Employee and Officer Liability for Inducing Infringement

By Jason Rantanen, Visiting Scholar at UC Hastings School of Law

Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc. (Fed. Cir. 2010)

In most patent cases, companies are the ones sued as alleged infringers. But sometimes individuals—particularly corporate officers—are also named as defendants.   While this often occurs when the company accused of infringing appears to be merely the officers’ alter ego, corporate officers can be liable for indirect infringement even when the corporate veil is not pierced.

In Wordtech, the patentholder (Wordtech) sued both a corporation (INSC) and the two principal employees of that corporation. A jury found the claims infringed both directly and indirectly by the corporation’s products, and awarded damages against all three defendants. The jury also returned a verdict of willful infringement of the asserted patents, and the trial judge trebled the jury’s damages award. The two employees appealed the verdict of liability entered against them, and all three defendants appealed the damages determination and district court’s denial of a motion for leave to amend their answer.

Individual Liability

Generally, the “corporate veil” shields officers from liability for tortious conduct occurring in the regular course of their employment, and the employees in Wordtech filed a motion for judgment as a matter of law (“JMOL”) based on this doctrine. The district court denied this motion, allowing the jury to find that the employees infringed the patents.

Individual Liability for Direct Infringement

On appeal, the Federal Circuit affirmed the denial of the motion for JMOL with respect to direct infringement because Wordtech presented substantial evidence during trial that the corporation was nonexistent under Nevada law and, even if it existed, the corporate veil should be pierced. However, the appellate court agreed with defendants that the lack of any instruction on corporate status constituted plain error, and remanded for further proceedings on personal liability for direct infringement.

Individual Liability for Indirect Infringement

The most interesting aspect of the opinion was the Federal Circuit’s ruling on the indirect infringement claims against the employees. Although the court addressed inducement and contributory infringement separately, it applied virtually identical reasoning to both.

The panel began by affirming the denial of the defendants’ Rule 50(a) and 50(b) motions based on the corporate veil theory, pointing out that “corporate officers who actively assist with their corporation’s infringement may be personally liable for inducing infringement regardless of whether the circumstances are such that a court should disregard the corporate entity and pierce the corporate veil.” Slip Op. at 12.   It applied the same reasoning to contributory infringement, concluding that “a corporation does not shield officers from liability for personally participating in contributory infringement.” Slip Op. at 14. Under these rules, the court rejected the individual defendants’ corporate veil defense as irrelevant to issues of inducement and contributory infringement.

Nevertheless, the panel concluded that the employees were entitled to a new trial due to flawed jury instructions, which asked only whether the accused product induced or contributed to infringement. Because a product cannot possess the necessary mens rea elements of inducement or contributory infringement, and there were no jury instructions that might have mitigated the error, the court vacated the verdict of liability.[1]

Damages

Addressing the issue of excessive damages in the context of its review of a denial of a motion for a new trial, the panel considered the evidence supporting the jury’s damages finding, which was based on a reasonable royalty under a hypothetical negotiation theory.   The panel reviewed the licenses Wordtech relied upon for the hypothetical negotiation and concluded that the verdict was not supported by the evidence and based solely on speculation and guesswork. This portion of the opinion is noteworthy for the court’s detailed discussion of the licenses and its rejection of them on an array of different grounds.

Denial of Motion to Amend

In a curious twist, the trial and subsequent appeal involved no substantive invalidity issues. This was due to defendants’ failure to raise an invalidity defense in their answer, apparently relying on the fact that a previous co-defendant school district had included the defense in its answer. After INSC and its two employees learned that the school district had settled with the patent holder, they moved to amend their answer to add invalidity defenses. The Federal Circuit declined to find that the district court abused its discretion in denying the motion, as it was filed months after the close of discovery despite the defendants’ prior knowledge of the invalidity defenses they intended to raise.

Notes:

 

  • Ultimately, the favorable result for the individual defendants turned not on the legal question of whether officers can be liable for patent infringement, but rather on flawed jury instructions. This suggests two lessons from this case: first, be aware of potential employee liability, especially for indirect infringement, and second, make sure your jury instructions accurately reflect the elements of the issues being presented to the jury.
  • Although the opinion describes the individual defendants as employees, the rules it applies refer to corporate officers. This may be reconciled by the fact that Wordtech presented evidence at trial supporting the conclusion that they were officers.   See Slip Op. at 11. Nevertheless, this opinion arguably could be used to apply indirect infringement claims to employees, provided that the necessary mens rea elements are present.

[1] The panel also noted that Wordtech failed to identify proof of elements required for contributory infringement, including the existence of any direct infringement corresponding to the alleged contributory actions. With respect to inducement, although the opinion is silent on who the officers were inducing to infringe, the patentee’s brief indicates that its theory was that the officers induced the corporation’s direct infringement, similar to the circumstances in Power Lift, Inc. v. Lang Tools, Inc., 774 F.2d 478 (Fed. Cir. 1985).


About Jason: After spending several years in practice as a patent litigator, Jason Rantanen is now looking at law from the academic side and is currently a Visiting Scholar at UC Hastings. His recent research focuses on the concept of mens rea in patent law.

Dennis Crouch

About Dennis Crouch

Law Professor at the University of Missouri School of Law. Co-director of the Center for Intellectual Property and Entrepreneurship.

9 thoughts on “Employee and Officer Liability for Inducing Infringement

  1. This is quite amusing. If you are an officer and you hurt the business environment by inducing infringement of a patent you can say syonara to the corporate veil. However, if you are Tony Hayward and you induce destruction of the natural environment on a scale unprecedented in human history you get to go out on a yacht comforted by the protection of the corporate veil.

  2. Here’s my understanding of the conventional understanding of indirect infringement (This is a fairly widely accepted view – Adams is only the most recent articulant of this doctrinal history, as it can be traced back through a number of sources, all the way to some of the early 20th century treatises), in extremely abbreviated form:

    Prior to 1952, there was no formal doctrine of inducement – only contributory infringement. However, contributory infringement had two major branches: making/selling a component that you knew was specifically designed/adapted for infringement and providing instructions or otherwise causing someone to infringe a patent (generally in the context of a sale of an item that was not specifically made for infringement).

    271(b) [inducement] codified the latter theoretical line; 271(c) [contributory infringement] codified the former.

    Adams wrote a later piece (Indirect Infringement from a Tort Law Perspective, 42 U. Rich. L. Rev. 635 (2008)) that provides a more concise summary – it’s worth a read if you’re interested in these issues, as he really digs into the tort roots of indirect infringement. Lemley also wrote a 2006 article on inducement that provides a bit of background.

    On your last point, it’s a distinction that’s occasionally made by the Federal Circuit as well, but in my view it’s a distinction without substance. “Intentional” conduct is really no different then “knowing” conduct. In other words, if you engage in an conduct “knowing” that it infringes a patent, it’s the same thing as “intentionally” infringing a patent in the eye of any test we can conceive of.

  3. The linked article several times says things like this:

    “No showing of intent is required for liability under paragraph (c) if the defendant sold a component of a patented invention that was a material part of the invention and had no substantial noninfringing use, and in addition, the defendant knew that the component was especially made for use in infringing the patent.”

    I’m at loss as to what this means.

  4. The linked article describes the history of 271 b and c. link to chtlj.org
    A BRIEF HISTORY OF INDIRECT LIABILITY FOR
    PATENT INFRINGEMENT
    Charles W. Adams, 370 SANTA CLARA COMPUTER & HIGH TECH. L.J., Vol. 22 (2006)

    The article states at 372, discussing Wallace, “There was no direct showing of the defendants’ participation in the
    infringement other than their sale of a component for the patented invention, but the court decided that the defendants must have intended to cause infringement because the component that the
    defendants manufactured and sold had no use except to infringe the patent.”

    Later the Supremes explained Wallace: “The court found that the doctrine from the Wallace case did not apply, because the defendants in Wallace knew that their burners could not be used without infringing the patent. The court concluded that “holding a party liable as an infringer solely because an article sold by him might be used by the purchaser as one element of a patented combination . . . would be too dangerous to be upheld.”

    Later:
    In many of the early cases, liability for contributory infringement was based on the manufacture of products that had no noninfringing
    uses.20 There was also a second branch of the doctrine of contributory infringement, though, in which liability for contributory infringement
    was based on other evidence that the defendant intended to cause infringement. For example, in Westinghouse Electric & Mfg. Co. v. Precise Mfg. Corp.,21 the defendants were found liable for contributory infringement for manufacturing and selling transformers and condensers that could be used to infringe the plaintiff’s patents for superheterodyne radio receivers. Though the components sold also had noninfringing uses, the defendants advertised that they were perfect for superheterodyne reception. The cartons in which they were sold contained directions for using the components to construct superheterodyne receivers that would infringe the plaintiff’s patents.
    The Second Circuit Court of Appeals found that there was little doubt that the defendants manufactured and sold their products to the public
    with the intent that their products would be used to build infringing radio receivers.

    And so on.

    Clearly, there are two theories, not one, in 271(c).

  5. Jason, I suspect we would have to actually read judge Rich’s law review article on the topic to fully understand what he intended to say when he drafted section 271(c). But it would be nice to have a contributory infringement theory of infringement that was “strict liability.”

    I half recall a recent Fed. Cir. case that essentially found direct infringement where what was being sold clearly was not the entire invention but even so embodied all the critical elements of the claimed invention. It was clear that bringing in issues such as “knowledge” and “not a staple” would make no sense at all in the context of the case.

  6. I agree that 271(c) really mixes up the in rem and mens rea components – in particular, it’s unclear from the language of the statute whether the accused infringer must “know” both that the component lacks a noninfringing use and is not a staple article of commerce. (In practice, courts have treated the latter element as a separate in rem requirement).

    The easy answer to your question, though, is that it’s largely historical – the requirement that defendant know that the component is especially adapted for infringement comes from contributory infringement’s roots in tort law – specifically, the concept of “aiding and abetting” a tort, which required knowledge that a tort was being committed. The “staple article or commodity of commerce” element stems from the Supreme Court’s anti-tying cases in the first half of the century. Both aspects of the doctrine were codified in 271(c).

    The harder question is *why* it should be so. That’s one that I don’t have a quick answer for, but definitely something to think about.

    —-

    (I’ve updated autocorrect to not modify “tortious,” and it’s been fixed in the post).

  7. Philosophy question:

    If one is required to prove that the component, material or apparatus is especially made or adapted for use in an infringement, why does one also have to prove that the component, etc., is not a staple item of commerce?

    As a corollary why would one have to prove mens rea if the component, etc., is not a staple item of commerce?

    The statute mixes in rem and mens rea elements together in a very unsatisfactory mix.

  8. Malcolm, can a robot chef have the mens rea necessary for contributory infringement of a business method patent?

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