On October 12, the Supreme Court granted certiorari to Global-Tech Appliances, Inc. and Pentalpha Enterprises, Ltd. (Docket No. 10-6; July 29, 2010) to consider what state of mind must be shown by a patentee, under 35 U.S.C. §271(b), to establish that a defendant induced infringement of a patent. That section simply states: “Whoever actively induces infringement of a patent shall be liable as an infringer.” 35 U.S.C. §271(b).
The Supreme Court’s answer may have significant economic consequences, especially for foreign companies importing goods into the United States, because the statutory provision addresses indirect, rather than direct liability. Actions taken exclusively abroad could create liability for such companies, who must now contemplate the costs of complying with the to-be-announced Supreme Court standard. The standard will also affect whether officers and directors of a corporation would be held personally liable for indirect infringement. Such additional costs will undoubtedly be passed on to consumers and, given the scale of foreign trade in the U.S., these costs may have a large impact on the economy as a whole.
Although the statutory language itself does not require that an alleged infringer have actual intent to induce infringement, courts have widely required that specific intent to induce infringement be shown because of the statutory phrase “actively induces”. Is the Doctrine of Inducement Dead? Vivian Lei, 50 IDEA 875 (2010). This judicial requirement implicates two questions: (1) what “magnitude of intent”1 must be established? Id. (2) to what must the intent be directed?2
The Federal Circuit finally resolved its previously-conflicting answers to the above questions in DSU Medical Corp. v. JMS, Co., 471 F.3d. 1293 (2006), or so we thought. In DSU Medical, the Federal Circuit announced the plaintiff’s burden is to show that defendant’s actions “induced infringing acts and that he knew or should have known his actions would induce actual infringements… [this] necessarily includes the requirement that he or she knew of the patent.”Id at 1304 (internal quotations omitted). Furthermore, the Court not only required knowledge of the patent but also required the defendants to have specifically intended to aid and abet another’s direct infringement.3 Id at 1305. In summary, the Federal Circuit held that a §271(b) violation required (1) knowledge of the existence of a patent and (2) affirmative action inducing a third party to directly infringe.
All was well until the (relatively egregious) record of Pentalpha found its way to the Federal Circuit in SEB, S.A. v. Montgomery Ward & Co., Inc., Global-Tech Appliances, and Pentalpha Enterprises, Ltd., 594 F.3d 1360 (Fed. Cir. 2010). In that case, Pentalpha, a Taiwanese company, developed a deep-fryer with cheap, plastic outer shell by copying one of SEB’s allegedly unmarked (i.e. not identified as patent-protected) deep-fryers that had been exported to Taiwan. Id. at 1365-66. Pentalpha planned to sell the deep-fryer to its wholesale customers, including Montgomery Ward, for importation and resale into the United States. Before doing so, Pentalpha sought an opinion letter from a New York patent attorney. An opinion letter states whether the attorney believes a particular product infringes any known patents. However, Pentalpha failed to disclose to its attorney that it had developed its deep-fryer by copying SEB’s.
Though Pentalpha did not contest direct infringement, it argued that induced infringement could not be shown because it had no knowledge of the existence of SEB’s patent before SEB brought suit against a Pentalpha customer. Apparently appalled by the facts, the Federal Circuit affirmed the jury’s finding of induced infringement and in a fit of academicism held that “deliberate indifference of a known risk” that a patent may exist is a form of knowing that a patent exists. Id. at 1377. In doing so, the Federal Circuit both raised doubts about whether the “deliberate indifference” standard can be reconciled with its opinion under DSU Medical and with the Supreme Court’s articulation of the standard: “affirmative intent that the product be used to infringe… active steps taken to encourage direct infringement…mere knowledge of infringing potential or of actual infringing uses would not be enough…The inducement rule, instead premises liability on purposeful, culpable expression and conduct.” MGM Studios, Inc. v. Grokster, Ltd., 545 U.S. 913, 916 (2005).
The “deliberate indifference” standard also raises questions as to (1) the requisite magnitude of risk that must be known and (2) what exactly constitutes deliberate indifference? Some risk that a patent covers the allegedly infringing product or activity always exists in a competitive market and opinion letters were traditionally relied on to mitigate this risk. With respect to what constitutes deliberate indifference, the Federal Circuit made clear that even in light of an opinion letter “deliberate indifference” may still be found. The Federal Circuit did not, however, state what it was, in addition to obtaining an opinion letter, that must be done to overcome a “deliberate indifference”.
Without additional guidance, the deliberate indifference standard may vitiate the requirement of “intent to infringe” under DSU Medical: this would revert us back to the now-rejected standard of Hewlett-Packard Co. v. Bausch & Lomb, the“intent to induce the infringing action” standard. 909 F.2d 1464 (Fed. Cir. 1990)). This is because intent to cause the infringing action will often be enough to establish “deliberate indifference” as to the existence of a patent if affirmative steps are not taken to ensure that the activity being induced is not protected by a patent.
I argue that the DSU Medical standard requiring knowledge of the existence of a patent and affirmative intent to infringe is the correct one. First, this standard has been implicitly approved by Congress in two ways: (1) in Congress’ enactment of §271(c) as a separate provision from §271(b) and (2) by Congress’ enactment of §287.
In their amici brief, twenty six law professors argue that the “deliberate indifference” standard would cause 271(b) to “swallow” 271(c). Global-Tech Appliances, Inc. v. SEB S.A.: Brief Amici Curiae of 26 Law, Economics, and Business Professors in Support of Petitioners, 2010 WL 3019717 (2010). In creating two different sections to address indirect infringement, Congress demonstrated its intent to treat these two types of indirect infringement differently. Section 271(b), as already discussed, addresses inducement to infringe, whereas section 271(c) addresses contributory infringement. Id. “[The Supreme Court has stated] that a contributory infringer under section 271(c) must know that the combination to which it is contributing ‘was both patented and infringing.’” Id (citing Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 488 (1964)). Thus, any activity that would infringe under 271(c)4 would necessarily infringe under the “deliberate indifference” standard of 271(b). Id. This would cause 271(c) to be superfluous, collapsing it into 271(b) and ignoring Congress’ intent to treat the two indirect infringement sections separately.
Under §287, Congress requires that a patentee must provide notice to an alleged infringer in order to recover monetary damages. This provision illustrates Congress’ understanding that it is more economically efficient to charge a patentee with the responsibility of notifying a potential infringer of the existence of a patent rather than requiring the infringer to perform an exhaustive patent search before investing in research and development (or even before simply using or selling a particular product). Section 287 also gives the alleged infringer a “free pass” up to the point of notice (that a patent exists). Allowing a “deliberate indifference” standard analysis under 271(b) would hold indirect infringers to a less culpable standard than direct infringers. The standard would also be inconsistent with Congress’ recognition that, because of information asymmetry, it is more efficient to require a patentee to provide notice of the existence of a patent rather than allowing the patentee to rely on weak circumstantial evidence of the alleged infringers’ knowledge of its existence.
Second, because a finding of indirect infringement necessarily entails a finding that another has directly infringed (and so 271(b) addresses behavior that could almost always be remedied by litigation against a direct infringer) 271(b) should be used sparingly and only to address truly deplorable behavior; a flexible standard is unnecessary to protect a patentee. Indeed, a flexible standard would create uncertainty and inhibit legitimate business activity.
Finally, a broad and flexible standard could have both unfavorable economic consequences (and anti-competitive effects) and could stifle innovation as a result of uncertainty.
In sum, the DSU Medical standard requiring knowledge of the existence of a patent and an affirmative intent to infringe is the correct standard under §271(b) because: (1) Congress implied this to be the standard in enacting §271(c) and §287 (2) a patentee will have already proven, and can recover, as a result of direct infringement (3) a flexible standard’s uncertainty may have economically unfavorable chilling effects.
2 In other words, must the alleged infringer actually intend to cause infringement or must the alleged infringer only intend to encourage the actions that result in infringement regardless of his knowledge the existence of a patent? Id.
3 “[t]o establish liability under §271(b) a patent holder must prove that once the defendants knew of the patent, they actively and knowingly aided and abetted another’s direct infringement…knowledge of the acts alleged to constitute infringement is not enough…specific intent and action to induce infringement must be proven” Id at 1305 (internal quotations omitted).
4 The language of 271(c) necessarily requires actual knowledge of the existence of a patent: http://www.uspto.gov/web/offices/pac/mpep/documents/appxl_35_U_S_C_271.htm