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Federal Circuit Remands for New Trial on Liability of Individual Defendants After Finding Errors in Jury Instructions

09-1454
June 16, 2010

Decision icon Decision

Last Month At The Federal Circuit - July 2010

Judges: Mayer, Gajarsa, Linn (author)

[Appealed from: E.D. Cal., Judge England]

In Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc., No. 09-1454 (Fed. Cir. June 16, 2010), the Federal Circuit reversed the district court’s denial of defendants’ motion for a new trial and remanded the case for a new trial on liability of individual defendants due to errors in the jury instructions, remanded for a new trial on damages because the damages verdict conflicted with the clear weight of the evidence, and affirmed the denial of defendants’ motion for leave to amend their answer to allege invalidity defenses.

Wordtech Systems, Inc. (“Wordtech”) sued Integrated Networks Solutions, Inc. (“INSC”) and its employees, Nasser Khatemi and Hamid Assadian (collectively “Defendants”), in the Eastern District of California for infringement of U.S. Patent No. 6,141,298 (“the ’298 patent”), No. 6,532,198 (“the ’198 patent”), and No. 6,822,932 (“the ’932 patent”), involving technology for automated duplication of compact discs.  The jury found Defendants liable for direct infringement, contributory infringement, and inducement of infringement, and awarded damages.  Khatemi and Assadian appealed the liability verdicts against them as individuals; all three Defendants appealed the damages verdict and the district court’s denial of their motion for leave to amend their answer to allege invalidity defenses.      

The Federal Circuit first addressed the issue of individual liability for infringement.  Regarding the
direct-infringement issue, Khatemi and Assadian argued that INSC’s corporate veil shielded them from direct-infringement liability because they acted as company employees, and INSC was a valid corporation during all periods of alleged infringement.  The Federal Circuit noted that patent infringement is a tort, and in general, a corporate officer is personally liable for his tortious acts, just as any individual may be liable for a civil wrong.  But the Court also noted that the “corporate veil” shields a company’s officers from personal liability for direct infringement that the officers commit in the name of the corporation, unless the corporation is the officers’ “alter ego.” 

On appeal, Wordtech defended the verdict on two grounds.  First, Wordtech claimed that INSC did not exist during the alleged infringement because, under Nevada law, INSC permanently forfeited its corporate charter when it neglected to file required annual statements for five consecutive years, and could not be reinstated.  Alternatively, Wordtech contended that even if INSC was a valid corporation, the jury heard substantial evidence that supported piercing INSC’s corporate veil.  The Court noted that the district court never instructed the jury on INSC’s corporate status.  Moreover, the Court found neither the jury instructions nor the jury’s verdict form mentioned piercing the corporate veil or the Nevada statutory scheme that Wordtech asserted on appeal.

 

“[T]he jury’s verdict of Khatemi and Assadian’s individual liability, despite the lack of instructions on INSC’s existence or piercing its corporate veil, was plain error that requires a new trial. . . . [F]ailure to instruct the jury was plainly erroneous because “[p]ersonal liability under § 271(a) . . . requires sufficient evidence to justify piercing the corporate veil.”  Slip op. at 10.

Because the jury was not instructed about INSC’s corporate status, the Court had to determine whether this omission required a new trial.  The Federal Circuit reviewed jury instructions under the law of the relevant regional circuit—in this case, the Ninth Circuit.  The Court noted that, in the Ninth Circuit, if a party does not object properly to jury instructions at trial, the instructions are reviewable only for plain error.  In this case, the Federal Circuit found, the jury’s verdict of Khatemi and Assadian’s individual liability was plain error that requires a new trial.  Although Defendants conceded that they did not object to the jury instructions, the Court nevertheless held that failure to instruct the jury was plainly erroneous because personal liability under § 271(a) requires sufficient evidence to justify piercing the corporate veil. 

Because resolution of INSC’s corporate status was a legal prerequisite to finding Khatemi and Assadian individually liable, the Court found that the jury instruction omissions were obvious and important, and seriously affected the trial’s fairness.  The Court held that Wordtech needed to prove either that INSC was not a valid corporation when Khatemi and Assadian committed infringing acts on its behalf, or that INSC’s corporate veil should be disregarded under state law.  While Wordtech identified evidence that INSC did not exist or served as Defendants’ alter ego, the Court held that a correctly instructed jury could have concluded otherwise.   

Moreover, the Court noted, the trial record showed that even though the district court ruled that Wordtech waived its arguments about INSC’s corporate status, it nonetheless allowed Wordtech to introduce evidence on these issues.  The Court concluded that, because the jury instructions were plainly erroneous, the proceedings rested on “a mistake of law” that warrants retrial, and therefore reversed the district court’s denial of Defendants’ Rule 59(a) motion and remanded for a new trial on Khatemi and Assadian’s personal liability for direct infringement. 

Defendants also challenged their individual liability for inducement.  Khatemi and Assadian claimed that Wordtech produced insufficient evidence of inducement to support the verdict.   The Court reviewed their motion for a new trial on inducement, asking whether the verdict conflicted with the clear weight of the evidence or involved a mistake of law.  The Court began with the jury’s verdict form and found that it included no other inducement questions or instructions that might have mitigated these errors.  Moreover, the Court found, the legal test for inducement was never presented to the jury.

 

“Running-royalty agreements can be relevant to lump-sum damages, but ‘some basis for comparison must exist in the evidence presented to the jury.’”  Slip op. at 22 (quoting Lucent Techs. v. Gateway, Inc., 580 F.3d 1301, 1308 (Fed. Cir. 2009)).

Wordtech argued that the instructions did not mislead the jury because the jury received proper instructions on willful infringement and, in fact, found willfulness.  But the Court held that the legal standards for willfulness and inducement, such as the requisite intent, are not identical.  Therefore, the Court concluded, these mistakes of law precluded legitimate verdicts on inducement. 

Khatemi and Assadian also challenged their individual liability for contributory infringement.  Wordtech argued that Khatemi and Assadian waived any challenge to the sufficiency of the evidence for contributory infringement by failing to raise it in their preverdict Rule 50(a) motion.  Defendants did not refer to contributory infringement in their Rule 50(a) motion, contesting only their individual liability as INSC employees.  The Court held that the district court correctly denied Khatemi and Assadian’s motion for JMOL on contributory infringement.   The Court held, however, that the district court’s legal error in presenting the contributory infringement issue to the jury requires a new trial.  The Court found a new trial was also required because Wordtech failed to identify proof of elements needed for contributory infringement. 

For the foregoing reasons, the Court vacated the liability verdicts against Khatemi and Assadian, reversed the denial of their Rule 59(a) motion on these issues, and remanded the case to the district court to address the issues of piercing INSC’s corporate veil and INSC’s corporate status, whether Wordtech preserved these arguments for trial, the law governing these issues, and whatever jury instructions might be necessary. 

Next, the Court turned to the damages issue.  Khatemi, Assadian, and INSC challenged the jury’s $250,000 damages award. 

At trial, Wordtech sought only a hypothetically negotiated royalty, and the jury received damages instructions for this theory alone.  Wordtech claimed that INSC sold $950,000 of infringing Robocopiers and asked for at least 12% of the $950,000—or $114,000.  The Court observed, however, that the $250,000 verdict equated to a 26.3% royalty on the $950,000 total alleged sales.  Wordtech also relied on testimony from its President, David Miller, and introduced thirteen patent licenses that it previously granted to third parties for rights to some or all of the patents-in-suit.  The Court stressed that comparisons of past patent licenses to damages for infringement must account for the technological and economic differences between them. 

In this case, the jury awarded the $250,000 as a lump-sum royalty.  Of Wordtech’s thirteen licenses, only two were lump-sum agreements.  The first licensee paid Wordtech $175,000; the second, $350,000.  Wordtech argued that $250,000 is reasonable because it is roughly the average of these two lump-sum fees.  But the Federal Circuit found this averaging theory flawed because the two lump-sum licenses provided no basis for comparison with INSC’s infringing sales.  For example, the Court noted that neither license described how the parties calculated each lump sum, the licensees’ intended products, or how many products each licensee expected to produce.  The Court further noted that if Wordtech’s previous licensee paid $350,000 to produce one thousand devices, for example, INSC would not have agreed ex ante to pay $250,000 if it expected to make only fifty-six units.  Thus, the Court held that, without additional data, the licenses offered the jury little more than a recitation of royalty numbers.

The Court noted that the remaining eleven licenses, which used running royalties, also failed to support the verdict.  As the Court noted, running-royalty agreements can be relevant to lump-sum damages, but some basis for comparison must exist in the evidence presented to the jury.  In this case, the Court found that the remaining licenses revealed no such basis.  For example, the Court noted that one license listed per-unit fees of $100-195 instead of a royalty percentage, and by contrast, the verdict reflected a per-unit fee that exceeds $4400 ($250,000 for 56 units).  The Court also noted that the other ten licenses stated royalty rates in the range of 3-6% of the licensees’ sales—far less than the 26.3% rate that the jury effectively awarded. 

Wordtech told the jury that INSC sold $950,000 of Robocopiers but argued on appeal that INSC’s sales totaled at least $1,278,133 based on “reasonable inferences.”  The Court found that Wordtech supplied no evidence that explained why its estimated sales abruptly increased by $328,133.  Furthermore, the Court found Wordtech’s original $950,000 figure was itself suspect because Miller, who did not qualify as a damages expert, calculated it by using “the second highest value” from INSC’s invoices “as a phantom value.”  The Court further held that the invoice dates also suggested that the jury incorrectly apportioned damages among the three patents. 

Wordtech implied that INSC withheld records of sales, which permitted the jury to infer greater sales.  The Court noted, however, that the district court did not find that Defendants withheld or destroyed any documents.  The Court concluded that it was impossible for the verdict to fall within the range encompassed by the record as a whole.  The Court further found that Wordtech’s remaining arguments continued this pattern of guesswork because it provided no damages analysis—only the conclusory statement that the verdict was “supported by the evidence at trial.”  Because the verdict was clearly not supported by the evidence and was based only on speculation or guesswork, the Court reversed the denial of Defendants’ Rule 59(a) motion and remanded for a new trial on damages. 

Last, Defendants claimed that the district court erred by denying their motion to amend their answer to allege invalidity affirmative defenses.  The Court noted that Defendants filed their motion to amend five months after the scheduling order, three months after the close of discovery, and almost three weeks after it first learned that the San Juan Unified School District intended to settle.  Furthermore, the Court noted that INSC retained an expert and secured an invalidity report as early as 2004, and therefore should have known its relevant defenses long before the Rule 16(b) order.  Considering all these factors, the Court concluded that the trial court did not abuse its discretion by denying Defendants’ motions for leave to amend.

Summary authored by Jin Zhang, Esq.