Changing the scope of liability for contributory infringement

In a decision of 23rd December 2008 that could significantly impact on patent litigation in 2009, particularly with respect to software and electronic technology, the US Court of Appeals for the Federal Circuit reviewed the issue of liability for contributory infringement and inducement of infringement in Ricoh Company, Ltd v Quanta Computer Inc.

In doing so, the Federal Circuit re-evaluated the balance between non-infringing uses and claims of contributory infringement. As such, patent holders and prospective litigants should analyse the court’s decision and understand the implications for their business strategies.

Background
Ricoh Company, Ltd filed an action in the US District Court for the Western District of Wisconsin for patent infringement concerning optical disc drives against:

• Quanta Computer Inc, an original equipment manufacturer of wholesale laptops;
• Quanta Storage, Inc, an original equipment manufacturer of optical disc drives;
• Quanta Computer USA, Inc, a company that repairs laptops; and
• NU Technology, Inc, a customer of Quanta.

Ricoh’s patents at issue included:

• US Patent 6,631,109 (the “109 patent”), regarding methods for recording information to a rewritable optical disc;
• US Patent 6,172,955 (the “955 patent”), governing methods for formatting rewritable optical discs using a background process;
• US Patent 5,063,552 (the “552 patent”), concerning an apparatus and method for controlling the speed at which a drive spins an optical disc to increase the recording capacity; and
• US Patent 6,661,755 (the “755 patent”), relating to methods of writing data to optical discs in different sessions to avoid read errors or damage to the discs.

In granting summary judgment in favour of Quanta and NU, the district court held that the 109 patent was invalid for obviousness and that the 955 patent had not been infringed because the disc drives at issue did not format the discs using the required background process.

It further concluded that Ricoh did not present enough evidence to support its contention of either direct or indirect infringement by Quanta related to the 552 and 755 patents. It reasoned that since Quanta did not sell or offer to sell the patented methods, and there was no evidence to show that NU tested the drives in a manner using the patented methods, there was no direct infringement by Quanta or NU. With respect to contributory infringement and inducement, as all the disc drives sold had substantial non-infringing uses, and since Ricoh did not present evidence sufficient to create a material issue of fact as to Quanta Storage, Inc’s intent to induce infringement, the district court rejected both claims.

The US Court of Appeals for the Federal Circuit affirmed summary judgment in favour of Quanta and NU relating to the 109 and 955 patents, but vacated the district court’s decision as to Quanta on the 552 and 755 patents. It highlighted that the district court had applied “erroneous legal standards” to assess whether Quanta contributorily infringed or induced infringement of the two patents at issue.

Federal Circuit analysis
The Federal Circuit initially considered the 109 patent and found that since Ricoh’s European patents on similar processes revealed certain key details, the 109 patent was presumed to be obvious. Ricoh attempted to rebut this presumption by arguing that the 109 patent produced new and unexpected results, but failed to persuade the judges. The court then turned its attention to the 955 patent, which required formatting the optical disc by starting with a background process. The court held that since there was no evidence that Quanta used this method, the district court had correctly granted summary judgment. The court also evaluated whether Quanta directly infringed the 552 and 755 patents and determined that “a party that sells or offers to sell software containing instructions to perform a patented method does not infringe the patent”. It also applied this conclusion to NU.

The Federal Circuit then turned to the central focus of the decision: contributory infringement and inducement to infringe the 552 and 755 patents.

Contributory infringement
While Quanta’s drives could potentially be used to infringe the 552 and 755 patents, the district court granted summary judgment of non-infringement because the drives were capable of a “substantial noninfringing use” since the drives could also read discs in a manner not covered by the patents.

The Federal Circuit accepted evidence that the drives at issue contained certain distinct and separate components that were used only to perform the allegedly infringing write methods. It evaluated the rules concerning the scope of liability for contributory infringement and Supreme Court precedent governing this issue, citing both Sony Corporation of America v Universal City Studios, Inc (1984, where the court held that a VCR manufacturer could not be held liable for contributory infringement for selling products that consumers used to record copyrighted works) and Metro-Goldwyn-Mayer Studios, Inc v Grokster, Ltd (2005, where the court held that the makers of peer-to-peer file-sharing software used to distribute and obtain copyrighted music were responsible for contributory infringement because “[w]hen a manufacturer includes in its product a component that can only infringe, the inference that infringement is intended is unavoidable”).

It also cited the law under 35 USC 271(c) that if one sells a component designed for use in a patented invention and that component is not a staple article of commerce suitable for substantial non-infringing use, there is liability for contributory infringement. As such, the Federal Circuit held that if Quanta embedded a microcontroller with no non-infringing use within a larger product that had some separate non-infringing feature prior to the larger product’s importation and sale, it was liable for contributory infringement. It concluded that holding otherwise would make evasion of the protection “rather easy”.

Inducement
Ricoh claimed that Quanta Storage, Inc, as the OEM drive manufacturer, purposely induced customers (eg, Hewlett-Packard, Dell and Gateway) and consumers to infringe based on product specification sheets, a presentation that it gave to Dell, instructions on its website and other issues. The Federal Circuit found a material issue of fact as to Quanta’s intent that its drives be used to infringe the 552 and 755 patents since there appeared to be an affirmative intent to cause direct infringement.

It determined that the district court erred by discounting evidence of Quanta Storage, Inc’s intent and failing to consider properly the importance of QSI’s presentation to Dell highlighting the advantages of the Quanta drives. The court noted that the presentation was relevant to any extent that it indicated that Quanta Storage, Inc intended for its drives to be used to perform the infringing methods and on the issue of whether it explicitly encouraged Dell to do so. It also stated that intent may be inferred from circumstantial evidence in matters where a defendant has knowledge of the patent and specific intent to cause the infringement.

The Federal Circuit remanded both the contributory infringement and inducement claims to the Western District of Wisconsin for further examination of whether Quanta’s drives contained hardware or software components that had no substantial non-infringing use other than to execute Ricoh’s patented methods.

Evaluation and planning
The ruling could alter the arguments in software cases in which some amount of code is applied in the allegedly infringing use, but is not needed for the non-infringing use, making it harder to avoid contributory infringement allegations with claims of non-infringing use. For instance, if a software program that has a variety of uses, including one that infringes, requires a single line of additional code for the infringing use that is not necessary for the non-infringing uses, a court could potentially find contributory infringement based on the Federal Circuit’s reasoning in this case.

However, given its success before the Supreme Court in Quanta Computer, Inc v LG Electronics, Inc in June 2008, Quanta may again find a different result on appeal.