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Korean Law Does Not Govern Successor Liability of Two U.S. Corporations

September 01, 2010

Decision icon Decision

Last Month at the Federal Circuit - October 2010

Judges: Newman (author), Lourie, Linn (concurring)

[Appealed from: N.D. Cal., Magistrate Judge Spero]

In Funai Electric Co. v. Daewoo Electronics Corp., Nos. 09-1225, -1244 (Fed. Cir. Sept. 1, 2010), the Federal Circuit affirmed the district court’s grant of SJ of infringement of U.S. Patent No. 6,021,018 (“the ’018 patent”), U.S. Patent No. 6,421,210 (“the ’210 patent”), and U.S. Patent No. 6,064,538 (“the ’538 patent”) and the damages award, and reversed the district court’s determination of no successor liability.

Funai Electric Company, Ltd. (“Funai”) owns six patents directed to various electrical and mechanical components of video cassette players and recorders (“VCRs”).  After receiving a default judgment for infringement by Daewoo Electronics Company Ltd. (“DECL”) and Daewoo Electronics Company of America (“DECA”), which DECL and DECA did not pay, Funai amended its complaint to assert that U.S. successor companies (collectively “Daewoo”) are liable for payment.  The district court held on SJ that three of the six patents were not infringed.  The district court then granted SJ that the ’018 and ’210 patents are not literally infringed but denied SJ as to infringement under the DOE.  The district court denied SJ as to infringement of the ’538 patent and held that the claims of the ’538 patent are not invalid for indefiniteness.  A jury found that Daewoo willfully infringed the ’018 and ’210 patents under the DOE and willfully infringed the ’538 patent.  The district court applied the law of South Korea as to successor liability and ruled that Daewoo is not liable for the judgment entered against predecessors DECL and DECA.  Daewoo appealed issues of infringement, claim indefiniteness, and damages.  Funai cross-appealed the district court’s refusal to enhance damages and the ruling as to successor liability.

With regard to infringement of the ’018 patent, Funai argued that claims 1-4 of the ’018 patent were not literally infringed based on the construction of “holder drive gear.”  Daewoo appealed the district court’s grant of SJ that the “opened” limitation was literally met.  The Court held that the claims were predicated on the presence of a cassette tape, for all claims recite “loading,” “receiving,” “holding,” and “moving” a video cassette, and affirmed the district court’s ruling that the “holder drive gear” limitation could not be literally met.  The Court also agreed that the “opened” limitation was literally met by the accused products and affirmed the jury’s verdict of infringement under the DOE as supported by substantial evidence.

Turning to the ’210 patent, the Federal Circuit first reviewed the claim construction of “insulating material.”  Daewoo argued that the district court’s definition of insulating material as a material having “poor electrical conduction” rendered the claim construction fatally flawed because it improperly used comparative language, and that the district court’s further description of “insulating material” as a material that “acts to suppress switching noise generated by a pulse width modulation control of the direct driving motor” was functional and therefore circular and improper.  The Court found no error in using comparative and functional explanations in construing claims.

The Federal Circuit, however, found that the district court erred in finding that Funai failed to produce any evidence that one of ordinary skill in the art would consider Daewoo’s bearing holders to be made of material with poor electrical conduction, and in granting SJ of no literal infringement.  Nevertheless, the Federal Circuit found that even if SJ were granted on this question, the issue of infringement was decided by the DOE.  For that reason, a trial on literal infringement was unwarranted.  Daewoo contended that infringement by equivalents was precluded by prosecution history estoppel, but the Court found that the nature of the insulating material was not a factor in the allowance of claim 4.  Thus, the Federal Circuit concluded that the district court correctly held that the cancellation of claims 1 and 2 did not surrender to equivalency with respect to the insulating material.

Next, considering the ’538 patent, the Federal Circuit affirmed the district court’s claim construction of “a series circuit connecting in series through a series junction point said entire-width erasing head and said linear record erasing head” in claim 5 of the ’538 patent.  Daewoo argued that claims 1, 3, and 4 were invalid for failure to meet the claim-definiteness requirement of 35 U.S.C. § 112, second paragraph, because the claim clause “a series junction point at least between said linear record erasing head and one of said entire-width erasing head and an inductance element” was fatally indefinite.  The Federal Circuit concluded that “[a]n ungainly claim is not thereby indefinite, when its meaning can be understood by a person experienced in the field of the invention, on review of the patent documents.”  Slip op. at 25.  Accordingly, the Court affirmed the district court’s ruling of validity.

The Court turned next to the question of damages.  Daewoo argued that Funai’s letter notice of infringement was inadequate and that Funai’s marking of its products was incomplete, such that damages could not accrue for infringement before the filing of suit.  Daewoo also argued that Funai’s notice letter was legally insufficient to provide actual notice as to Daewoo VCR models not mentioned in the letter, thus limiting the period of damages at least as to those models.  The Federal Circuit, in affirming the jury’s verdict, noted that “when the threshold specificity is met, the ensuing discovery of other models and related products may bring those products within the scope of the notice.”  Id. at 28. 

With respect to constructive notice, Daewoo argued that Funai did not completely mark all products with the ’018 patent and marked no products with the ’538 patent, and that these lapses eliminated any benefit of constructive notice.  Funai responded that 88-91% of its products sold at retail were properly marked and that marking need not be perfect, provided that it is sufficiently complete so that the interested public is reasonably apprised of the patented status of the product.  The Court affirmed the district court’s finding that substantial evidence supported the jury’s application of a rule of reason to the question of constructive notice and the calculations applying constructive notice to the ’018 patent.

Daewoo also challenged the amount of the damages award on the basis that Funai failed to establish that, but for the infringement, Funai would have made 30% of these VCR sales.  Daewoo also argued that Funai’s patented technology was not the basis for demand for the Daewoo products, and therefore that damages should not have been based on the entire lost-sales value.  The Court found that Daewoo’s arguments did not undermine the sufficiency of the evidence supporting the verdict, and affirmed the award.  The Court also did not disturb the district court’s conclusions regarding willful infringement.

The Federal Circuit also found that the district court erred in ruling that Korean law applies to the successor-liability relationship of the two U.S. successor corporations.  The Court summarized the question before it as “whether a domestic corporation incurring a judgment of a United States court is insulated from that judgment if the judgment would not be enforceable under the laws of its foreign parent.”  Id. at 40.  Because “[t]his is not a question of conflict with foreign law, or [a] choice between domestic and foreign law, for no foreign law is involved in this question of successor liability for a default judgment for violation of United States law,” the Court reversed.  Id. at 41. 

In choosing which U.S. state law applies, the Federal Circuit analyzed the situation in accordance with California’s “governmental interest” choice-of-law test.  Because both successor companies have principal places of business in New Jersey, the Court chose New Jersey law in accordance with the Supreme Court’s ruling in Hertz Corp. v. Friend, 130 S. Ct. 1181, 1192 (2010), wherein it held that, for diversity jurisdiction, the “principal place of business” is “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities,” from which it follows that the laws of the principal place of business should normally apply to transactions flowing from the corporation’s “nerve center.”

Under New Jersey law, the transferee of corporate assets ordinarily is not liable for the debts of the transferor company, subject to several exceptions.  The exceptions include instances where (1) there is an express or implied assumption of the liabilities, (2) the transaction amounts to an actual or de facto consolidation or merger of the two corporations, (3) the purchasing corporation is a mere continuation of the seller, or (4) the transaction is for the fraudulent purpose of escaping the seller’s liabilities.  The Court found that the transfer between DECA and one of the successor companies was simply a “new hat” for DECA, and ruled that the successor should be liable for the earlier default judgment entered against DECA.

Judge Linn joined the opinion of the Court with the exception of the constructive-notice issue.  Judge Linn noted that the record was not fully developed as to the constructive notice of products made by a patentee for an Original Equipment Manufacturer (“OEM”) customer.  Judge Linn also observed that the jury might award damages for the ’018 patent only for those time periods in which Funai carried its burden of showing that Daewoo had actual notice.  For these reasons, Judge Linn would not decide the question of constructive notice and would simply affirm on the substantial evidence that fully supports the jury’s verdict apart from the OEM sales, leaving the constructive-notice question as it relates to OEM sales for another day on a record that more comprehensively presents the question and requires an answer.

Summary authored by Weiguo (Will) Chen, Esq.