Warn Potential Patent Infringers: But Do Your Homework First

Next month's installment will discuss Dominant Semiconductors Sdn. Bhd. v. OSRAM Gmbh.

Michael M. Murray is a partner and Michael D. Kurzer is an associate with Milbank, Tweed, Hadley & McCloy LLP. The focus of the authors' practice is intellectual property litigation. The views expressed herein are solely those of the authors and may not be attributed to Milbank Tweed or its clients.

Part One of a Two-Part Article

Patent owners generally understand the benefits to be realized from sending notice letters out to potential infringers. Such notice may increase damages that can be collected down the road in the event of litigation, both by increasing the period of time for which damages can be obtained, and by subjecting the infringer to a claim for increased damages if the infringement is willful. Notice also often brings the alleged infringer to the table to discuss a possible licensing arrangement, which can create revenue streams for the patent owner.

While the benefits of notice are clear, the pitfalls should also be considered. A baseless assertion of infringement can subject the patent owner to an array of claims, such as tortious interference with business relationships. These risks can be substantially reduced if the proper steps are taken before the notice letters go out. In order to better understand the required level of care that must be taken before issuing such a notice, and the legal standard under which that care may be later judged in court, we address two recent Federal Circuit cases on this topic.

The 800 Adept Case

In 800 Adept, Inc. v. Murex Secs., Ltd. et al., 539 F.3d 1354 (Fed. Cir. 2008), the Federal Circuit reversed a jury verdict that defendant Targus Information, Inc. (“Targus”) committed tortious interference in connection with Targus' alleged threats of patent infringement to customers of Adept, Inc. (“Adept”). Targus and Adept are competing providers of telephone routing services. Vail Systems, Inc. (“Vail”) was a customer of Targus and, in turn, provided routing services to its own customers, including Allstate Motor Club (“AMC”). AMC was also a customer of Adept and the routing services that Vail was providing to AMC included the use of certain Adept databases. Vail approached AMC on more than one occasion and attempted to convince AMC to discontinue the use of Adept's database services and switch over to Targus' database services. In spite of Vail's efforts, AMC continued to use Adept's services. Adept brought suit against Targus asserting, among other claims, tortious interference with its business relationships with its customers (including AMC) and seeking a declaratory judgment that it was not infringing the Targus patents. Targus then brought a third-party claim against Vail for infringing the Targus patents because the system that Vail was providing to AMC continued to use Adept's databases. Targus dismissed its infringement claim against Vail after AMC terminated its relationship with Adept.

A Florida jury found that Adept had not infringed Targus' patents, that those patents were invalid, and that Targus had tortiously interfered with Adept's business relationships with AMC and other customers. The jury awarded Adept $2 million in compensatory damages plus $5 million in punitive damages. Targus appealed that verdict to the Federal Circuit and argued, among other things, that Adept's tortious interference claims were pre-empted by federal patent laws.

In its opinion, the Federal Circuit reiterated the “now well-established” rule that state law tort claims against a patent holder based on enforcing the patent in the marketplace are pre-empted by federal patent laws, unless the claimant can show that the patent holder acted in “bad faith” in the publication (i.e., notice) or enforcement of its patent. To show “bad faith” a party must demonstrate that the infringement allegations were “objectively baseless.” The objectively baseless standard has been interpreted to mean that “no reasonable litigant could realistically expect success on the merits.”

The Federal Circuit found that Targus could have had a reasonable belief that its patents were valid and infringed by Adept's customers, even though Targus' patents were ultimately found to be not infringed (a ruling that the Federal Circuit affirmed). Judge S. Jay Plager wrote that courts “must 'resist the temptation to engage in post hoc reasoning by concluding' that an ultimately unsuccessful 'action must have been unreasonable or without foundation.'” Evidence relied on by the Federal Circuit to find that Targus' belief may have been reasonable included the following: 1) Adept admitted that the routing database it provided to two of its customers was in the same format as the one used in the Targus system; 2) Targus did not assert its claims against one Adept customer until after Targus' in-house counsel had prepared claim charts explaining Targus' infringement theories; 3) Adept did not cite any evidence introduced at trial that contradicted (1) or (2); and 4) Adept's claim that Targus and Vail colluded to pressure AMC notwithstanding, Adept failed to cite any evidence showing that Targus' belief that Vail infringed its patents was unreasonable. Ultimately, the Federal Circuit found no clear and convincing evidence on which a reasonable jury could conclude that Targus' actions were objectively baseless and overturned the jury verdict on Adept's tortious interference claim as pre-empted by federal patent law.

Next month's installment will discuss Dominant Semiconductors Sdn. Bhd. v. OSRAM Gmbh.

Michael M. Murray is a partner and Michael D. Kurzer is an associate with Milbank, Tweed, Hadley & McCloy LLP. The focus of the authors' practice is intellectual property litigation. The views expressed herein are solely those of the authors and may not be attributed to Milbank Tweed or its clients.