Patent Law | Expert Legal Commentary

April 1, 2010

SEB v. Montgomery Ward: “Deliberate Indifference” Can Sustain Inducement Claim

SEB S.A. v. Montgomery Ward & Co., Inc.

By Thomas F. Zuber of Zuber & Taillieu and Yuri Mikulka

SEB v. Montgomery Ward: “Deliberate Indifference” Can Sustain Inducement Claim

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The Federal Circuit Court has broadened the standard for inducement of patent infringement by holding that proof of a defendants’ deliberate disregard of the risk that a patent exists can meet the actual knowledge requirement of an inducement claim. In SEB S.A. v. Montgomery Ward & Co., Inc., 594 F.3d 1360 (Fed. Cir. 2010), the Federal Circuit found that a defendant could be found liable for inducement -- even without evidence of its actual knowledge of the patent-in-suit -- if the evidence indicated that the defendant acted with “deliberate indifference” of a known risk that the patent existed. The Court also held that foreign corporations could be held liable for direct infringement even if sale of the infringing product is f.o.b. outside of the U.S., if the defendant intends for the product to be sold in the U.S.

BACKGROUND

In August 1999, Plaintiff SEB S.A. (“SEB”) sued defendants Montgomery Ward & Co., Global-Tech Appliances Inc., and Pentalpha Enterprises Ltd. for infringement of its U.S. patent claiming a deep fryer with an inexpensive outer shell. Pentalpha, a Hong Kong company, made the allegedly infringing deep fryers and sold them to the other defendants for sale and distribution in the U.S.

To design its fryer, Pentalpha purchased one of SEB’s fryers in Hong Kong and directly copied every aspect of it except the cosmetics. Pentalpha then hired a U.S. attorney to conduct a right-to-use study, but failed to inform its attorney that it had based its product substantially on SEB’s product. Pentalpha knew that SEB had previously sued Sunbeam, a re-seller of Pentalpha deep fryers, for patent infringement, and knew that those parties had settled, but it continued to sell its infringing deep fryers to other customers for U.S. resale.

SEB sued Pentalpha and the other defendants for both direct infringement – selling into the U.S. – and inducement to infringe. At the trial on the merits, there was no evidence presented that Pentalpha knew about the SEB patent prior to April, 1998, when Pentalpha learned of the SEB-Sunbeam lawsuit. At the close of evidence, Pentalpha moved for Judgment as a Matter of Law on SEB’s inducement claim, arguing no claim of inducement could be sustained as a matter of law without evidence that Pentalpha specifically knew about SEB’s patent. The District Court denied the motion, finding that “you could infer the specific intent to … encourage the infringement…” by the fact that Pentalpha did not disclose the fact that it copied SEB’s product to its attorneys doing the patent search. SEB S.A. v. Montgomery Ward & Co., Inc., 594 F.3d 1360, 1367 (Fed. Cir. 2010) (citing SEB S.A. v. Montgomery Ward & Co., Inc., 137 F. Supp. 2d 285 (S.D.N.Y. 2001)).

The District Court allowed the inducement claim to go to the jury, which found that Pentalpha both directly infringed and induced others to infringe SEB’s patent. Pentalpha appealed. SEB S.A. v. Montgomery Ward & Co., Inc., 594 F.3d 1360 (Fed. Cir. 2010).

Deliberate Indifference is a Form of Actual Knowledge

Prior to SEB, the primary case on the intent requirement for inducement claims brought under 35 U.S.C. section 271(b) was DSU Medical Corp. v. JMS Co., 471 F.3d 1293 (Fed. Cir. 2006) (en banc) (“DSU”). In DSU, the Federal Circuit held that to prove “specific intent” for an inducement claim, a plaintiff had to prove that the defendant either knew or should have known that his acts would induce infringement, which required proof that the defendant had actual knowledge of the plaintiff’s patent. DSU, 471 F.3d at 1304. Merely showing that the defendant intended to induce the acts that constituted infringement is not enough – a plaintiff has to show intent to induce infringement of a patent known to defendant. Id.

The SEB decision broadens the standard articulated in DSU by concluding that in some circumstances, inducement may be found even without proof of defendant’s actual knowledge of the plaintiff’s patent. Specifically, in SEB, the Federal Circuit Court explained that there is no requirement that a defendant have knowledge of the actual patent in order to be an inducer. Rather, it is enough if the defendant is “deliberately indifferent” to the risk that a patent exists – in other words, the defendant subjectively knew of and disregarded the obvious risk that a patent existed. SEB, 594 F.3d 1376.

The Federal Circuit distinguished its decision in DSU from SEB, explaining that DSU focused on resolving conflicting case law by requiring that a defendant knowingly induce actual infringement, rather than knowingly induce the acts that happened to constitute infringement. SEB, 594 F.3d 1376. Because the DSU defendant had actual knowledge of the patent-at-issue, the scope of the knowledge was not really an issue before the DSU court.

Applying its new broader standard to the facts of SEB, the Federal Circuit Court affirmed the District Court’s determination of inducement. “The record contains adequate evidence to support a conclusion that Pentalpha deliberately disregarded a known risk that SEB had a protective patent.” Id. at 1377. That evidence included: 1) Pentalpha’s act of deliberately copying all but the cosmetics of SEB’s product; 2) Pentalpha’s hiring of an attorney to conduct a right-to-use study without telling him that it had copied SEB’s product; 3) Pentalpha’s president was well-versed in U.S. patent law and specifically knew of other SEB patents; and 4) Pentalpha failed to produce any evidence showing that it subjectively believed that no SEB patent existed. Id. at 1377-78.

The Federal Circuit added that the SEB opinion “does not purport to establish the outer limits of the type of knowledge needed for inducement.” Id. at 1378. By way of example, the Federal Circuit noted that inducement might be proven without actual notice if the plaintiff can show that the defendant had constructive notice of plaintiff’s patent due to certain markings. Id.

Foreign Defendants Can Be Liable for Direct Infringement Even if Sales Occurred Outside the U.S.

Pentalpha argued that it could not be liable for direct infringement under 35 U.S.C. section 271 (a) because it did not make, use, offer to sell, sell, or import “within the United States.” Specifically, Pentalpha sold its products to its customers f.o.b. Hong Kong or China – meaning that legal title to the product transferred to the customer in Hong Kong or China. Technically speaking, then, Pentalpha’s sales took place outside the U.S.

But the Federal Circuit followed its recent decision in Litecubes LLC v. Northern Light Products Inc., 523 F.3d 1353 (Fed. Cir. 2008), and held that a foreign defendant who sells the infringing products f.o.b. outside the U.S. may still be liable as a direct infringer for selling with the U.S. under 35 U.S.C. section 271(a).

Despite the “f.o.b.” technicality, the record showed that Pentalpha intended the products to be sold, ultimately, in the U.S. – the fryers were manufactured with North American electrical fittings; Pentalpha had affixed its American customers’ trademarks to them; and all sales invoices specified delivery to U.S. destinations. Id. at 1375. In light of the evidence that Pentalpha intended to sell its fryers in the U.S., the f.o.b. terms were not dispositive, and Pentalpha could be found liable for direct infringement. Id.

CONCLUSION

In many ways, the SEB opinion marks the Federal Circuit’s effort to close loopholes in patent infringement cases. Foreign companies selling infringing products into the U.S. cannot avoid direct infringement liability merely by manipulating the technicalities of the title transfer. Companies can no longer avoid inducement liability by consciously avoiding knowledge of an existing patent.

SEB also illustrates that when entities obtain right-to-use opinions from counsel, they must disclose to their counsel every bit of relevant information to ensure a comprehensive and protective opinion. Indeed, if all relevant information is provided and a proper opinion of counsel is obtained, that opinion can serve as evidence to establish a lack of intent to induce.

But SEB does not fill in all the gaps. SEB really represents an extreme case – a defendant that went really far in trying to avoid liability on technicalities, so it was not hard for the court to find “deliberate indifference.” It will be interesting to see how this standard might apply to a less obvious case – to a defendant whose actions may or may not have amounted only to a high level of negligence, but maybe not conscious disregard. Certainly, application of the SEB standard will require a factual analysis: How familiar was the defendant with the U.S. patent system? How familiar were they with plaintiff’s products? What if a jury finds that a defendant “probably should have known” instead of “should have known” of plaintiff’s patent? Future courts will have to address these issues on a case-by-case basis.