Patent Infringement Warranties in BPO
October 9, 2009 by Bierce & Kenerson, P.C.
Today, virtually any contract, including a business process outsourcing contract, for the delivery of goods, services or licensed rights in applied technology contains an indemnification clause concerning possible infringement of third-party intellectual property rights. In the initial draft of the agreement, the typical clause provides for unlimited indemnification for patents, copyrights, trademarks and trade secrets. Increasingly, the suitability and evidentiary issues in such clauses are getting careful scrutiny. A recent U.S. federal judicial decision revoked a twenty-year old common law precedent relating to the measures that must normally be taken in order to eliminate certain special statutory damages and liability for attorneys’ fees.
Ordinary Infringement of a Patent.
Patent holders face a challenge in protecting their rights. The U.S. patent law ordinarily imposes actual damages for patent infringement.
Patent holders must think twice about suing for infringement. The stakes are high.
- Legal Fees.
Ordinarily, the patent holder has no right to recover its attorneys’ fees. The patent holder will have a significant amount at stake in order to justify paying the huge expense of attorney’s fees for complex litigation. - Invalidation of Patent.
Invariably, the patent holder’s infringement lawsuit will invite a counterclaim for invalidation of the patent. As a result, the infringement litigation could risk termination of all license royalties from parties other than the alleged infringer.
Willful Infringement of a Patent.
The patent holder’s risk of an invalidation can be reduced if it raises the stakes in the litigation. It can do so by alleging that the infringement was “willful.” This puts into motion a threat that the alleged infringer will be liable for punitive damages.
Consequences of Willful Infringement.
If the infringement can be shown to have been “willful,” then the court may award attorney’s fees and triple the compensatory damages. 35 U.S.C. § 284 (“the court may increase the damages up to three times the amount found or assessed”); 35 U.S.C. § 285 (“the court in exceptional cases may award reasonable attorney fees to the prevailing party”).The Definition of “Willful” Patent Infringement.
In determining whether a patent infringement was “willful,” the court must balance the totality of the circumstances. Many circumstances may be taken into consideration. See compilation in Rolls-Royce Ltd. v. GTE Valeron Corp, 800 F.2d 1101, 1110 (Fed. Cir. 1986) and Read Corp. v. Portec, Inc., 970 F.. 2d 816, 826-27 (Fed. Cir. 1992). “Willfulness” is not an absolute, based on “all or nothing,” but is a matter of degree. Knorr-Bremse Systeme fuer Nutzfahrzeuge GmBH v. Dana Corporation, __ F.3 __, NYLJ (Sept. 24, 2004), p. 21, cols. 1-4, p. 22, cols. 1-2 (2nd Cir. 2004) Judge Newman.The Service Provider’s Defensive Strategy: Get an Attorney’s Opinion.
Under a 1983 decision by the U.S. Court of Appeals for the Federal Circuit, judicial precedent required that, as a precaution, the potential infringer of a patent should obtain a review by a patent lawyer of the patents at issue. Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed. Cir. 1983). In the context of a flagrant disregard for the patent owner’s demand for payment of a royalty for infringing presumptively valid patents, that court ruled that “where, as here, a potential infringer has actual notice of another’s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing,” including “the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity. Id. at 1389-90.The “duty” or “best practice” of getting a legal opinion is not specified in the patent statute. Instead, the defensive strategy was raised to the level of a common-law duty by interpretation of the patent statute. Courts applied the common law rule as a matter of evidentiary procedure. This applied specifically to cases where a patent holder had warned the potential infringer and asked that the infringement cease.
Change in Common Law.
This “legal opinion” requirement was applicable as judicial precedent from 1983 to 2000. In September 2004, the same court, in the Knorr-Bremse decision, overruled this precedent because the evidentiary principle promoting caution violates an even more fundamental principle, the attorney-client privilege. The court ruled that, while the issue is not one of legal privilege, it is the related issue “whether there is a legal duty upon a potential infringer to consult with counsel, such that failure to do so will provide an inference or evidentiary presumption that such opinion would have been negative” and would have concluded the potential infringer had no right to use the patented process.Having framed the issues, the Knorr-Bremse court decided that, as a matter of public policy, it is so important to continue the general principle that courts should decline to impose, as a procedural rule of evidence, any “adverse inference” on invocation of the attorney-client privilege. Expanding this principle to the treble-damage and attorney’s fee provisions of the patent law, the court concluded that no such adverse inference may be drawn:
- when the potential infringer (such as an service provider in outsourcing) invokes attorney-client privilege, and/or attorney work-product privilege, or
- when the potential infringer fails to consult with counsel.
Impact on Outsourcing.
This decision eliminates a negative presumption against potential infringers of U.S. patents. Since the U.S. patent law permits registration of patents on business methods, this judicial decision will make it easier to defend, and harder to prosecute, business method patent infringements. The impact on the ordinary business process outsourcing should be small, but it will give some comfort to service providers. When notified of an alleged infringement, consultation with an attorney will still be highly advisable, but no adverse presumption will apply if no consultation occurs.
Liability of Service Provider for Customer’s Copyright Infringement
October 9, 2009 by Bierce & Kenerson, P.C.
Litigation involving providers of software or services for the peer-to-peer file sharing on the Internet highlights the risk for service providers under the theories of contributory infringement and vicarious infringement of copyright. Napster, Aimster and Grokster file sharing systems and Gnutella software provide some analogies for Internet hosting services.
A review of these decisions suggests that the developers of software might be able to escape liability if they fail to have the capability of controlling the uses of the software. But a service provider runs the risk of liability for its customer’s copyright infringement if the service provider uses software or systems that enable contribute to copyright infringement by a “customer.” As a result, service providers need to clarify their roles and responsibilities in respect of copyright matters.
Privacy issues are also related/considered in a Verizon case involving a subpoena to a telecom service provider to disclose customer identities in a potential copyright infringement case.
Customer’s Infringing Activity.
In the famous Napster decision, Napster offered a service via the Internet allowing users (“customers”) to engage in sharing of files of music and other copyrighted works. Napster controlled the access rights to the system, so it was found to be liable for contributory infringement.
Contributory Copyright Infringement.
Under the doctrine of contributory copyright infringement, a service provider is liable for contributory infringement of copyrighted works if, with knowledge of the infringing activity, he or she “induces, causes or materially contributes to the infringing conduct of another.” A&M Records Inc. v. Napster Inc., 239 F.3d 1014, 1019 (9th Cir. 2001).
But if a manufacturer’s systems could be used for “substantial non-infringing uses,” as the Sony video cassette recorder was found to offer, the manufacturer’s generalized knowledge that some users might use the systems for infringing purposes is not sufficient to warrant liability for contributory infringement. Sony Corporation of America v. Universal City Studios Inc., 464 U.S. 217 (1984). In that sense, the manufacturer only had “constructive knowledge” of the infringement.
Where the defendant has “actual knowledge” of the infringement and the defendant materially contributes to that infringement, then the defendant is liable for contributory infringement, according to a California court scrutinizing a peer-to-peer file sharing system. If the defendant does nothing to facilitate the infringement, and is technologically powerless to stop it, the defendant is not liable for contributory infringement. Metro-Goldwyn-Mayer Studios v. Grokster Ltd., __ F.3d ___, C.D. Cal, No. CV 01-08541-SVW (C.D. Cal. Apr. 25, 2003); Metro-Goldwyn-Mayer Studios inc. v. Consumer Empowerment BV, __F.3d __, C.D. Cal. No. CV 01-09923-SVW (C.D. Cal. Apr. 25, 2003) (hereinafter, “Grokster Decision”).
Critical to “contributory infringement” is the defendant’s substantial knowing support for the infringement by its users (customers):
As an initial matter, the record indicates that Defendants have undertaken efforts to avoid assisting users who seek to use their software for improper purposes. More critically, technical assistance and other incidental services are not “material” to the alleged infringement. To be liable for contributory infringement, “[p]articipation in the infringement must be substantial. The authorization or assistance must bear a direct relationship to the infringing acts, and the contributory infringer must have acted in concert with the direct infringer.” Marvullo v. Gruner & Jahr, 105 F. Supp. 2d 225, 230 (S.D.N.Y. 2000) (citation omitted); accord Arista Records, Inc. v. MP3Board, Inc., 2002 U.S. Dist. LEXIS 16165, at *16 (S.D.N.Y. Aug. 28, 2002). Here, the technical assistance was rendered after the alleged infringement took place, was routine and non-specific in nature, and, in most cases, related to use of other companies’ software (e.g. third-party media player software). [Emphasis in original text]. Grokster Decision, slip op., p. 25.
Vicarious Liability for Infringement.
Vicarious liability arises from the agency doctrine of respondeat superior under common law. Under the legal theory of vicarious liability for copyright infringement, a defendant will be held liable for contributory infringement when it is found that the defendant both:
- “has a right and ability to supervise the infringing activity” and
- “has a direct financial interest in such activities.” A&M Records Inc. v. Napster, 114 F.Supp. 2d 896 (N.D. Cal. 2000). This could be satisfied even by a free “service” since financial interest could be shown where the increased traffic to the defendant’s website would generate financial gain, even if the actual supervision of the infringing activity did not.
“As opposed to contributory infringement, one can be liable for vicarious infringement without knowledge of the infringement.” Grokster Decision, p. 27-28, citing Adobe Systems Inc. v. Canus Prods., Inc., 173 F. Supp. 2d 1044, 1049 (C.D. Cal. 2001) (“Lack of knowledge of the infringement is irrelevant.”).
In Napster, the “service provider” provided the central indices of files of copyrighted works being shared and exchanged. Similarly in the Aimster decision, the defendant managed a peer-to-peer file sharing network in which the defendant had the ability to terminate users and control access to the system. In re: Aimster Copyright Litig., 2002 U.S. Dist. LEXIS 17054, at *50-*51 (N.D. Ill. Sept. 4, 2002).
In contrast, in Grokster, the “service provider” merely issued software and started the chain reaction of granting access to some “starter files” that users could then disseminate without any control by the service provider. The Grokster service provider lacked the ability to block infringers’ access to a particular computer environment for any reason. The lack of control saved the Grokster service provider from vicarious liability for infringement.
Impact for Service Providers.
Taken together, the Napster and Grokster cases underscore the risk of contributory liability or vicarious liability for copyright infringement.
Statutory Protection – Copyright Infringement.
Certain statutes protect the service provider. For example, the Digital Millennium Copyright Act of 1998 has a procedure for allowing aggrieved copyright owners to seek to enjoin or stop an ongoing infringement.
Statutory Protection – Privacy.
Copyright is distinct from privacy law. However, a similar concept exists in privacy legislation, for protection of the data processor from liability for wrongful disclosure by its customer of confidential information. See, e.g., pending legislation (e.g., the “Consumer Privacy Protection Act of 2003, H.R. ____, 108th Cong., 2d Sess.) (proposed regulatory regime under Federal Trade Commission for mandatory privacy policies and securities policies and voluntary self-regulation programs.) And, according to one court,
if an individual subscriber opens his computer to permit others, through peer-to-peer file-sharing, to download materials from that computer, it is hard to understand just what privacy he or she has after essentially opening the computer to the world. In re: Verizon Internet Services, Inc., Civ. No. 03-MS-0040 (JDB), __F.3d __ (D. D.C. Apr. 24, 2003).
Thus, courts may hold the user liable and without protection from anonymity.
These cases highlight the importance of suitable intellectual property clauses in the outsourcing contract.