Lowered Risks of U.S. Patent Infringement for Component Suppliers

Authored by Gary C. Ma and Ming-Tao Yang

Introduction

If you are a component supplier who has limited direct sales to the United States, your risk for patent infringement in the United States may be a lot lower than before. This is particular important because the United States has seen an exponential increase in the number of patent lawsuits being filed each year—almost doubling in the past four years. More and more Taiwan companies, even ones that rarely sell or import products into the United States, are being named as defendants in these lawsuits. Patentees include component suppliers to seek damages primarily from induced infringement, which occurs where one party acts to direct or cause another to perform an act of direct infringement, such as selling allegedly-infringing products in the United States. For example, a Taiwan company that sells components to a customer in China may be accused of induced infringement if those components are ultimately incorporated into downstream products being sold in the United States. 

Indirect infringement liability can become significant and catch companies by surprise, because a company that rarely does business in the United States can be liable for the activities of its downstream customers in the United States. Two decisions in 2013, however, may reduce risks associated with induced infringement. The Federal Circuit in Commil USA, LLC v. Cisco Systems, Inc. held that not only does a good faith belief of non-infringement potentially negate the intent required for induced infringement, but evidence of an accused inducer’s good faith belief of invalidity may as well. The Commil decision followed in the footsteps of the Supreme Court’s Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060 (2011) decision, which held that a defendant must have actual knowledge of, or be "willfully blind" to infringement (a standard more commonly applied in criminal cases), in order to be liable for induced infringement. Neither recklessness nor negligence is sufficient for finding induced infringement, and one who has done the proper analyses or reasonably relies on opinions of counsel to support a belief of non-infringement, invalidity, or both, may avoid or reduce risks of indirect infringement liability in later litigation.

Second, the bar for proving damages against a foreign defendant has also risen. In Power Integrations, Inc. v. Fairchild Semiconductor Int'l, Inc., the Federal Circuit held that plaintiffs cannot establish defendants’ U.S. sales by simply estimating damages using worldwide market and sales data and must develop and proof those sales result from the defendants' activities. This development, along with recent decisions by the same court that limit the instances where damages calculations can be based on the price of an end-user product, make it much more difficult for plaintiffs to seek inflated damages against component suppliers outside the United States.       

Heightened Requirements for Proving Induced Infringement

In Commil, the U.S. 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, evidence that tends to negate that intent becomes highly relevant. For example, in cases following Global-Tech, design around efforts, seeking reexamination or review of a patent through the U.S. Patent and Trademark Office, and obtaining a competent opinion of counsel on non-infringement or invalidity, have all been cited as evidence tending to show a lack of intent. Opinions of counsel appear to be particularly relevant, as courts have specifically pointed to their existence to find a lack of intent, while the failure to obtain an opinion has been seen in a negative light. Since Global-Tech, there has also been an increasing trend in the number of courts finding inadequate pleadings for induced infringement. Specifically, a number of courts have found that plaintiffs failed to plead facts that would establish actual knowledge or willful blindness under the standard set out in Global-Tech. 

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

Even if a patent owner is able to overcome the high bar of proving induced infringement, it will still need to prove what damages it is entitled to recover. Determining damages for a component supplier outside of the U.S. that does not directly sell or import products into the United States is challenging, because it requires discovery from the supplier's downstream customers that is often difficult or practically impossible to get. Patent owners often estimate damages in these situations by allocating a likely percentage of worldwide sales attributable to the United States. 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 United States. The Federal Circuit's Power Integrations decision, however, largely forecloses 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 United States of developing an infringing design and resulted in U.S. sales that were 18% of worldwide sales. The Federal Circuit, however, rejected that argument, and reiterated 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 criticized the plaintiff's damages expert's analysis, which estimated the number of infringing products that enter the United States. In particular, the court 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 for phone chargers) was included in every mobile phone charger sold worldwide, and that every charger accompanies every phone shipped to the United States. 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. The Federal Circuit's decision in Power Integrations complements its decision in LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 67 (Fed. Cir. 2012) well to set boundaries on what a patent holder can seek in damages. In Laserdynamics, the Federal Circuit held that in order to use the price of a product made of multiple components as the base for calculating royalties, the patentee must show that the patented feature drives demand for the entire product. In other words, it is not enough to show that patented feature was valuable, important, or even essential to the use of the product. Instead, the patented feature alone must cause customers to purchase the accused product, and plaintiffs must establish this through evidence such as market studies or surveys.

Conclusion and Takeaways

The recent Commil and Power Integrations decisions, as well as the Global-Tech and Laserdynamics decisions from 2012, demonstrate the additional challenges for patentees to prove induced patent infringement and recover damages. In light of these cases, component makers in Taiwan that do not sell or import products directly into the United States should consider the following:

• If a component is not intended to be incorporated into a product that is sold in the United States, consider incorporating terms in supplier agreements or sales contracts that recognize this understanding.
• Unless there are good business reasons, component suppliers should avoid keeping track of (such as maintaining exhaustive databases about) what exact downstream products incorporate every single products of theirs or where downstream sales occur.
• Obtain a competent opinion of counsel regarding non-infringement or invalidity upon learning of a patent that may be asserted against your company.
• Component suppliers negotiating licenses or settlements, or disputing royalty computations have good reason to question any demand based on worldwide sales or the price of an end-user product.
• If a complaint alleges induced infringement, consider whether it includes sufficient facts for a court to infer actual knowledge of or willful blindness to the alleged infringement.
• Higher standards of proof for induced infringement and damages can be used as leverage in licensing negotiations.

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