Federal Circuit Rewrites Law of Induced Infringement

On August 31, 2012, a sharply divided en banc Federal Circuit Court of Appeals issued its opinion in Akami Technologies v. Limelight Networks.  The case is significant in that it rewrites the rules for finding a party liable for inducing patent infringement.  The case could have significant impact in the enforcement of business method and internet related patents.  As a result, many non-practicing entities or “trolls”  in particular may benefit from the opinion as it expands the scope of their potential lawsuit targets.  For a copy of the opinion, click here.

There are two general categories of patent infringement: direct and indirect.  Direct infringement has long been held to require that a single actor (meaning a single individual or entity) perform all the steps of a claimed method (in the case of method patents) or that an accused product include all of the elements of a claimed apparatus (in the case of apparatus patents).  Indirect infringement has two flavors: contributory infringement and inducement of infringement.  Contributory infringement typically occurs when someone supplies a component of a patented invention knowing that it is adapted for infringing the patent when the component lacks substantial non-infringing uses.

Inducement of infringement occurs when someone induces others to infringe a patent with the knowledge that the induced acts constitute patent infringement.  One frequent scenario in which claims of inducement are asserted is when someone supplies a product with many non-infringing uses but teaches or encourages its customers to perform the steps of a patented method using the product.  In that case, the customers are the “direct infringers” and the product suppliers may be held liable for inducing infringement by the customers.  Notably, the direct infringers may be held liable regardless of whether they knew about the patent because direct infringement is a strict liability offense.  However, to be liable for inducement, the product supplier would have to have at least known about the patent.

Prior to Akami, it was well established that one could not be held liable for inducing infringement of a method patent unless there was a direct infringer who could also be held liable for direct infringement.  No direct infringement; no inducement.  As recently as 2007, the Federal Circuit held that in order for a party to be liable for inducing infringement, a single actor must have directly infringed the patent.  Now, however, the Akami opinion holds that for purposes of inducement, “direct infringement” does not require that a single actor perform all of the claimed steps.  Instead, some parties may perform some of the steps and other parties may perform others of the steps, but if they were each “induced” to do so, the inducing party may be held liable for inducing patent infringement.  The irony is that under such a scenario, none of the “induced” parties could be held liable for direct patent infringement because the Federal Circuit has not changed the rule that one can only directly infringe a method patent by performing all of the claimed steps.  It has only changed the rule for inducing infringement to cover multiple actor scenarios.

Interestingly, the Federal Circuit was apparently not asked to decide whether to change the law of induced infringement, but rather, to decide whether and under what circumstances multiple parties could be held liable for direct infringement when each performs different portions of a claimed method.  In Akami, the defendant Limelight was accused of performing some of the claimed steps and then having its customers perform the remaining steps.  Thus, the issue that the parties (and numerous amici curiae) focused on was whether Limelight could be held liable as a direct infringer.  The majority expressly refused to decide this issue but was apparently trying to find some basis for holding Limelight liable.

The majority seems to have reframed the issue it was asked to decide because it was concerned about the effects of expanding direct infringement liability given that it is a strict liability offense.  Direct infringement requires no knowledge of the infringed patent.  On the other hand, the majority was presumably sensitive to the fact that many patent claims are drafted (in order to be both novel and definite) such that in the real world, multiple actors are required to perform all of the claimed method steps.

This is really a case of bad facts making bad law and having potentially significant unintended consequences.  The paradigm that drove the majority opinion is apparently one where an evil “inducer” is well aware of the patent holder’s patent and encourages multiple parties to perform parts of a claimed method for the inducer’s benefit.  The law already provides that the inducer can be held liable if the induced parties were acting under its control or as its agents, but that rule does not apply to parties that merely have a contractual or business relationship with the inducer, a situation the majority presumably found to be unfair.

In my experience, many patent lawsuits involving allegations of induced infringement do not fit this paradigm, especially in NPE cases.  Instead, the alleged “inducer” often first learns of the existence of the patent holder’s patent when it gets sued or shortly before, and in any event, well after it has begun its allegedly inducing conduct.  At that point, conduct that was previously innocent and permissible becomes actionable.   Thus, the paradigm that seems to have driven the Akami majority opinion’s result may not be a sound basis for rewriting well established principles of inducement of infringement.

In addition, there is a good reason for limiting direct infringement liability (and inducement liability) to situations where a single actor performs all the method steps.  Patents are usually a combination of something old and something new.  In method patents, the entire sequence of steps is usually claimed because it was necessary in order to distinguish the prior art. Thus, parties should be free to practice individual steps of a method because those individual steps were not separately patentable.  Under the Akami rule, someone can be held liable for inducement because it “induced” parties to individually perform steps that were old in the art simply because it knew of the patent and that the parties would collectively perform all of the steps.

Interestingly, Judge Newman filed her own dissent.  She would allow multiple actors to be held liable for direct infringement if they collectively performed the steps of a claim regardless of whether one party controlled the other.  The majority noted that this would subject parties who supplied minor and old components of patented products to direct infringement liability.  Nevertheless, Judge Newman said that such a scenario went to the level of culpability of the individual actors, which could be addressed in the remedy phase.  Such a rule would subject many more companies and individuals to being sued and the pain that goes with it, even if the ultimate remedy were fashioned according to their culpability.

Given its on-going penchant for “correcting” the Federal Circuit, the Supreme Court will presumably have something to say about this.  Stay tuned.