of the patent. The court added that the latter element “necessarily” requires that the inducer “knew of the patent.” But, as two judges noted in a concurring opinion, that comment was dicta because the parties had stipulated the defendant knew of the patent.
The Federal Circuit reversed course in Global-Tech, holding that an entity can be liable for inducement even if it is not specifically aware of the patent. In this instance, Pentalpha designed its product by copying a version of the plaintiff’s product sold in Hong Kong. SEB’s product was not marked with a U.S. patent number. Pentalpha hired a lawyer to search for patents and determine if it was at risk of infringement but did not tell the lawyer it copied SEB’s product. The search did not uncover SEB’s patents, and none of the patents it turned up presented an issue. Pentalpha sold its product outside the United States to a distributor, which resold it in the United States, thereby directly infringing. The question was whether Pentalpha induced its distributor to infringe.
The Federal Circuit found that Pentalpha had the requisite “specific intent to encourage another’s infringement” for inducement because it “deliberately disregarded a known risk that SEB had a protective patent.” The Court relied on: Pentalpha’s copying of the SEB product, the fact that Pentalpha did not tell the attorney who conducted a freedom to operate search that it copied SEB’s product, the fact that Pentalpha’s president was “versed in the U.S. patent system,” a named inventor on 29 patents, and understood SEB to be cognizant of patents because of an earlier business relationship between SEB and Pentalpha, and Pentalpha produced no exculpatory evidence showing its employees did not actually believe the SEB patent did not exist.
The result is arguably defensible, but the Federal Circuit’s rationale was less so. To avoid contradicting DSU Medical’s statement that inducement requires showing the defendant “knew of the patent,” the court claimed that deliberate indifference is “not different from actual knowledge, but is a form of actual knowledge.” It is true that deliberate indifference requires knowing of a risk that a patent exists. That is not the same as knowing with 100 percent certainty a patent exists, as the phrase “knew of the patent” requires. It may well be that these two types of knowledge warrant the same legal treatment. But they are different, and there are significant implications to equating them.
The Supreme Court will probably reverse or at least vacate the judgment. Because the Federal Circuit hears all patent appeals, there would be no need for the Supreme Court to intervene unless it planned to change the legal standard. In doing so, the Court should focus on the practical effect of its decision. Legal analysis of the various types of knowledge and intent usually devolves a series of vague pronouncements. Hand-wringing over how to word the standard is less important than explaining in plain English why the facts of a particular case justify or do not justify imposing liability. And it is often a futile exercise. The subtle differences among the various standards will surely be lost on the juries that decide patent cases – it is difficult enough for the courts to apply at summary judgment.
Should the law impose liability on the defendant in Global-Tech? The answer turns on at least two things: whether we want to encourage copying a competitor’s product, and how hard it would have been for Pentalpha’s lawyer to find SEB’s patent had he known that he should spend extra time reviewing its portfolio because Pentalpha copied the SEB design.
Copying is not always bad. When a product is unpatented, copyists are free to replicate it and sell a competing version. This drives down prices and may result in more innovation if the copyist makes improvements while using the knowledge that led to the original product as a starting point. The patent system encourages copying once a patent has expired because it requires the patent to describe the invention in a way that enables others to make and use it. When a product is patented, however, copying imposes social costs. It interferes with the patent holder’s ability to charge a higher price for its product and thereby recover his investment in developing it. The copyist often bears little or no development costs, which enables it to undercut the patent holder’s price, perhaps so much that the patent holder can no longer make a profit. And if companies knew that copyists could freely duplicate new products, they would stop investing in new technology because they would be unable to recoup that investment.
So whether we want to encourage copying depends on whether a product is patented. The question then becomes whether the patent holder or copyist should bear the burden of finding the other. It seems like the copyist is in the better position to bear this burden, unless it can show it would have been prohibitively hard to find the patent. Sometimes it is hard. If the product is complex, like a cellphone, there could be thousands of patents owned by different companies that cover various components. In SEB, however, the product was a deep fryer, which seems relatively simple. The Federal Circuit faulted Pentalpha for keeping its lawyer in the dark about using SEB’s product to design the product. But it is difficult to tell whether Pentalpha would have been better off conducting no search, or whether the court was saying that a copyist must find the patent at any cost.
Another issue is whether it might be imprudent to expand inducement liability if the patentee already has an adequate remedy for direct infringement. Here, the induced infringement involves Pentalpha’s sales to a single U.S. distributor. Why not make SEB sue the distributor instead? Pentalpha is probably obliged to indemnify the distributor, so it would not get off the hook, and it would be unnecessary to strain the law of inducement.
The problem is that it will often not be economically feasible for the patentee to pursue the direct infringer. Inducement allegations are most common for patents where individual customers are the direct infringers by virtue of using a product sold by a large company. A common example is software that, when installed and used by a customer, performs a series of steps covered by a patent. In these cases, it is inducement or nothing – the patentee cannot feasibly name each customer as a defendant. Nor would we want it to.
Global-Tech is a poor vehicle for analyzing the proper standard for inducement because it is a less common use of the doctrine. Most inducement cases involve actual notice of the patent, do not involve copying, and require the court to determine whether the defendant reasonably believed its customers were not directly infringing. The Supreme Court should avoid broad pronouncements in this unusual case, which could have unintended consequences in the more common ones.
Posted with the permission of Daily Journal Corp. (2010).