Inducing Infringement: Inferring Knowledge and Intent from a Finding of Deliberate Indifference by Ronald J. Brown and Bridget M.

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1 Inducing Infringement: Inferring Knowledge and Intent from a Finding of Deliberate Indifference by Ronald J. Brown and Bridget M. Hayden Ronald J. Brown and Bridget M. Hayden are lawyers at Dorsey & Whitney, Minneapolis. Brown can be reached at brown.ron@dorsey.com. Hayden can be reached at hayden.bridget@dorsey.com. Historically, the Federal Circuit has opined that inducement of patent infringement requires (1) direct infringement by a third party, (2) actual or constructive knowledge by the inducer of the patent infringed, and (3) the intent to induce infringement of that patent. A little over three years ago, the Federal Circuit handed down an opinion that made it more difficult for the patent holder to prove inducement of infringement under 271(b) of the Patent Act by imposing a specific intent requirement. Just recently, however, the Court in SEB S.A. v. Montgomery Ward & Co. 1 eased the quantum of proof required to establish inducement. It held that evidence of a deliberate indifference to the patent-in-suit may be sufficient to satisfy both the knowledge and intent requirements for proof of inducement. 2 The Law Prior to Late 2006 Inducement is a common claim in patent infringement cases. It often arises where the putative inducer sells an article to its customers, who then practice a method covered by the patent-in-suit. Rather than proceeding against a large number of defendants, it may be more efficient to proceed directly against the putative inducer under an inducement theory. Similarly, the need for an inducement claim may arise where the putative inducer makes extra-territorial sales of a covered article to its customers, who then sell the article in the U.S. The Patent Act provides that "[w]hoever actively induces infringement of a patent shall be liable as an infringer." 3 Prior to late 2006, the Federal Circuit consistently held that inducement requires (1) direct infringement by a third party, (2) actual or constructive knowledge by the inducer of the patent infringed, and (3) the intent to induce infringement of that patent. 4 The Court, however, was imprecise concerning the requisite intent. It didn't specify whether it was just an intent to cause the acts that later were found to infringe, or whether it was an intent to cause those acts, believing that performance of those acts would constitute direct infringement. 5 The Court also did not elaborate on precisely what it meant by "actual knowledge" of the patent infringed. The DSU Medical Decision of Late 2006

2 DSU Med. Corp. v. JMS Co. 6 was the Federal Circuit's attempt to clarify the nature of the intent required to prove inducement. In a later Federal Circuit decision, the Court said the following: "In DSU Medical... this court addressed the intent necessary to support a finding of inducing infringement.... [T]he plaintiff must show that the alleged infringer knew or should have known that his actions would induce actual infringements." 7 It held that the intent requirement for inducement includes not just an intent to cause the acts that are later found to constitute direct infringement, but also a specific intent to cause direct infringement by the performance of those acts. 8 In other words, the inducer either must have actually believed, or had reason to believe, that the actions he caused would result in infringement. The DSU Medical decision did not, however, address the knowledge-of-the-patent requirement for inducement. With respect to this element of inducement, the Court commented in dictum that "[t]he requirement that the alleged infringer knew or should have known his actions would induce actual infringement necessarily includes the requirement that he or she knew of the patent." 9 (Emphasis added). Chief Judge Michel, however, noted in his concurring opinion in DSU Medical that "the record in DSU Medical showed that the alleged infringer had actual knowledge of the patent-in-suit.... Accordingly, the 'knowledge of the patent' issue [was] not before us." 10 The SEB Decision of February 5, 2010 In a recent decision of the Federal Circuit, SEB S.A. v. Montgomery Ward & Co., 11 the Court elaborated on the scope and content of the knowledge required to show active inducement. While the SEB decision addresses a multitude of issues, the facts relevant to inducement are relatively uncomplicated. The plaintiff SEB owns U.S. Patent No. 4,995,312, which claims a deep fryer with a cool-touch feature. 12 SEB is based in France. 13 It sells home cooking products, including deep-fryers with the cool-touch feature, in the U.S. through an indirect subsidiary T-Fal Corp. 14 The defendant Pentalpha Enterprises Ltd., a subsidiary of British Virgin Islands-based Global-Tech Appliances Inc., is a Hong Kong entity. 15 Pentalpha developed the cooltouch deep fryer after purchasing and copying an SEB cool-touch fryer in Hong Kong. 16 Pentalpha began selling its accused deep fryers to Sunbeam Products Inc. in Sunbeam then resold those fryers in the U.S. 18 SEB sued Sunbeam in 1998 for infringement of the 312 patent. 19 The parties eventually settled, with Sunbeam paying SEB a significant sum of money. 20 Although Pentalpha was aware of the Sunbeam litigation, it subsequently sold the cool-touch deep fryers to Fingerhut Corp. and Montgomery Ward & Co., who then resold those fryers in the U.S. 21 In 1999, SEB sued Pentalpha, Global-Tech, and Montgomery Ward for infringement of the 312 patent. 22 At trial, the jury found, among other things, inducement. 23 Judgment was entered against the defendants, from which Pentalpha appealed. 24 Defendant Pentalpha argued in SEB that it could not have induced infringement because it did not know of the SEB patent -- a requirement that Pentalpha apparently gleaned from the dictum in the DSU Medical

3 decision. 25 In addressing the nature of the knowledge required to show active inducement, the Court reasoned that in other legal contexts, "the standard of deliberate indifference of a known risk is not different from actual knowledge, but is a form of actual knowledge." 26 The Court proceeded to adopt this expansive view of "actual knowledge" by holding 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." 27 The following facts appear to have been relevant to the Court s analysis of defendant's knowledge of the SEB patent: (1) Pentalpha's president was well versed in the U.S. patent system, and a named inventor on 29 U.S. patents 28 ; (2) he also was aware that SEB was cognizant of U.S. patent rights 29 ; (3) Pentalpha had obtained a specimen of SEB's deep fryer in Hong Kong and had copied its design, including the construction that resulted in the cool touch feature a feature that was the focus of SEB's patent 31 ; (4) Pentalpha retained a patent attorney to conduct a search and prepare a freedom-to-operate opinion 32 ; (5) Pentalpha, however, did not disclose to its patent attorney that it had copied the SEB deep fryer 33 ; (6) its patent attorney apparently did not identify the SEB patent during his search 34 ; (7) Pentalpha asked its patent attorney to prepare a freedom-to-operate opinion based on his search results, which did not include the SEB patent 35 ; and (8) it does appear, however, that Pentalpha never informed its patent attorney of the SEB patent. 36 Based on these facts, the Court concluded that Pentalpha had actual knowledge of the SEB patent because the defendant exhibited a deliberate indifference to a known risk that its deep fryer fell within the scope of SEB's patent. 37 The Court found not only that plaintiff had produced evidence of a deliberate indifference to the SEB patent, but that defendant had failed to produce any exculpatory evidence: "[P]roof of knowledge through a showing of deliberate indifference may be defeated where an accused infringer establishes that he actually believed that a patent covering the accused product did not exist. But here Pentalpha did not argue that it or its employees actually believed that an SEB patent did not exist...." 38 Finally, the Court added that its opinion "does not purport to establish the outer limits of the type of knowledge needed for inducement. For instance, a patentee may perhaps only need to show, as Insituform suggests, constructive knowledge with persuasive evidence of disregard for clear patent marking, similar to the constructive notice requirement in 287(a)." 39 While the Court focused on the knowledge element of inducement, it did not totally ignore intent. In concluding that the jury's finding of inducement was justified, it made an elliptical comment on the intent element of inducement: "'[S]pecific intent' in the civil context is not so narrow as to allow an accused wrongdoer to actively disregard a known risk that an element of the offense exists. 40 Nothing else in the opinion addresses the intent requirement of inducement. It appears that the Court was of the view that, in the case of deliberate indifference, specific intent can be inferred from the same facts that support a finding of actual knowledge. Its reasoning is consistent with its earlier holding in Water Techs. Corp. v. Calco, Ltd. that direct evidence is not required to prove intent. 41

4 Implications of DSU Medical and SEB What then do DSU Medical and SEB mean for the patent holder and the putative inducer? The patent holder needs to concern itself with three elements of proof. First, as before, the patent holder must show direct infringement by a third party. Second, the patent holder must prove that the putative inducer had actual or constructive knowledge of the allegedly infringed patent. Actual knowledge may take the form of either actual knowledge of the patent (such as having seen or been informed of it) or, in view of SEB, a deliberate indifference to, or avoidance of, the patent. Constructive knowledge may take the form of a patent marking and evidence that the putative infringer saw the patent marking. Finally, the patent holder must prove that the putative inducer had the requisite intent. Specifically, evidence must be offered that the defendant possessed an intent to cause the acts that are later found to constitute direct infringement, as well as a specific intent to cause direct infringement by the performance of those acts. In some circumstances, such as for the SEB fact pattern, it appears that proof of deliberate indifference to the patent-in-suit may be sufficient to infer the requisite intent. 42 The putative inducer needs to offer in its defense evidence of one or more of the following facts. If the patent holder offers evidence of defendant's deliberate indifference to the patent-in-suit, then the putative inducer must come forward with evidence of a belief on its part that the patent-in-suit did not exist. If the putative inducer either knew, or believed that the patent-in-suit did exist, and the patent holder has offered proof of these facts, then the putative inducer must look to the element of intent for a defense. Similarly, if the putative inducer saw patent markings, then it must look to the element of intent. With respect to the element of intent, the putative inducer should attempt to offer evidence of one or more of the following if the plaintiff has offered evidence of intent. First, evidence that the putative inducer did not intend to cause the acts that later were found to constitute direct infringement would constitute a viable defense. For example, if (1) the putative inducer supplied the direct infringer with articles that had a noninfringing use, and (2) the putative inducer did not direct, suggest, or have reason to believe, that the direct infringer would use those articles in a way that infringed, such evidence would be exculpatory. Second, the putative inducer could produce in its defense evidence that it had secured from a patent attorney a timely opinion that the actions of the third party would not constitute direct infringement. Such a noninfringement opinion could rebut the patent holder s evidence of specific intent WL (C.A. Fed. (N.Y.)). 2 Id. at * U.S.C. 271(b). 4 Insituform Techs., Inc. v. CAT Contracting, Inc., 161 F.3d 688, 695 (Fed. Cir. 1998); Water Techs. Corp. v. Calco, Ltd., 850 F.2d 660 (Fed. Cir. 1988).

5 5 MercExchange LLC v. ebay Inc., 401 F.3d 1323 (Fed. Cir. 2005), rev d on other grounds, 547 U.S. 388 (2006); Insituform Techs., Inc. v. CAT Contracting, Inc., 161 F.3d 688, 695 (Fed. Cir. 1998) F.3d 1293 (Fed.Cir.2006) WL at *12. 8 DSU Med. Corp. v. JMS Co., 471 F.3d 1293, 1306 (Fed. Cir. 2006). 9 Id. at Id. at WL Id. at *1. 13 Id. 14 Id. 15 Id. at *2. 16 Id. 17 Id. 18 Id. 19 Id. 20 Id. 21 Id. 22 Id. 23 Id. at *3. 24 Id. 25 See id. at * Id. quoting United States v. Carani, 492 F.3d 867, 873 (7th Cir. 2007) ( Deliberate avoidance is not a standard less than knowledge; it is simply another way that knowledge may be proved. ); Woodman v. WWOR-TV, Inc., 411 F.3d 69, 84 (2d Cir. 2005) ( We note that a party's knowledge of a disputed fact may also be proved through evidence that he consciously avoided knowledge of what would otherwise have been obvious [to] him. ). 27 Id. at * Id. 29 Id. 30 Id. at *2, * Id. at *1. 32 Id. at *2, * Id. The Court seized on Pentalpha s failure to disclose to its patent attorney that it had copied the SEB product. Presumably, a patent savvy party such as Pentalpha would at least suspect that a commercial product sold in the U.S. a product it had copied was covered by a U.S. patent. 34 Id. While the Federal Circuit does not explicitly state that the SEP patent was not located by the patent search, the lower court refers to the search as doomed to failure. Id. at *2. The search would not have failed had it found the SEP patent. The Court also does not mention the content of the opinion. Had the opinion addressed the SEP patent, presumably the Court would have discussed whether the opinion was exculpatory. 35 Id. It is unclear whether Pentalpha was aware of the results of the search before the opinion was prepared, or only became aware of the results when it received the opinion. 36 Id. The cornerstone of Pentalpha s defense was it claim that it had no knowledge of the SEP patent. It could not have disclosed to its patent attorney that of which it was unaware. 37 Id. 38 Id. 39 Id. at * Id. at *12 citing Crawford-El v. Britton, 951 F.2d 1314, 1318 (D.C. Cir. 1991) (equating specific intent and deliberate indifference) F.2d 660, 668 (Fed. Cir. 1988). 42 See 2010 WL at *12.