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Contributory Infringement and Active Inducement Analyzed Under Rubric of Supreme Court Copyright Law Decisions

December 23, 2008

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Last Month at the Federal Circuit - January 2009

Judges: Gajarsa (dissenting-in-part), Linn, Dyk (per curiam)

[Appealed from: W.D. Wis., Chief Judge Crabb]

In Ricoh Co. v. Quanta Computer Inc., No. 07-1567 (Fed. Cir. Dec. 23, 2008), the Federal Circuit held that the district court applied erroneous legal standards for assessing whether defendant Quanta Computer Inc. (“QCI”) contributorily infringed U.S. Patent Nos. 5,063,552 (“the ’552 patent”) and 6,661,755 (“the ’755 patent”), and whether defendant Quanta Storage, Inc. (“QSI” and collectively with QCI “Quanta”) induced infringement of the same patents. The Court vacated the district court’s grant of SJ of noninfringement due to the application of the erroneous standards. The Court affirmed the remainder of the decision, holding that (1) the asserted claims of U.S. Patent No. 6,631,109 (“the ’109 patent”) are invalid for obviousness; and (2) the accused devices do not practice the methods of the asserted claims of U.S. Patent No. 6,172,955 (“the ’995 patent”).

The patents-in-suit are directed to various aspects of optical disc drive technology. The ’109 patent is directed to methods and apparatuses for generating a particular pulse sequence for recording information to a rewritable optical disc. The ’955 patent is directed to methods and apparatuses for formatting rewritable optical discs. The ’552 patent is directed to an apparatus and method for controlling the velocity at which a disc drive spins an optical disc. Finally, the ’755 patent is directed to methods of writing data to optical discs in multiple sessions rather than a single session.

QCI manufactures notebook computers, but does not sell the computers directly to consumers. Instead, QCI is an original equipment manufacturer (“OEM”) that sells its products to other companies for retail marketing. QSI, which is partially owned by QCI, manufactures optical disc drives. Like QCI, QSI is an OEM that does not sell directly to consumers, but sells its optical disc drives to its U.S. customers, including g NU Technology, Inc. (“NU”).

Ricoh Company, Ltd. (“Ricoh”) sued Quanta, accusing Quanta of directly and indirectly infringing each of the patents-in-suit. On SJ, the district court ruled that (1) the asserted claims of the ‘109 patent are obvious; (2) the asserted claims of the ’955 patent are not infringed; and (3) issues of material fact exist as to whether the accused devices perform the methods of the asserted claims of the ’552 and ’755 patents. Moreover, with respect to whether the ’552 and ’755 patents are infringed by Quanta and NU, the district court ruled that (1) Quanta does not directly infringe under § 271(a) because it neither sells nor offers to sell the patented methods; (2) NU does not directly infringe under § 271(a) because Ricoh presented no evidence to show that NU infringed the patents-at-issue while testing the accused device; (3) neither Quanta nor NU contributorily infringe under § 271(a) because all of the devices sold have substantial noninfringing uses; and (4) Ricoh failed to present evidence sufficient to create a material issue of fact as to QSI’s intent to induce infringement under § 271(c). Accordingly, the district court dismissed all of Ricoh’s claims against Quanta and NU.

On appeal, the Federal Circuit first dismissed Ricoh’s arguments that the asserted claims of the ‘109 patent are not obvious in view of either Ricoh’s European Patent Nos. EP 0898272 (“EP ’272”) or EP 0737962 (“EP ’962”). The Court found that, because the range of recording speeds disclosed in the European patents overlaps the range claimed by the ’109 patent, the ’109 patent is presumed obvious under Ormco Corp. v. Align Technology, Inc., 463 F.3d 1299 (Fed. Cir. 2006). Ricoh attempted to overcome this presumption by arguing that the European patents ‘teach away’ from the range of recording speeds claimed by the ’109 patent and that the faster recording speeds produced by the ’109 patent produced unexpected results in view of the teachings of the European patents. The Federal Circuit rejected Ricoh’s arguments because, first, the Court found no genuine issue of material fact that EP ’272 does not teach away from using its disclosed write strategy, which is the same write strategy claimed in the ’109 patent, in a high-speed range from 5 m/s to 28 m/s. The Court also found that the mere understanding that the write strategy of the ’109 patent and EP ’272 is useful in a faster but overlapping linear speed range is not the type of unexpected result that can rebut the prima facie case of obviousness arising from the overlapping ranges. The Court stated that “[s]uch development of the prior art is the quintessence of ‘ordinary skill’ or ‘ordinary skill and common sense’ rather than patentable innovation.” Slip op. at 13. Accordingly, the Court affirmed that the asserted claims of the ’109 patent are invalid as obvious.

Turning to SJ of noninfringement of the ’955 patent, the Court first noted that each of the asserted claims of the ’995 patent requires the step of “starting a formatting process for said optical disc as a background process.” The parties agreed that a background process differs from a foreground process in that a background process “can be interrupted at any time to allow another, higher priority process to be performed.” Id.. The Court found no issue of material fact with regard to infringement because Ricoh failed to cite any evidence that the accused devices use two separate formatting processes, one of which starts in the foreground and the other of which starts in the background. Accordingly, the Court affirmed that no party infringes the claims of the ’955 patent.

The Court next considered Quanta’s direct infringement of the method claims of the ’552 and ’755 patents through the sale or offer of sale of software. Ricoh argued that a party may directly infringe a method claim under 35 U.S.C. § 271(a) by offering to include patented methods in software sold as part of an accused device. Relying on the Supreme Court’s recent holding in Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109, 2117 (2008), that “a patented method may not be sold in the same way as an article or device,” the Court concluded that “a party that sells or offers to sell software containing instructions to perform a patented method does not infringe the patent under § 271(a).” Slip op. at 17-18. The Court also concluded that Ricoh failed to put forth evidence sufficient to create a material issue of fact as to whether NU directly infringed the ’552 and ’755 patents by testing the accused devices upon receipt from Quanta.

The Court turned next to Ricoh’s arguments that Quanta contributorily infringed the ’552 and ’755 patents by selling optical disc drives adapted to perform the patented recording methods. As an initial matter, the Court recognized that this case “presents an important, and previously unresolved, question concerning the scope of liability for contributory infringement, the construction of § 271(c), and the interpretation of the Supreme Court’s decisions in Sony Corporation of America v. Universal City Studios, Inc., 464 U.S. 416 (1984), and Metro- Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 545 U.S. 913 (2005).” Slip op. at 19.

The Court first reminded that “one who sells a component especially designed for use in a patented invention may be liable as a contributory infringer, provided that the component is not a staple article of commerce suitable for substantial noninfringing use.” Id. at 20. The Court further noted that, were direct infringement found, Quanta would be liable under § 271(c) if it imported into or sold in the United States a bare component that had no use other than practicing the methods of the ’552 and ’755 patents. The Court warned that “[i]t thus follows that Quanta should not be permitted to escape liability as a contributory infringer merely by embedding [a] microcontroller in a larger product with some additional, separable feature before importing and selling it.” Id. at 21. The Court concluded that, if it were to hold otherwise, then so long as the resulting products, as a whole, had a substantial noninfringing 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. The Court held that this result would run contrary to what the Supreme Court recognized in Grokster as a fundamental purpose of contributory infringement liability—to provide an alternative to suing all direct infringers by allowing suit against distributors for secondary liability.

Recognizing that the Grokster and Sony cases involved contributory infringement under copyright law rather than patent law, the Court stated that “the principles are generally the same.” Id. at 23. The Court concluded that “it is entirely appropriate to presume that one who sells a product containing a component that has no substantial noninfringing use in that product does so with the intent that the component will be used to infringe.” Id. at 24. The Court was unable to read Grokster as suggesting that Congress intended § 271(c) to eliminate this presumption in such cases where an infringing component is bundled together with something else. Moreover, the Court found that, unlike the disputed facts of the present case, the VCRs at issue in Sony did not have recording components that could only be used to infringe and separable, distinct playback components that did not infringe. Thus, the Court found that the Sony court had no occasion to address the question at issue here. Further, noting that, unlike contributory infringement, induced infringement under § 271(b) requires proof of affirmative intent to cause direct infringement, the Court concluded that the potential for induced infringement liability is not a practical substitute for contributory infringement liability.

For these reasons, the Court vacated the grant of SJ of no contributory infringement and remanded to the district court for further proceedings on the material issue of fact of whether Quanta’s products contain hardware or software components that have no substantial noninfringing use other than to practice Ricoh’s claimed methods, in which case contributory infringement may appropriately be found.

Finally, the Court considered whether defendant QSI actively induced infringement under 35 U.S.C. § 271(b), which states that “[w]hoever actively induces infringement of a patent shall be liable as an infringer.” Ricoh claimed that QSI actively induced infringement by its customers as well as the end users of the drives. Initially, the Court noted that a finding of inducing infringement requires a threshold finding of direct infringement—either a finding of specific instances of direct infringement or a finding that the accused products necessarily infringe. Thus, the Court considered whether “Ricoh has introduced evidence sufficient to create a material issue of fact as to Quanta’s intent that its drives be used to infringe the method claims of the ’552 and ’755 patents.” Slip op. at 29. Again, the Court turned to Grokster and its analysis of the law of active inducement, reminding that “when an article is suitable for substantial noninfringing use, an evidentiary showing that the defendant intended that the article be used for direct infringement is required.” Id. (citing Grokster, 545 U.S. at 935). The Court also noted that, in Grokster, the Supreme Court concluded that a showing of intent does not require evidence that the accused indirect infringer successfully communicated a message of encouragement to the alleged direct infringer. Id. at 30 (citing Grokster, 545 U.S. at 938).

Accordingly, the Court concluded that the district court improperly applied the law of active inducement when it required an affirmative act that is communicated in some fashion to the alleged direct infringer. In particular, the Court concluded that the district court erred in discounting evidence of QSI’s intent, including product specification sheets, a presentation given to Dell, and website instructions, as failing to present evidence that QSI communicated the nature of its actions to alleged direct infringers. The Court also concluded that the district court incorrectly analyzed other circumstantial evidence presented by Ricoh. Specifically, the Court concluded that, in light of QSI’s knowledge of the ’552 and ’755 patents, “QSI’s role as the designer and manufacturer of the optical drives in question may evidence an intent sufficiently specific to support a finding of inducement.” Id. at 32. For these reasons, the Court remanded Ricoh’s inducement claim against QSI for further consideration.

In a dissenting opinion, Judge Gajarsa agreed with respect to the result and judgment reached by the majority, but disagreed with the majority’s “decision to decide the difficult issue of contributory infringement on the basis of policy concerns without due regard for the text of 35 U.S.C. § 271(c).” Gajarsa Dissent at 1. In Judge Gajarsa’s view, the majority made three errors in its contributory infringement analysis. First, Judge Gajarsa found that the majority ignored the fact that Quanta does not sell or offer to sell the accused components, as the term “sell” is used in § 271(c). Judge Gajarsa stated that “irrespective of whether the hardware and software components of Quanta’s drives identified by Ricoh constitute a separable component or a material or apparatus for use in practicing Ricoh’s method claims, it is undisputed that Quanta has neither offered for sale nor sold these components as the term ‘sale’ has been interpreted by this court.” Id. at 3. Second, Judge Gajarsa viewed the majority’s application of § 271(c) as overly inclusive and at odds with Supreme Court guidance as to how § 271(c) ought to be interpreted. In Judge Gajarsa’s view, the “majority’s [decision] would burden the wheels of commerce and would give undue regard to the limited monopoly of the patent statute at the expense of the public interests identified by the Supreme Court.” Id. at 6. Finally, Judge Gajarsa noted the conduct to which the majority objected relates to the design and manufacture of components, even though § 271(c) only addresses the act of selling a component. Judge Gajarsa stated that “[n]othing in § 271(c) can be read as directed to the non-sale activity of embedding components in larger products. Rather § 271(c) is concerned only with the sale of either the component or the larger product.” Id.