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Unknowingly Inducing Patent Infringement is a Risk

Businesses have tried many different ways to avoid infringing other companies' patents, but one strategy clearly doesn't work. If a business doesn't itself infringe a patent, but deliberately enables others to do so, the business will still face liability--for inducing patent infringement.

This cause of action--inducing infringement--is vital to many patent owners. Electronics companies, for instance, often rely on this cause of action to go after overseas wrongdoers. Financial and Internet firms often use it to protect their online business method patents.

The Federal Circuit recently made it easier for patent owners to win these lawsuits, many experts say. A three-judge panel held in February 2010, in SEB S.A. v. Montgomery Ward & Co., that a party can induce infringement even if that party didn't know there was a patent on the infringed item. Liability can attach when a defendant "deliberately disregarded a known risk" that the item was patented.

One of the defendants in that case, Global-Tech Appliances, appealed. On Oct. 12, 2010, the U.S. Supreme Court granted certiorari. Many businesses and patent experts are now awaiting the court's decision in Global-Tech Appliances Inc. v. SEB S.A.

"This case will be very important in determining who is liable for inducing patent infringement," says Sunwoo Lee, a partner in Roetzel & Andress.

Fryer Fiasco

The case is a model of globalization. A French corporation, SEB, is suing a Hong Kong-based firm, Global-Tech, over deep fryers sold in the U.S.

This worldwide dispute began in 1997 when Global-Tech decided to manufacture a fryer aimed at the U.S. market. The company developed this fryer by copying some technology from an SEB fryer marketed in Hong Kong. The copied technology was patented in the U.S., but Global-Tech didn't know this because SEB's fryers in Hong Kong lacked U.S. patent markings.

Global-Tech did perform some due diligence in this regard. The company had hired a patent lawyer in Binghamton, N.Y., to provide an opinion on whether its fryer would infringe any U.S. patent. However, Global-Tech failed to tell the attorney that it had copied important aspects of the SEB fryer. It made no mention of the SEB fryer. The attorney failed to uncover the patent for the SEB fryer and ultimately provided a written opinion that Global-Tech's fryer did not infringe any U.S. patent.

Global-Tech subsequently manufactured its fryer in China and sold it in that country to Fingerhut, Sunbeam and Montgomery Ward. Those companies, in turn, imported the fryers to the U.S. and sold them there.

In 1999, SEB sued Global-Tech in federal district court in Manhattan. The complaint alleged, among other things, that Global-Tech induced the three retailers to infringe SEB's patent. A jury found for SEB and awarded damages of approximately $4.9 million. The Federal Circuit affirmed in a controversial ruling.

Ignorance Isn't Bliss

Until the Federal Circuit's 2010 decision in SEB, the standard for inducing infringement was relatively clear. The court had declared, in its 2006 en banc ruling, DSU Medical Corp. v. JMS Co., that a party is liable for inducing patent infringement only if "the alleged infringer knew or should have known his actions would induce actual infringement." This, the court added, "necessarily includes the requirement that [the alleged infringer] knew of the patent."

Global-Tech was unaware of SEB's patent, so one might think the company could not be guilty of inducing infringement. However, the Federal Circuit found that because Global-Tech was familiar with U.S. patent law, yet copied important aspects of SEB's fryer and withheld this information from its patent counsel, a jury could find Global-Tech deliberately ignored the risk that SEB had a patent on its deep fryer. Such "deliberate indifference" was sufficient to create liability for inducing infringement, the Federal Circuit held.

"Deliberate indifference" is not a new standard for liability, the panel averred. It is merely evidence that an accused "knew of the patent," as required by DSU. In other words, when a party intentionally avoids knowledge of a patent, this indicates the party knew some relevant patent existed.

This reasoning seems flawed to many patent experts. They assert that the Federal Circuit's rulings in SEB and DSU are not easily reconciled. "The cases point in such different directions regarding intent, it is hard to believe they are from the same court or the same generation," says William Rooklidge, a partner in Howrey LLP. He adds that the Federal Circuit's ruling in SEB has "thrown the law into complete disarray. Today, it is hard for anyone to say what the law is."

Clarification in Court

The Supreme Court will attempt to remove this confusion. But no matter what the court decides, many businesses will be unhappy.

If the court upholds the "deliberate indifference" test, many legitimate companies would suddenly be at risk for inducing patent infringement. "Given the common practice in Silicon Valley and elsewhere of not conducting a patent search, if the Supreme Court affirms, it could expose many of the largest technology companies in the world to a new source of liability," says Prof. Mark Lemley of Stanford Law School.

Companies that already perform patent clearances will need to spend significantly more time and money on these efforts. "Businesses would have to broaden the scope of their clearances. They would have to be concerned not just about the patents they might infringe by their own activities, but about the patents that might be infringed when their products are used by other companies," says Rooklidge.

Upholding the "deliberate indifference" test would also increase the power of so-called patent trolls--who make money by licensing their patents and suing those who refuse to purchase licenses. Their allegations of inducing infringement would be harder to dismiss pretrial, according to Rooklidge. "This jacks up litigation costs and increases the case's settlement value," he adds.

On the other hand, if the Supreme Court rejects the "deliberate indifference" test, many foreign businesses could escape infringement liability by deliberately remaining ignorant of whether their products or services induce any patent infringement in the U.S. "It would make it difficult for U.S. companies to enforce their IP rights against overseas infringers who try to stay out of the U.S. market. That would relegate the IP owner to filing lawsuits against consumers or retailers, rather than against the parties who are actually culpable. That would make enforcement less effective and more expensive," says Norman Zivin, a Cooper & Dunham partner who represents SEB in this lawsuit. (Lawyers for Global-Tech declined to comment on the pending litigation.)

The court will hear oral arguments in this case early this year, according to patent experts. They add that it's unclear how the court will rule.

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Steven Seidenberg

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