by Dennis Crouch
Hall v. Bed, Bath & Beyond, Inc. and Nachemin, __ F.3d __ (Fed. Cir. 2013)
This design patent decision is interesting and important on several levels and so I have divided the post into two sections. This section focuses on the Federal Circuit’s dismissal of the charges filed personally against a Bed Bath & Beyond employee who allegedly caused the infringement. In my view, the court arrived at the wrong conclusion in holding that the corporate veil protected the employee from patent infringement liability. In a separate post, I wrote about the court’s decision to maintain a low notice pleading requirement for design patent infringement litigation.
Set Up From the Complaint: Mr. R.J. Hall designed a new product known as a “Towel Tote” that is basically an absorbent scarf with pockets on the ends. [See one here]. After filing his design patent application, Hall e-mailed with Mr. Farley Nachemin at Bed Bath & Beyond (BB&B) to see whether the company would retail his product. Nachemin is a VP at BB&B and is employed as the General Merchandise Manager. Nachemin showed interest and two later met face-to-face. In the meetings and e-mails Hall made clear that the patent was pending. However, instead of moving forward with Hall, BB&B (with direct participation from Nachemin) mailed Hall’s product to Pakistan and had it copied and manufactured for retail distribution back in the US.
When Hall later sued BB&B, he also sued Nachemin for infringement and inducing infringement (as well as other federal and state business torts).
Corporate Veil Protecting Officers and Directors: In a recent opinion, the Federal Circuit agreed with the district court that the Corporate Veil shields Nachemin from liability under New York law (the law applicable to this case). The basic contention is that – as a Vice-President of the Company, Nachemin is an officer of the company and therefore cannot ordinarily be held liable for debts of the company unless the corporate veil is pierced. Under New York law, “the party seeking to pierce a corporate veil [must] make a two-part showing: (i) that the owner [or officer] exercised complete domination over the corporation with respect to the transaction at issue; and (ii) that such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil.” Quoting Am. Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997). The appellate panel arrived at the reasonable conclusion that the complaint did not sufficiently allege domination by Nachemin.
Error: However, the error in the Federal Circuit’s decision is its seeming assumption that the corporate veil applies to protect an officer who personally committed the tort of patent infringement. It does not. The court wrote:
[Defendants] primarily argue that under New York law, “the party seeking to pierce a corporate veil [must] make a two-part showing: (i) that the owner exercised complete domination over the corporation with respect to the transaction at issue; and (ii) that such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil.” Am. Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997); see also Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 138 (2d Cir. 1991) (“[T]o pierce the corporate veil, the parent corporation must at the time of the transaction complained of . . . have exercised such control that the subsidiary ‘has become a mere instrumentality’ of the parent, which is the real actor.”). Applying the principles of New York law, we do not discern reversible error in the district court’s dismissal of the action against Mr. Nachemin.
The problem with the court’s conclusion is that the corporate veil does not liberate an individual from personally committed torts.
The Corporate Veil: Corporate law is, for the most part, a creature of state law. Each state has its own rules regarding the various corporate forms and their resulting limitations of liability that protect corporate owners as well as officers and directors of the corporation. However, all states follow the general principle that certain qualified parties will not be held liable for debts of a corporation unless the facts conform to a veil-piercing exception to the rule as suggested above.
Agents Personally Liable for Their Own Torts: One enormous caveat to the corporate veil protection is the general rule that corporate officers and agents are personally liable for their own tortious conduct. Thus, a bouncer who commits battery will be personally liable for the damage caused even if the improper action was at the behest of his nightclub employer. See Aguirre v. Paul, 862 N.Y.S.2d 580 (2008) (“A corporate officer is not held liable for the negligence of the corporation merely because of his official relationship to it; it must be shown that the officer was a participant in the wrongful conduct.”); Munder v. Circle One Condominium, Inc., 596 So2d 144 (Fla 4th DCA 1992); Messenger v. Frye, 176 Wash 291 (1934).
Agent Personally Liable for Their Own Torts Even if Act is On Behalf of Company: It is generally not an excuse that the tortious conduct was done on behalf of the corporate entity. Thus, a person is liable for his own tortious conduct even when acting for the benefit of another.
Personal Liability for Patent Infringement: A plain reading of the patent laws make clear that individuals can be held liable for patent infringement. 35 U.S.C. 271(a) (“whoever without authority makes … any patented invention, within the United States … infringes the patent”). That reading is supported by a long history of holding individuals personally liable for patent infringement. There have been a few Federal Circuit cases on point. In Orthokinetics, lnc. v. Safety Travel Chairs, Inc., 806 F.2d 1565 (Fed. Cir. 1986), the court wrote:
[I]t is well settled that corporate officers who actively aid and abet their corporation’s infringement may be personally liable for inducing infringement under § 271(b) regardless of whether the corporation is the alter ego of the corporate officer.
Id. See also Wordtech Systems, Inc v. Integrated Networks Solutions, Inc., 609 F.3d 1308 (Fed. Cir. 2010) (corporate structure does not shield officers from liability for personally participating in contributory patent infringement); Power Lift, Inc. v. Lang Tools, Inc.,774 F.2d 478 (Fed. Cir. 1985) and Manville Sales Corp. v. Paramount Systems, Inc., 917 F.2d 544 (Fed. Cir. 1990).
In a 2003 article, Professor Lynda Oswald foreshadowed the wrong-turn made by the court here. Oswald writes:
[Courts] tend to mis-apply the general principles of agency and tort law described above when evaluating the liability of an officer for the infringing acts of his or her corporation. Although courts purport to look for personal participation by the officer in the patent infringement of the corporation, courts typically gauge such personal participation by examining whether the corporate veil can be pierced to hold the officer personally liable for violating § 271(a)’s prohibition against ” making, using, or selling” the patented invention. In doing so, however, courts fail to recognize that piercing analysis is irrelevant to issues of officer liability.
See Lynda J. Oswald, The Personal Liability of Corporate Officers for Patent Infringement, 44 IDEA 115, 130 (2003).
Nachemin might not be liable in this case, but it is clear that the corporate veil does not serve as his shield.
- The individual liability of Mr. Nachemin was something of an appendage to the decision as a whole. I suspect that the confused language that I note is most likely due to the light treatment given to the issue.