Intellectual Property Law

Leadership liability: Protecting directors, officers from exposure to patent infringement damages

By Sheppard Mullin

Legal standards for personal liability

In 1988, the Court of Appeals for the Federal Circuit first set forth the following legal standard for holding an individual personally liable for inducing infringement: "[A] person infringes by actively and knowingly aiding and abetting another's direct infringement." Water Techs. Corp. v. Calco, Ltd., 850 F.2d 660, 668 (Fed. Cir. 1988) (emphasis in original); see 35 U.S.C. § 271(b).

The Water Techs. standard -- "actively and knowingly aiding and abetting another's direct infringement" -- contained a significant ambiguity. Must the patentee prove that the individual knew or should have known that his or her actions would induce an actual infringement by the company? Or does it suffice to show that the individual intended to cause the acts of the company that constituted direct infringement, regardless of whether the individual also knew or should have known that these acts would constitute direct infringement?

The Federal Circuit resolved this ambiguity in DSU Medical Corp. v. JMS Co., 471 F.3d 1293 (Fed. Cir. 2006). In DSU, the Federal Circuit held that "[t]he plaintiff has the burden of showing that the alleged infringer's actions induced infringing acts and that he knew or should have known his actions would induce actual infringements," 471 F.3d at 1304 (quotation omitted). In other words, the "alleged infringer must be shown ... to have knowingly induced infringement, not merely knowingly induced the acts that constitute direct infringement." Id. at 1305.

A year later, in Wechsler v. Macke International Trade, Inc., 486 F.3d 1286 (Fed. Cir. 2007), the Federal Circuit reaffirmed that "[u]nless the corporate structure is a sham, we have held that personal liability for inducement must be supported by personal culpability. ... This requires the officer to have possessed a specific intent to 'aid and 'abet' the infringement." Id. at 1292. Thus, there should be no personal liability if the only evidence is that the corporate officer was negligent in his or her reading of a patent. Id. Of course, the corporate officer's negligence can still get the company in hot water, and the line between negligence and intent can be hard to draw in certain cases.

Tips for protecting corporate officers and directors

The Wechsler and DSU cases present something of a dilemma for corporate officers and directors. On the one hand, an officer or director can try to shield him or herself from personal liability by avoiding knowledge of patents that might apply to the company's processes and products. On the other hand, sticking one's head in the sand leaves the company itself exposed to charges of patent infringement, and might not help the individual if it appears that he or she was trying willfully to remain ignorant of relevant patents. In addition, the officer or director must discharge his or her fiduciary duty to the company. In short, what is an officer or director to do?

The best course of action depends upon the individual situation of the officer or director, and of his or her company. However, as a general matter, an officer or director might establish a patent due diligence program, through which patent counsel regularly apprises the officer or director (or in-house counsel) of patents that might apply to the company's processes and products. Alternatively, the officer or director, in conjunction with patent counsel, might opt to perform individual infringement analyses as to processes and products as they are developed by the company. In some circumstances, the officer or director might decide simply to inform in-house or outside patent counsel as the officer or director learns about patents owned by competitors and other third parties, and let patent counsel analyze whether these patents pose a risk for the company -- either informally or by means of a formal opinion letter.

Regardless of whether the officer or director opts to establish a proactive patent due diligence program, the best practice is to have patents that raise concerns brought quickly to the attention of in-house or outside patent counsel. That way, an officer or director can best minimize the risk of exposure to patent infringement damages, both to the company and to the officer or director individually.

Published in the The Daily Transcript/San Diego Source, January 31, 2008

Full post as published by Intellectual Property Law on February 11, 2008 (boomark / email).