One For the Money: Supreme Court Holds the Single-Entity Rule

The Supreme Court ruled yesterday on two more of the several intellectual property cases argued before it this year. In Limelight Networks, Inc. v Akamai Technologies, Inc. the Supreme Court addressed the issue of whether a defendant that performs some steps of a patented method and actively induces its customers to perform the remaining steps is liable for induced infringement.

The parties to the case both operate what are known as content delivery networks or CDNs. CDNs operate by storing the content (usually large files such as movies and music) for a website across a large number of distributed servers. Through various system optimizations the CDNs are able to reduce the download time for users.

Akamai owns the patent at issue, U.S. Patent No. 6,108,703 (‘703 patent), which covers the system and methods utilized by CDNs. However, specifically at issue are the method claims of the ‘703 patent which recite, in part, a step of “tagging” the content that allows the content to be identified and accessed later. Limelight, a direct competitor to Akamai, performs all of the steps of the ‘703 patent, aside from tagging the content; however, Limelight allegedly instructs its customers to tag the content themselves.

The two statutory sections at play in the case are 35 U.S.C. §271(a) and 35 U.S.C. §271(b). As it relates to method patents, §271(a) states that whoever performs the steps of the method is directly liable for infringement, whereas §271(b) states that a party who actively induces infringement of a patent is liable for infringement.

Back in 2006, Akamai sued Limelight for direct infringement of the ’703 patent under §271(a), and in 2008, a jury found that Limelight had committed direct infringement and awarded Akamai over $40 million in damages. However, shortly thereafter, in a case with similar facts, the Federal Circuit held that “direct infringement requires a single party to perform every step of a claimed method,” or if the steps are performed by multiple parties, that a single defendant “exercise ‘control or direction’ over the entire process such that every step is attributable to the controlling party.” Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318, 1329 (2008). Muniauction was the latest statement by the Federal Circuit reaffirming what is sometimes called the single-entity rule for direct infringement of method patents.

Accordingly, in view of Muniauction and due to the undisputed fact that Limelight does not tag the content themselves, and therefore does not perform each and every step of the method patent, the District Court granted a motion for judgment notwithstanding the verdict. A panel of the Federal Circuit then affirmed the District Court’s ruling that Limelight was not liable for direct infringement under §271(a).

Interestingly, on an en banc review, the Federal Circuit focused not on the issue of direct infringement under §271(a), but instead held Limelight liable for induced infringement under §271(b). Akamai Technologies, Inc. v. Limelight Networks, Inc., 692. F. 3d 1301, 1319 (2012). In doing so, the Federal Circuit stated that “[r]equiring proof that there has been direct infringement as a predicate for induced infringement is not the same as requiring proof that single party would be liable as a direct infringer.” Id., at 1308-1309. (emphasis original)

In essence, the en banc ruling removed the single-entity rule from the analysis of induced infringement. Instead, a party would be found liable for induced infringement merely for inducing the performance of each step in a method patent regardless of how many actors were involved, whether it be one or one hundred.

The Supreme Court granted certiorari on the narrow question of “[w]hether the Federal Circuit erred in holding that a defendant may be held liable for inducing patent infringement under 35 U.S.C. §271(b) even though no one has committed direct infringement under §271(a).”

In oral argument, the Justices expressed concern over the apparent ease in circumventing a method patent by simply finding an unrelated third party to perform one step. In response to arguments that a patent owner can protect their idea by carefully drafting claims, Justice Scalia stated “[ i ]t doesn’t seem to me you can avoid the problem by simply requiring all the steps to be conducted…by one person.”

However, the Justices seems equally concerned with expanding liability for induced infringement particularly given the unusual handling of the case by the Federal Circuit below. “I can’t think of a way in which our decision on the 271(b) question would be relevant for any case if the Federal Circuit on remand goes the opposite way…on the 271(a) question” said Justice Kagan with Justice Alito agreeing that “the question before us really has no significance…unless the Federal Circuit is right about [271](a).”

In the unanimous opinion delivered yesterday, the Court reversed the en banc ruling and remanded the case back to the Federal Court for further review. In the opinion, the Court explicitly stated that the ruling did not address §271(a). However, the opinion did include several indications that the Justices believe the case can (and should) be settled through a §271(a) direct infringement analysis.

The Court stated twice that the opinion is based on an assumption that the holding of Muniauction is correct, while reminding the Federal Circuit that upon remand “the Federal Circuit will have the opportunity to revisit the §271(a) question.” And, just in case the Federal Circuit doesn’t get the hint, the Court also analogized the present situation with prior issues involving parties acting jointly to circumvent patent laws where Congress later stepped in to create §271(f)(1).

The narrow holding by the Supreme Court has not yet changed the law. For a plaintiff to recover on infringement of method patents under §271(a) or §271(b), there must be one party that performs all of the steps. As it currently stands, direct infringement of a method patent requires that a single entity, or multiple entities acting under the control or direction of a single entity, perform each and every step to be held directly liable. For induced infringement a party must first be found liable for direct infringement.

However, it does appear that the Supreme Court is looking to the Federal Circuit to critically reconsider the ruling in Muniauction and expand liability under §271(a). Regardless of the present outcome or any future developments, it is important to make sure that patent claims are carefully drafted to prevent clever would-be infringers from finding a way to avoid infringement. For method patents, this means drafting claims so that every step has to be carried out by a single party.