Federal Circuit Rejects Patent Infringement Claim Based on Joint Infringement by Multiple Parties

A unanimous panel of the Federal Circuit Court of Appeals held that a competitor that provided a debit payment system did not infringe patented payment system method because it did not itself perform every step of patented method. The Court emphasized that a party cannot avoid infringement liability simply by contracting out the performance of one or more steps of a patented method, but ruled that absent control or direction of a third party that performs one or more of the steps of the patented method, there can be no liability for infringement by a party that does not perform each step of the patented method. BMC Resources, Inc. v. Paymentech, L.P., No. 2006-1503 (Fed.Cir., September 20, 2007).
BMC Resources, Inc. owns two patents that claim a method for processing debit transactions without a personal identification number (PIN). As described by the Court:

The patented invention provides an interface between a standard touch-tone telephone and a debit card network. On this interface, a customer may perform real-time bill payment transactions with only a telephone keypad. The invention includes an interactive voice response unit (IVR) that prompts the caller to enter an access code, account number, debit card number, and payment amount. This information, in turn, passes to a debit network and on to a banking or financial institution. Each of these entities participates in approving and carrying out the transaction. Using the invention, the caller may also obtain information regarding authorization for the transaction, and inquire about previously processed transactions. Thus, BMC's patents disclose a method for PIN-less debit bill payment (PDBP) featuring the combined action of several participants, including the payee's agent (for example, BMC), a remote payment network (for example, an ATM network), and the card-issuing financial institutions.

BMC filed suit for patent infringement against Paymentech, L.P., which processes financial transactions for its clients. According to the Court, Paymentech processes a PDBP transaction according to the following sequence:

1. the customer calls the merchant to pay a bill using an IVR;
2. the merchant collects payment information from the customer and sends it to Paymentech;
3. Paymentech routes the information to a participating debit network;
4. the debit network forwards the information to an affiliated financial institution;
5. the financial institution authorizes or declines the transaction, and if authorized, charges the customer's account according to the payment information collected by the merchant; and
6. information regarding the status of the transaction moves from the financial institution to the debit network and then, through Paymentech, to the merchant who informs the customer of the status of the transaction.

The district court granted summary judgment of noninfringement for Paymentech, holding that Paymentech had not infringed the claims because it performed some but not all of the steps of the asserted method claims. The Court of Appeals affirmed: "Because the record contains no basis to hold Paymentech vicariously responsible for the actions of the unrelated parties who carried out the other steps, this court affirms the finding of non-infringement."

As framed by the Court, "the case presents the issue of the proper standard for joint infringement by multiple parties of a single claim.... As the parties agree, Paymentech does not perform every step of the method at issue in this case. With other parties performing some claimed method steps, this court must determine if Paymentech may nonetheless be liable for direct infringement under 35 U.S.C. §271(a) (2000).

Section 271(a) states:

Except as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.

According to the Court, "direct infringement requires a party to perform or use each and every step or element of a claimed method or product." Warner-Jenkinson Co., Inc. v. Hilton Davis Corp., 520 U.S. 17, 117 S.Ct. 1040, 137 L.Ed.2d 146 (1997). "For process patent or method patent claims," according to the Court, "infringement occurs when a party performs all of the steps of the process." Joy Techs., Inc. v. Flakt, Inc., 6 F.3d 770, 773 (Fed.Cir.1993).

The Court noted that "when a defendant participates in or encourages infringement but does not directly infringe a patent, the normal recourse under the law is for the court to apply the standards for liability under indirect infringement." But according to the Court, "indirect infringement requires, as a predicate, a finding that some party amongst the accused actors has committed the entire act of direct infringement." Dynacore Holdings Corp. v. U.S. Philips Corp., 363 F.3d 1263, 1272 (Fed.Cir.2004).

The Court observed that "these rules for vicarious liability might seem to provide a loophole for a party to escape infringement by having a third party carry out one or more of the claimed steps on its behalf." But "to the contrary," according to the Court, "the law imposes vicarious liability on a party for the acts of another in circumstances showing that the liable party controlled the conduct of the acting party."

In the context of patent infringement, a defendant cannot thus avoid liability for direct infringement by having someone else carry out one or more of the claimed steps on its behalf. In [Cross Med. Prods. v. Medtronic Sofamor Danek, 424 F.3d 1293 (Fed.Cir., 2005)], this court refused to attribute the acts of surgeons in making the claimed apparatus to the medical device manufacturer because the medical device manufacturer representative, who appeared in the operating room and identified instruments for the surgeons, did not direct the surgeons' actions. The Court remanded the case for a determination of whether the surgeons directly infringed by making the claimed apparatus and whether the medical device manufacturer could be held vicariously liable for such infringing acts. 424 F.3d at 1312.

BMC argued that the district court erred in dismissing the argument that On Demand Machine Corp. v. Ingram Industries, Inc., 442 F.3d 1331 (Fed.Cir., 2006) sanctioned a finding of infringement by a party who performs some steps of a claim in cases where a patent claims an invention that cannot be performed by one person. In that case, the jury was instructed that —

It is not necessary for the acts that constitute infringement to be performed by one person or entity. When infringement results from the participation and combined action(s) of more than one person or entity, they are all joint infringers and jointly liable for patent infringement. Infringement of a patented process or method cannot be avoided by having another perform one step of the process or method. Where the infringement is the result of the participation and combined action(s) of one or more persons or entities, they are joint infringers and are jointly liable for the infringement.

Although the Court of Appeals affirmed, according to the Court, "it did so without any analysis of the issues presented relating to divided infringement." The district court discounted On Demand because the "decision did not in any way rely on the relationship between the parties," and the Court of Appeals concluded that "the district court properly analyzed the law and this court's cases."

As Paymentech succinctly noted in its brief, "it is unlikely the Court intended to make a major change in its jurisprudence in the On Demand [statement] that was not even directly necessary to its decision in the case."… In other words, BMC's interpretation of On Demand goes beyond settled law. On Demand did not change this court's precedent with regard to joint infringement.

According to the Court, "infringement requires, as it always has, a showing that a defendant has practiced each and every element of the claimed invention."
This holding derives from the statute itself, which states "whoever without authority makes, uses, offers to sell, or sells any patented invention within the United States, or imports into the United States any patented invention during the term of the patenttherefor, infringes the patent." 35 U.S.C. §271(a) (2000). Thus, liability for infringement requires a party to make, use, sell, or offer to sell the patented invention, meaning the entire patented invention.

Where a defendant participates in infringement but does not directly infringe the patent, the law provides remedies under principles of indirect infringement. However, this court has held that inducement of infringement requires a predicate finding of direct infringement. Dynacore, 363 F.3d at 1272.

However, according to the Court, "a party cannot avoid infringement… simply by contracting out steps of a patented process to another entity."
In those cases, the party in control would be liable for direct infringement. It would be unfair indeed for the mastermind in such situations to escape liability. District courts in those cases have held a party liable for infringement.

The Court acknowledged that "the standard requiring control or direction for a finding of joint infringement may in some circumstances allow parties to enter into arms-length agreements to avoid infringement." However, "this concern does not outweigh concerns over expanding the rules governing direct infringement."

For example, expanding the rules governing direct infringement to reach independent conduct of multiple actors would subvert the statutory scheme for indirect infringement. Direct infringement is a strict-liability offense, but it is limited to those who practice each and every element of the claimed invention. By contrast, indirect liability requires evidence of "specific intent" to induce infringement. Another form of indirect infringement, contributory infringement under §271(c), also requires a mens rea (knowledge) and is limited to sales of components or materials without substantial noninfringing uses. Under BMC's proposed approach, a patentee would rarely, if ever, need to bring a claim for indirect infringement.

The Court pointed out that "the concerns over a party avoiding infringement by arms-length cooperation can usually be offset by proper claim drafting." According to the Court, "a patentee can usually structure a claim to capture infringement by a single party." The Court suggested that "in this case, for example, BMC could have drafted its claims to focus on one entity."

The steps of the claim might have featured references to a single party's supplying or receiving each element of the claimed process. However, BMC chose instead to have four different parties perform different acts within one claim. BMC correctly notes the difficulty of proving infringement of this claim format. Nonetheless, this court will not unilaterally restructure the claim or the standards for joint infringement to remedy these ill-conceived claims.

Applying the rule to the instant case, the Court concluded that "BMC's charges against Paymentech properly results in a finding of no infringement." The Court held that while BMC offered evidence of some relationship between Paymentech and the debit networks, the "evidence was insufficient to create a genuine issue of material fact as to whether Paymentech controls or directs the activity of the debit networks."

Without this direction or control of both the debit networks and the financial institutions, Paymentech did not perform or cause to be performed each and every element of the claims. In this situation, neither the financial institutions, the debit networks, nor the payment services provider, Paymentech, bears responsibility for the actions of the other.

Fourth Circuit Gives Novell 'Half a Loaf' in Antitrust Case Against Microsoft

The Fourth Circuit Court of Appeals held that Novell, Inc. had standing to bring antitrust claims against Microsoft arising from Microsoft's monopolization of the PC operating system market because "its popular applications, though themselves not competitors or potential competitors to Microsoft's Windows, offered competing operating systems the prospect of surmounting the applications barrier to entry and breaking the Windows monopoly. However, the Court found that the Novell claims alleging injury in the office productivity market were barred by the statute of limitations, which was not tolled by the government's antitrust case against Microsoft because "the office-productivity market... is neither identical to nor completely encompassed by the PC operating-system market at issue in the government action." Novell, Inc. v. Microsoft Corp., No. 06-1134 (4th Cir., October 15, 2007).

The case came before the Court on cross appeals from two interlocutory orders in an antitrust action filed by Novell, Inc. against Microsoft Corp. in the wake of Microsoft's settlement of antitrust claims brought by the federal government. As described by the Court:

Novell pursues six claims on appeal. Four of these, styled Counts II, III, IV, and V, allege monopolization or attempted monopolization of the markets for office-productivity applications. Novell's products, Word Perfect and Quattro Pro, directly competed in such markets. The other two claims, Counts I and VI, are based on the same alleged conduct as Counts II through V and seek recovery for damage to the same Novell products, but are predicated on the theory that Microsoft's conduct injured competition in the market for PC operating systems, a market in which Novell did not directly compete.

According to the Court, all six of Novell's claims arose prior to March 1996, and are time-barred under the four-year federal statute of limitations for antitrust actions, 15 U.S.C. §15b, unless the statute of limitations is tolled by the filing of the DOJ complaint in May 1998, which tolls the statute of limitations for private antitrust actions "based in whole or in part on any matter complained of" by the government.

On Microsoft's motion, the district court dismissed Counts II through V of Novell's complaint on the ground that the claimed injury was not specifically alleged in the DOJ complaint, and therefore the statute of limitations on those claims was not tolled. The district court denied Microsoft's motion to dismiss Counts I and VI, finding that Novell has antitrust standing to raise those claissms. The district court certified its rulings for interlocutory review.

The Court first reviewed the district court's ruling that Novell has antitrust standing to bring Counts I and VI. According to the Court, "Novell concedes that its products did not directly compete in the market for PC operating systems," but "contend[ed] that the technological connection between operating systems and applications gives rise to a significant barrier to entry into the operating-systems market and thus protects Microsoft's Windows monopoly. As explained by the Court, "Novell maintains that its office-productivity applications could perform well on a variety of operating systems and that, during the relevant time period, they were the dominant office-productivity applications in the market."

The thrust of Novell's argument is that its popular applications, though themselves not competitors or potential competitors to Microsoft's Windows, offered competing operating systems the prospect of surmounting the applications barrier to entry and breaking the Windows monopoly. That is, Novell argues its products could provide a path onto the operating-system playing field for an actual competitor of Windows, because a competing operating system, running the popular Novell software applications, would offer consumers an attractive alternative to Windows.

Novell alleged three unlawful actions on the part of Microsoft that harmed its products and also harmed competition in the PC operating-systems market. As characterized by the Court—

First, Novell claims Microsoft withheld frosm Novell key technical information necessary to make well-functioning office-productivity applications for Windows 95….
Second, Novell argues that Microsoft impeded Novell's access to distribution channels, including original equipment manufacturers ("OEMs")….
Finally,… Novell claims that Microsoft required it, as a condition of being certified as Windows-compatible, to use Windows-specific technologies that degraded the performance of Novell's office-productivity applications on other operating systems….

In Assoc. Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters ("AGC"), 459 U.S. 519, 529-30, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983), the Supreme Court held that a multi-factor analysis is required to determine whether a private plaintiff has antitrust standing. The Fourth Circuit distilled five factors in Kloth v. Microsoft, 444 F.3d 312 (4th Cir., 2006):

(1) the causal connection between an antitrust violation and harm to the plaintiffs, and whether that harm was intended; (2) whether the harm was of a type that Congress sought to redress in providing a private remedy for violations of the antitrust laws; (3) the directness of the alleged injury; (4) the existence of more direct victims of the alleged antitrust injury; and (5) problems of identifying damages and apportioning them among those directly and indirectly harmed.

Applying those factors in this case, the Court found that "the injury that Novell alleges here is plainly an injury to competition that the anti-trust laws were intended to forestall," and "the analysis of the causal link between these activities and the decline in Novell's office-productivity-applications market share is straightforward."

Microsoft's use of its monopoly power in the operating-system market to foreclose the distribution channels for Novell's applications, for example, would have naturally tended to decrease Novell's market share and consequently decrease the value of its applications. Likewise, withholding crucial data on its soon-to-be-released Windows 95 operating system would have put Novell at a competitive disadvantage vis-a-vis Microsoft's office-productivity applications, leading naturally to a loss of market share for Novell. This loss of market share could make a competing operating system featuring Novell's office-productivity applications less attractive to consumers, harming that competing operating system's potential to surmount the barrier protecting the Windows monopoly.

"In sum," according to the Court, "the first two AGC factors weigh in favor of granting Novell antitrust standing."

The facts alleged by Novell, taken as true for the purposes of this appeal, are sufficient to demonstrate that Novell suffered an antitrust injury and that its injury can be traced to Microsoft's alleged antitrust violations. While the showing of an antitrust injury demonstrates that a case is of the type for which antitrust standing is recognized, such a showing is not necessarily sufficient to demonstrate that the particular plaintiff has antitrust standing. Thus, we now turn to an analysis of the remaining AGC factors.

The latter three AGC factors—"the directness of the alleged injury;" "the existence of more direct victims of the alleged antitrust injury;" and "problems of identifying damages and apportioning them among those directly and indirectly harmed"—"are intended to further restrict entry into the federal courts for private enforcement of the antitrust laws," according to the Court.

The Court found that "Microsoft's withholding of information from Novell's software developers relating to Windows 95 clearly has no more direct victim than Novell," and that "Novell may be the best-situated plaintiff to assert these claims. Indeed, today Novell may be one of the few private plaintiffs whose claims in this regard are neither time-barred nor too tenuous to support antitrust standing."

With respect to the fifth factor, the Court observed that "there is little risk that any damages Novell might prove would need to be allocated or apportioned among any more-directly injured parties."

In sum, according to the Court, "we therefore find that the AGC factors favor granting standing to Novell to assert Counts I and VI," and "thus affirm the district court's denial of Microsoft's motion to dismiss as to these claims on the antitrust-standing issue."

With respect to Novell's standing to bring Counts II through V, the Court rejected Novell's argument that there was a substantial overlap between its own claims and those brought by the Government. According to the Court, "Novell's reading would require us to look beyond the face of the DOJ complaint," which "only expressly alleges harm to the markets for PC operating systems and for Internet browsers." The Court found that "Novell's allegations of harm to the office-productivity-applications market… overlap little with the subject matter of the DOJ complaint.

In addition, "a straightforward application of the different-markets rule also bars application of the tolling provision here."

Though Novell characterizes the different-markets rule as merely "a helpful rule of thumb," … Novell cites only cases involving either the same markets in the government and private suits, or markets much more closely linked than the PC operating-system market and the office-productivity-applications market. Indeed, the Supreme Court has accepted tolling only where the private plaintiffs make claims in markets identical to, or completely encompassed by, those at issue in the earlier government suit…. Because the office-productivity market at issue in Counts II through V is neither identical to nor completely encompassed by the PC operating-system market at issue in the government action, these cases are of little service to Novell.

Accordingly, "we therefore hold that the tolling provision of §5(i) of the Clayton Act does not preserve Counts II through V of Novell's complaint. After tarrying with these claims for more than eight years, Novell cannot now resurrect stale causes of action, and Microsoft is entitled 'to the comfort of repose.'"