Supreme Court Overturns Federal Circuit's Standard on Inducement and Divided Infringement

Executive Summary

On June 2, 2014, the U.S. Supreme Court issued its decision in Limelight Networks, Inc. v. Akamai Technologies, Inc. The Supreme Court overturned the en banc decision of the U.S. Court of Appeals for the Federal Circuit (Federal Circuit) that had significantly expanded the liability for “induced” infringement, in which a party that does not itself directly infringe a patent can be held liable for causing or encouraging others to infringe.

The Supreme Court held that a single entity must be liable for performing all the steps of the method before the inducing party can be held liable for induced infringement.

This heightened standard for proving inducement restores to potential accused infringers a powerful defense the Federal Circuit had removed – especially in the software, Internet, and biotech/pharma fields, where innovative processes often involve actions of multiple parties. But the Supreme Court indicated that the Federal Circuit may revisit its standard for direct infringement, which could once again broaden the scope of infringement in the future.

Background

The Supreme Court held in the landmark Aro cases (successfully argued by Wolf Greenfield’s David Wolf) that a patent owner seeking to recover for indirect (e.g., induced) infringement must first prove that the defendant caused someone to directly infringe the patent. For a method claim, which requires performance of a series of steps, a patent owner proves direct infringement by showing that someone performed all of the steps of that method.

Originally, the patent owner would identify a single entity that performed all the steps of – and thus directly infringed – the claim. The development of the Internet and distributed network technologies, however, has presented the courts with cases where no single entity performs all of the claimed steps. Instead, multiple entities act in concert to perform those steps. In these cases of “concerted action,” the courts have had to decide whether to attribute the performance of some steps to other entities.

The Federal Circuit first addressed the issue in 2007 in BMC Resources which held that inducement required proof of underlying direct infringement by a single entity. The direct infringer had to perform all the steps of the method claim, either itself or by exercising “control or direction” over the entities that performed the claimed steps. Subsequent decisions clarified that “control or direction” meant that the defendant acts as the “mastermind” of all infringing activity.

In an en banc reconsideration by the entire Federal Circuit in Akamai, a narrowly divided court (6-5) held that a patent holder may prove induced infringement of a claim to a method or process even where multiple parties perform the steps (commonly called “divided infringement”), leaving none of them individually liable for direct infringement.

Supreme Court Decision

In a unanimous decision, the Supreme Court reversed the Federal Circuit. Following Aro, the Supreme Court held that inducement must be predicated on direct infringement. It rejected the Federal Circuit’s position that induced infringement can occur absent a single direct infringer.

The Supreme Court assumed, without deciding that the Federal Circuit was correct in prior cases like BMC Resources and Muniauction, that a method claim has not been directly infringed unless all the steps are performed by or under the control of one entity. Under this standard, there had been no direct infringement of Akamai’s claimed method, because the performance of all the steps was not attributable to any one company. With no direct infringement, there could be no inducement of infringement either.

The Supreme Court found that allowing an inducement claim to proceed even when no one had engaged in direct infringement would be unworkable and would require two separate lines of case law (for direct infringement and inducement). The Supreme Court also analogized to contributory infringement, which similarly requires a direct infringer to perform all of the steps. The Court also noted that Congress knows how to impose liability for activity that does not itself constitute direct infringement, if it wishes, such as when it amended the Patent Act to prohibit importing components of a patented invention.

Lastly, the Supreme Court rejected Akamai’s arguments based on cases pre-dating enactment of the Patent Act. And while acknowledging Akamai’s concern that would-be infringers could evade liability by dividing performance of a method’s steps among multiple entities, the Supreme Court did not deem this risk to warrant loosening the standards for infringement.

Takeaways

This decision significantly reduces the ability to prove inducement in a “divided infringement” context, to the advantage of defendants in patent cases – especially in the software, Internet, and biotech/pharma fields. If a defendant can demonstrate that no single entity performs all of the steps of a claimed method, by not performing all the steps itself and not exerting sufficient control or direction over performance of the remaining steps, then there can be no liability for either direct or indirect infringement. The decision will encourage defendants in ongoing litigation, and competitors to patent holders, to review existing patents and determine whether they have stronger defenses to inducement claims on divided infringement grounds.

The Supreme Court was clear, however, that it was not considering the correctness of the Federal Circuit’s “control or direction” standard, indicating the Federal Circuit could revisit that standard when the case was sent back. As the entire Federal Circuit had not resolved that issue, there is a good chance they will do so on remand. It is also unclear what impact any change in the standard on direct infringement would have on non-method claims, like apparatus or system claims.

Divided infringement issues should be considered when claims are initially drafted and during prosecution before the U.S. Patent Office. Prosecution counsel must understand the current and contemplated business approaches relevant to the subject matter being patented to ensure that divided infringement issues do not later arise.