Volume 21, No. 2
Winter 2010
Committee Cochairs
Erick Howard
Shartsis Friese LLP
San Francisco, CA
ehoward@sflaw.com
John P. Hutchins
Troutman Sanders LLP
Atlanta, GA
john.hutchins@troutmansanders.com
Coke Stewart
Kaye Scholer
Washington, D.C.
cstewart@scholer.com
Newsletter Editors
Editor in Chief
Steve Gardner
Kilpatrick Stockton LLP
Winston-Salem, NC
sgardner@KilpatrickStockton.com
Editor at Large
Brad Lyerla
Marshall Gerstein & Borun LLP
Chicago, IL
blyerla@marshallip.com
Young Lawyer Oriented Editor
Elaine Y. Chow
K&L Gates LLP
San Francisco, CA
elaine.chow@klgates.com
Litigation Tips Editor
Douglas N. Masters
Loeb & Loeb
Chicago, IL
dmasters@loeb.com
Editor at Large
David L. Marcus
Comcast Cable Communications
Philadelphia, PA
David_Marcus@Comcast.com
Associate Editor
Anna Sachdeva
Published by the Intellectual Property Litigation Committee of the ABA Section of Litigation © 2010 American Bar Association, All Rights Reserved
This Issue: Secondary/indirect liability issues in IP Litigation
Parent/Subsidiary Liability
Issues in Patent Litigation
By Irfan A. Lateef and Marko R. Zoretic
P
atent owners often prefer to deal
directly with a corporate parent to
address acts of infringement by its
subsidiaries. There are important issues,
however, to consider in this context that
are separate from the situation in which
the parent has itself engaged in conduct
giving rise to liability. For example, patent infringement plaintiffs often name as a
party the parent corporation of an infringing subsidiary. But naming a parent that
has not committed acts of infringement is
typically a waste of time and resources.
Unless you can pierce the corporate veil
to hold the parent liable for the infringing acts of its subsidiary, naming the
non-infringing parent corporation as a
party may be unavailing. Similarly, patent
owners sometimes send written notices of
www.abanet.org/litigation/committees/
intellectual
Can a Parent Corporation Be Liable
for Its Subsidiary’s Infringing Acts?
The short answer is yes. But a parent corporation is not automatically liable for its
subsidiary’s infringing acts.1 This is conContinued on page 22
Divided Infringement: The
Impact of BMC Resources and
Muniauction
By Anthony I. Fenwick and Jill Zimmerman
Art Director
Tamara Nowak
Intellectual Property Litigation (ISSN 1936-7619) is
published quarterly by the Committee on Intellectual
Property Litigation, Section of Litigation, American
Bar Association, 321 N. Clark Street, Chicago,
IL 60654. The views expressed within do not
necessarily reflect the views of the American
Bar Association, the Section of Litigation, or
the Committee on Intellectual Property
Litigation. © 2010 American Bar Association
patent infringement or cease-and-desist
letters to parent companies when the
infringement is committed by the subsidiary. These notices can help establish
a right to patent infringement damages,
or to treble damages for willful infringement, if they are sent to the correct party.
However, sending the notice or letter to
the wrong corporate entity can also be
problematic. Here, we address these two
parent/subsidiary issues in the patent litigation context.
I
n BMC Resources, Inc. v. Paymentech,
L.P.,1 and Muniauction, Inc. v.
Thomson Corp.,2 the Federal Circuit
clarified and tightly restricted the circumstances in which there can be direct
infringement of a method claim through
the combined actions of multiple actors—
that is, when no single actor performs
each and every step of the claimed
method. In sum, any step not performed
by the alleged direct infringer must be
performed by another under the “control
or direction” of the alleged direct infringer
(the “mastermind”). Where it finds traction, the divided infringement argument
will dispose not only of claims of direct
infringement but also any theories of contributory or induced infringement, as they
must fail in the absence of direct infringement. Many patents issued prior to BMC
Resources and Muniauction will be difficult to enforce under the newly restrictive
“control or direction” standard. Accused
Continued on page 26
Published in Intellectual Property Litigation, Volume 21, Number 2, Winter 2010 © 2010 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be
copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Message from the Chairs
I
n intellectual property litigation,
whether concerning patent, trademark,
or copyright, just about any participant
in the chain of commerce can be secondarily liable under a variety of legal theories. A company that purchases and uses
an infringing device in its own products
may be liable for patent infringement
just as the manufacturer of the infringing device may be liable. The director or
officer of a company that manufactures a
device that infringes a patent can be held
personally liable under an inducement of
patent infringement theory. A software
maker that encourages its users to make
copies of copyrighted material may be
held liable for contributory infringement. A parent company that controls the
operations of a subsidiary that engages
in trademark infringement or trade secret
misappropriation might be liable for its
subsidiary’s misconduct under the doctrine of respondeat superior. Every party
involved may be a target.
In keeping with our tradition of being
one of the largest and most active committees in the Section of Litigation, we
are instituting some ambitious initiatives
this year to provide more benefits to you,
our members. As always, we are looking
for committee members who are interested in becoming more involved in our
work, whether it be through contributing
to the newsletter, website, or programs,
or through membership outreach. For
more information about opportunities to
become involved, please visit the committee’s website at www.abanet.org/
litigation/committees/intellectual.
You can contact any of the committee
cochairs with questions. Our contact
information can be found on the inside
cover of the newsletter.
We also want to remind you to mark your
calendars for the next Section of Litigation
Annual Conference, which will be held in
New York City, April 21–24, 2010. Thank
you for your continuing support. l
This issue of Intellectual Property
Litigation explores these secondary liability doctrines (and the defenses thereto),
which can greatly expand the scope and
complexity of our intellectual property
cases. The articles discuss how indemnification under the Uniform Commercial
Code affects claims for patent infringement, how the Uniform Trade Secrets Acts
affects the respondeat superior doctrine,
how and when directors and officers may
be held personally liable for the infringing
misconduct of the entities for which they
work, how secondary liability doctrines
affect trademark and copyright claims and
defenses, and how the Supreme Court’s
recent decisions in Bell Atlantic Corp v.
Twombly and Ashcroft v. Iqbal may affect
induced and contributory patent infringement claims. This issue thus canvasses the
secondary liability area to provide intellectual property practitioners with the tools
to bring or defend against infringement
claims up and down the chain.
C
Committee on Pretrial Practice & Discovery
ommittee
Information
Summer 2008
Intellectual Property
Committee’s Homepage:
www.abanet.org/litigation/
committees/intellectual
Newsletter Archive:
www.abanet.org/litigation/
committees/intellectual/
newsletter.html
Subcommittee Page:
www.abanet.org/litigation/
committees/intellectual/
subcommittees.html
2
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Published in Intellectual Property Litigation, Volume 21, Number 2, Winter 2010 © 2010 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be
copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Director and Officer Liability for Inducement of
Patent Infringement
By Jason A. Wietjes and Michael D. Pegues
M
any corporate officers and directors may take some solace in
the figurative corporate veil,
knowing, or maybe hoping, that walking the company line will insulate them
from personal liability for actions taken
on behalf of the business. But, as is often
the case in the realm of patent law, the
same rules do not always apply. Actions
against directors and officers for corporate
patent infringement present a number of
unique considerations for both plaintiffs
and defendants. At the outset, it is important to understand that these claims are
different from other cases of director and
officer liability.
Differences from Other Suits
Against Directors and Officers
First, typical actions against directors
and officers are brought by stockholders as derivative suits, whereas patent
infringement actions against directors and
officers are brought by third-party patent
owners. Second, under normal circumstances, corporate directors and officers
cannot be held personally liable for the
wrongful acts of their companies absent
circumstances that allow for piercing the
corporate veil. Although this is true when
attempting to hold a director or an officer
personally liable for a company’s direct
patent infringement, it is not necessary to
pierce the corporate veil to establish director and officer liability for inducement
of infringement.1 In this sense, actions
against directors and officers for direct
infringement are no different from any
other action for direct infringement, with
the added hurdle of piercing the corporate
veil. The more complex cases, and the
focus of this article, are those for inducement of infringement.
Reasons to Bring Claims Against
Corporate Directors and Officers
It is helpful to start by getting a feel for
the circumstances under which corporate
directors and officers may become potential targets. There are several strategic reasons to bring claims directly against cor-
porate directors and officers, the obvious
instance being that in which the defendant
company itself is insolvent or otherwise
judgment-proof. Given the economic
climate, it is feasible that more plaintiffs
may take aim at directors and officers as
more companies succumb to the financial downturn and become unable to pay
large damage awards. Even if a corporate
defendant has the means to account for
a damages award, patent infringement
plaintiffs may consider going after directors and officers to reach as many cash
sources as possible. An additional reason
for naming directors and officers is to
manufacture a tactical advantage, because
putting these decision makers on the hook
individually may work to create tension
between the company and its principals.
This could result in increased pressure
from the named directors and officers to
settle the case and, potentially, to settle
for more money.
A Wide Variety of Acts Covered by
Active Inducement
Inducement to infringe is as broad as the
range of acts by which one causes, urges,
encourages, or aids another to infringe
a patent.2 Acts that have been found to
induce infringement include licensing
activities, indemnification of third parties
for infringement, repair and maintenance
of infringing items, design of infringing
items, purchase of infringing items, providing instructions for use of infringing
items, advertising activities with respect
to infringing items, and publication of
information regarding patented products.3
The Legal Framework for
Inducement and the Intent
Requirement
Inducement of infringement is actionable
pursuant to 35 U.S.C. § 271(b): “Whoever
actively induces infringement of a patent shall be liable as an infringer.” There
are three primary elements that must be
shown to prove inducement of infringement.4 First, there must be an act of direct
infringement by some party.5 In the con-
text of director and officer liability, the
direct infringer may often be the company
that the individual directors and officers
serve. Stated another way, we are talking
about instances in which directors and
officers are held individually liable for
their company’s infringement. Second,
the accused inducer must have knowledge
of the patent at issue.6 And, third, the
inducer must have the intent to induce the
infringement.7
Some Act of Direct Infringement
As an obvious precursor to a finding of
inducement, there must first be an act of
infringement.8 Any act of infringement
will suffice. Courts will not consider the
prospect of indirect infringement unless
direct infringement is shown first.9
Knowledge of the Patent at Issue
A finding of inducement of infringement
“necessarily includes the requirement that
[the inducer] knew of the patent.”10 The
inducer’s knowledge can be either actual
or constructive.11 It follows that knowledge of the patent can be obtained on the
accused inducer’s own initiative, such
as pursuant to a patent search or from
general industry knowledge, or that the
accused inducer may be put on notice by
the patent holder.12 The manner in which
the accused infringer obtained knowledge
of the patent is not considered when making this determination.13
Intent to Induce Infringement
Prior to DSU Medical, there was a question as to the level of intent required to
show inducement.14 In Hewlett-Packard
Co. v. Bausch & Lomb Inc., in a decision issued on July 30, 1990, the Federal
Circuit found that “proof of actual intent
to cause the acts which constitute the
infringement is a necessary prerequisite to finding active inducement.”15
Subsequently, on October 23, 1990, in
Manville Sales, Corp. v. Paramount
Systems, Inc., a different Federal Circuit
panel found that, for purposes of showing
inducement, “[i]t must be established that
ABA Section of Litigation l Intellectual Property Litigation Committee
Published in Intellectual Property Litigation, Volume 21, Number 2, Winter 2010 © 2010 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be
copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
3
the defendant possessed specific intent to
encourage another’s infringement and not
merely that the defendant had knowledge
of the acts alleged to constitute inducement.”16 After these two cases, a majority
of the Federal Circuit panels considering
the requisite intent necessary for inducement ignored the Hewlett-Packard decision and adopted the heightened level
of intent standard set forth in Manville
Sales. However, there were a number of
decisions that followed the lower intent
threshold of Hewlett-Packard.17
An en banc section of the DSU Medical
decision resolved this conflict, affirming
the intent standard set forth in Manville
Sales in finding that “[t]he plaintiff has the
burden of showing that the alleged infringer’s actions induced infringing acts and that
he knew or should have known his actions
would induce actual infringements.”18 In
other words, the accused inducer must
An Overt Act of Inducement
Generally, a failure to prevent an infringement does not constitute inducement.22 In
reaching this decision, the Federal Circuit
noted that this would not be true in cases
in which the accused inducer exercises
control over the direct infringer. So, in
cases of director and officer liability for
inducing corporate infringement, directors and officers will not be able to escape
liability by allowing their companies to
continue known infringements.
Limitations on Director and Officer
Liability for Corporate Infringement
Many states, including Delaware, have
adopted “charter option statutes,” which
allow corporations to implement charter
provisions specifically limiting director
and officer liability.23 The problem is that
in some states, these statutes do not protect directors and officers from liability to
or judgment-proof, which may be the
impetus for pursuing inducement claims
against directors and officers in the first
place, indemnification by their company
will probably not be forthcoming.
A final means of limiting liability may
be director and officer insurance.27 Many
corporations maintain such insurance policies on behalf of their corporate officials.
But, once again, these policies do not
ensure against claims premised on bad
faith. The intent prong of the inducement
test may therefore wipe out coverage.
Directors and officers facing inducement charges will want to consider carefully their specific corporate charters, state
statutes, and any applicable insurance
policies to determine any limits on their
individual liability for inducement. If they
are found liable, however, in many cases,
these instruments will not insulate them
from liability.
The Best Defense
In the event that a corporate officer or
director is served with a suit alleging
inducement of his or her company’s
infringement, he or she should immediately
seek a competent opinion of counsel.
have had the specific intent to induce
infringement. This would appear to impose
a heavy burden on a plaintiff attempting
to prove inducement. The burden may be
lessened, at least to some degree, as courts
will consider circumstantial evidence of
intent.19 The “should have known” prong
of the intent requirement set forth in DSU
Medical also seemingly reduces the burden on plaintiffs with respect to proving
intent.20
Given the burden associated with
proving the intent element of a claim
for inducement, this is often the focus
of the inducement analysis. The best
evidence of intent, and therefore inducement, may be the accused inducer’s
control over the infringing acts—in the
case of directors and officers, the acts of
the company that they serve.21
4
third parties.24 In such cases, these statutes
will not protect directors and officers from
liability for inducement of corporate patent infringement.25 Because of this, plaintiffs considering the strategic benefits of
bringing claims against directors and officers may want to research relevant charter
option statutes when considering venue.
Some states also have indemnification
statutes that protect corporate directors
and officers from good-faith actions in
the best interests of the corporation.26
The problem with these statutes is that,
should liability be found for inducement,
the requirement of good faith would likely
not be satisfied in view of the intent prong
of the inducement test. For this reason,
these statutes will likely do little to protect directors and officers in most cases.
Further, if the corporation is bankrupt
In the event a corporate officer or director
is served with a suit alleging inducement
of his or her company’s infringement, he
or she should immediately seek a competent opinion of counsel. In view of DSU
Medical, an opinion of counsel outlining
the company’s noninfringement will very
likely be the linchpin of the inducement
defense and may provide an absolute
defense.
At least one district court case has held
that an advice of counsel defense has no
relevance in determining whether a defendant has induced infringement under 35
U.S.C. § 271(b).28 However, the Federal
Circuit has found that an opinion of counsel is relevant evidence in considering the
intent prong of the inducement test.29
DSU Medical requires a finding that
the accused inducer intended to cause
direct infringement or that there was a
specific intent to encourage another’s
infringement.30 It is important that the
intent standard focus on the accused
inducer’s state of mind. Because an opinion of counsel would negate the accused
inducer’s culpable state of mind, he or
she could not be found to possess the
necessary intent to induce. Therefore, an
opinion of counsel arguably provides a
complete defense to director and officer
liability for corporate infringement. It is
interesting that, had the Federal Circuit
adopted the intent standard of HewlettPackard, an opinion of counsel would not
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Published in Intellectual Property Litigation, Volume 21, Number 2, Winter 2010 © 2010 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be
copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
provide such a defense because that case
required only an intent to cause the acts
constituting infringement.31 Because of the
lack of a specific intent requirement, there
would have been no state of mind to be
negated by the opinion.
Conclusion
Corporate directors and officers will not
be able to invoke the corporate veil to
avoid liability for inducement of infringement on behalf of the companies they
serve. There are a number of strategic
reasons for naming these individuals
in infringement litigation, and given
the wide array of acts that can constitute inducement, such claims should be
a valid concern to many directors and
officers, especially those who represent
technology-driven companies. Proving a
lack of culpable intent will be the key in
defending against an inducement claim.
Therefore, any director or officer sued
for personal liability for inducement of
corporate patent infringement should seek
a competent opinion of counsel so as to
negate this intent element. This is even
more important given that corporate charters, state statutes, and insurance policies
will likely do little to limit director and
officer liability. If a competent opinion of
counsel is properly obtained, it may serve
as an absolute defense. l
Jason A. Wietjes and Michael D. Pegues
are with Bracewell & Giuliani LLP, Dallas,
Texas. They may be reached at jason
.wietjes@bgllp.com and michael.pegues@
bgllp.com.
Endnotes
1. E.g., Manville Sales, Corp. v. Paramount
Sys., Inc., 917 F.2d 544, 552 (Fed. Cir. 1990).
2. 17 Donald S. Chisum, Chisum on
Patents § 17.04[4] (Matthew Bender).
3. Id.
4. DSU Med. Corp. v. JMS Co., Ltd., 471
F.3d 1293 (Fed. Cir. 2006).
5. Id. at 1303.
6. Id. at 1304.
7. Id.
8. Id. at 1303.
9. Chisum, supra note 2, § 17.04[1].
10. DSU Med. Corp. v. JMS Co., Ltd., 471
F.3d 1293, 1304 (Fed. Cir. 2006).
11. Instituform Techs., Inc. v . Cat
Contracting, Inc., 161 F.3d 688 (Fed. Cir. 1998).
12. See id.
13. Id.
14. Id. at 1304–6.
15. Hewlett-Packard Co. v. Bausch &
Lomb Inc., 909 F.2d 1464, 1469 (Fed. Cir.
1990) (emphasis added).
16. Manville Sales, Corp. v. Paramount
Sys., Inc., 917 F.2d 544, 553 (Fed. Cir. 1990)
(emphasis added).
17. NCube Corp. v. Seachange Int’l, Inc.,
436 F.3d 1317 (Fed. Cir. 2006); MEMC
Elec. Materials, Inc. v. Mitsubishi Materials
Silicon Corp., 420 F.3d 1369 (Fed. Cir. 2005);
MercExchange, L.L.C. v. eBay, Inc., 401 F.3d
1323 (Fed. Cir. 2005), rev’d on other grounds,
547 U.S. 388 (2006).
18. DSU Medical, 471 F.3d at 1293, 1304.
19. See, e.g., Water Techs. Corp. v. Calco,
Ltd., 850 F.2d 660 (Fed. Cir. 1988).
20. DSU Medical, 471 F.3d at 1304.
21. See Water Technologies Corp., 850
F.2d 660 at 668.
22. Tegal Corp. v. Tokyo Electron Co.,
Ltd., 248 F.3d 1376, 1378 (Fed. Cir. 2001).
23. Joshua L. Cohen, Corporate Officers
and Directors: Likely Targets in Patent
Infringement Actions, 16 Del. J. Corp. L.
1327, 1356 (1991).
24. Id. at 1356–57.
25. See id.
26. Id. at 1358–59.
27. Id. at 1360–61.
28. Symbol Techs., Inc. v. Metrologic
Instruments, Inc., 771 F. Supp. 1390, 1405
(D.N.J. 1991).
29. See Micro Chem., Inc. v. Great Plains
Chem. Co., 194 F.3d 1250, 1261 (Fed. Cir. 2000).
30. DSU Medical, 471 F.3d at 1293, 1306.
31. Hewlett-Packard, F.2d at 1464.
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copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
5
Strategies for Indemnification under the UCC
Against Claims of Patent Infringement
By Paul E. McGowan
T
he scenario happens with some
frequency: Your client purchases
widgets from a seller and incorporates them into a product that it in turn sells
in the marketplace. Just as your client is
seeing a return on its efforts to develop a
manufacturing infrastructure and sales network, it learns of allegations that use of the
widgets may infringe a third party’s patent
rights. Although the widgets may be only a
minor component in the overall product,
your client faces the prospect of having its
entire operations shut down in the face of
a patent infringement lawsuit.
As you contemplate your client’s
exposure and any potential defenses to a
patent dispute in federal court, consider an
indemnification action against the seller
under the state’s Uniform Commercial
Code (UCC) for breach of the implied
warranty against claims of patent infringement. This often-overlooked cause of
action may allow your client to recover—
on an implied-contract basis—its costs
to defend or settle an expensive patent
infringement action, thus filling a gap
in the current patent laws. This article
describes an indemnification action under
the UCC, including recent court decisions
that appear to relax the applicable standard and provide a road map for assessing
its viability from both the buyer’s and the
seller’s perspectives.
Implied Warranty Against Claims of
Infringement under the UCC
In any contract for the sale of goods
governed by the UCC, certain implied
warranties run from the seller to the
buyer. These include the implied warranty against infringement (IWAI), in
which the seller assures the buyer that
use of the goods as delivered will not
infringe the intellectual property rights of
a third party. This makes for sound policy,
because the seller ostensibly has superior
knowledge of its own goods and can better identify any potential claims by a third
party that would interfere with the buyer’s
enjoyment of the goods. As an example of
how such a warranty is applied, consider
6
the IWAI contained in section 11-2-312 of
Georgia’s UCC.1
Warranty of title against infringement;
buyer’s obligation against infringement . . . (3) Unless otherwise
agreed, a seller who is a merchant
regularly dealing in goods of the kind
warrants that the goods shall be delivered free of the rightful claim of any
third person by way of infringement
or the like but a buyer who furnishes
specifications to the seller must hold
the seller harmless against any such
claim which arises out of compliance
with the specifications.
Based on this statute, therefore, an
indemnification action against the seller
arising out of a contract for the sale of
allegedly infringing goods involves the
following key elements (highlighted above):
1. “Unless otherwise agreed.” This
phrase codifies the bedrock principle
that any implied warranty will be
trumped by an express warranty or
by other agreement of the parties.
Thus, the first hurdle to asserting a
statutory indemnity claim against
a seller is to determine whether the
contract for the sale of goods contains any express agreement to limit
or exclude application of the IWAI.
2. By a “seller who is a merchant.”
Indemnification for breach of the
IWAI is limited to sales by a “merchant,” defined under the UCC as
one who regularly deals in goods of
the kind or otherwise by his or her
occupation holds himself or herself
out as having knowledge or skill
peculiar to the practices or goods
involved in the transaction. This is
broad enough to capture sellers such
as retail dealers, wholesalers, and
product manufacturers.
3. The seller warrants that the
“goods shall be delivered.”
Note that the IWAI has both a
temporal component and a scopeof-coverage component. As to
timing, any implied warranty generally arises when the seller tenders
delivery of the goods—the point at
which a cause of action for breach
of the IWAI arises, regardless of the
buyer’s knowledge of any breach of
the warranty. This is discussed in
more detail below.
As to scope, the seller’s warranty
against infringement is limited to the
goods themselves as they are delivered.
This was explained in the seminal case
of Motorola, Inc. v. Varo, Inc., which
held that the UCC only requires the
seller to provide goods free of patent infringement claims at the time
of delivery; it does not speak to the
buyer’s use of those goods, even if
such use infringes a third party’s patent
rights.2 That reasoning was later adopted in Chemtron, Inc. v. Aqua Products,
Inc., which also found no implied warranty covering the buyer’s conduct with
respect to the goods after delivery.3
This essentially limits indemnification
under the UCC to claims of direct patent infringement against the buyer by
the patent holder (i.e., the goods themselves were subject to claims of patent
infringement at the time of delivery).
Thus, if the buyer is accused of contributory infringement or inducement
to infringe, any indemnification action
by the buyer against the seller would
generally be preempted by the federal
patent laws.
4. The goods shall be delivered “free
of the rightful claim” of “infringement or the like” (by a third
party). While the UCC does not
define the types of “infringement or
the like” covered by the IWAI, the
Official Comments and relevant case
law tell us the warranty applies at
least to claims of patent, trademark,
and copyright infringement.4
It is the buyer’s burden to estab-
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copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
lish the seller’s breach of the IWAI
for failure to deliver the goods free
of infringement claims. Defining
what constitutes a “rightful claim”
of patent infringement has proven
quite difficult. In the seminal case of
Cover v. Hydramatic Packing Co.,
the Federal Circuit suggested that an
absolute finding of patent infringement is not required for the buyer to
seek indemnification from the seller.5 Since then, courts have extended
this principle to find that the actual
issue of infringement need not have
been adjudicated at trial—so long
as the buyer can establish that the
claim of patent infringement against
it was more than frivolous.6 Indeed,
recent decisions suggest that the
courts are continuing to lower the
bar for a buyer to meet its burden.
In Sun Coast Merchandise Corp.
v. Myron Corp., a New Jersey court
held that while a “rightful” claim of
infringement must be more than frivolous, it need only “cast a ‘substantial shadow’ on the buyer’s ability to
make use of the goods in question,
in order to constitute a breach of the
warranty against infringement.”7 In
so holding, Sun Coast further lessened the standard by suggesting the
“buyer must [only] establish that the
infringement claim is of a substantial nature that is reasonably likely
to subject the buyer to litigation, and
has a significant and adverse effect
on the buyer’s ability to make use of
the goods in question.”8 In Pacific
Sunwear of California, Inc. v. Olaes
Enterprises, Inc., a case of first
impression in California, the court
went beyond the Sun Coast standard,
stating that “[a] rightful claim under
[the UCC] is a nonfrivolous claim of
infringement that has any significant
and adverse effect, through the prospect of litigation or otherwise, on the
buyer’s ability to make use of the
purchased goods.”9 The most significant aspect of Pacific Sunwear, however, may be its explicit statement
that “[a] claim of infringement may
be rightful under [the UCC] whether
or not it is ultimately pursued in
litigation,” thus ostensibly allowing
claims for indemnification where,
“[f]or example, a . . . buyer, prior to
any litigation, voluntarily ceases to
use purchased goods due to a third
party claim of infringement.”10
Although Pacific Sunwear was
a trademark case, a California federal court, in Phoenix Solutions,
Inc. v. Sony Electronics, Inc., has
recognized that “there is no reason to construe section 2312(3) of
actually be sued for patent infringement to seek indemnification under
the UCC. Where the buyer is sued,
however, it must provide notice to
the seller of the infringement litigation within a “reasonable time” after
learning of that litigation as set forth
in section 11-2-607(3)(b). Although
Generally, the buyer can recover those
damages necessary to make it whole
as a result of defending and settling a
“righful claim” of patent infringement.
the California [Commercial] Code
any differently for patent cases.”11
Ultimately, this line of cases has the
potential to increase indemnification
claims by buyers who are the targets of cease-and-desist letters sent
by patent holders, thus opening the
floodgates for such claims.
5. Unless the “buyer [ ] furnishes
specifications to the seller.” The
IWAI operates in reverse if the seller
manufactures goods in compliance
with the buyer’s own specifications.
If so, it is the buyer who must hold
the seller harmless against any rightful claims of infringement.
Statutory Requirements for
Indemnification under the UCC
Predicates to indemnification under the
IWAI include the buyer’s compliance with
the notice, timing, and vouch-in provisions
of section 11-2-607, and consideration of
the statute of limitations of section 11-2725. A buyer’s failure to satisfy these
requirements can bar its recovery and will
operate as a defense for the seller.
1. Requirement that the buyer provide timely notice of the lawsuit.
As discussed, the buyer need not
the UCC does not define a “reasonable time” or specify the form of
notice, it is generally understood that
commercially reasonable standards
will apply.
2. Requirements associated with tendering and assuming the defense.
The so-called vouch-in provisions of
the UCC allow, but do not mandate,
a buyer who is sued to tender the
defense of the underlying litigation;
likewise, the seller may demand
control of the defense, including
settlement. The buyer’s notice must
be in writing and must adhere to
the form specified in section 11-2607(5)(a), which will be binding if
the seller fails to accept the defense.
Similarly, the seller’s written
demand that the buyer tender the
defense will be binding on the buyer
so long as the demand specifically
adheres to the form specified in section 11-2-607(5)(b).
3. Requirement to timely seek
indemnification. The applicable
statute of limitations for seeking
indemnification will vary with the
particular state’s commercial code.
In Georgia, for example, section
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7
Tactical Considerations for the Buyer and the Seller
Both the buyer and the seller face certain
strategic choices in assessing the viability
of an indemnification action for breach
of the IWAI. These include identifying
the proper forum and necessary parties as
well as consideration of federal preemption and removal.
1. Selecting the proper forum. Any
action for indemnification due to
a breach of the IWAI turns solely
on a particular state’s UCC, as it
affects the contractual relations
between the buyer and seller.
Nevertheless, the elements of an
indemnification action do implicate
the patent laws to the extent necessary to establish a “rightful claim”
of patent infringement. Therefore,
such an action can generally be
properly asserted in either a state
court (e.g., as a separate, contractbased action) or a federal court
(e.g., as a cross-claim or impleader
action in the underlying federal
court action), depending on the
circumstances.i
2. Identifying the necessary parties.
Because any indemnification action
under the UCC concerns the contractual relationship between the
buyer and the seller, the patent
holder is not a necessary party—
whether indemnification is raised in
a separate state court action or as a
state-law-based claim appended to
the underlying federal litigation.
3. Consideration of federal preemption. Principles of federal preemption shape the applicability of
11-2-725(1) states that “[a]n action
for breach of any contract for sale
must be commenced within four
years after the cause of action has
accrued,” while section 11-2-725(2)
provides that any such cause of
action accrues when the breach
occurs, regardless of the aggrieved
party’s lack of knowledge of the
8
any indemnification action for
breach of the IWAI under the UCC
First, only the patent holder has
standing under the federal patent laws
for patent infringement claims. Thus,
any other patent-related claims asserted against the buyer are generally
preempted. Second, as discussed
above, the buyer’s claim for indemnification by the seller is proper only if
the patent holder brings a claim
against the buyer for direct infringement, i.e., the goods themselves were
infringing at the time of delivery. By
comparison, the buyer cannot seek
indemnification from the seller if the
claim against the buyer is for contributory infringement and/or inducement
to infringe—both of which turn on
the buyer’s conduct with respect to
the goods after taking delivery of the
goods. Accordingly, any state law
claims by the buyer for indemnification based on these theories of
infringement are generally preempted
by the federal patent laws.ii
4. Removal. If the buyer brings a
state court action under the UCC’s
indemnification provisions for
breach of the IWAI, the seller may
remove that action if the federal
court finds it has the requisite subject matter jurisdiction to evaluate
the underlying infringement allegations to determine whether it was a
“rightful claim” subject to indemnification in the first instance.iii Even
so, the federal court may wish to
sever such an action claim pending
a resolution of the underlying patent
infringement allegations.iv
breach. Because the IWAI pertains
to the goods only at the time of
delivery, any breach of that warranty
would occur when tender of delivery
is made, which is when the cause of
action for indemnification accrues.
In our scenario, therefore, any claim
for indemnification for breach of the
IWAI under the Georgia UCC must
Endnotes
i. See, e.g., Cover v. Hydramatic Packing Co.,
83 F.3d 1390, 1393–94 (Fed. Cir. 1996) (once
underlying patent infringement litigation had been
settled with the patent holder, the “patentee and
the patent code are no longer in the picture,” and
the remaining dispute involves only “the legal
relationship between two contracting parties [under
the state’s UCC]”); 84 Lumber, 145 F. Supp. 2d at
677 (indemnification claim filed by buyer against
seller as state court action after the underlying
patent infringement action had been settled, though
claim was later removed by seller to federal court).
ii. See, e.g., Motorola, Inc. v. Varo, Inc., 656
F. Supp. 716, 717–18 (N.D. Tex. 1986) (federal
patent laws specifically identify contributory
infringers and those who induce infringement,
and such claims cannot be the subject of state
law); Chemtron, Inc. v. Aqua Prods., Inc., 830
F. Supp. 314, 316 (E.D. Va. 1993) (“There is
no claim for contribution under the U.S. patent
laws, and none may arise under state law as it is
preempted by federal law.”)
iii. See, e.g., 84 Lumber, 145 F. Supp. 2d at
680 (state law indemnification claim turned on
substantial question of federal patent law, thus
federal court had subject matter jurisdiction to
compare patent scope with buyer’s allegedly
infringing conduct). But see Linear Tech.
Corp. v. Applied Materials, Inc., 152 Cal
App. 4th 115, 130 (Cal. 6th Ct. App. 2007)
(“contract-based causes of action [involving
allegations of patent infringement] can proceed
in state court” because “[a] case does not
arise under the patent laws merely because
questions of patent law may arise in the course
of interpreting a [sales] contract”).
iv. See, e.g., Tillotson Corp. v. Shijiazhaung
Hongray Plastic Prods., Ltd., No. 4:05cv0118,
2006 U.S. Dist. LEXIS 76978, at *6–7
(N.D. Ga. Oct. 23, 2006) (court exercised its
discretion to bifurcate and sever third-party
claims for breach of warranty under the UCC
because such claims involved distinctly separate
areas of the law and standards of liability.)
be brought within four years from
tender of delivery.
One word of caution: Calculating
the applicable statute of limitations
may be different if your particular
state has adopted the model UCC
(as revised). There are two significant changes to section 2-725(3)(d)
of the model UCC (as revised) that
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would affect the present analysis.
First, while there remains a fouryear statute of limitations for breach
of contract claims, the clock does
not begin to run on such claims
until the buyer discovered or reasonably should have discovered the
breach. Georgia law, by comparison,
reserves this so-called discovery
rule exclusively for application to
personal injury cases.12 Second, the
model UCC (as revised) implements
a six-year statute of limitations for
breach of the IWAI measured from
the tender of delivery of the goods.13
Thus, it pays to be aware of the
statute of limitations if your client
were sued in a state that adopts the
model UCC (as revised) or applies
the discovery rule to breach of warranty claims.
Damages Recoverable in an
Indemnification Action
Generally, the buyer can recover those
damages necessary to make it whole as a
result of defending and settling a “rightful claim” of patent infringement. These
include attorney fees, costs, and expenses,
as well as the reasonable costs of obtaining a license from the patent holder or
retooling the buyer’s plant to avoid future
infringement.14 Provided there was a
“rightful claim” of infringement, as discussed, the buyer could recover such damages without the necessity of an absolute
finding of patent infringement, and, under
the reasoning of Pacific Sunwear, the
buyer could do so even if the infringement
claim never materializes into litigation.
Conclusion
In any contract for the sale of goods, the
buyer or seller may find that a component,
or a product incorporating a component,
runs afoul of the patent rights of a third
party. This could land either or both parties in a federal court battle with the patent holder. Unless the sales contract says
otherwise, a state law indemnification
claim may arise under the UCC for breach
of the implied warranty against claims
of infringement. Despite some important
limitations, such a claim for statutory
indemnity can allow the buyer to recover
its costs to defend or settle a complex
patent infringement action even if the
underlying infringement issue is never
adjudicated. A seller, on the other hand,
must be aware of its obligations under
the UCC, and avoid its application by
contract, or rely upon a buyer’s failure to
comply with the procedural requirements
of such a cause of action to prevent its
applicability. More important, both parties should be aware of the courts’ recent
trend in lowering the bar for a buyer to
make out a “rightful claim” of patent
infringement—thus increasing the likelihood that an “innocent purchaser” can
recover its out-of-pocket costs due to the
misfortune of having purchased allegedly
infringing goods. l
Paul E. McGowan is an associate
at Troutman Sanders LLP in Atlanta,
Georgia. He may be reached at paul
.mcgowan@troutmansanders.com.
Endnotes
1. The Georgia UCC is similar to the
commercial codes adopted by the other
states and territories (except Louisiana) and
generally tracks the United States UCC (“the
model UCC”). The 2003 revisions to the
model UCC (“the model UCC (as revised)”)
include a modified statute of limitations for
indemnification claims for breach of the IWAI.
See infra. However, no state’s legislature has
adopted these revisions to date.
2. Motorola, Inc. v. Varo, Inc., 656 F.
Supp. 716, 718–19 (N.D. Tex. 1986) (“The
delivery of a good is warranted to be free of all
claims of infringement. There is no warranty
that a buyer’s use of the good will be free of
all infringement. . . . This would be a warranty
as to conduct, not as to goods.”).
3. Chemtron, Inc. v. Aqua Prods., Inc., 830
F. Supp. 314, 315 (E.D. Va. 1993) (“[A] buyer
. . . should not be entitled to purchase goods
from a seller . . . which are not subject to any
infringement action [at the time of delivery],
use the non-infringing component goods in an
infringing device and incur liability to a third
party patentee . . . and then turn around and
impose liability on the original seller of the
component parts.”).
4. See, e.g., Pure Country Weavers, Inc.
v. Bristar, Inc., 410 F. Supp. 2d 439, 447–48
(W.D.N.C. 2006) (UCC’s warranty against
infringement applies to copyrights as well as
patent and trademark infringement.).
5. Cover v. Hydramatic Packing Co., 83
F.3d 1390, 1394 (Fed. Cir. 1996) (stating
in dicta that “rightful claim” of patent
infringement for purposes of indemnification
under the UCC does not “equate” to a finding
of patent liability).
6. See,.e.g., 84 Lumber Co. v. MRK Techs.,
Ltd., 145 F. Supp. 2d 675, 680 (W.D. Pa. 2001)
(“If claims of patent infringement are seen as
marks on a continuum, whatever a ‘rightful
claim’ is would fall somewhere between purely
frivolous claims at one end, and claims where
liability has been proven, at the other.”); Linear
Tech. Corp. v. Applied Materials, Inc., 152 Cal
App. 4th 115, 128–30 (Cal. 6th Ct. App. 2007)
(“rightful claim” of patent infringement does
not require a finding of whether buyer “actually
infringed” the patent).
7. 393 N.J. Super. 55, 79 (N.J. Super. Ct.
App. Div. 2007) (“We agree that a frivolous
infringement claim does not generate a breach
of the [IWAI] . . . any more than a buyer is
obligated to prove the seller’s liability for
infringement to succeed in demonstrating a
breach of this warranty.”).
8. Id. at 79–80 (emphasis added).
9. 167 Cal. App. 4th 466, 482 & n.10
(Cal. App. 4th 2008) (emphasis added) (use
of “nonfrivolous claim” standard designed to
erase any “potential implication” of Sun Coast
that the “warranty is triggered by the [mere]
filing of litigation, without any evaluative
inquiry into the merits of the underlying claim
itself”).
10. Id. (emphasis added).
11. 2009 U.S. Dist. LEXIS 48208, at *36
(N.D. Cal. June 4, 2009) (rejecting argument
that claim construction of the underlying
patent infringement action was a predicate for
finding a breach of the IWAI).
12. See, e.g., Corp. of Mercer Univ. v.
Nat’l Gypsum Co., 258 Ga. 365, 365–66 (Ga.
1988).
13. As the Official Comments explain,
this is actually a statute of repose. See UCC
§ 2-725(3)(d) cmt. 4 (2003) (“In recognition of
a need for a time of repose in an infringement
case, a party may not bring an action based
upon a warranty of non-infringement more
than six years after tender of delivery.”)
14. See, e.g., 84 Lumber Co. v. MRK
Techs., Ltd., 145 F. Supp. 2d 675, 679–80
(W.D. Pa. 2001) (buyer who settled underlying
patent infringement litigation with patent
holder can recover costs from seller in separate
indemnification action).
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9
The Common Law and Secondary Liability:
Culpability and Procedure in Trademark and
Copyright Litigation
By J. Alexander Hershey
T
he courts frequently note that copyright and trademark infringement
are “species” of tort for which any
participant in the chain of commerce can
be secondarily liable. But what are the
consequences of basing secondary liability
under the Lanham Act and Copyright Act
on the broad principles of common-law
tort and agency law? What do the courts
really mean, and what should potential
parties scrutinize to understand their
potential claims and liabilities?
In general terms, the United States
Supreme Court has recognized that principles of secondary infringement liability
are based on broad common-law notions.
“[V]icarious liability is imposed in virtually all areas of the law, and the concept of
contributory infringement is merely a species of the broader problem of identifying
the circumstances in which it is just to hold
one individual accountable for the actions
of another.”1 Taking this observation from
the Court’s decision in Sony Corp. v.
Universal City Studios on its face, a court
may look to an array of common-law principles in assessing and imposing secondary
liability on those who assist in or benefit
from acts of infringement.
Claims of contributory and vicarious
infringement are not specifically codified in the Lanham Act or the Copyright
Act, and in passing, the Supreme Court
has referred to “the non-statutory tort
of contributory infringement.”2 As was
succinctly stated in the Supreme Court’s
subsequent decision in Metro-GoldwynMayer Studios Inc. v. Grokster Ltd.,
“[o]ne infringes contributorily by intentionally inducing or encouraging direct infringement and infringes vicariously by profiting
from direct infringement while declining to
exercise a right to stop or limit it.”3
Ultimately, parties and courts must look
beyond the specific statutory provisions to
determine the effects of common-law tort
and agency principles on the substantive
rights and procedural issues presented by
cases of secondary liability. As discussed
10 below, the division of tort law into intentional, unreasonable, and strict liability
wrongdoing affects the analysis of secondary infringement liabilities, and commonlaw principles also influence potential procedural issues in infringement litigation.
The Tort Law Knowledge
Requirements of Contributory
Liability
Contributory Liability under the Lanham Act
Pursuant to tort law principles, a plaintiff
may state contributory infringement claims
against all those who induce or assist in
the underlying infringement. Under the
Supreme Court’s decision in Inwood
Laboratories, Inc. v. Ives Laboratories,
Inc., a secondary defendant can be held
contributorily liable for trademark infringement where it has either intentionally
induced the primary infringer to commit
the infringement or continued to provide
assistance to the primary infringer knowing that it was engaged in infringement.4
Anyone who knowingly participates in the
marketing of infringing goods or services
can be held liable under trademark law,
and such knowledge is assessed based on
what a reasonably prudent person should
have known.5 Thus, contributory infringement liability can arise from intentional or
negligent wrongdoing.
To answer questions concerning the
potential scope of contributory liability
given the absence of governing statutory
language,
[courts] have treated trademark
infringement as a species of tort and
have turned to the common law to
guide our inquiry into the appropriate boundaries of liability. . . . Thus,
courts have discerned contributory
infringement principles under the
Lanham Act from the state common
law from which the Act is derived.6
Indeed, courts have recognized that both
state and federal trademark remedies,
including remedies for contributory
infringement, evolved from and codified
common-law tort principles.7
As a result of their common-law basis,
tort law contributory infringement principles can also be extrapolated from the
subsections of sections 876 and 877 of the
Restatement (Second) of Torts.8 A defendant may be liable if he or she “act[s] in
concert” with the direct infringer, knowingly “giv[es] substantial assistance or
encouragement” to the direct infringer, or
“orders or induces the conduct” that constitutes infringement.9 The Restatement
(Third) of Unfair Competition similarly
subjects a secondary defendant to contributory infringement liability where it either
“intentionally induces” the infringement
or “fails to take reasonable precautions
against” infringement that “can be reasonably anticipated.”10
Thus, the level of knowledge necessary
for contributory trademark infringement is
governed in large part by tort law’s “intentional” and “reasonable person” standards.
A secondary defendant “has no affirmative
duty to seek out and prevent trademark violations, but has a duty only to understand
what a reasonably prudent person would
understand.”11 In short, tort law injects
issues of mental state and duty of care into
claims of contributory Lanham Act liability
that are not present in the basic elements of
direct infringement.
Contributory Liability under the Copyright Act
Like trademark liability, “[c]ontributory
copyright infringement is a form of secondary liability with roots in the tort-law
concepts of enterprise liability and imputed intent.”12 A “defendant is a contributory infringer if it (1) has knowledge of
a third party’s infringing activity, and (2)
induces, causes, or materially contributes
to the infringing conduct.”13
Notably, unlike in the case of vicarious
infringement, if a defendant lacks knowledge of the underlying infringement, a
claim for contributory copyright infringe-
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ment will not stand.14 Constructive
knowledge may suffice, however, and
“[a]n individual may be liable for contributory infringement even where she does
not have actual knowledge of the infringing activity, but should have reason to
know of the infringing conduct.”15 Thus,
in discerning the scope of appropriate liability, courts will distinguish between
codefendants who had no reason to know
and who knew or should have known of
infringement.16
In Grokster, the Supreme Court reconsidered the rule set forth in its Sony decision and held that “one who distributes
a device with the object of promoting its
use to infringe copyright, as shown by
clear expression or other affirmative steps
taken to foster infringement, is liable
for the resulting acts of infringement by
third parties.”17 Although its outcome
was largely based on issues of proof,
the Grokster decision sets forth a test
for intentional inducement liability that
falls within language used by the courts
to define contributory infringement. The
Court noted that contributory infringement
incorporates “rules of fault-based liability
derived from the common law.”18 Given
the facts of the case, the Court focused
on the secondary infringement liability of
defendants who are not only unreasonable
and negligent but who also act intentionally to bring about primary infringement.
In fact, previous notions of contributory infringement can be divided into
cases of negligent support for infringement and intentional wrongdoing, and
some courts and commentators have formally split these two theories of liability.19
In the recent decision in Arista Records
LLC v. Usenet.com, Inc., the court treated
inducement and contributory liability
separately and granted summary judgment
for the plaintiffs on theories of inducement, contributory, and vicarious infringement. The Arista court noted that, after
Grokster, inducement may be considered
a “new theory of secondary copyright liability” for those who undertake “by clear
expression or other affirmative steps taken
to foster infringement by third parties.”20
The Grokster decision can, however, be viewed as simply focusing
on the “actual knowledge” rather than
“reason to know” aspects of contributory infringement. It is not clear that, in
Grokster, the Supreme Court intended
to redefine the categories of secondary
liability. Traditional and evolving notions
of secondary infringement liability have
included both liability for those who
intentionally support infringement and a
more careful balancing analysis for those
who unreasonably contribute to the direct
infringer’s conduct. The Grokster decision
notes that “at common law a copyright or
patent defendant who ‘not only expected
Injunctive relief is
enforceable against all
joint tortfeasors and
can even be asserted
against non-parties.
but invoked [infringing use] by advertisement’ was liable for infringement ‘on
principles recognized in every part of the
law.’”21 The Court then concluded that
“[t]he rule on inducement of infringement as developed in the early cases is
no different today.”22 Thus, rather than
evolving away from traditional commonlaw notions or creating new theories of
secondary liability, the Court’s Grokster
decision specifically notes its adherence to
traditional principles.
The Basis of Vicarious Strict
Liability in Agency Law
Vicarious Liability under the Copyright Act
The Ninth Circuit has noted that “[v]icarious infringement is a concept related to,
but distinct from, contributory infringement. Whereas contributory infringement
is based on tort-law principles of enterprise
liability and imputed intent, vicarious
infringement’s roots lie in the agency principles of respondeat superior.”23 Vicarious
liability stands as “a principle for enforcing
copyrights against a defendant whose economic interests were intertwined with the
direct infringer’s, but who did not actually
employ the direct infringer.”24
Vicarious copyright liability arises
where the defendant has the right and the
ability to supervise the acts that result
in infringement and the defendant has a
financial interest in the exploitation of
the copyrighted works.25 While vicarious infringement is often analogized to
respondeat superior, it in fact goes beyond
control through employee or corporate
relationships to include arm’s length
relationships that would allow the secondary defendant to regulate the infringing
activities of the primary infringer.26 Where
the direct infringer is the defendant’s
agent under common-law principles, the
defendant can be vicariously liable for the
agent’s own tortious infringement.27
In contrast to contributory infringement, vicarious infringement does not
require knowing participation in the direct
infringer’s wrongdoing or an intent to
induce the acts of infringement. “[I]n
general, vicarious infringement is a tort
of strict liability and hence the vicarious
infringer need not possess knowledge of
the infringement[.]”28 In short, for vicarious liability purposes, “[l]ack of knowledge of the infringement is irrelevant.”29
However, while knowledge and intent
are not among the requirements for the
imposition of vicarious liability, there
must be a causal connection between the
infringing activity and the financial benefit
derived by the secondary defendant.30
Vicarious Liability under the Lanham Act
Principles of vicarious infringement result
in a similarly broad scope of liability with
respect to trademark claims. After noting
the incorporation of common-law principles into contributory liability concepts
available under the Lanham Act, the court
in American Telephone & Telegraph Co.
v. Winback & Conserve Program, Inc.,
discussed at length the effect of commonlaw agency principles on the potential for
vicarious Lanham Act liability. Because the
Lanham Act essentially “federalizes a common law tort[,]” courts “have recognized the
propriety of examining basic tort concepts
to determine the scope of liability.”31
Ultimately, the acts of agents within
the defendant’s actual or apparent control—whether employees or independent
contractors—can subject the defendant to
Lanham Act liability. Vicarious liability
“requires a finding that the defendant and
the infringer have an apparent or actual
partnership, have authority to bind one
another in transactions with third parties or
exercise joint ownership or control over the
infringing product.”32 In resolving Lanham
Act vicarious liability claims, courts will
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11
consider common-law principles concerning whether independent contractors are
“authorized by [the defendant] to act on his
behalf or under his control” either expressly or impliedly as a natural and an ordinary
incident of the business relationship.33
In Winback, the court held that a “principal will be liable in an action brought
pursuant to section 43(a) of the Lanham Act
based on the agents’ foreseeable infringing
actions upon which it would be reasonable for the third party to rely[.]”34 Under
this standard, the principal need not actually control the agents’ infringing acts to
give rise to vicarious liability provided that
they are foreseeable. Where the infringing
actions were not specifically controlled,
however, the agents must be subject to the
secondary defendant’s general control or
be seen as acting with apparent authority
by those deceived by the misdescriptions
actionable under the Lanham Act.35
Notably, the Third Circuit’s consideration of foreseeability in assessing vicarious infringement under the Lanham Act
may conflict with a strict liability approach
and introduce a negligence standard.36
Foreseeability also plays a role, however,
in the assessment of the agency status of
the direct infringer and whether, in fact, the
secondary defendant can be held strictly
accountable for the agent’s infringing conduct. At times, in assessing vicarious liability, courts may examine the accused defendant’s knowledge or intent.37 Nonetheless,
cases decided under both the Lanham Act
and the Copyright Act emphasize that
vicarious infringement is a strict liability
offense where common-law agency principles are satisfied.
Procedural Implications of
Secondary Liability
The principles of secondary infringement
liability, including their common-law bases,
can also affect procedural determinations
in a case. Under the law of vicarious and
contributory liability, individual officers,
directors, proprietors, managers, and the
like can be held liable for infringement
together with their business entities for their
own tortious conduct, and such liability
does not depend on piercing the corporate
or entity structure.38 Thus, common-law tort
principles distinguish infringement liability
from the commercial liabilities of a corporation from which officers, directors, and
employees may be shielded.
As a result of the joint tortfeasor status
of multiple parties who directly, vicariously, or contributorily participate in
infringement, defendants found liable are
jointly and severally responsible for damages awarded to an infringement plaintiff.
Of course, injunctive relief is enforceable against each and all joint tortfeasors
and can even be asserted against nonparties.39 Where damages are assessed
based on a defendant’s profits, however,
recovery may be limited with respect to
other defendants who did not enjoy those
profits. Moreover, it is not clear that
Other Bases of Secondary Liability
The courts have explored various common-law bases of secondary infringement
liability—including vicarious liability, contributory liability, and inducement
liability—under common-law tort, agency, and respondeat superior principles.
Based on the Supreme Court’s remark in Grokster that “rules of fault-based
liability derived from the common law” remain available, it has been observed
that “[n]othing forecloses yet another doctrine from arising in future cases where
appropriate analogy to common law can fill the gaps left by existing species of
secondary liability.”i
Just as the Court in Grokster articulated an inducement theory that shares features with, but may be distinct from, knowing contributory infringement, courts
apparently remain free to review the common law’s panoply of “fault-based liability” to find applicable concepts. In other words, if existing secondary liability decisions do not support a clear cause of action, perhaps other traditional common-law
notions will support the liability of a secondary actor in a particular case.
Endnote
i. 3 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 12.04[A][5][b].
12 common-law principles of contribution
or indemnity would apply in the uniquely
federal context of the Copyright Act.40
Secondary liabilities can also affect
pleading and discovery issues. In Kelley v.
Euromarket Designs, Inc., the court lifted
a retailer’s designation of its supplier
information as confidential and permitted the plaintiff to amend to add claims
of contributory and vicarious copyright
infringement. Citing the general secondary liability principles discussed above,
the court noted that, “because the suppliers’ participation in the development
and production of the infringing products
is relevant and essential to proving [the
plaintiff’s] copyright infringement claims,
she is entitled to learn the identities of
[the] suppliers and examine their role in
the development and production of the
allegedly infringing products.”41
Similarly, because defendants who
are accused of secondary infringement
liability are potentially liable for their own
actions in assisting the direct infringer,
those actions are relevant in assessing
whether a particular court has personal
jurisdiction over them. In Rosenthal v.
MPC Computers, LLC, the court found
that a firm was subject to jurisdiction
under the Massachusetts long-arm statute
because, “through its active supervision
and management of [the direct infringer,
the firm] did cause tortious injury to
Plaintiff in the Commonwealth.”42 Thus,
secondary defendants cannot assert the
structure of an arm’s length transaction or
the corporate shield to challenge a court’s
jurisdiction to hear secondary liability
claims against them.43
Beyond pleading issues, copyright preemption principles will not apply to aiding
and abetting or civil conspiracy claims
where the underlying claims of tortious
conduct to which they relate are not preempted by the Copyright Act. “Aiding and
abetting or acting in concert solely with
respect to the nonpreempted . . . claim is not
preempted simply because the copyright law
imposes contributory and vicarious liability
on accused copyists for committing preempted conduct such as copying and using
protected material.”44 Such secondary claims
will, however, be preempted if they relate to
otherwise preempted claims asserted against
an accused infringer.
Finally, the theoretical underpinnings
of secondary liability can have an effect on
whether a court ruling is a final determina-
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tion for purposes of appeal. “[C]laims for
direct and contributory infringement are not
separate claims . . . but rather are separate
theories under which [a plaintiff] seeks
to hold [a defendant] liable for copyright
infringement.”45 As a result, the court in
Costar found that, where they are asserted
with direct infringement against a single
defendant, “the direct and contributory
infringement ‘claims’ are not separate claims,
but merely separate theories of copyright
liability, [and that] the court’s ruling on direct
infringement [alone] is not a final judgment.”
Conclusion
Common-law principles substantially
broaden the issues that may arise in
infringement litigation against potentially
liable secondary actors. Although direct
infringement claims may be assessed
under the applicable statutory language
and related federal case law, secondary
liability implicates broader principles of
culpability, agency, and procedure that
have evolved in the common law. As a
result, parties and their counsel should
pay close attention to the possible effects
of common-law principles both on substantive pleading and rulings and on the
procedural course of litigation. l
J. Alexander Hershey is a partner
at Thorp Reed & Armstrong, LLP, in
Pittsburgh, Pennsylvania. He can be
reached at ahershey@thorpreed.com or
412-394-2450.
Endnotes
1. Sony Corp. v. Universal City Studios, Inc.,
464 U.S. 417, 435 (1984).
2. Id. at 428.
3. Metro-Goldwyn-Mayer Studios Inc.
v. Grokster Ltd., 545 U.S. 913, 930 (2005)
(citations omitted).
4. Inwood Labs., Inc. v. Ives Labs., Inc., 456
U.S. 844, 854–55 (1982).
5. 4 J. Thomas McCarthy, McCarthy on
Trademarks and Unfair Competition
§ 25:19 (4th ed. 2009).
6. Hard Rock Cafe Licensing Corp. v.
Concession Servs., Inc., 955 F.2d 1143, 1148
(7th Cir. 1992) (the Inwood Labs test would
apply equally to a landlord as to a licensor under
the Restatement (Second) of Torts).
7. See Transdermal Prods., Inc. v.
Performance Contract Packaging, Inc., 943 F.
Supp. 551, 552–53 (E.D. Pa. 1996).
8. See generally Charles W. Adams, Indirect
Infringement from a Tort Law Perspective,
University of Tulsa Legal Studies Research
Paper No. 2007-03 (2007) (discussing the
relationship between Restatement and secondary
infringement liability principles), available at
http://ssrn.com/abstract=1019282.
9. Restatement (Second) of Torts
§§ 876(a), 876(b), 877(a).
10. Restatement (Third) of Unfair
Competition § 27(a), (b); see also id. §§ 7, 8,
26. Under the Restatement’s reasonable person
standard, “liability may be imposed on the
basis of an objective evaluation of the actor’s
conduct without the necessity of inferring
intent.” Restatement (Third) of Unfair
Competition § 27, cmt. c. Moreover, while
constructive knowledge has been found sufficient
to support contributory infringement liability,
section 26(2) of the Restatement (Third) of
Unfair Competition provides that, “[i]f an actor
subject to contributory liability . . . acted without
knowledge that the reproduction or imitation was
intended by the [direct infringer] to confuse or
deceive, the actor is subject only to appropriate
injunctive relief.”
11. SB Designs v. Reebok Int’l, Ltd., 338 F.
Supp. 2d 904, 912 (N.D. Ill. 2004).
12. Perfect 10, Inc. v. Visa Int’l Serv. Ass’n,
494 F.3d 788, 794–95 (9th Cir. 2007).
13. Id. (citations omitted).
14. See Parker v. Google, Inc., 242 F. App’x
833, 837, 2007 WL 1989660, at *3 (3d Cir.
2007).
15. Microsoft Corp. v. EEE Bus. Inc., 555
F. Supp. 2d 1051, 1059 (N.D. Cal. 2008) (citing
Cable/Home Commc’n Corp. v. Network Prods.,
Inc., 902 F.2d 829, 845–46 (11th Cir. 1990)).
16. See Mojica v. Boston Coll., No.
01-40017-CBS, 2004 WL 5708263, at *8–9 (D.
Mass. Jan. 9, 2004).
17. Metro-Goldwyn-Mayer Studios Inc. v.
Grokster Ltd., 545 U.S. 913, 936–37 (2005).
18. Id. at 934.
19. See 3 Melville B. Nimmer & David
Nimmer, Nimmer on Copyright § 12.04[A]
[5][b] (Matthew Bender, rev. ed. 2009)
(differentiating inducement and contributory
infringement); Alfred Chueh-Chin Yen, Torts
and the Construction of Inducement and
Contributory Liability in Amazon and Visa,
Boston College Law School Legal Studies
Research Paper No. 179 (May 19, 2009)
(discussing the relationship between tort law’s
levels of intent and subdivisions of secondary
copyright liability), available at http://ssrn.com/
abstract=1407257.
20. 2009 WL 1873589, at *19 (S.D.N.Y. June
30, 2009).
21. Grokster, 545 U.S. at 935.
22. Id.
23. Perfect 10, Inc. v. Visa Int’l Serv. Ass’n,
494 F.3d 788, 802 (9th Cir. 2007).
24. Fonovisa, Inc. v. Cherry Auction, Inc., 76
F.3d 259, 262 (9th Cir. 1996).
25. Ellison v. Robertson, 357 F.3d 1072, 1076
(9th Cir. 2004).
26. Nimmer, supra note 19, § 12.04.
27. See Restatement (Third) of Agency
§§ 7.04, 7.08.
28. Arista Records, Inc. v. MP3Board, Inc.,
No. 00 CIV. 4660 (SHS), 2002 WL 1997918, at
*10 (S.D.N.Y. Aug. 29, 2002).
29. Adobe Sys. Inc. v. Canus Productions,
Inc., 173 F. Supp. 2d 1044, 1048 (C.D. Cal.
2001).
30. See Louis Vuitton Malletier, S.A. v.
Akanoc Solutions, Inc., 591 F. Supp. 2d 1098,
1110 (N.D. Cal. 2008).
31. AT&T Co. v. Winback & Conserve
Program, Inc., 42 F.3d 1421, 1433 (3d Cir.
1994).
32. Hard Rock Cafe Licensing Corp. v.
Concession Servs., Inc., 955 F.2d 1143, 1150
(7th Cir. 1992).
33. Proctor & Gamble Co. v. Haughen, 222
F.3d 1262, 1278 (10th Cir. 2000) (granting
summary judgment for a defendant distributor
under the Lanham Act).
34. Winback, 42 F.3d at 1438 (emphasis in
original).
35. Id. at 1439.
36. The Winback court noted that in Sony,
the Supreme Court “explicitly has held that
secondary liability for trademark infringement
must be drawn more narrowly than secondary
liability for copyright infringement.” Winback, 42
F.3d at 1441; see also Hard Rock Cafe, 955 F.2d
at 1150 (noting and distinguishing the broader
copyright doctrine of vicarious infringement).
37. See David Hricik, Remedies of the
Infringer: The Use by the Infringer of Implied
and Common Law Federal Rights, State
Law Claims, and Contract to Shift Liability
for Infringement of Patents, Copyrights, and
Trademarks, 28 Tex. Tech. L. Rev. 1027,
1043 (1997) (examining contributory and
vicarious trademark and copyright infringement
principles).
38. McCarthy, supra note 5, § 25:24.
39. See id. § 25:25.
40. See Nimmer, supra note 19, § 12.04[C]
[4][b].
41. Kelley v. Euromarket Designs, Inc., No.
Civ. S-07-0232 RRB EFB, 2008 WL 223718, at
*2 & n.6 (E.D. Cal. Jan. 28, 2008).
42. Rosenthal v. MPC Computers, LLC, 493
F. Supp. 2d 182, 184–85 (D. Mass. 2007).
43. See Balance Dynamics Corp. v. Schmitt
Indus., Inc., 204 F.3d 683, 697–98 (6th Cir.
2000) (reversing dismissal of corporate officers
on jurisdictional grounds); Endless Pools, Inc.
v. Wave Tec Pools, Inc., 362 F. Supp. 2d 578,
582–85 (E.D. Pa. 2005) (applying tort-out/harmin theory of jurisdiction under the Lanham Act
and common law).
44. Tingley Sys., Inc. v. CSC Consulting,
Inc., 152 F. Supp. 2d 95, 113–14 (D. Mass.
2001).
45. Costar Group Inc. v. Loopnet, Inc., 172 F.
Supp. 2d 747, 749 (D. Md. 2001).
ABA Section of Litigation l Intellectual Property Litigation Committee
Published in Intellectual Property Litigation, Volume 21, Number 2, Winter 2010 © 2010 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be
copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
13
Just the Facts: Pleading Claims for Induced and
Contributory Patent Infringement after Iqbal
By Brandon Mark
F
ollowing the United States Supreme
Court’s decision in Ashcroft v.
Iqbal,1 which clarified the reach of
the Court’s decision in Bell Atlantic Corp.
v. Twombly,2 practitioners in all areas of
the law have been forced to reconsider
whether allegations that were previously
sufficient to state a claim for relief now
pass muster under the new standards. In
Iqbal, the Court reiterated that all claims
must contain “factual content that allows
the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.”3 The pressing question confronting plaintiffs is just how
much “factual content”—or, as Twombly
puts it, “further factual enhancement”—is
required to avoid dismissal.
After Twombly, in McZeal v. Sprint
Nextel Corp., the Court of Appeals for
the Federal Circuit held that, to state a
claim for patent infringement, a plaintiff
may simply follow the form complaint
appended to the Federal Rules of Civil
Procedure.4 Although the form patent
infringement complaint, Form 18, has
remained largely unchanged since it was
first adopted in 1938 and contains scant
“factual content,” Rule 84 of the Federal
Rules of Civil Procedure provides that
“[t]he forms in the Appendix suffice under
the[] rules.”5 In partial dissent in McZeal,
Judge Dyk lamented that while “a bare
allegation of literal infringement using the
form is inadequate to provide sufficient
notice to an accused infringer,” the court
was constrained by Rule 84 to find that
allegations that track the form are sufficient to state a claim.6
Although the form patent infringement
complaint suffices, at least for now, to
state a claim for literal direct infringement,
the form complaint does not address any
other type of infringement claim, such
as infringement by equivalents or the
indirect types of infringement. As Judge
Dyk cautioned, “the forms should not be
interpreted as going beyond the fact situation described in the form.”7 Therefore,
while a plaintiff may seek refuge in the
form complaint for routine claims of literal,
14 direct infringement, questions remain about
the minimum allegations necessary to state
claims for other kinds of infringement.
Well before McZeal and Judge Dyk’s
comments about the proper scope of the
form complaint, district courts had recognized the inherent limitations of the
form complaint, especially for claims of
induced and contributory infringement.
In Shearing v. Optical Radiation Corp.,
for example, the court recognized that the
form patent infringement complaint “does
not contain the necessary allegations for
[35 U.S.C.] § 271(b) and (c) liability,”8
which are, respectively, the sections
of the statute that establish claims for
induced infringement and for contributory
infringement.
The median cost of
discovery in patent
infringement litigation is
now between $350,000
and $3 million.
As a preliminary matter, claims for
indirect infringement contain certain
essential elements not required of claims
for direct patent infringement.9 Although
the statutory language defining induced
infringement is rather simple—anyone
who “actively induces infringement of a
patent” is also guilty of infringement—
additional elements are necessary to
establish such liability. In particular,
liability for actively inducing another to
infringe a patent “requires evidence of
‘specific intent’ to induce infringement.”10
Although Rule 9(b) permits conditions of
the mind, such as “intent,” to be “alleged
generally,” a claim for induced infringe-
ment must at least contain a general allegation of intent.
Likewise, to establish liability for contributory infringement, a plaintiff must not
only show infringement by another party,
but it must also demonstrate that the defendant had knowledge that a “material or
apparatus” that it sells is “especially made
or especially adapted for use in an infringement of [the plaintiff’s] patent” and is “not
a staple article or commodity of commerce
suitable for substantial noninfringing
use.”11 Absent such express allegations
of knowledge, a claim for contributory
infringement should fail a Rule 12(b) test.
Although the “specific intent” and
“knowledge” pleading requirements may
not be particularly onerous for plaintiffs
because they may be alleged generally, a more difficult problem confronts
plaintiffs bringing claims for indirect
patent infringement. Following Iqbal, the
important question that plaintiffs asserting claims for induced and contributory
infringement must answer is how much
“factual content” a complaint must contain connecting the defendants’ activities
to the underlying direct infringement.
Because “[a] defendant’s liability for
indirect infringement must relate to the
identified instances of direct infringement,” a plaintiff must typically allege
direct infringement by a party other
than the defendant accused of indirect
infringement to state a viable indirect
infringement claim.12 For example,
to establish a claim for infringement
by inducement pursuant to 35 U.S.C.
§ 271(b), “there must have been direct
infringement by someone other than
the inducer.”13 Likewise, a claim for
contributory infringement also requires
direct infringement by some other party.14
Hence, to state viable claims for indirect
infringement, a plaintiff must allege direct
infringement by one party and then connect that infringement to the acts of the
defendant accused of contributing to or
inducing such infringement.
However, in the wake of Iqbal and
Twombly, “[a] pleading that offers ‘labels
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copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
and conclusions’ or ‘a formulaic recitation
of the elements of a cause of action will
not do.’”15 This proscription, and the manner in which the Court applied it in Iqbal
and Twombly, has important implications
for claims of indirect patent infringement.
While a plaintiff asserting such claims
can arguably recite just the allegations of
the form patent infringement complaint to
establish the underlying direct infringement, the plaintiff must then aver facts
linking that direct infringement to the acts
constituting inducement or contribution.
Such allegations would seem to be necessary, at a minimum, to support a “reasonable inference that the defendant is liable
for the misconduct alleged.”16 Moreover,
it is likely that the “factual content” of
the allegations connecting the defendant’s
conduct to the underlying infringement
will be the most vulnerable to an Iqbalstyle challenge.17
Indeed, the allegations found wanting
in both Iqbal and Twombly involved a
very similar factual issue: the defendants’
alleged connection to the conduct of other
defendants. In both Iqbal and Twombly,
establishing such a nexus was a necessary element of the defendants’ liability.
In Twombly, for example, the plaintiffs,
to sustain their antitrust claims, were
required to plead facts demonstrating
an illegal agreement between the defendants. Although the plaintiffs alleged that
defendants engaged in parallel business
behavior consistent with a conspiracy,
the Supreme Court emphasized the need
“for allegations plausibly suggesting
(not merely consistent with) agreement”
between the defendants.18 Absent factual
averments establishing “plausible grounds
to infer an agreement,” the Court was
unwilling to permit the plaintiffs the right
to conduct discovery, often an expensive
exercise in antitrust cases.19
In Iqbal, the crucial allegations centered on whether the defendants “themselves acted on account of a constitutionally protected characteristic.”20 While
the plaintiff had adequately “allege[d]
that various other defendants . . . may
have [targeted plaintiff] . . . for impermissible reasons,” the plaintiff had no
factual allegations linking the defendants
at issue—high-ranking officials—to the
impermissible policies executed by lower
level personnel.21 Because those highranking officials were not, as a matter of
law, vicariously liable for the actions of
their subordinates, the plaintiff’s failure
to draw a factual nexus from the allegedly
unconstitutional policies to the defendants
themselves required the dismissal of the
claims against them.
For similar reasons, it would appear
that plaintiffs asserting claims for
induced and contributory patent infringement must be prepared to allege facts
that plausibly establish a connection
between the defendant’s actions and the
underlying direct infringement. Although
this may be an easy obstacle to surmount
in the typical case, there are certainly
occasions when a plaintiff has a reasonable, good-faith suspicion of such a
connection but has no basis upon which
to allege facts to support that suspicion
without the opportunity to conduct discovery. Nevertheless, absent such allegations, courts will be reluctant to “unlock
the doors of discovery”22—a paradox that
plaintiffs in all types of cases will likely
face after Iqbal.
According to statistics cited by Judge
Dyk in McZeal, the median cost of discovery in patent infringement litigation is now
between $350,000 and $3 million.23 Because
discovery in patent infringement cases is a
time-consuming and expensive proposition,
especially, perhaps, in those cases in which
indirect infringement is alleged, plaintiffs
must be prepared to allege enough facts to
persuade the district courts that there is a
“reasonable expectation that discovery will
reveal evidence” to sustain the plaintiffs’
claims.24 This will require plaintiffs to allege
facts sufficient to satisfy the courts that their
indirect infringement claims are “plausible”
and, thus, that discovery will be more than
an expensive fishing expedition. To do so,
plaintiffs asserting claims for induced and
contributory patent infringement must, to
paraphrase Twombly, allege facts suggestive
of, and not simply consistent with, intentional inducement of the underlying infringement and knowledgeable contribution to it.
As practitioners begin to understand
the full impact of Iqbal, it is likely that
plaintiffs, including those asserting patent infringement claims, will face a wave
of new Rule 12(b) challenges. Because
Iqbal is a potential trap for the unprepared, a plaintiff bringing claims for patent
infringement, especially claims for induced
and contributory infringement, must carefully consider how much factual enhancement the claims require to convince the
district court of their plausibility. l
Brandon Mark is an associate at the
Salt Lake City office of Parsons Behle &
Latimer. He may be reached at bmark@
parsonsbehle.com.
Endnotes
1. 129 S. Ct. 1937 (2009).
2. 550 U.S. 544 (2007).
3. 129 S. Ct. at 1949.
4. McZeal v. Sprint Nextel Corp., 501 F.3d
1354 (Fed. Cir. 2007).
5. See id. at 1360–61 (Dyk, J., dissenting).
6. Id. at 1360; see also Elan Microelectronics
Corp. v. Apple, Inc., No. C 09-01531, 2009
WL 2972374, at *2 (N.D. Cal. Sept. 14, 2009)
(“It is not easy to reconcile Form 18 with the
guidance of the Supreme Court in Twombly
and Iqbal; while the form undoubtedly
provides a ‘short and plain statement,’ it
offers little to ‘show’ that the pleader is
entitled to relief.”).
7. Id. at 1361.
8. Shearing v. Optical Radiation Corp.,
CV-5-93-870, 1994 WL 382444, at *2, 30
U.S.P.Q.2d 1878 (D. Nev. Mar. 24, 1994).
9. Elan Microelectronics, 2009 WL
2972374, at*2 (“Both types of indirect
infringement include additional elements, none
of which Form 18 even purports to address.”).
10. BMC Res., Inc. v. Paymentech, L.P.,
498 F.3d 1373, 1381 (Fed. Cir. 2007).
11. 35 U.S.C. § 271(c).
12. Dynacore Holdings Corp. v. U.S. Phillips
Corp., 363 F.3d 1263, 1274 (Fed. Cir. 2004).
13. Shearing, 1994 WL 382444, at *2
(emphasis added).
14. RF Del., Inc. v. Pac. Keystone Techs.,
Inc., 326 F.3d 1255, 1268 (Fed. Cir. 2003)
(“[L]iability for either active inducement of
infringement or for contributory infringement
is dependent upon the existence of direct
infringement by” others.).
15. Iqbal, 129 S. Ct. 1937, 1949 (2009)
(quoting Twombly, 550 U.S. 544, 555 (2007)).
16. Id. at 1949.
17. Cf. Pegasus Imaging Corp. v. Northrop
Grumman Corp., No. 8:07-CV-1937, 2008
WL 5099691, at *2 (M.D. Fla. Nov. 25,
2008) (holding that the plaintiff’s claim for
contributory copyright infringement “fails,
under the dictates of Twombly” because
it “includes only vague and conclusory
allegations with respect to direct involvement
by” the defendant).
18. Twombly, 550 U.S. at 556–57.
19. Id.
20. Iqbal, 129 S. Ct. at 1952.
21. Id.
22. Id. at 1950.
23. McZeal v. Sprint Nextel Corp., 501
F.3d at 1362 n.13 (Dyk, J., dissenting) (citing
AIPLA, Report of the Economic Survey
2007, 25 (2007)).
24. Twombly, 550 U.S. at 556.
ABA Section of Litigation l Intellectual Property Litigation Committee
Published in Intellectual Property Litigation, Volume 21, Number 2, Winter 2010 © 2010 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be
copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
15
Respondeat Superior under the Uniform Trade
Secrets Act
By Adam Kargman
T
wo companies with similar
names—Mr. Plow and Plow
King—compete for driveway
snow-plowing services in Springfield.1
Recently, Mr. Plow hired a new addition
to its sales force, Gil, who held a similar
position at Plow King. Unknown to Mr.
Plow, Gil begins generating leads through
the help of a computer file that he copied
from Plow King before his departure.
The file contains a confidential list of
homeowners in the area with a history of
ordering snow-plowing services. Although
Mr. Plow experiences a slight increase
in sales, nothing about the additional
profits is unusual. Lo and behold, Plow
King finds out about the use of the file
and hits Mr. Plow with a lawsuit for trade
secret misappropriation under the state’s
Uniform Trade Secrets Act (UTSA).
Predictably, Mr. Plow protests that the
company was in the dark about Gil’s
alleged activity and should not be liable.
Plow King asserts that Mr. Plow, as Gil’s
employer, is legally responsible under the
doctrine of respondeat superior.
Under traditional notions of tort law,
Plow King would be correct if it can
establish that Gil’s activities were in the
course and scope of employment. Under
the UTSA, however, the law is less clear:
Jurisdictions are split as to whether vicarious liability applies at all. The few cases
to address the issue have all arisen within
the past few years, possibly signaling a
trend by claimants to try to expand the
traditional reach of the UTSA. This article
analyzes the law in the area and offers
steps employers can take to protect themselves against potential liability.
The Uniform Trade Secrets Act
In 1979, the National Conference of
Commissioners on Uniform State Laws
approved the UTSA in an attempt to conform various common-law approaches
to trade secret misappropriation.2 Under
the UTSA, information must meet two
elements to qualify as a trade secret: (1)
the information must “derive[ ] independent economic value, actual or potential,
16 from not being generally known to, and
not being readily ascertainable by proper
means by, other persons who can obtain
economic value from its disclosure or
use”; and (2) it must be “the subject
of efforts that are reasonable under the
circumstances to maintain its secrecy.”3
Classic examples of trade secrets are customer lists and software.
Misappropriation of a trade secret may
occur in three forms: improper acquisition, disclosure, or use. To establish
liability, the plaintiff must prove that the
defendant either used improper means
to acquire the trade secret directly or
“[knew] or [had] reason to know” that
the information at issue is a trade secret
and that it was acquired through some
impropriety, breach of duty, accident, or
mistake.4 The UTSA provides trade secret
owners with several remedies, including injunctive relief, damages, recovery
of amounts of unjust enrichment, and
exemplary damages.5 It also provides an
equitable defense to a defendant where it
makes “a material and prejudicial change
of position prior to acquiring knowledge
or reason to know of misappropriation.”6
At present, 45 states and the District of
Columbia have adopted the act in some
form.7 In most states, the UTSA “displaces” conflicting civil law claims.8
Respondeat Superior
Under the legal doctrine of respondeat
superior, vicarious liability may be
imposed on an employer for the torts of
an employee when committed within the
employee’s scope of employment.9 No
proof of the employer’s knowledge is
required. In fact, liability may arise even
when the employer directs the employee
to the contrary. Traditionally, respondeat
superior has been justified on the public
policy ground that an employer, albeit
innocent, should be responsible for injuries that are inherent in, or created by,
the employer’s enterprise.10 Consistent
with this view, the doctrine is applicable
only so long as the employee acts within
the scope of authority or in a manner
that could be reasonably foreseen by the
employer.
Respondeat Superior vis-à-vis the
UTSA
Historically, there has been a dearth of
case law under the UTSA on the subject
of respondeat superior. Indeed, a recent
Westlaw search using the words “trade
secret,” combined with “respondeat superior” or “vicarious liability,” returned
only a handful of opinions. One likely
explanation for this is that the UTSA, by
its terms, provides that mere acquisition
of a trade secret can be an act of misappropriation rendering the actor directly
liable if he or she “knows or has reason to
know” that the trade secret was acquired
by improper means.11 Thus, the UTSA
already captures a large subset of persons
who, under most torts, would only be
vicariously liable.12
A broader application of vicarious
liability under the UTSA poses problems,
as illustrated by the cases below.
Newport News Industrial v. Dynamic Testing, Inc.
The first published case to address respondeat superior under the UTSA, Newport
News Industrial v. Dynamic Testing, Inc.,
did not arise until 2001. In it, the District
Court for the Eastern District of Virginia
was called upon to decide whether the
plaintiff could assert a claim against an
employer for the alleged acts of misappropriation by its employee.
The employee, Samuel Runge, had
worked as engineer since 1982 for the
plaintiff, NNS, developing shock mount
systems for U.S. Navy ships. Runge’s
employment agreement specified that he
would not disclose NNS’s confidential
information or inventions. In 1999, Runge
resigned from NNS and went to work
for a competitor, DTI. Shortly thereafter, DTI created a shock mount system
that suspiciously mirrored NNS’s. NNS
alleged, among other things, that Runge
revealed trade secrets and other confidential information to DTI for the purposes of
developing the competing system. NNS
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sued Runge, DTI, and DTI’s successor in
interest under the Virginia Uniform Trade
Secrets Act (VUTSA), which closely tracks
the UTSA.
DTI brought a motion for judgment
on the pleadings on the grounds that the
VUTSA precluded application of respondeat superior. Like the UTSA, Virginia’s
act contains a provision “displac[ing]
conflicting tort, restitutionary, and other
laws.”13 According to DTI, that provision,
combined with the lack of any explicit
provision for respondeat superior liability
in the VUSTA, meant that the theory was
inapplicable.
The district court disagreed, holding that “[r]espondeat superior is not an
independent conflicting tort, civil claim
or remedy”; rather, “one simply relies on
this theory as a vehicle for imposing on
the principal liability for the underlying
wrongful acts of the agent.”14 The court
found no “conflict” with the VUTSA.
However, the court did recognize that
the VUTSA—like most states’ versions
of the UTSA—defines “misappropriation”
to require, at a minimum, “knowledge”
or “reason to know.” Thus, the definition
includes a mens rea requirement of recklessness. It would appear that imposing any
kind of strict liability, which is inherent in
the notion of respondeat superior, would go
beyond the scope of the act. Nonetheless,
the court concluded that respondeat superior would not change the nature of the
prohibited conduct: “[A]pplying respondeat
superior liability would not allow liability
without fault in the absolute sense, but
rather would allow liability based on the
fault of another—in this case, the fault
of Runge in misappropriating the trade
secret.”15 Accordingly, the court found no
discord with the “knowledge” or “reason to
know” requirement.
Hagen v. Burmeister & Associates, Inc.
Several months later, a similar case came
before the Minnesota Supreme Court.16
An insurance agent, Paul Hagen, had
signed a noncompetition agreement
with his former employer, Burmeister
& Associates, agreeing not to disclose
information (deemed to be “trade secrets”
pursuant to the agreement) related to
Burmeister’s policyholders. Hagen left
Burmeister for a new employer, American
Agency, and sent out solicitation letters
to Burmeister’s customers. Burmeister
sued Hagen under the Minnesota Trade
Secrets Act (MTSA). Against American,
Burmeister asserted a “respondeat superior claim.” (The significance of that
characterization will be discussed further
below). The trial court held in favor of
American, finding that the MTSA did not
permit recovery against an employer pursuant to respondeat superior. The court of
appeals reversed.
In the appellate court’s unpublished
opinion, the court analogized a claim
under the MTSA to an intentional tort
claim. It reasoned, somewhat speciously,
that respondeat superior can apply to tortious acts committed by employees, and,
therefore, “the general rule for vicarious liability should apply to trade secret
torts.”17 The court did not address the
statute’s recklessness requirement or the
provision that the MTSA displaces conflicting law.18
[W]e stress that we will assume for
purposes of this decision that an
employer can, as a matter of law, be
vicariously liable for an employee’s
UTSA violation. . . . Neither party
challenged that legal conclusion after
Hagen I, the issue has never been
thoroughly briefed by the parties, and
neither party raises the issue before
us now. Therefore, our analysis of
the narrow legal issue before us
occurs against the background of our
acceptance—for this case only—of
the proposition that there is no legal
prohibition to vicarious liability for
UTSA violations.20
Accordingly, the applicability of respondeat superior in Minnesota is far from
clear, despite the fact that Minnesota’s
statute is virtually identical to Virginia’s
Until the law is further clarified, employers
in states that have adopted the UTSA,
particularly those in technical or sensitive fields,
should take steps to protect themselves.
Surprisingly, neither party sought
review of the court of appeals’ decision. After remand and subsequent
appeal, when the case came before the
Minnesota Supreme Court, the issue of
the applicability of respondeat superior
to the MTSA was not before it. Instead,
the court focused solely on whether
Hagen was acting within the scope of
employment when he mailed the letter; it concluded that Burmeister’s
failure to introduce any evidence on
the issue of foreseeability—one of
the two elements of the scope-ofemployment test—was fatal to its
claim. 19 Significantly, the court, with a
somewhat emphatic qualification, left
open for challenge whether respondeat
superior was applicable at all:
statute, at issue in Newport News
Industrial.
Hagen is also of interest because, as
mentioned above, the plaintiff had asserted respondeat superior as a separate and
independent claim (rather than as a legal
theory attributing responsibility). This
appears to be how both the two lower
courts and the Minnesota Supreme Court
treated the claim.21 Although the minority of jurisdictions may take this view,
in those that do, there is added difficulty
in squaring respondeat superior with the
UTSA. Treated as a separate claim, a
clear case for preemption of respondeat
superior would appear to be mandated by
section 7(a)’s displacement language,22
as argued by the employer-defendant in
Newport News Industrial.
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17
Employer Safeguards
Imposing respondeat superior under the Uniform Trade Secrets Act (UTSA)
appears to turn the act’s “knows or has reason to know” requirement on its head,
transforming the act into a strict liability statute for innocent employers. If a
jurisdiction has taken the position that the UTSA is meant to occupy the field,i it
would seem that all remedies and liabilities should be as exclusively set forth in
the act, and that respondeat superior or other doctrines should not be imported
into the statute. The drafters of the UTSA could have included a respondeat superior provision, if that was intended.
In addition, respondeat superior appears to clash with an equitable defense
built into the UTSA: Section (2)(ii)(C) provides that misappropriation does not
include a situation where a person makes “a material change of his position”
before he “knew or had reason to know” of the trade secret status of information.
If an employer can establish that it innocently made a material change in its position, is it fair to nonetheless hold the employer liable under respondeat superior?
Until the law is further clarified, employers in states that have adopted the
UTSA, particularly those in technical or sensitive fields (or in the litigious driveway snow-plowing industry), should take steps to protect themselves.
Employment contracts should contain written policies forbidding disclosure or
use of a former employer’s trade secrets. In fact, an employer may wish to define
the scope of employment not to include the use of unauthorized trade secrets.
This may make it more difficult for a claimant to argue that the employee’s action
are “within the scope of employment.”
Employers should require new hires, particularly those recruited from competitors, to disclose immediately the existence of any confidentiality agreements
they have entered into with former employers.
In sensitive industries, employers may consider requiring new employees to
sign indemnity agreements for any liability arising from the employee’s use of a
former employer’s trade secrets.
Endnote
i. See, e.g., K.C. Multimedia, Inc. v. Bank of Am. Tech. Operations, Inc., 171 Cal.
App. 4th 939 (2009) (holding that the California Uniform Trade Secrets Act occupies
the field and preempts claims based on the same nucleus of facts as trade secret
misappropriation claims).
Infinity Products, Inc. v. Quandt
The most recent decision to address
these issues came down from the Indiana
Supreme Court in 2004. Infinity Products,
a manufacturer of webbing and strapping
products, alleged that a former employee,
Herbert Quandt,23 stole customer and cost
information, then used it to lure customers to his new employer, Fabri-Tech, Inc.
Infinity sued both Quandt and Fabri-Tech
under Indiana’s Trade Secrets Act (ITSA).
The trial court found that there was
insufficient evidence to demonstrate that
Fabri-Tech knew or should have known
of the misappropriation; thus, it was not
directly liable. The trial court also rejected
Infinity’s argument that, because Quandt
made use of the information while acting
within the scope of his employment with
Fabri-Tech, Fabri-Tech should be liable
18 under respondeat superior. The court of
appeals reversed on the issue of respondeat superior.
The Indiana Supreme Court, in assessing whether respondeat superior was applicable, noted that the ITSA’s preemption
provision “displaces all conflicting law of
this state pertaining to misappropriation of
trade secrets, except contract and criminal
law,” with no other exceptions.24 In contrast, the UTSA (and the trade secrets acts
of most states) specifically exempts “other
civil remedies that are not based on misappropriation of a trade secret.”25 Although
that notion may also be implicit in the
ITSA, i.e., a civil remedy “not based on
misappropriation of a trade secret” would
appear not to “pertain[ ] to misappropriation of trade secrets,” the Indiana court
nonetheless concluded that the ITSA’s dis-
placement provision was broader than the
UTSA’s. The court also placed significance
on the fact that commentary to the UTSA
stated that the displacement was intended
to cover “duties imposed from law.”26
Accordingly, the court held that respondeat
superior was inapplicable:
Surely, [respondeat superior] must
be thought of as conflicting with
the uniform act’s requirements that
a claimant demonstrate that the
defendant “knows or has reason to
know” that the trade secret at issue
was acquired by improper means. It
is thus displaced by the provisions of
the uniform act.27
The court briefly addressed Newport
News Industrial. It found that the two
cases did not necessarily conflict, because
Virginia’s displacement provision mirrored
what the court viewed as the less broad
displacement provision of the UTSA.28
In a forceful dissent, Justice Dickson
criticized the majority for creating a lack of
uniformity with other jurisdictions (namely
Virginia) in contravention of the statutory
purpose. He also opined that a risk of liability would serve as a powerful incentive for
employers to discourage employees from
misappropriating trade secrets. Finally, he
reasoned that relief—if limited to the assets
of the misappropriating employee—would,
in many cases, be relatively meager.29
Conclusion
The recent cases addressing respondeat
superior under the UTSA do little to clarify
whether, and how, the doctrine applies.
Although there seems to be little difference
in the relevant language of the various trade
secret acts, two jurisdictions (the Eastern
District of Virginia and Indiana) have now
reached opposite rules of law, and the law
in a third (Minnesota) is unclear. Until more
jurisdictions have weighed in on the subject,
employers should proceed with caution and
take reasonable steps to protect themselves
from liability arising from employee acts of
misappropriation. l
Adam Kargman is an associate at
Hernandez, Schaedel & Olson, LLP,
in Pasadena, California. He may be
reached at akargman@hernlaw.com. Don
A. Hernandez, a partner at Hernandez,
Schaedel & Olson, LLP, also contributed
to this article.
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copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Endnotes
1. This hypothetical derives from
the popular “Mr. Plow” episode of “The
Simpsons” (season 4, episode 9).
2. See Reingold v. Swiftships Inc., 210 F.3d
320, 322 (5th Cir. 2000).
3. UTSA § 1(4).
4. Id. § 1(2).
5. Id. § 3(a).
6. Id.
7. See Uniform Law Commissioners, A
Few Facts about the Uniform Trade Secrets
Act, www.nccusl.org/Update/uniformact_
factsheets/uniformacts-fs-utsa.asp (last visited
September 17, 2009). Massachusetts, New
Jersey, New York, Pennsylvania, and Texas
follow unique statutes or the common law.
8. UTSA § 7(a).
9. The terms “respondeat superior”
and “vicarious liability” are often used
interchangeably. For the purposes of this article,
“vicarious liability” refers to the broader concept
of “liability on one person for the actionable
conduct of another, based solely on a relationship
between the two persons,” Black’s Law
Dictionary (6th ed. 1991), of which respondeat
superior is a species.
10. See Martinez v. Hagopian, 182 Cal.
App. 3d 1223, 1227–28 (1986).
11. UTSA § 1(2).
12. See Robert G. Bone, Secondary
Liability for Trade Secret Misappropriation:
A Comment, 22 Santa Clara Computer
and High Tech. L.J. 529, 537 (Mar. 2006),
for an additional explanation. Professor
Bone compares copyright infringement with
trade secret misappropriation, and notes that
secondary liability is more apt to arise in
copyright cases, which frequently involve
multiple direct infringers under the control of
a third party and problems of judgment-proof
defendants. Id. at 537. He asserts that in trade
secret misappropriation cases, where there is
usually “a single, discrete act performed by
one or a small number of persons, all of whom
can be easily sued in the same lawsuit,” there
is less of a need for secondary liability. Id.
13. Va. Code § 59.1-341.
14. Newport News Indus. v. Dynamic
Testing, Inc., 130 F. Supp. 2d 745, 751 (E.D.
Va. 2001).
15. Id. at 752.
16. Hagen v. Burmeister & Assocs., Inc.,
633 N.W.2d 497 (Minn. 2001).
17. Hagen v. Burmeister & Assocs.,
Inc., 1999 Minn. App. LEXIS 85, at *10
(unpublished).
18. Minn. Stat. § 325C.07(a).
19. Hagen, 633 N.W.2d at 505 (“We will
not assume, absent introduction of some
evidence, that UTSA violations are a common
hazard in the insurance industry.”).
20. Id. at 504.
21. Id. at 501, 503 (characterizing claim as
a “vicarious liability claim”).
22. UTSA § 7(a) (displacing “conflicting
tort, restitutionary, and other laws . . . providing
civil remedies for misappropriation of a trade
secret.”).
23. Quandt was actually a former employee
of Infinity’s predecessor in interest, T.E. Scott,
Inc. The trial court held that Infinity had a
protectable interest in the trade secrets and that
had been transferred from the other company.
Infinity Prods., Inc. v. Quandt, 810 N.E.2d
1028, 1031 (Ind. 2004).
24. Ind. Code § 24-2-3-1(c).
25. UTSA § 7(b).
26. Infinity Products, 810 N.E.2d at 1033.
27. Id. at 1034 (internal citations omitted).
28. Id. at 1034, n.6.
29. Id. at 1034–35 (Dickson, J., dissenting).
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19
The Morphing Accused Product after Ricoh v.
Quanta
By Vandana Koelsch
L
ate last year, in Ricoh Co. Ltd. v.
Quanta Computer, Inc.,1 the United
States Court of Appeals for the
Federal Circuit issued an important decision on the scope of contributory patent
infringement under 35 U.S.C. § 271(c).
In the past several months, courts have
applied Ricoh in a handful of cases. These
cases demonstrate that § 271(c), which
was subject to a bright-line test, is now
subject to the same type of jockeying
by patentees and defendants as seen in
claim construction. Before Ricoh, under
§ 271(c) a product accused of infringing
a patent was the thing that was sold in
the marketplace. After Ricoh, an accused
product can be subset, component, or part
of the thing sold. Patentees and defendants
are now framing the product in a light that
is most favorable to their position. The
Supreme Court denied Quanta’s petition
for certiorari in June of this year. Thus,
Ricoh remains the guiding precedent.
Defining the Accused Product
under Ricoh
Section 271(c) states, in part, that a party
contributes to patent infringement by selling,
offering for sale, or importing a component
that has no substantial non-infringing uses.2
But many products are multifunctional—
for example, a telephone that takes pictures
with an embedded camera and also provides
directions through its GPS capabilities. If
only one of these functions is accused of
infringing, the telephone has “substantial
non-infringing uses,” because it performs
other functions that do not infringe. Ricoh
held that these hybrid products still infringe
if the infringing aspect is embedded “in a
larger product with some additional, separable feature.”3 The substantial non-infringing
use must stem from that additional, separable feature.
In Ricoh, the accused infringer Quanta
sold optical disc drives that read discs in
a non-infringing manner but also wrote
on discs using a patented method. The
court accepted as true that the drive’s
hardware and software modules that performed the patented method were separate
20 from hardware and software modules
that performed non-infringing functions.
With that premise, the court concluded
that Quanta was a contributory infringer,
because although the product as a whole
had substantial non-infringing uses, noninfringing and infringing components
were separable, and the infringing components had no substantial non-infringing
uses. Any other interpretation, the court
reasoned, would render § 271(c) toothless:
“If we were to hold otherwise, then so
long as the resulting product, as a whole,
has a substantial non-infringing use based
solely on the additional feature, no contributory liability would exist despite
the presence of a component that, if sold
alone, plainly would incur liability.”4
The dissent in Ricoh disagreed with
the majority’s interpretation of § 271(c).
Judge Gajarsa explained that a product
should not be dissected into infringing and
non-infringing components but must be
evaluated as a whole and as sold.5 Indeed,
in Hodosh v. Block Drug Co., the Federal
Circuit had previously construed the
phrase “offers to sell or sells” in § 271(c)
to refer to “the material the accused actually sells,” and not some subpart, component, or ingredient.6 In Hodosh, the patentee owned a patent claim for a “method
for desensitizing teeth with a composition
containing an alkali metal nitrate.”7 The
accused infringer sold toothpaste that
contained potassium nitrate, an ingredient
that had substantial non-infringing uses;
accordingly, the accused infringer argued
it could not be a contributory infringer.
The Hodosh court rejected that argument,
stating that § 271(c) deals with the material actually sold, the toothpaste, and not
with an ingredient, the potassium nitrate.8
Although the Ricoh test examines less
than the whole product and focuses on a
subpart, the Ricoh majority insisted that
its decision was consistent with the precedent: Both Ricoh and Hodosh indicate
that an otherwise infringing product may
not “automatically escape liability merely
because it contains a noninfringing staple
ingredient.”9
Recent Application of Ricoh
Only in the past several months have
courts begun applying Ricoh. Each of
these cases manifests the importance
of identifying the accused product. The
patentee will choose to identify it in a particular mode of operation that has no substantial non-infringing uses. The defendant will identify the product in its entirety or as broadly as possible to capture
substantial non-infringing uses. This is
illustrated in a recent Federal Circuit decision. In Vita-Mix Corp. v. Basic Holding,
Inc.,10 the accused infringer sold blenders
with a “stir stick” to break air bubbles
and push food toward the blades. The
stir stick could be removed (and replaced
with a lid), or the stick could be used to
stir manually. Basic Holding argued that
these were substantial non-infringing uses
of the product, and thus it was not liable
as a contributory infringer. However, the
default mode of the blender was its use in
a manner that infringed Vita-Mix’s patent.
Relying on Ricoh, the patentee argued
that these manual uses were “additional
features” of the device and did not avoid
infringement. The Federal Circuit agreed
in part. It held that selling the blender
with a cap—an additional, separable
feature—did not allow Basic Holding to
escape liability. Manually using the stir
stick, however, was a substantial noninfringing use. The blender included a
ball and socket joint, interrupted ribbing,
and a rubber o-ring that assisted with
manually stirring, and were not additional,
separable features of the device. Instead,
they were “defining features of the device
. . . directly related to the use of the stir
stick, and are useful only if the stir stick is
used to stir the contents of the pitcher and
push the ingredients into the blades.”11
Important to understanding this holding
is how the accused product was defined.
Here, the accused product was the blender
with a stir stick and lid. Had the accused
product been defined as a blender with
a stir stick in its default mode, the result
may have been entirely different. In its
default mode, the blender likely would
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copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
have had no non-infringing uses.
In contrast, in software cases, patentees
have succeeded in defining the accused
product by a particular mode of operation. For example, a few days before the
Vita-Mix decision, in Lucent Technologies,
Inc. v. Gateway, Inc.,12 the court evaluated
whether the accused product was the entire
Microsoft Outlook software package or a
particular tool, a calendar date-picker that
performed a claimed method. If it were
the former, the software package would
have substantial non-infringing uses,
whereas the date-picker was “especially
made or especially adapted for” practicing
the claimed method. The court affirmed
Microsoft’s infringement, citing Ricoh,
and reasoned that if Microsoft had offered
the date-picker as a separate download to
be used with Outlook, it would undoubtedly infringe. The court did not delve
into whether such a separate download
would be technically feasible nor question
whether the date-picker was embedded as
separable software in the larger software
package of Microsoft Outlook.
In another software case, i4i Ltd.
Partnership v. Microsoft Corp., the Eastern
District of Texas found an XML feature
embedded in Microsoft Word to be a separable additional feature. In a footnote, the
court interpreted Ricoh as requiring the
“substantial non-infringing use” analysis
to focus on an accused separable feature
and not the entire product.13 Microsoft
argued that the “separable feature” must be
physically separable for Ricoh to apply, and
because the XML feature was not physically
separable from Microsoft Word, the accused
product was Microsoft Word. The court
disagreed because, before the accused XML
feature was added, Word had hundreds of
other features. In addition, the patentee presented evidence of stand-alone XML editors
in the marketplace to buttress its argument
that the XML feature of Word was separable. Thus, the court found that the “substantial non-infringing use” was to be “analyzed
within the context of the accused feature and
not the product as a whole.”14
The importance of defining the accused
product is further highlighted in an
International Trade Commission case, In
the Matter of Certain Semiconductor Chips
with Minimized Chip Package Size and
Products Containing Same. The accused
infringing devices were semiconductor
chip assemblies mounted onto a printed circuit or printed wiring board. Respondents,
Foreshadowing of Ricoh
Before delving into cases that have applied Ricoh, a brief history is in order.
Although Ricoh is a seminal Federal Circuit decision, some district courts have
come to the same conclusion—that a product combining infringing and noninfringing components may infringe under § 271(c).i Twenty years ago, in Oak
Industries, Inc. v. Zenith Electronics, Inc.,ii a district court held that Zenith may
not evade infringement for selling cable television converters although Zenith’s
converters used the same parts to perform both unpatented functions and the patented method. In an approach that is somewhat similar to the test announced in
Ricoh, the court queried whether the accused device was “in effect, a combination
of separable functions in a single package, one of which leads to infringement, or
a device designed for other purposes which, because of the limits of technology,
necessarily and incidentally permits the practice of the patented method if those
other purposes are to be accomplished.”iii Oak Industries left it to the jury to
decide this question of fact, but under the Ricoh test, because the same parts were
used for both infringing and noninfringing functions, the Zenith converter may
not have infringed.
Endnotes
i. See e.g., Oak Indus., Inc. v. Zenith Electronics, Inc., 726 F. Supp. 1525 (N.D. Ill.
1989); Imagexpo, LLC v. Microsoft Corp., 284 F. Supp. 2d 365, 369 (E.D. Va. 2003).
ii. Oak Industries, 726 F. Supp. 1525 (N.D. Ill. 1989).
iii. Id. at 1538.
the accused infringers, argued that their
semiconductor chips had substantial noninfringing uses because the chips could
be mounted in non-infringing ways. The
administrative law judge (ALJ), applying Ricoh, made a threshold query: “The
question here, therefore, is just what is the
accused device in question and whether it,
alone, has any substantially non-infringing
uses.”15 The ALJ disagreed with the
respondents and stated that any additional
features of packages that a manufacturer
might use in assembling a device beyond
a narrow set of components was an additional, separable feature that did not avoid
contributory infringement.
Conclusion
The accused product, once self-evident, has
now become one more contention between
the parties. These early cases evidence
the fierce debate between the parties and
the courts to give the proper scope to the
accused product. In the next few years, as
other courts apply Ricoh and the interpretation of Ricoh solidifies, the parties will have
greater guidance on the degree of granularity with which an accused product can be
broken down and compartmentalized to the
point that components can be deemed “sepa-
rable” or “additional.” Until then, patentees
and defendants must be creative in defining
the accused product. l
Vandana Koelsch is an associate in the
Washington, D.C., office of Kaye Scholer
LLP. She can be reached at vkoelsch@
kayescholer.com.
Endnotes
1. 550 F.3d 1325 (Fed. Cir. 2008), cert.
denied, 129 S. Ct. 2864 (2009).
2. 35 U.S.C. § 271(c).
3. Ricoh, 550 F.3d. at 1337.
4. Id. at 1338.
5. Id. at 1345.
6. Hodosh v. Block Drug Co., 833 F.2d
1575, 1578 (Fed. Cir. 1987).
7. Id. at 1576.
8. Id. at 1578.
9. Ricoh, 550 F.3d at 1339 (discussing Hodosh).
10. 2009 U.S. App. LEXIS 20622 at *21–
24 (Fed. Cir. Sept. 16, 2009).
11. Id.
12. 2009 U.S. App. LEXIS 20325 at *38–
42 (Fed. Cir. Sept. 11, 2009).
13. 2009 U.S. Dist. LEXIS 70104 at *22,
n.5 (E.D. Tex. Aug. 11, 2009).
14. Id.
15. 337-TA-605, 2009 WL 2371550
(U.S.I.T.C. July 29, 2009).
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21
Parent/Subsidiary
Liability Issues
Continued from page 1
sistent with the general rule that parent
and subsidiary corporations are treated
as separate legal entities. Liability cannot be imposed on a parent for merely
exercising only basic directional control
over a subsidiary that is inherent in stock
ownership.2
But a parent may be liable for the
infringing acts of its subsidiary if the
plaintiff can show that the corporate veil
between the parent and subsidiary should
be pierced.3 As the Federal Circuit has
held, a court “must start from the general
rule that the corporate entity should be
recognized and upheld unless specific,
unusual circumstances call for an exception.”4 A court may “exert its equitable
powers and disregard the corporate entity
ego of the parent and, consequently,
failed to show a legal basis to pierce the
corporate veil to hold the parent holding
company liable for the allegedly infringing acts committed by its subsidiary.6
The court considered the following laundry list of factors to determine whether
the subsidiary was the alter ego of the
parent:
• whether the parent and the subsidiary have common stock ownership
• whether the parent and the
subsidiary have common directors
or officers
• whether the parent and the
subsidiary have common business
departments
• whether the parent and the
subsidiary file consolidated financial
statements and tax returns
• whether the parent finances the
subsidiary
The court held that there was no evidence that
either of the two corporations was created to
perpetrate a fraud or justify a wrong.
if it decides that piercing the veil will
prevent fraud, illegality, injustice, a contravention of public policy, or prevent
the corporation from shielding someone
from criminal liability.”5 Courts, however,
routinely deny attempts to do so in patent
infringement cases.
For example, in TIP Systems, LLC v.
SBC Operations, Inc., a case involving
cord-free telephones for use in correctional facilities, the District Court for
the Southern District of Texas granted a
defendant’s motion for summary judgment where it argued that, as a holding
company, it was not the proper party
in the patent infringement lawsuit. The
court held that the plaintiff failed to
show that the subsidiary was the alter
22 • whether the parent caused the incorporation of the subsidiary
• whether the subsidiary operates with
grossly inadequate capital
• whether the parent pays the salaries
and other expenses of the subsidiary
• whether the subsidiary receives no
business except that given to it by
the parent
• whether the parent uses the
subsidiary’s property as its own
• whether the daily operations of the
two corporations are not kept separate
• whether the subsidiary does not
observe the basic corporate formalities, such as keeping separate books
and records and holding shareholder
and board meetings7
The court further noted, that
“[c]omplete ownership and identity of directors and officers are an insufficient basis
for applying the alter-ego theory to pierce
the corporate veil.”8 Further, to pierce the
corporate veil, the control must amount to
“total domination of the subservient corporation, to the extent that the subservient
corporation manifests no separate corporate
interests of its own and functions solely to
achieve the purposes of the dominant corporation.”9 In considering these factors, the
court denied the attempt to pierce the corporate veil because the plaintiff failed to show
any of the following:
• that the finances, record keeping,
and daily operations of the two
corporations were not kept separate
• that the subsidiary’s business comes
only from the parent
• that the subsidiary operates with
grossly inadequate capital
• that the parent uses the subsidiary’s
property as its own
• that the parent totally dominates and
controls the subsidiary so that it is
operated as the parent’s business
conduit or agent10
Similarly, in Iridex Corp. v.
Synergetics USA, Inc., the District Court
for the Eastern District of Missouri
granted Synergetics USA’s motion for
summary judgment where it argued that
it was not a proper party in the lawsuit.
Applying Missouri’s “instrumentality”
or “alter ego” rule, the court held that
the plaintiff could not meet its burden to
pierce the corporate veil. Under the rule,
the party attempting to pierce the corporate veil must show the following:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances,
but of policy and business practice
in respect to the transaction attacked
so that the corporate entity as to
this transaction had at the time no
separate mind, will, or existence of
its own.
2. Such control must have been used
by the defendant to commit fraud or
wrong, to perpetrate the violation of a
statutory or other positive legal duty,
or a dishonest and unjust act in con-
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travention of plaintiff’s legal rights.
3. The control and breach of duty must
proximately cause the injury or
unjust loss complained of.11
Iridex argued that the parent,
Synergetics USA, and the subsidiary,
Synergetics, Inc., should be treated by
the court as the same company. It based
its argument on numerous inconsistencies, e.g., evidence of a slide shown at
a Synergetics USA shareholder meeting
referring to the company as Synergetics,
Inc. Further, there was evidence that the
companies referred to Synergetics, Inc.,
as a division of Synergetics USA rather
than as a wholly owned subsidiary. But,
in considering the above three factors,
the court held that there was no evidence
that either of the two corporations was
created to perpetrate a fraud or justify a
wrong and that there was no evidence
that Synergetics USA’s control of its
wholly owned subsidiary, Synergetics,
Inc., proximately caused the injury or
unjust loss.12 Further, the court rejected
the plaintiff’s argument that the subsidiary
was undercapitalized and that fraudulent
intent could be inferred from the undercapitalization.
Further, in Jacobs Vehicle Systems,
Inc. v. Pacific Diesel Brake Co.,
the District Court for the District of
Connecticut held that under both the
“instrumentality” and “identity” tests
for veil-piercing under Connecticut law,
the evidence on summary judgment was
insufficient to support alter-ego liability.
The three-part showing of the instrumentality test was the same as Missouri’s test
above.13 Under Connecticut’s identity test,
a parent may be liable for a subsidiary’s
acts if
there was such a unity of interest
and ownership that the independence of the corporations had in
effect ceased or had never begun
and an adherence to the fiction
of separate identity would serve
only to defeat justice and equity
by permitting the economic entity
to escape liability arising out of an
operation conducted by one corporation for the benefit of the whole
enterprise.14
The court found that despite the curious fact that the president of the subsid-
iary reported to the parent’s board without
knowing whether the subsidiary had its
own board, it was undisputed that the parent did not control the subsidiary’s dayto-day operations. Further, the evidence
was insufficient to support a reasonable
inference that the parent so dominated the
subsidiary with regard to the transaction
at issue that the subsidiary lacked a mind,
will, or existence of its own. The court
further noted that the patent infringement
counterclaimant did not contend that the
subsidiary was inadequately capitalized
or that the parent was hiding behind its
subsidiary’s corporate veil to perpetrate a
fraud or other wrong.
induced infringement and possessed specific intent to encourage another’s infringement.”17 In Iridex, for example, Iridex
also asserted that the parent was liable for
inducing its subsidiary to infringe. The
court, however, held that Iridex did not
present any evidence to show that the parent caused its subsidiary to infringe the
patent. The court noted that the subsidiary
was making and selling the accused product before there was a merger that created
the parent, and so there was no evidence of
intent to induce infringement.
Thus, naming a noninfringing parent corporation as a defendant in a patent
infringement lawsuit requires a basis to
Reliance on a notice or cease-and-desist letter
to a parent to provide notice to its subsidiary
will require establishing that the parent acted
as the subsidiary’s agent with the authority
to receive notices of infringement.
Occasionally, however, arguments that
the corporate veil should be pierced do
survive at least past the summary judgment stage. For example, in Sorensen v.
Black & Decker Corp., Black & Decker
argued that it was entitled to summary
judgment and that it was not a proper
party to the patent infringement lawsuit.
Black & Decker contended that Black
& Decker (U.S.), Inc., a wholly owned
subsidiary, manufactured the accused
products and was the proper defendant.
In denying Black & Decker’s motion,
the court found that there was significant
overlap in officers and directors between
the two companies and that Black &
Decker admitted that it controls the quality and products sold under its trademarks.15
Of course, even if a court fails to pierce
the corporate veil, a patent infringement
plaintiff could also maintain a claim
against the parent if it could show that the
parent induced its subsidiary to infringe.16
To establish inducement, it must be shown
“that the alleged infringer knowingly
pierce the corporate veil to hold the parent
liable for the infringing acts of its subsidiary. Attorneys need to be aware of the
factors courts consider in the relevant jurisdiction to pierce the corporate veil. In addition, patent infringement plaintiffs should
conduct the necessary discovery to gather
sufficient evidence to provide the court
with a justification for exerting its equitable
powers to disregard the corporate entity,
which is an uphill battle. At the very least,
patent infringement plaintiffs should gather
sufficient evidence to defeat a motion for
summary judgment that the parent corporation is not a proper party. And even if
attempts to pierce the corporate veil fail,
inducement claims may survive.
Does Notice to the Parent
Constitute Notice to the Subsidiary?
The short answer is “possibly, but unlikely.” A patentee sends a notice or ceaseand-desist letter to an alleged infringer for
at least two reasons: (1) to establish notice
under 35 U.S.C. § 287(a) and (2) to provide knowledge of the patent for purposes
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23
of recovering enhanced damages for willful infringement under 35 U.S.C. § 284.
More specifically, 35 U.S.C. § 287(a)
limits a patentee’s recovery of damages to
those incurred after notice to the infringer
involving a patented article unless the
patent owner has marked his or her patented product with the relevant patent
number. Thus, absent marking a patented
article, damages may be recovered only
after actual notice of infringement is provided to the infringer.18 Further, under 35
U.S.C. § 284, a patentee is able to recover
enhanced damages for willful infringement only if the infringer had knowledge
of the patent.19
But a notice or cease-and-desist letter to a parent, without more, does not
serve as notice to its subsidiaries under 35
U.S.C. § 284 or to establish the subsidiary’s knowledge of the patent for purposes of establishing willful infringement.
For example, in Endress & Hauser,
Inc. v. Hawk Measurement Systems Pty.
Ltd., the court held that “[k]nowledge
of the . . . infringement letter to Hawk
Australia cannot be imputed to Hawk
America, because actual notice in the form
of a letter or other form of communication
must be given to each infringer.”20 Thus,
the court calculated damages based on
sales starting on the date the complaint was
filed rather than the date of the notice letter
to the Australian parent company.
Further, in Semiconductor Energy
Laboratory Co. v. Chi Mei Optoelectronics
Corp.,21 the defendant sought summary
judgment that the plaintiff could not recover damages against its subsidiaries prior to
the time the subsidiaries were served with
the complaint. The plaintiff contended that
knowledge could be imputed from a parent
company to its subsidiaries based on an
earlier letter to the parent. The court held
that, apart from general allegations regarding ownership interest, there was no evidence that would support imputing knowledge from the parent to its subsidiaries.
In Coca-Cola Co. v. Pepsico, Inc., the
defendants moved for summary judgment
that Coca-Cola could not recover prefiling damages against Pepsi because it
did not receive pre-filing notice from
Coca-Cola. Coca-Cola asserted that its
notice to the other defendant, Rapak,
was sufficient to provide notice to
Pepsi because that company was acting as Pepsi’s agent in receipt of the
communications. The court noted that
24 “some courts have stated that agency
principles may permit a patentee to
establish ‘imputed notice’ vis-à-vis the
infringer by communicating accusations
of infringement to that party’s ‘agent.’”22
More specifically, the court observed that
“[w]here such a view has been adopted,
the courts have clarified that the ‘agency’
at issue must encompass the authority to
receive notices of infringement, and that
the patentee bears the burden of establishing such authority.”23
In assessing whether Rapak was
Pepsi’s agent, the court noted that the
only evidence that Coca-Cola appeared
to rely on was Rapak’s communication
of the accusations of infringement to
Pepsi. The court held that such evidence
was insufficient to create a genuine issue
of material fact. “Were such evidence
deemed sufficient to create a genuine
issue of material fact regarding Rapak’s
‘agency,’ the well-settled rule that a patentee must itself relate ‘actual notice’
to the infringer would cease to have any
practical meaning.”24
Thus, reliance on a notice or ceaseand-desist letter to a parent to provide
notice to its subsidiary will require
establishing that the parent acted as the
subsidiary’s agent with the authority
to receive notices of infringement. Of
course, it would be best to avoid this
problem in the first place by communicating directly with the allegedly infringing
subsidiary. Although it may require some
effort to determine the correct allegedly
infringing entity, it is likely worth the
effort. Defendants, on the other hand,
should consider filing motions (for summary judgment or in limine) to preclude
plaintiffs from recovering damages prior
to the time the subsidiary was provided
with notice or from introducing evidence
concerning notice letters sent to the wrong
entities.
Conclusion
Parties to a patent infringement lawsuit
involving parent corporations and their
subsidiaries should be aware of parent/
subsidiary liability issues that may arise.
In particular, parent corporations can be
liable for infringement by their subsidiaries
if the corporate veil between the parent and
subsidiary is pierced. Further, notice letters to parent corporations will not impute
notice to subsidiaries unless the existence
of an agency relationship between the two
companies, including the authority of one
corporation to receive notices on behalf of
the other, is established. l
Irfan A. Lateef is a partner and Marko
R. Zoretic is an associate at Knobbe,
Martens, Olson & Bear LLP, in Irvine,
California. They may be reached at irfan.
lateef@kmob.com and mzoretic@kmob.
com.
Endnotes
1. See A. Stucki Co. v. Worthington Indus.,
849 F.2d 593, 596–97 (Fed. Cir. 1988).
2. United States v. Bestfoods, 524 U.S. 51,
62, 141 L. Ed. 2d 43, 118 S. Ct. 1876 (1998).
3. See TIP Sys., LLC v. SBC Operations,
Inc., 536 F. Supp. 2d 745, 753 (S.D. Tex.
2008).
4. Manville Sales Corp. v. Paramount Sys.,
Inc., 917 F.2d 544, 552 (Fed. Cir. 1990) (citing
Zubik v. Zubik, 384 F.2d 267, 273 (3d Cir.
1967) (internal quotation marks omitted).
5. Id. (citing Zubik, 384 F.2d at 272).
6. TIP Systems, 536 F. Supp. 2d at 753–56.
7. Id. at 754.
8. Id.
9. Id. at 754–55 (citation omitted).
10. Id. at 755–56 (citation omitted).
11. Iridex Corp. v. Synergetics USA, Inc.,
474 F. Supp. 2d 1105, 1109 (E.D. Mo. 2007).
12. Id. at 1109–10.
13. Jacobs Vehicle Sys., Inc. v. Pac. Diesel
Brake Co., 424 F. Supp. 2d 388, 392 (D. Conn.
2006).
14. Id. at 392–93.
15. Sorensen v. Black & Decker Corp.,
No. 06cv1572 BTM (CAB), 2007 U.S. Dist.
LEXIS 13336, at *10 (S.D. Cal. Feb. 27,
2007).
16. See Manville Sales Corp. v. Paramount
Sys., Inc., 917 F.2d 544, 553 (Fed. Cir. 1990).
17. DSU Med. Corp. v. JMS Co., 471 F.3d
1293, 1306 (Fed. Cir. 2006).
18. SRI Int’l, Inc. v. Advanced Tech. Labs.,
Inc., 127 F.3d 1462, 1469 (Fed. Cir. 1997).
19. See State Indus., Inc. v. A.O. Smith
Corp., 751 F.2d 1226, 1236 (Fed. Cir. 1985).
20. Endress & Hauser, Inc. v. Hawk
Measurement Sys. Pty. Ltd., 892 F. Supp.
1123, 1129 (S.D. Ind. 1995).
21. Semiconductor Energy Lab. Co. v. Chi
Mei Optoelectronics Corp., 531 F. Supp. 2d
1084, 1114–15 (N.D. Cal. 2007).
22. Coca-Cola Co. v. Pepsico, Inc., 2004
U.S. Dist. LEXIS 30375, at *96–97 (N.D. Ga.
2004) (citing Maxwell v. J. Baker, Inc., 805
F. Supp. 728, 734–35 (D. Minn. 1992); In re
Elonex Phase II Power Mgmt. Litig., Case No.
C.A. 01-082, 2002 U.S. Dist. LEXIS 4706,
2002 WL 433614, at *3 (D. Del. 2002)).
23. Id. at *97.
24. Id. at *98.
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25
Divided Infringement
Continued from page 1
infringers have in fact seized on these
decisions to raise potent non-infringement
arguments at various stages of patent litigation, in some cases with success even as
early as the pleadings stage.
Divided infringement arguments can
be expected to feature prominently in patent litigation and licensing discussions for
a number of years to come as parties and
courts continue to grapple with a genera-
Federal Circuit precedent offered little
guidance. While opinions issued in 2004
and 2005 offered some support for application of an “agency” standard,4 in 2006,
the court appeared to endorse a standard
based on “participation and combined
action.” Judge Newman, writing for the
panel in On Demand Machine Corp. v.
Ingram Industries, commented in dicta
that the court discerned “no flaw . . . as
a statement of law” in a jury instruction
stating, in relevant part, that “[w]here the
infringement is the result of the participation and combined action(s) of one or
The jurors were instructed to consider whether
one party was “teaching, instructing, or
facilitating the other party’s participation
in the electronic auction process.”
tion of patents prepared prior to these decisions, many of them directed to inventions
for facilitating various types of communication and collaboration among multiple
actors. In this article, we will review these
decisions, consider their impact to date
in the district courts, and briefly explore
potential implications in various procedural
contexts in litigation and in the contexts of
licensing and reexamination.
Divided Infringement Prior to BMC
Resources
Conflicting standards governed divided
infringement allegations in the district
courts prior to BMC Resources. Some
courts followed an agency theory, under
which a defendant could be liable for
direct infringement of a method claim to
the extent that any step it did not itself
perform was performed by its agent.
Other courts adopted a theory of “participation and combined action,” often
requiring some degree of direction or
control. Another standard required that
there be “some connection” between the
accused parties to ground a finding of
joint infringement.3
26 more persons or entities, they are joint
infringers and are jointly liable for the
infringement.”5
The court’s statement in On Demand
added to existing confusion in the district
courts concerning the proper standard for
direct infringement under § 271(a). Just
one year earlier, a jury had awarded $128
million to Freedom Wireless for joint
infringement of its patents by multiple codefendants on the basis of a jury instruction similar to that apparently approved
in On Demand.6 Although the Federal
Circuit granted an emergency injunction to
review the theory of “joint infringement”
on which the Freedom Wireless jury award
was based,7 the parties settled out of court
before any decision was issued.
BMC Resources v. Paymentech
BMC Resources involved method claims
for processing debit transactions without
use of a consumer’s personal identification number (PIN). Plaintiff BMC
Resources alleged that Paymentech
infringed its patents by processing consumer bill payment transactions on behalf
of merchants. In the accused transac-
tions, Paymentech acted as a third-party
intermediary between the merchant and
consumers, contacting debit networks that,
in turn, contacted participating financial
institutions for authorization and completion of each transaction. Although the
parties agreed that Paymentech did not
itself perform each step of the claimed
methods, BMC Resources argued that
Paymentech could be held jointly liable
for direct infringement by participating in
combined actions with merchants, cardissuing financial institutions, and payment networks to complete the claimed
methods.8 The Federal Circuit disagreed,
affirming the district court’s finding of
non-infringement.9 The court clarified that
method steps performed by a third party
cannot be attributed to an alleged direct
infringer absent a showing that the alleged
infringer (the “mastermind”) exercised
“control or direction” over the third party.
Notably, in finding that Paymentech’s
provision of debit card data to the debit
networks did not establish “control or
direction” over them, the court specifically remarked upon the absence of “any
evidence that Paymentech also provides
instructions or directions regarding the use
of those data.”10
Application of BMC Resources in
Muniauction v. Thomson Corp.
The Federal Circuit tightened the “control or direction” standard one year later
in Muniauction, addressing head-on the
relevance of the provision of instructions
or directions. Muniauction had obtained
a jury verdict of infringement against
Thomson, an online auction house that
processed internet sales of municipal bond
offerings.11 The asserted method claims
required actions on the part of individual
bidders as well as on the part of the auction house. The district court instructed
the jurors that they could find Thomson
liable for direct infringement if they found
a sufficient connection between Thomson
and the bidders who used Thomson’s process. Among the questions the jurors were
instructed to consider was whether one
party was “teaching, instructing, or facilitating the other party’s participation in the
electronic auction process.”12 In reversing
the jury’s finding of infringement, the
Federal Circuit held that this question was
not relevant to whether Thomson satisfied the “control or direction” standard of
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BMC Resources. Specifically, the court
held that the fact that “Thomson controls
access to its system and instructs bidders on its use is not sufficient to incur
liability for direct infringement.”13 Rather,
the court clarified that “the control or
direction standard is satisfied in situations
where the law would traditionally hold the
accused direct infringer vicariously liable
for the acts committed by another party
that are required to complete performance
of a claimed method.”14
Divided Infringement May Be
Dispositive under Rule 12
The “divided infringement” argument
can be dispositive under Rule 12 of the
Federal Rules of Civil Procedure where
the claim language or the allegations
in the complaint indicate that no single
actor performs each and every step of the
claimed method, and allegations of “control or direction” are either absent, merely
conclusory, or not sufficiently plausible
under the pleading standards recently set
forth by the U.S. Supreme Court in Bell
Atlantic Corp. v. Twombly and Ashcroft
v. Iqbal.
For example, the Southern District
of Florida granted a Rule 12 motion on
the basis of a divided infringement argument in Global Patent Holdings, LLC
v. Panthers BRHC LLC.15 There, Global
alleged that defendant Boca Resort
directly infringed method claims requiring
actions on the part of the resort’s website
and visiting website users. Specifically,
Global alleged that the Boca website controlled and directed users by “stor[ing] a
set of computer programs which it then
sends to the user’s computer for execution by that computer.”16 After Global
acknowledged it could not allege any
additional facts that would render Boca
Resort “vicariously liable for the acts
of the remote user,” the court dismissed
the action with prejudice.17 The Federal
Circuit affirmed.18
Shortly after the decision in Global,
the Eastern District of Missouri granted
a Rule 12 motion brought on divided
infringement grounds in The Friday Group
v. Ticketmaster.19 In The Friday Group,
six defendants moved to dismiss a complaint alleging that each of them infringed
a patent for conducting, recording, and
distributing recordings of live events by
practicing all steps of the claims “directly
and/or exercising direction or control over
the practice of all steps of one or more
claims.”20 The patent claims required both
the sale of a recording (such as by a ticket
vendor) and the conducting of a live event
by musical artists.21 The court held that the
plaintiff’s failure to allege which of the
named defendants was the “mastermind”
of the operation, much less any theory
under which the “mastermind” might be
vicariously liable for the actions of others,
required dismissal of the complaint under
Fed. R. Civ. P. 12(b)(6).22
Finally, a magistrate judge in the
Southern District of New York recently
recommended granting defendant
Google’s motion to dismiss a pro se
complaint for patent infringement pursuant to Rule 12 on divided infringement
grounds.23 As of the writing of this article,
no action had yet been taken by the district court.
While divided infringement may be dispositive under Rule 12 in appropriate cases,
not all such motions are successful. Two
courts have declined to grant motions on the
formed the requisite elements of the patented
method.”25 Similarly, in Yangaroo Inc. v.
Destiny Media Technologies Inc., the Eastern
District of Wisconsin denied Destiny Media’s
motion to dismiss where plaintiff argued that
the claim did not require performance by
more than one actor.26
Other Procedural Contexts
“Divided infringement” may also play a
prominent role in other procedural contexts. It can influence claim construction
proceedings, for example, where parties
dispute whether or how claim language
requires actions on the part of two or
more actors.27 Where no single alleged
infringer performs all steps of a claimed
method, either apparent on the face of the
complaint or patent, as a factual matter,
or where allegations of “control or direction” are sufficiently plausible to justify
discovery on that issue, accused infringers
will of course make “divided infringement” arguments in motions for summary
judgment, at trial, and/or in motions for
While accused infringers often consider
reexamination as a parallel defensive strategy
in aid of litigation, it makes sense to consider
whether initiation of reexamination may open
the door for patent holders to correct divided
infringement problems with existing claims.
pleadings where the parties disputed whether
the claims required actions on the part of
multiple actors. In kSolo, Inc. v. Catona, for
example, plaintiff asserted a method claim
relating to custom mixing of an audio track
on a client computer.24 The plaintiff argued
that the claims could be performed entirely
by a user of defendant kSolo’s audio track
software offering. The court denied kSolo’s
motion for judgment on the pleadings, noting
that “[e]ven if the pleadings establish that the
users could not infringe the patent without the
kSolo software, the fact that users were aided
does not preclude a finding that the users per-
judgment as a matter of law (JMOL).
As of the writing of this article, some 20
motions for summary judgment or JMOL
on divided infringement grounds have
been resolved in published decisions since
the Federal Circuit’s decision in BMC
Resources. Of these, approximately half
have been successful.
Emtel Inc. v. LipidLabs Inc.
Among cases addressing divided infringement on summary judgment, the Southern
District of Texas’s decision in Emtel,
Inc. v. Lipidlabs, Inc. is notable for its
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copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
27
extensive review of relevant case law and
analysis regarding the Federal Circuit’s
standard for “control or direction.”28
In Emtel, defendants were accused of
practicing a patented method for using
videoconferencing to allow a physician
to communicate with a medical caregiver
and patient in a remote healthcare facility.
The claims required certain steps to be
performed by physicians. After analyzing
the Restatement (Second) of Agency
§ 220, as well as the divided infringement
case law, the court concluded that BMC
Resources and Muniauction require that
the alleged mastermind in the divided
infringement context “exercise such direction or control over the entire process that
it is vicariously liable for the actions of
the other parties in performing steps of
that process.”29 The court granted sum-
Implications in Other Contexts
Additional implications flow from the Federal Circuit’s holdings in BMC
Resources and Muniauction. Licensors may find that patents previously central to
well-established licensing programs are now viewed with skepticism by prospective licensees. And existing licensees may examine patents under which royalties are currently being paid with an eye for divided infringement issues. Where
such issues are conspicuous, some licensees may seek to renegotiate royalty rates
or, in unusual cases, even consider a declaratory judgment action based on the
Supreme Court’s decision in MedImmune, Inc. v. Genentech, Inc.,i as a means of
testing the issues and potentially avoiding future royalty obligations.
Moreover, while accused infringers often consider reexamination as a parallel
defensive strategy in aid of litigation, it makes sense to consider whether initiation of reexamination may open the door for patent holders to correct divided
infringement problems with existing claims. Under the rules governing practice
before the U.S. Patent and Trademark Office, a patent holder may not propose
new or amended claims enlarging the scope of the claims in the original patent,
and claim amendments embracing conduct not originally covered by the claims
are prohibited.ii An interesting question, however, is whether there may be situations in which an amendment cures a divided infringement problem by reorienting a claim to the perspective of a single actor and yet cannot be said to have
enlarged the scope of the claim.
At least one Central Reexamination Unit Examiner recently answered this
question in the negative during an ex parte reexamination of the patent at issue
in Global Patent Holdings.iii After the Southern District of Florida dismissed
Global’s infringement complaint on divided infringement grounds, Global added
two new claims during reexamination, drafted from the perspective of a single
actor.iv A second request for reexamination was filed in response to these and
other newly added claims, contending among other things that the two “single
actor” claims were impermissibly broader than the original claim litigated in
Florida because they “could be infringed by someone who would not have
infringed the original claim.”v The examiner agreed, rejecting the claims in
part on this basis. In late July 2009, Global canceled all pending claims and
abandoned the patent.
Endnotes
i. 549 U.S. 118 (2007).
ii. 35 U.S.C. §§ 305, 314; Manual of Patent Examining Procedures (MPEP)
§§ 2258(III), 2658(III); see also MPEP § 1412.03.
iii. Global Patent Holdings LLC v. Panthers BRHC LLC, 586 F. Supp. 2d 1331 (S.D.
Fla. 2008).
iv. See 1/12/09 Request for Reexamination of United States Patent No. 5,253,341
C1, Ex Parte Reexamination Certificate (5820TH), “Detailed Statement in Support of Ex
Parte Reexamination of United States Patent No. 5,253,341 C1, Ex Parte Reexamination
Certificate (5820TH),” at 11–14, Reexamination Control No. 90/009,381.
v. Global Patent Holdings, 586 F. Supp. 2d at 14.
28 mary judgment of non-infringement, holding that defendant videoconferencing providers’ contracts with physicians, which
required the physicians to follow professional standards, schedule times to be on
call, and purchase malpractice insurance,
did not render the physicians defendants’
agents so as to make defendants vicariously liable for their actions. Instead, the
court reasoned that the “contractual provisions only set basic parameters for the
physicians to follow that [did] not affect,
much less control, how they exercise their
judgment in performing the medical work
[required by the claimed method].”30
Applications in the Eastern District
of Texas and the Northern District
of California
The Eastern District of Texas and the
Northern District of California both have
patent-heavy dockets and are sometimes
viewed, rightly or wrongly, as having differing approaches to motion practice in
patent cases. A review of recent holdings
in these courts based on BMC Resources
and Muniauction suggests, however, that
in appropriate cases, the divided infringement argument may provide alleged
infringers with a successful defense
regardless of venue.
Since the Federal Circuit’s decision
in Muniauction, which clarified that the
provision of “instructions or directions”
regarding the performance by third parties of allegedly infringing method steps
does not suffice for a finding of “control
or direction,” both courts appear to be
requiring traditional grounds for the imposition of vicarious liability.31 In Golden
Hour Data Systems, Inc. v. emsCharts,
Inc., for example, a jury sitting in the
Eastern District of Texas found defendants emsCharts and Softtech jointly
responsible for patent infringement.32 In
requesting JMOL, emsCharts and Softtech
argued that neither of them controlled the
other as a matter of law and introduced
evidence of a non-exclusive distributorship agreement between them that explicitly rejected creation of “any agency,
partnership, joint venture, or employer/
employee relationship.”33 Plaintiff Golden
Hour argued that the fact that defendants
had jointly submitted a bid and engaged
in joint sales and quotes showed “control
or direction.” In describing the applicable
standard for a finding of “control or direction,” Judge Ward adopted the Southern
Intellectual Property Litigation l WInter 2010
Published in Intellectual Property Litigation, Volume 21, Number 2, Winter 2010 © 2010 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be
copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
District of Texas’s statement in Emtel
v. Lipidlabs that “[m]aking information
available to the [other] party, prompting
the [other] party, instructing the [other]
party, or facilitating or arranging for the
[other] party’s involvement in the alleged
infringement is not sufficient [to find control or direction].”34
Judge Ward moreover offered useful
guidance regarding the standards for a
finding of an agency relationship giving
rise to vicarious liability, holding that “[a]
contracting party is not vicariously liable
for an independent contractor unless that
party controls the details of the independent contractor’s work to such an extent
that the contractor cannot perform the
work as he chooses.”35 Applying these
standards, the court granted defendants’
motion for JMOL, finding Golden Hour’s
evidence of “control or direction” insufficient as a matter of law.36
The Northern District of California held
similarly. The court expressly held that
instruction and training of third parties was
insufficient to raise a triable issue of fact
on control or direction in its decision in
Medtronic, Inc. v. AGA Medical Corp.37
Implications in Other Contexts
Additional implications flow from the
Federal Circuit’s holdings in BMC
Resources and Muniauction. Licensors
may find that patents previously central to
well-established licensing programs are
now viewed with skepticism by prospective licensees. And existing licensees may
examine patents under which royalties
are currently being paid with an eye for
divided infringement issues. Where such
issues are conspicuous, some licensees
may seek to renegotiate royalty rates or, in
unusual cases, even consider a declaratory
judgment action based on the Supreme
Court’s decision in MedImmune, Inc. v.
Genentech, Inc.,38 as a means of testing
the issues and potentially avoiding future
royalty obligations.
Moreover, while accused infringers
often consider reexamination as a parallel
defensive strategy in aid of litigation, it
makes sense to consider whether initiation
of reexamination may open the door for
patent holders to correct divided infringement problems with existing claims.
Under the rules governing practice before
the Patent & Trademark Office, a patent
holder may not propose new or amended
claims enlarging the scope of the claims
in the original patent, and claim amendments embracing conduct not originally
covered by the claims are prohibited.39 An
interesting question, however, is whether
there may be situations in which an
amendment cures a divided infringement
problem by reorienting a claim to the perspective of a single actor and yet cannot
be said to have enlarged the scope of the
claim.
At least one Central Reexamination
Unit Examiner recently answered this
question in the negative during an ex
parte reexamination of the patent at issue
in Global Patent Holdings.40 After the
Southern District of Florida dismissed
Global’s infringement complaint on divided infringement grounds, Global added two
new claims during reexamination drafted
from the perspective of a single actor.41 A
second request for reexamination was filed
in response to these and other newly added
claims, contending among other things that
the two “single actor” claims were impermissibly broader than the original claim
litigated in Florida because they “could
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ABA Section of Litigation l Intellectual Property Litigation Committee
Published in Intellectual Property Litigation, Volume 21, Number 2, Winter 2010 © 2010 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be
copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
29
be infringed by someone who would not
have infringed the original claim.”42 The
Examiner agreed, rejecting the claims in
part on this basis. In late July 2009, Global
canceled all pending claims and abandoned
the patent.
Conclusion
The Federal Circuit’s opinions in BMC
Resources and Muniauction provided
much-needed clarification concerning the
standard for direct infringement under
§ 271(a) by alleged “joint infringers.” The
generation of patents issued prior to BMC
Resources and Muniauction was, however,
prepared without sensitivity to the divided
infringement issue as articulated in those
decisions. Many of these patents are now
vulnerable to non-infringement defenses
based on “divided infringement.” For this
reason, and because the argument potentially presents a clean defense based on
a question of settled law, it seems likely
to arise commonly for a number of years
to come in licensing negotiations and in
litigation. Counsel for patentees and for
accused infringers and potential licensees
are therefore well advised to keep “divided
infringement” issues in mind.
Anthony I. Fenwick is a partner and
Jill Zimmerman is an associate at
Davis Polk & Wardwell LLP, in Menlo
Park, California. They may be reached
at anthony.fenwick@davispolk.com and
jill.zimmerman@davispolk.com.
Endnotes
1. 498 F.3d 1373 (Fed. Cir. 2007).
2. 532 F.3d 1318 (Fed. Cir. 2008).
3. See, e.g., Sriranga Veeraraghavan, Joint
Infringement of Patent Claims: Advice for
Patentees, 23 Santa Clara Comp. & High Tech
L.J. 211, 213–32 (2006); RealSource, Inc. v.
Best Buy Co, Inc., 514 F. Supp. 2d 951, 958
(W.D. Tex. 2007), aff’d, 282 Fed. Appx. 821
(Fed. Cir. 2008).
4. See Cross Med. Prods., Inc. v. Medtronic
Sofamor Danek, Inc., 424 F.3d 1293, 1310–11
(Fed. Cir. 2005), and Int’l Rectifier Corp. v.
Samsung Elecs. Co., Ltd., 361 F.3d 1355, 1361
(Fed. Cir. 2004).
5. On Demand Machine Corp. v. Ingram
Industries, 442 F.3d 1331, 1345 (Fed. Cir.
2006).
6. See Freedom Wireless, Inc. v. Boston
Commc’ns Group, Inc., Nos. 06-1020, -1078,
-1079, -1098, -1099, slip op. at 2 (Fed. Cir.
Dec. 15, 2005).
7. Id. at 6–7.
8. BMC Resources, Inc. v. Paymentech, L.P.,
30 2006 WL 306289 (N.D. Tex Feb. 9, 2006).
9. BMC Resources, Inc. v. Paymentech,
L.P., 498 F.3d 1373 (Fed. Cir. 2007).
10. Id. at 1381.
11. Muniauction, Inc. v. Thomson Corp.,
502 F.Supp.2d 477 (W.D. Pa. 2007).
12. Muniauction, Inc. v. Thomson Corp.,
532 F.3d 1318, 1329 (Fed. Cir. 2008).
13. Id. at 1330.
14. Id.
15. 586 F. Supp. 2d. 1331 (S.D. Fla. 2008),
aff’d, 318 Fed. App’x 908 (Fed. Cir. 2009)
(per curiam).
16. Id. at 1333.
17. Id. at 1335–1336.
18. Global Patent Holdings, LLC v.
Panthers BRHC LLC, 318 Fed. App’x 908
(Fed. Cir. 2009).
19. No. 4:08 CV 01203 JCH, 2008 U.S.
Dist. LEXIS 100529, at *13–14 (E.D. Mo.
Dec. 12, 2008)
20. Id. at *3.
21. See, e.g., Memorandum in Support of
Defendants’ Joint Motion to Dismiss at 3–4,
No. 4:08 CV 01203 JCH, Doc. Ent. No. 24
(E.D. Mo.).
22. See The Friday Group at *10, 13.
23. Desenberg v. Google, Inc., No.
09-CV-10121, 2009 U.S. Dist. LEXIS 66122
(S.D.N.Y. Jul. 30, 2009).
24. No. CV-07-5213, 2008 U.S. Dist.
LEXIS 95107, at *3–6 (C.D. Cal. Nov. 10,
2008).
25. Id. at *14.
26. No. 09-C-462, 2009 U.S. Dist. LEXIS
82052 at *7, 9–10 (E.D. Wisc. Aug. 31, 2009).
27. A magistrate judge in the Eastern
District of Texas recently grappled with a
divided infringement claim construction
argument in Fotomedia Technologies., LLC
v. AOL, LLC, No. 2:07-CV-255, 2009 U.S.
Dist. LEXIS 62542 (E.D. Tex. July 21, 2009).
The defendants argued that an embedded
clause specifying that image data received
by a server [the claim’s primary actor] that is
transferred to the server by a user of a client
computer required the user to perform a step
of the claimed method. Id. at *25–27. The
court disagreed on grammatical grounds,
holding that while image data the server
“receives” must be sent by the user, this fact
did not “require a user to perform a step of the
method.” Id. at *27.
28. 583 F. Supp. 2d 811 (S.D. Tex. 2008).
29. Id. at 831, 834.
30. Id. at 838.
31. Prior to Muniauction, both courts
issued decisions relying to some extent on
the provision of instructions by an alleged
mastermind to secondary actors in describing
the standard for a finding of “control or
direction.” See Privasys, Inc. v. Visa Int’l, No.
C-07-03257, 2007 U.S. Dist. LEXIS 86838 at
*8 (N.D. Cal. Nov. 14, 2007) and TGIP, Inc.
v. AT&T Corp., 527 F. Supp. 2d 561, 578
(E.D. Tex. 2007), respectively.
32. No. 2:06-CV-381, 2009 U.S. Dist.
LEXIS 30108 (E.D. Tex. Apr. 3, 2009).
33. Id. at *10.
34. Id. at *11–12 (brackets in original)
(quoting Emtel, 583 F. Supp. 2d at 839).
35. Id. at *13 (quoting Emtel, 583 F. Supp.
2d at 837).
36. Id. at *10–14.
37. No. C-07-0567, 2009 U.S. Dist. LEXIS
36168, at *2-4 (N.D. Cal. Apr. 28, 2009). See
also Keithley v. Homestore.com, Inc., No. C-034447, 2008 U.S Dist. LEXIS 94235, at *20
(N.D. Cal. Nov. 19, 2008) (granting summary
judgment of non-infringement because “plaintiffs
have not articulated any theory under which [the
website] is vicariously liable for the actions of
the users.”). At least one court has interpreted
Muniauction to hold that while vicarious liability
is sufficient for a finding of direction or control,
it is not necessary. In Akamai Technologies,
Inc. v. Limelight Networks, Inc., the District of
Massachusetts reasoned that liability for divided
infringement must exist in certain circumstances
absent a finding of vicarious liability because,
among other things, the Federal Circuit held in
BMC Resources that “a defendant cannot [ ]
avoid liability for direct infringement by having
someone else carry out one or more of the
claimed steps on its behalf.” 614 F. Supp. 2d 90,
120 (D. Mass. 2009) (quoting BMC Resources,
498 F.3d at 1379). In light of this statement,
the Massachusetts court stated in dicta that “a
contract to perform steps of a patented process
on [a defendant] mastermind’s behalf” (in other
words, a “contractual obligation” to practice
the patent) would not shield a defendant from
liability. Id. at 121. It seems likely that both
the Southern District of Texas in Emtel and
the Eastern District of Texas in Golden Hour
would have treated the situation presented by
the Akamai court of a contractual obligation to
perform steps of an asserted patent as a basis
for a finding of vicarious liability under the
Restatement of Agency (Second). See Emtel,
583 F. Supp. 2d. at 837; Golden Hour, 2009
U.S. Dist. LEXIS 30108, at *13.
38. 549 U.S. 118 (2007).
39. 35 U.S.C. §§ 305, 314; MPEP
§§ 2258(III), 2658(III); see also MPEP
§ 1412.03.
40. 586 F. Supp. 2d 1331.
41. See 1/12/09 Request for Reexamination
of United States Patent No. 5,253,341 C1, Ex
Parte Reexamination Certificate (5820TH),
“Detailed Statement in Support of Ex Parte
Reexamination of United States Patent No.
5,253,341 C1, Ex Parte Reexamination
Certificate (5820TH)” at 11–14,
Reexamination Control No. 90/009,381.
42. Global Patent Holdings, 586 F. Supp.
2d at 14.
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Published in Intellectual Property Litigation, Volume 21, Number 2, Winter 2010 © 2010 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be
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In This Issue...
Parent/Subsidiary Liability Issues in Patent Litigation
By Irfan A. Lateef and Marko R. Zoretic ........................................................... 1
Divided Infringement: The Impact of BMC Resources and Muniauction
By Anthony I. Fenwick and Jill Zimmerman ...................................................... 1
Director and Officer Liability for Inducement of Patent Infringement
By Jason A. Wietjes and Michael D. Pegues ................................................... 3
Strategies for Indemnification under the UCC Against Claims of
Patent Infringement
By Paul E. McGowan ...................................................................................... 6
The Common Law and Secondary Liability: Culpability and
Procedure in Trademark and Copyright Litigation
By J. Alexander Hershey ............................................................................... 10
Just the Facts: Pleading Claims for Induced and Contributory Patent
Infringement after Iqbal
By Brandon Mark .......................................................................................... 14
Respondeat Superior under the Uniform Trade Secrets Act
By Adam Kargman . ...................................................................................... 16
The Morphing Accused Product after Ricoh v. Quanta
By Vandana Koelsch ..................................................................................... 20
Published in Intellectual Property Litigation, Volume 21, Number 2, Winter 2010 © 2010 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be
copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.