Until the Federal Circuit’s decision in SEB S.A. v. Montgomery Ward & Co., Inc. (Fed. Cir. 2010), it was unclear what level of knowledge an accused patent infringer must have to be liable for inducement of infringement under Section 271(b) of the Patent Act.
Generally, there are two ways a defendant in a patent infringement suit may be liable: (1) direct infringement and (2) indirect infringement. A direct infringer is anyone who, without permission, “makes, uses, offers to sell, or sells any patented invention within the U.S. or imports into the U.S. any patented invention during the term of the patent.” 35 U.S.C. §271(a). An indirect infringer is a party who contributes to or induces the infringement, even though a third party is responsible for the actual infringement—similar to vicarious liability in tort law.
The SEB decision pertains to inducers, which are defined as parties who actively encourage direct infringement by a third party. 35 U.S.C. §271(b). This discussion contains a brief explanation and history of the inducement liability standard, the impact of the SEB decision, and what questions remain unresolved.
To prevail on a claim of inducement, a patent holder must first establish direct infringement and then show that the infringer knowingly induced infringement. But, the Federal Circuit, which has exclusive jurisdiction to review patent infringement claims, has grappled with what level of intent is required to seek judgment against an alleged inducer. The question considered: Is the plaintiff required to show that the defendant actually knew of the patent and specifically intended to violate the law? Or does the plaintiff need to show that the defendant knew of the acts which induced infringement?
Historically, the Federal Circuit aligned itself with the strict, “specific intent” standard for proving that a defendant induced patent infringement. See Manville Sales Corp. v. Paramount Sys., Inc., 917 F.2d 544 (Fed. Cir. 1990). Under this standard, a plaintiff must show that the defendant third party knew or should have known that his acts would induce actual infringement—which necessarily requires a plaintiff to show that the defendant knew of the patent.
Three years ago, in DSU Medical Corp. v. JMS (Fed. Cir. 2006)(en banc), the Federal Circuit adopted this “specific intent” standard—making it very difficult for plaintiffs to prove inducement. Furthermore, courts were willing to dismiss claims of inducement if the accused infringer relied in good faith on the opinion of counsel. See Amersham Pharmacia Biotech, Inc. v. Perkin-Elmer Corp., 2000 U.S. Dist. LEXIS 18751 (N.D. Cal. Dec. 22, 2000).
However, on February 5, 2010, the Federal Circuit in SEB finally set out to establish the “metes and bounds of the knowledge-of-the-patent requirement.” SEB at 1376. The Court took an abrupt turn by narrowing the “specific intent” standard, thereby expanding the scope of liability for inducement. The court held that “a claim for inducement is viable even where the patentee has not produced direct evidence that the accused infringer actually knew of the patent-in-suit.” Id. at 1377.
SEB, a French company that designs home-cooking appliances and owns the patent to a deep fryer with an inexpensive and heat resistant outer shell, sued Pentalpha, a Hong-Kong based company which had copied and sold the SEB deep fryer to US-based Sunbeam Products and Montgomery Ward. Pentalpha was found to have infringed and induced infringement of SEB’s deep fryer patent.
The Federal Circuit, in SEB, developed a new liability standard which not only reduces a plaintiff’s pleading burden, but also clarifies that “specific intent” is broad enough to include a showing of recklessness or “deliberate indifference.” Plaintiff need only show that the defendant “deliberately disregarded a known risk” that someone else held a patent on the design or device. This “deliberate indifference” standard would allow a plaintiff to prevail on evidence that shows an accused infringer deliberately avoided facts that would have been obvious to anyone else.
So what will suffice for a showing of “deliberate indifference”? The SEB court suggested three things based on Pentalpha’s behavior. First, the fact that “Pentalpha purchased an SEB deep fryer in Hong Kong and copied all but the cosmetics” was substantial evidence to support the jury’s finding of inducement. Id. Second, Pentalpha did not produce any other evidence that they were unaware of SEB’s patent. In fact, at trial, they jury found that SEB consistently marked all of its products with stickers displaying the patent. Third, and most importantly, Pentalpha hired counsel to perform a “right to use” study, but failed to inform their attorney of the elements copied. The court found that “a failure to inform one’s counsel of copying would be highly suggestive of deliberate indifference.” Id. at 1376.
The facts of this case beg the question: Is there any functional difference between proving actual knowledge and deliberate indifference? The court seems to conflate the two by citing a 2nd Circuit opinion that “‘deliberate avoidance is not a standard less than knowledge; it is simply another way that knowledge may be proved.’” Id. (citing, Woodman v. WWOR-TV, Inc., 411 F.3d 69, 84 n.14 (2nd Cir. 2005)).
The difference is that, before SEB, an accused infringer could avoid inducement liability by pointing to a formal “right to use” or “non-infringement” opinion of counsel that they relied on in good faith. SEB shows that this defense no longer has teeth. For example, in DSU, the defendant accused of inducing infringement, ITI Corp Ltd., obtained counsel’s opinion that their open-shell needle guards did not infringe any DSU patent rights. This opinion letter was crucial exculpatory evidence of lack of intent to infringe.
Under SEB, this good faith defense receives a much stronger scrutiny. Parties are under a duty to fully disclose all relevant information to their patent attorney before they can allege reliance on counsel’s opinion. Noting that Pentalpha’s attorney only analyzed 26 patents before concluding that none infringed, the court did not address the scope of an accused infringer’s duty. As suggested by Michael Kasdan of IPWatchdog.com, a party seeking a patent invalidity or non-infringement letter from counsel must ensure that the letter is complete. Further, anyone seeking to manufacture, use, or sell a competing product should investigate for any overlapping patent claims, especially where the copied product has been sufficiently marked.
Thus, this decision leaves some questions: How much patent-searching due diligence is enough to defeat an inducement claim? And now that it’s easier for patent owners to deter profit-seeking competitors, what impact will this decision have on healthy competition driven by less expensive, non-infringing products?
In sum, the onus is on accused inducers of infringement to: (i) show that they didn’t just turn a blind eye to evidence that their product was infringing; and (ii) disclose every detail about the manufacture, use, and sale of their product to counsel before relying on a non-infringement letter.
*Emily Cantrell is a third year law student at Wake Forest School of Law, where she is pursuing an interest in entrepreneurial law. Emily is the recipient of Wake Forest’s Public Interest Research Fellowship and serves as Symposium Editor of the Wake Forest Journal of Business and Intellectual Property Law. She holds a Bachelor of Arts degree in English, Magna Cum Laude, from Emory University and was awarded Emory’s 2005 Humanitarian Award. Prior to enrolling in law school, Emily founded and managed a 501(c)(3) tax-exempt nonprofit organization, The Cambodian Countryside Development Foundation.