Supreme Court Rules on Induced Infringement Standard and Upholds Clear and Convincing Evidence Standard for Invalidity
By Justin E. Gray (firstname.lastname@example.org)
The U.S. Supreme Court resolved two important patent law issues that were before it this term. On May 31, 2011, the Court issued its decision in Global-Tech Appliances, Inc. v. SEB S.A., U.S., 10-6, -- U.S. – (2011), which clarifies the state of mind a party must have to be liable for inducing infringement by others. On June 9, 2011, the Court issued its decision in Microsoft Corp. v. i4i Ltd., U.S., No. 10-290, -- U.S. – (2011), which addresses the proper burden of proof for invalidating a patent.
The Court’s decision in Global-Tech raises the standard for proving induced infringement. The case involves interpretation of Section 271(b) of the Patent Act, which states: “Whoever actively induces infringement of a patent shall be liable as an infringer.” The issue for the Court was what state of mind a party must possess to “actively induce” infringement by a third party.
The Federal Circuit had ruled that a party is liable for inducing infringement if it was “deliberately indifferent to a known risk that a patent may exist” covering the accused product. The Supreme Court rejected the “deliberate indifference” standard. Instead, the Court held that a plaintiff must show that a defendant either had actual knowledge that the induced acts constitute infringement, or that the defendant engaged in “willful blindness” of the existence of a patent.
“Willful blindness,” the Court held, requires that “(1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact.” The Court explained how the “willful blindness” test differs from the Federal Circuit’s “deliberate indifference” standard, stating that deliberate indifference permitted a finding of knowledge “when there is merely a ‘known risk’ that the induced acts are infringing” and that it did not require “active efforts by an inducer to avoid knowing about the infringing nature of the activities.”
As a practical matter, it remains to be seen whether the new “willful blindness” standard will lead to a decrease in the number of parties found liable for induced infringement. Indeed, the Supreme Court found that the defendant in Global-Tech was liable under either standard.
The second case on the Supreme Court’s docket, i4i, initially made headlines when the jury awarded the patent owner $290 million in damages. One of Microsoft’s defenses was that the patent should be found invalid because i4i was allegedly selling a product covered by the patent more than one year before it filed its application with the USPTO. That prior art was not considered by the USPTO during prosecution.
The Supreme Court granted review on the issue of whether invalidity must be proven by “clear and convincing evidence,” or the lower “preponderance of the evidence” standard. The “clear and convincing” standard has been in place since 1984, when it was established by the Federal Circuit in American Hoist & Derrick Co. v. Sowa & Sons, Inc., 725 F.2d 1350, 1359 (Fed. Cir. 1984). The dispute involved interpretation of Section 282 of the Patent Act, which states: “A patent shall be presumed valid... The burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity.”
The Supreme Court heard oral arguments in the case on April 18, 2011. At the arguments, Microsoft’s counsel contended that Section 282 does not specify a level of proof and, as a result, the lower preponderance of the evidence standard should apply by default. i4i, on other hand, argued that Congress had implicitly condoned use of the clear and convincing standard by failing to amend Section 282 during the 27 years since the American Hoist decision.
One issue the Court had to wrestle with is whether the lower burden of proof should apply only in those instances where the USPTO did not consider the prior art at issue. In its 2007 decision in KSR Int’l Co. v. Teleflex, Inc., 550 U.S. 398 (2007), the Supreme Court suggested it might favor such a bifurcated standard of proof. In its i4i decision, however, the Court rejected that approach, finding there is nothing in the text of Section 282 that “suggests Congress meant to … enact a standard of proof that would rise and fall with the facts of each case.”
Ultimately, the Court unanimously affirmed the Federal Circuit’s clear and convincing standard. Regarding situations where the USPTO did not consider the prior art at issue, the Court explained that this can be dealt with in jury instructions: “When warranted, the jury may be instructed to consider that it has heard evidence that the PTO had no opportunity to evaluate before granting the patent.”
The i4i decision is viewed by many as a clear victory for patent holders and generally maintains the long-standing state of the law. But, it remains to be seen how future courts will instruct juries about prior art that was not considered by the USPTO in light of this decision.
In March 2011, the U.S. Court of Appeals for the Ninth Circuit issued an important decision addressing the circumstances in which the use of keywords for Internet searches can constitute trademark infringement. The court’s opinion in Network Automation, Inc. v. Advanced Systems Concepts, Inc., 638 F.3d 1137 (9th Cir. 2011), provides crucial guidance for anyone using the Internet as a marketing channel. In particular, the court emphasized that the likelihood of confusion analysis must reflect the increasing sophistication of Internet users.
The case involved two direct competitors selling job scheduling and management software via the Internet. The trademark owner, Advanced Systems Concepts, Inc., sells its software under the registered trademark “ActiveBatch.” The plaintiff, Network Automation, Inc., purchased the keyword “ActiveBatch” from the Google and Bing search engines. As a result, Internet searches using the word “ActiveBatch” returned results that included Network Automation’s Web site. When Advanced Systems sent Network Automation cease and desist letters, Network Automation filed a declaratory judgment action seeking a ruling that its use of ActiveBatch as a keyword did not constitute trademark infringement. Advanced Systems responded by moving for a preliminary injunction.
The legal dispute centered on whether Network Automation’s use of the ActiveBatch keyword caused initial interest confusion, a form of trademark infringement commonly alleged in the Internet context. The Ninth Circuit described initial interest confusion as occurring “when the defendant uses the plaintiff’s trademark in a manner calculated to capture initial consumer attention, even though no actual sale is completed as a result of the confusion.”
The district court held that there was a likelihood of initial interest confusion, reasoning that the following three factors weighed in the trademark owner’s favor: 1) the similarity of the marks; 2) the relatedness of the goods; and 3) the marketing channels used. Those three factors were emphasized by the Ninth Circuit in Brookfield Communications v. West Coast Entertainment, 174 F.3d 1036 (9th Cir. 1999), a seminal case regarding Internet trademark infringement, and have come to be known as the “Internet troika.” The district court also found that confusion was likely because, in its view, “there is generally a low degree of care exercised by Internet consumers.”
The Ninth Circuit reversed the district court’s ruling and went out of its way to emphasize that courts must avoid rigid formulas and assumptions “when applying the law in the Internet context.” “Emerging technologies,” said the court, “require a flexible approach.” The Ninth Circuit reminded courts that “the sine qua non of trademark infringement is consumer confusion,” and the factors relevant to assessing the likelihood of confusion may vary with the context. The court also emphasized that just because a consumer is diverted to a competing Web site does not mean that consumer is confused.
The Ninth Circuit reaffirmed that the starting point for trademark infringement analysis in that jurisdiction is the eight factors it identified in AMF, Inc. v. Sleekcraft Boats, 599 F.2d 341 (9th Cir. 1979): 1) strength of the mark; 2) proximity of the goods; 3) similarity of the marks; 4) evidence of actual confusion; 5) marketing channels used; 6) types of goods and the degree of care likely to be exercised by the purchaser; 7) defendant’s intent in selecting the mark; and 8) likelihood of expansion of the product lines. Those factors, however, are not exclusive and the weight given to each may vary with the context.
In particular, the court deemphasized the importance of the “marketing channels used” factor in the Internet context because “it would be the rare commercial retailer that did not advertise online, and the shared use of a ubiquitous marketing channel does not shed much light on the likelihood of consumer confusion.”
The court instead placed emphasis on two considerations: the growing sophistication of Internet users and whether allegedly infringing Internet search results were labeled in a manner that might reduce the likelihood of confusion. The court noted “that the default degree of consumer care is becoming more heightened as the novelty of the Internet evaporates and online commerce becomes commonplace.” Experienced Internet users, said the court, “fully expect to find some sites that aren’t what they imagine based on a glance at the domain name or search engine summary.”
The court’s emphasis on the sophistication of Internet consumers and labeling of Internet search results colored its analysis of the eight Sleekcraft factors. For example, the court explained that when consumers use a mark as a keyword, the “strength of the mark” analysis must consider whether the consumers are so knowledgeable about the source associated with the mark that they are unlikely to be confused by competing Internet search results. Similarly, the court stated that the “proximity of the goods” factor “must be considered in conjunction with the labeling and appearance of the advertisements and the degree of care exercised by the consumers.”
In the Ninth Circuit’s view, how Internet search results are labeled or otherwise depicted onscreen is particularly important in the keyword advertising context, because the “likelihood of confusion will ultimately turn on what the consumer saw on the screen and reasonably believed, given the context.” For example, results that are confusingly labeled or not labeled at all may be likely to cause confusion. On the other hand, in this case, the Ninth Circuit suggested that the district court should have considered that the keyword search results appeared in a separate section of the screen labeled “sponsored links,” which may have reduced the likelihood of confusion.
The Ninth Circuit’s decision in Network Automation should help refocus trademark infringement analysis in light of the quickly evolving nature of Internet marketing and consumers. The decision reminds everyone that the core issue in trademark cases is the likelihood of confusion and that the factors for analyzing that issue must vary with the context of the alleged infringement. In Internet cases, courts cannot overlook the sophistication of Internet users and the labeling of search results. Network Automation will likely be a leading case in this area of the law.
The U.S. Court of Appeals for the Federal Circuit’s recent decisions in the area of joint infringement have generated disagreements about whether those decisions are consistent. The court recently signaled its intent to clarify the law of joint infringement by calling for en banc review of its decisions in Akamai Technologies, Inc. v. Limelight Networks, Inc., 629 F.3d 1311 (Fed. Cir. 2010), and McKesson Technologies, Inc. v. Epic Systems Corp., No. 2010-1291, 2011 WL 1365548 (Fed. Cir. April 12, 2011).
Joint infringement, sometimes called divided infringement, refers to situations in which a patent claim contains a series of elements that are performed by multiple parties. For a claim to be directly infringed, all of the steps must be performed. This creates a potential non-infringement defense if there are multiple parties performing separate steps. For example, if a claim has four steps, and one entity performs the first two steps and a second entity performs the second two steps, each entity may assert that it cannot be liable for infringement because it does not perform all four steps.
The Federal Circuit’s current line of joint infringement law began to develop in 2007 with the court’s decision in BMC Resources, Inc. v. Paymentech, L.P., 498 F.3d 1373 (Fed. Cir. 2007). In BMC Resources, the court held that in cases of divided infringement of a method claim, one party must “control or direct” each step of the method for there to be direct infringement.
The Federal Circuit expanded on what it means for an entity to “control or direct” all of the steps of a method claim in Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318 (Fed. Cir. 2008). The patent in Muniauction related to methods for conducting auctions of financial instruments. Like BMC Resources, the claims at issue were method claims, and they were performed by multiple parties, with at least one step performed by auction bidders and the rest performed by the accused software system. The plaintiff argued that there was direct infringement because the defendant controlled access to its system and instructed bidders how to use the system. The court, however, held that merely providing instructions to the bidders was not sufficient to demonstrate “control or direction,” and thus found no direct infringement.
At the end of 2010, in Akamai, the Federal Circuit provided its clearest direction about the meaning of “control or direct,” stating that an agency or other contractual relationship must exist for there to be direct infringement in cases of divided infringement of method claims. The patents in Akamai included methods directed to content delivery services over the Internet. The court held that there was no direct infringement because the defendant’s customers, while provided with instructions on how to use the service and required to perform some of the steps of the claim to take advantage of the service, were not agents of the defendant.
In January 2011, however, the court issued what some view as an inconsistent ruling in Centillion Data Sys. v. Qwest Communs. Int’l, Inc., 631 F.3d 1279 (Fed. Cir. 2011). Centillion involved divided infringement of “system” claims, rather than method claims. The patent in Centillion disclosed a system for collecting, processing, and delivering information from a service provider, such as a telephone company, to a customer. The system processes call data and delivers it to customers in a format appropriate for a personal computer. The claim included a “front-end” portion and a “back-end” portion. Although the accused products included both portions, the customer did not perform the “back-end” portion. In evaluating infringement by the customer, the Centillion court did not apply the agency test announced in Akamai. Instead, it found there was direct infringement by the customer because the customer “puts the system as a whole into service, i.e., controls the system and obtains benefits from it.” On the other hand, the court determined that Qwest was not a direct infringer because it did not direct its customers to perform any steps, nor were the customers agents of Qwest.
Finally, and most recently, in McKesson Technologies, Inc. v. Epic Systems Corp., No. 2010-1291, 2011 WL 1365548 (Fed. Cir. April 12, 2011), the court addressed infringement of a method claim for electronically communicating between a health care provider and the health care provider’s customers. The court held that there was no infringement because there was no agency relationship between the providers and the customers.
In view of the court’s other decisions involving method claims, McKesson appears to be a straightforward application of the law. In a dissent, however, Judge Newman contended that the Federal Circuit’s decisions on joint infringement have been incorrect and inconsistent, citing what she viewed as the different treatment of system and method claims established by the Centillion decision. Similarly, in a concurrence, Judge Bryson suggested that the court’s decisions in BMC Resources, Muniauction, and Akamai might be incorrect and that the court should consider en banc review of its joint infringement rules in an appropriate case.
The court quickly found appropriate cases. Just two weeks after the McKesson decision, the court vacated its opinion in Akamai and ordered a rehearing en banc to address the following question: “If separate entities each perform separate steps of a method claim, under what circumstances would that claim be directly infringed and to what extent would each of the parties be liable?” Akamai Technologies, Inc. v. The Massachusetts Institute of Technology, No. 2009-1372, 2011 WL 1518909, *1 (Fed. Cir. Apr. 20, 2011).
Then, at the end of May 2011, the court granted rehearing en banc in McKesson to address the following two issues: 1) “If separate entities each perform separate steps of a method claim, under what circumstances, if any, would either entity or any third party be liable for inducing infringement or for contributory infringement?” and 2) “Does the nature of the relationship between the relevant actors — e.g., service provider/user; doctor/patient — affect the question of direct or indirect infringement liability?” McKesson Technologies Inc. v. Epic Systems Corp., Fed. Cir., No. 2010-1291 (May 26, 2011).
Briefing in the en banc cases should be completed this summer, with oral argument likely in fall 2011. Decisions could be issued as early as late 2011 or early 2012. Until then, it will be unclear whether many claims that require multiple parties can be successfully asserted in litigation. It remains wise to draft claims in a manner such that a single entity performs all the steps.
Resolution of these issues will be important for numerous businesses and patent owners, especially those involving interactive online services.