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Wednesday, 27 May 2015

Supreme Court closes the door on good-faith invalidity defence in Cisco's patent troll saga

Because the AmeriKat does not believe
she is doing anything wrong, does this give her a defence
to destroying a toilet paper roll?  
Does your belief that you are not doing something wrong, give you a defence to conduct that is in fact wrong?   This question is likely still haunting Cisco following yesterday's US Supreme Court defeat in Commil USA, LLC v Cisco Systems, Inc (2015).

In a 6-2 vote (Justice Breyer was recused), the highest court in the United States overturned the decision of the US Court of Appeals for the Federal Circuit (CAFC) that held that the Cisco could run the "good faith" defence against Commil's claims that Cisco directly infringed its patent for a method of implementing short-range wireless networks and had induced others to infringe by selling the infringing equipment for them to use.  After two trials, Cisco was found liable for both direct and induced infringement.  The question before the Supreme Court concerned the inducement element.  Cisco had argued in defence to inducement that it had a good-faith belief that Commil's patent was invalid.  However, the District Court held Cisco's supporting evidence to be inadmissable.  The CAFC held that the District Court had erred in excluding Cisco's evidence.

The Background

Cisco took issue with two of the District Court's rulings.  The first related to the District Court's instruction to the jury in the second case that dealt with Cisco's alleged inducement.  The jury was instructed 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.” 
On this basis, in finding Cisco liable for induced patent infringement, the jury awarded Commil $63.7 million in damages.  
Cisco looks forward to the retrial.

After the verdict in the second trial which dealt with inducement, the Supreme Court delivered its decision in Global-Tech Appliances Inc v SEB SA (2011).  That case held that in an action for induced infringement it is necessary for the claimant to show that the alleged inducer knew of the patent in question and knew that induced acts were infringing (note the added emphasis on knowledge).  Cisco therefore argued that the jury instruction was incorrect because nowhere did it state that knowledge of the inducement was the standard.  Cisco appealed to the CAFC who concluded that the District Court erred in its instruction.  In instructing the jury that Cisco could be liable if it "knew or should have known" that its customers infringed, it had left the door open for the jury to find infringement "based on mere negligence where knowledge is required".  A new trial is now required with a corrected instruction on knowledge to the jury.  

The CAFC's second, related ruling excluded Cisco's evidence that it has a good-faith belief that Commil's patent was invalid.  In siding with Cisco, the CAFC held that "evidence of an accused inducer's good-faith belief of invalidity may negate the requisite intent for induced infringement." That is to say, how can a defendant ever be said to know that it has caused acts of induced patent infringement if a defendant does not believe there is even a valid patent that can be infringed? If the defendant thinks there is no harm to be done, how can the defendant be held to know that it has caused harm?  The CAFC also considered that there was "no principled distinction between a good-faith belief of invalidity and a good-faith belief of non-infringement for the purpose of whether a defendant possessed the specific intent to induce infringement of a patent." 

However, this holding was not without it's critics in the CAFC.  Judge Newman, to whom the AmeriKat had the pleasure of listening at last year's Fordham (see post here), dissented.  In her view, a defendant's good-faith belief that a patent is invalid is not a defence to induced infringement.  "Whether there is infringement in fact, " she wrote "does not depend on the belief of the accused infringer that it might succeed in invalidating the patent."  

The Question

Whether a good-faith belief in invalidity is a defence to induced infringement?  

The Answer

The US Supreme Court
No.  After Justice Kennedy trotted through the Court's 2011 decision in Global-Tech (in which he was the lone dissenter), the Court explained their opinion in four parts.  First, infringement and invalidity are separate matters under patent law.  Indeed, issues of infringement and validity appear in separate parts of the Patents Act.  The defences of non-infringement and invalidity are two separate defences.  As Newman J wrote in her dissenting opinion "validity and infringement are distinct issues, bearing different burdens, different presumptions, and different evidence."   The key element to the question as to whether a defendant is liable for induced infringement is infringement - not validity.  Under section 271(b), the statute requires that the defendant "actively induce[d] infringement" which requires intent to "bring about the desired result", being infringement.  Belief regarding validity has no role to play whether there was intention to bring about infringement. Invalidity, after all, is not a defence to infringement.  Invalidity is a defence to liability.  Therefore belief as to invalidity "cannot negate the scienter required for induced infringement." To hold otherwise, would conflate the issues of infringement and validity.  

Second, to allow such a defense would also undermine the "common core of thought and truth" that a patent is presumed valid. This presumption makes it possible for a patentee to commence a claim without first having to prove that his patent is valid.   If belief in invalidity were a defence to induced infringement, the presumption would be undermined to such a degree that a defendant could prevail if he proved that he reasonably believed that the patent was invalid.  The reasonable belief standard would fly in the face of the "clear and convincing" standard of proof established by Congress that defendants must meet to rebut the presumption of validity (see the AmeriKat's posts on Microsoft v i4i).  

Third, such a defence would also have negative consequences in that it could render "litigation more burdensome for everyone involved".  The availability of such a defence could incentive every potential inducer to advance a theory of invalidity, the veracity of which would be more difficult for the court to assess than questions of infringement.  This could result in accused inducers finding it "easier to prevail on a defence regarding the belief of invalidity than non-infringement.  In addition the need to respond to the defence will increase discovery costs and multiply the issues the jury must resolve.  Indeed, the jury would be put to the difficult task of separating the defendant's belief regarding validity from the actual issue of validity."

Finally, in its reasoning, the Supreme Court also placed weight on the practical reasons why not to create a defence based on a good-faith belief in invalidity.  Practically, if the defendant really has a belief that the patent is invalid then there are procedural avenues open to them.  They can prove that the patent is invalid as an affirmative defence,  file a declaratory judgment requesting the court to declare the patent invalid (MedImmune v Genetech (2007)), seek inter partes review at the Patent Trial and Appeal Board or seek ex parte rexamination at the Patent and Trademark Office.  

The Scalia Dissent

A welcome opponent to bifurcation?
Justice Scalia thinks infringing
an invalid patent is nonsense.  
"It follows, as night the day, that only valid patents can be infringed.  To talk of infringing an invalid patent is to talk nonsense."  Although readers could be forgiven in thinking that such colorful dicta came from the mouth of our beloved Sir Robin Jacob, it actually came from Justice Scalia in his dissent ["This is where the comparisons between the two stop," Merpel hastens to add].  

In what reads like an angry professor marking an incompetent, but arrogant, student's exam paper Justice Scalia (who was joined by Chief Justice John Roberts) picks apart each of the Court's arguments.  His own reasoning goes like this:
1.  Induced infringement requires knowledge that the induced acts constitute patent infringement (see Global-Tech).
2.  Only valid patents can be infringed.
3.  Anyone with a good-faith belief in a patent's invalidity, necessarily believes the patent cannot be infringed.
4.  It is impossible for anyone who believes the patent cannot be infringed to induce actions that he knows will infringe it.
5.  A good faith belief that a patent is invalid is therefore a defence to induced infringement of that patent.  
Justice Scalia considered that the fact that infringement and validity are dealt with separately under the Patents Act was irrelevant.  "Saying that infringement cannot exist without a valid patent does not “conflate the issues of infringement and validity,” ... any more than saying that water cannot exist without oxygen “conflates” water and oxygen. Recognizing that infringement requires validity is entirely consistent with the “long-accepted truth . . . that infringement and invalidity are separate matters under patent law.”"  Further, permitting a good-faith invalidity defence would not undermine the statutory presumption of validity.  All it would do would be to permit an alleged inducer the possibility to avoid liability for a third party's infringement of a valid patent.  It would not undermine the patent's presumed validity (the AmeriKat recommends listening to the opening questions from Chief Justice Roberts regarding the percentage of patents that are upheld as valid here saying that 60% of patents being found to be valid is not much of a presumption of validity).  

In saying that “invalidity is not a defense to infringement, it is a defense to liability.” the Court was merely making "an assertion, not an argument."  Justice Scalia reiterated that infringing a patent means invalidating the patentee’s right of exclusivity:  "An invalid patent confers no such right. How is it possible to interfere with rights that do not exist? The Court has no answer." 

Scalia considered the Court's weakest argument to be its reliance on "practical reasons" not to create a defence based on a good-faith belief in invalidity.  He concluded:
"Ours is not a common-law court. Erie R. Co. v. Tompkins, 304 U. S. 64, 78 (1938). We do not, or at least should not, create defenses to statutory liability—and that is not what this dissent purports to do. Our task is to interpret the Patent Act, and to decide whether it makes a good-faith belief in a patent’s invalidity a defense to induced infringement. Since, as we said in Global-Tech, supra, the Act makes knowledge of infringement a requirement for induced-infringement liability; and since there can be no infringement (and hence no knowledge of infringement) of an invalid patent; goodfaith belief in invalidity is a defense."

The Troll Issue

Patent for a troll, does not make a patent troll.  
Commentators have picked up on the identity of the patentee - a troll/patent assertion entity/non-practicing entity/etc  - as being the headline grabber in  this case, if only to paint a picture of General Counsel throughout Silicon Valley being on the edge of their seats awaiting this decision.  However, the Court's comments in this respect were limited.  The Court said that they were well aware of the industry that had developed in which patents were being used primarily for obtaining licensing fees.  Such conduct can create a "harmful tax on innovation".   However, because no issue of frivolity had been raised by the parties in this case the Supreme Court did not comment further, except to reinforce the power that the district courts have in dissuading frivolous cases.  The Court stated that:
"If frivolous cases are filed in federal court, it is within the power of the court to sanction attorneys for bringing such suits. Fed. Rule Civ. Proc. 11. It is also within the district court’s discretion to award attorney’s fees to prevailing parties in “exceptional cases.” 35 U. S. C. §285; see also Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572U. S. ___, ___–___ (2014) (slip op., at 7–8). These safeguards, combined with the avenues that accused inducers have to obtain rulings on the validity of patents, militate in favor of maintaining the separation expressed throughout the Patent Act between infringement and validity. This dichotomy means that belief in invalidity is no defense to a claim of induced infringement. "
Justice Scalia, however, viewed the Court's holding as increasing the "in terrorem power of patent trolls" and viewed the Court's comments about district courts authority in this respect as seemingly acknowledging the consequences of its opinion.  

What does this mean?  

Key message:  Be proactive in invalidating patents,
not reactive in saying you thought the patent
was invalid.  
So what is the importance of this case?  One of Cisco's lawyers, Seth Waxman, is reported as saying that the decision "simply eliminates one of many defenses available to Cisco, which looks forward to retrial of the case."   Commil's counsel, Mark Werbner, said that it restored "common sense to patent litigation."  The AmeriKat considers that this decision shows the Supreme Court actively encouraging would-be infringers/inducers to proactively invalidate patents, especially those wielded by patent trolls, through avenues already available to them.  Given the options already available to challenge the validity of patents, the Court will be reluctant to create short-cuts for defendants to escape liability from infringement of patents that already benefit from a presumption of validity.  It also acts as another loud and clear message to the district courts, following a year of such messages, that they have the authority to discourage the patent troll industry from benefiting from the threat of patent litigation.  

All that being said, many commentators are left at a loss as to the Supreme Court's reasoning, much for the same reasons that Justice Scalia expressed in his dissent.  Given that Global-Tech was all about the knowledge of the inducer, is the court's reasoning satisfactory?  How can an inducer who does not believe that a patent is valid, have the knowledge that what it is inducing amounts to patent infringement?  Infringement and validity merely being in separate parts of the Patents Act seems too convenient an answer for some, including Justice Scalia.  The answer may be as simple as what Judge Newman was getting at - belief is not the same as fact.  

Unless the Supreme Court rexamines this questions again, which seems unlikely, the state of affairs is this:  Even if you actually believe the patent is invalid, you can still be liable for inducing infringement unless you prove that the patent is, in fact, invalid.  

To listen to the oral arguments before the Supreme Court, please click here.  

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