Bubbles Bursting for Indirect Infringement

Authored by Gary C. Ma and Ming-Tao Yang

Introduction

Companies who supply products both within and outside the U.S. may limit its direct infringement liability for patent infringement to their U.S. sales. These companies, however, may still face substantial risks for induced infringement based on sales overseas, especially for components sold overseas that were ultimately incorporated into downstream products sold in the United States. Recent cases, however, have presented reasons to reduce risks associated with indirect infringement. The hurdles for proving indirect infringement started rising with the Global-Tech decision , in which the Supreme Court held that a defendant must have actual knowledge of, or be "willfully blind" to infringement (a standard more commonly applied in criminal cases) to be liable for induced infringement. Neither recklessness nor negligence is sufficient for finding induced infringement. The hurdles then rose even higher with the Commil decision, in which the Federal Circuit vacated a $63.7 million verdict for induced infringement and held that "evidence of an accused inducer's good faith belief of invalidity may negate the requisite intent for induced infringement." In its earlier Power Integrations decision, the same court also held that plaintiffs cannot establish defendants' U.S. sales by simply estimating damages using worldwide market and sales data.

$63.7 Million Verdict Vacated

In Commil, the United States District Court for the Eastern District of Texas ordered a second trial regarding the issue of induced infringement after it vacated a prior finding of no induced infringement. In the second trial, the district court precluded defendant Cisco from presenting its belief that the patent was invalid, which Cisco would have relied on to show that it did not have the requisite intent to induce others to infringe. The district court also "instructed the jury that it could find inducement if 'Cisco actually intended to cause the acts that constitute direct infringement and that Cisco knew or should have known that its actions would induce actual infringement.'" With those instructions, the jury awarded Commil $63.7 million for Cisco’s induced infringement. The Federal Circuit, however, vacated the verdict, holding that the district erred in precluding Cisco from presenting evidence regarding its "good-faith belief of invalidity." Such evidence, in addition to a defendant’s good-faith belief of noninfringement, "should be considered by the fact-finder in determining whether an accused party knew 'that the induced acts constitute patent infringement.'"

The Commil decision rejected the jury instructions applying the negligence standard for indirect infringement (previously acceptable under the Manville and DSU Medical decisions) by following the heightened standard under Global-Tech. Because of the "willful blindness" standard required to prove the requisite intent for indirect infringement, evidence that tends to negate that intent becomes highly relevant. This is similar to how this type of evidence can negate "subjective recklessness" used to establish willful infringement. In other words, defendants now possess much more ammunition to fend off indirect infringement allegations, making those claims less likely to succeed. 

"Estimating" U.S. Damages Using Worldwide Sales Not Acceptable

Faced with the challenges in proving indirect infringement, plaintiffs have sought to lighten that burden by "guesstimating" damages by allocating a likely percentage of worldwide sales to suggest U.S. sales. Plaintiffs typically rely on this theory, arguing that because the U.S. market is a certain percentage of the worldwide market, defendants should be liable for infringement using the same estimate, despite the lack of evidence to establish the actual number of the relevant products that enter into the U.S. The Federal Circuit’s Power Integrations decision, however, largely foreclosed that theory. 

In Power Integrations, the plaintiff sought damages recovery from Fairchild’s sales overseas, arguing that those sales resulted, foreseeably and directly, from Fairchild's act within the U.S. of developing an infringing design and resulted in U.S. sales that were 18% of worldwide sales. The Federal Circuit, however, rejected that argument, holding that "the entirely extraterritorial production, use, or sale of an invention patented in the United States is an independent, intervening act that, under almost all circumstances, cuts off the chain of causation initiated by an act of domestic infringement." The court also held that the plaintiff’s damage expert’s opinion was unreliable because it relied on questionable data and incorrectly assumed, with little evidence, that the component the defendant sold (integrated circuit chips) was included in every mobile phone charger, and that every charger accompanies every phone shipped to the U.S. Vacating the district court’s judgment, the court held that the "layered assumptions lacked the hallmarks of genuinely useful expert testimony" and the district court erred in admitting that testimony.

Conclusion

The recent Commil and Power Integrations decisions, as well as the Global-Tech decision, demonstrate the additional challenges for patentees to prove indirect patent infringement and recover damages. Companies who are negotiating licenses, disputing royalty computations, or defending against accusations of indirect infringement may now have well-supported reasons and improved positions to burst unsubstantiated bubbles.

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