Two employees who were found personally liable for their corporate employer’s direct, induced, and contributory patent infringement are entitled to a new trial on those issues, even though they failed to object to the relevant jury instructions or raise inducement or contributory infringement in their JMOL motions, because the district court’s jury instructions and verdict form were so fundamentally flawed that their use constituted “plain error,” the Federal Circuit has ruled. A new trial on damages was also necessary, the appeals court ruled, because the verdict on that issue was against the clear weight of the evidence and based on “speculation or guesswork.” Wordtech Sys. v. Integrated Network Solutions, Inc., 609 F.3d 1308 (Fed. Cir. 2010).

Background

In 2006, Wordtech Systems, Inc. (“Wordtech”) sued Integrated Networks Solutions, Inc. (“INSC”), and two of its employees, Nasser Khatemi and Hamid Assadian, for direct infringement of three patents directed to automated compact disc duplication technology by their sale of devices called “Robocopiers.” Wordtech also alleged that INSC, Khatemi, and Assadian contributorily infringed and induced third parties to infringe by selling the allegedly infringing products.

INSC was founded and incorporated in Nevada in 1994. Under Nevada law, corporations are required to file annual forms that include the names and addresses of their officers and directors. Failure to do this results in revocation of the corporate charter which cannot be reinstated after five consecutive years of noncompliance. INSC filed its annual forms in 1994 and 1995, but stopped doing so after 1995. INSC did not file a Certificate for Revival for a Nevada Corporation until Wordtech filed this lawsuit. Khatemi and Assadian denied they were officers of INSC, but the record was contradictory on that point.

After trial, a jury found INSC, Khatemi, and Assadian each liable for direct infringement, contributory infringement and inducement of infringement and awarded $250,000 in damages. The jury also found that all defendants infringed the patents willfully. The district court found the case “exceptional” under 35 U.S.C. § 285 and awarded treble damages, attorney fees, interest, and costs to Wordtech.

The defendants filed pre- and post-verdict motions for JMOL under Rule 50 of the Federal Rules of Civil Procedure, and a motion for a new trial under Rule 59(a), all of which the district court denied. On appeal, the defendants did not challenge the verdicts of infringement against INSC, the verdicts of willfulness, or the court’s exceptional case determinations. They challenged only the liability verdicts against Khatemi and Assadian, and the $250,000 damages award.

Applicable Law On Individual Liability For Infringement Omitted Or Misstated In Jury Instructions, Resulting in Plain Error

Direct Infringement

Khatemi and Assadian argued that INSC’s corporate status protected them from direct infringement liability under 35 U.S.C. §271(a) because they acted as company employees, that INSC was a valid corporation during the alleged infringement, and that Wordtech introduced insufficient evidence at trial to hold them personally responsible for the corporation’s actions, i.e, to “pierce the corporate veil.” Wordtech responded that INSC did not exist during the alleged infringement because under Nevada law its corporate charter was permanently revoked after the company’s annual forms were not filed for five consecutive years, and that in any case, substantial evidence was presented to support piercing the corporate veil.

The Federal Circuit declined to evaluate these arguments regarding Khatemi and Assadian’s individual liability for direct infringement because “the district court never instructed the jury on INSC’s corporate status.” Neither the jury instructions nor the verdict form mentioned piercing the corporate veil or the Nevada laws asserted by Wordtech. Khatemi and Assadian failed to object to the jury instructions at trial, however, and the Federal Circuit noted that this restricted the scope of its review of the instructions to the existence of “plain error,” i.e., an error that is obvious, affects substantial rights, and seriously affects the fairness or integrity of the judicial proceeding. The error here satisfied this rigorous standard.

The Federal Circuit explained that “[p]ersonal liability under §271(a)...requires sufficient evidence to justify piercing the corporate veil.” Since “resolution of INSC’s corporate status was a legal prerequisite to finding Khatemi and Assadian individually liable, the jury omissions were obvious, important, and seriously affected the trial’s fairness.” Accordingly, the appeals court reversed the district court’s denial of the defendants’ Rule 59(a) motion and remanded for consideration of whether Khatemi and Assadian were entitled to a new trial on their individual liability for INSC’s direct infringement. Because Khatemi and Assadian did not clearly establish the absence of substantial evidence upon which a properly instructed jury could find that they were personally liable for the corporation’s direct infringement, however, the district court’s denial of their motion for JMOL on that issue was affirmed.

Inducement/Contributory Infringement

Khatemi and Assadian failed to raise inducement or contributory infringement in their pre-verdict JMOL motion, thereby waiving the right to challenge the sufficiency of the evidence on those issues. Rather, they argued that there was no basis to pierce the corporate veil and hold them personally liable for the corporation’s inducement and contributory infringement. The Federal Circuit rejected this argument, holding that a corporate veil defense is inapplicable to allegations of indirect – as opposed to direct – infringement.

According to the court, Federal Circuit precedent holds that although “[t]he corporate veil can shield officers from liability under §271(a)..., corporate officers who actively assist with their corporation’s infringement may be personally liable for inducing infringement [under §271(b)] regardless of whether the circumstances are such that a court should disregard the corporate entity and pierce the corporate veil.” (emphasis in original). The court applied this same reasoning to contributory infringement, concluding that “a corporation does not shield officers from liability for personally participating in contributory infringement.”

[Editor’s Note: The panel expressed some puzzlement over why corporate officers can be personally liable for a corporation’s inducement of infringement under § 271(b) without piercing the corporate veil, while the opposite rule applies when a corporation engages in direct infringement under § 271(a). The panel also cited commentators who have argued that the corporate veil should protect only the owners of a corporation, not is officers. Nonetheless, the panel concluded that it was bound by the Federal Circuit’s own precedent to allow officers to rely on a corporate veil defense to escape personal liability for the corporation’s direct infringement, and to disallow their reliance on that defense to escape personal liability for the corporation’s inducement of infringement. The panel noted that “[t]he differing rules for officer liability under §§ 271(a) and 271(b) and the treatment of officer liability as distinguished from owner liability in our precedent are important issues that cannot be resolved on this record and are left for another day.”]

Despite its rejection of Khatemi and Assadian’s reliance on the corporate form to shield them from personal liability, the Federal Circuit ruled that a new trial may be necessary because of plain error in the district court’s presentation of the inducement and contributory infringement issues to the jury. The court remarked that the questions concerning inducement on the jury’s verdict form, including “whether the Robocopier 8000 and 600 devices infringed by ‘(A) Inducing Infringement in the U.S.’” were “nonsensical” because “inducement requires intent, and... ‘a device cannot induce infringement.’” The court identified a similarly “confusing” question of “whether the Robocopier devices infringed by ‘(B) Contributing to infringement in the U.S.,’ even though devices cannot possess knowledge required under §271(c).” Moreover, although the jury received an instruction on contributory infringement, the court noted that the jury did not receive an instruction on inducement, nor did the parties raise inducement in the final pretrial order, jury instructions, or closing arguments.

These plain errors in the jury instructions and verdict form led the Federal Circuit to reverse the district court’s denial of the defendants’ Rule 59(a) motion and to remand for consideration of whether a new trial is warranted on their individual liability for inducement and contributory infringement. Another factor underlying the new trial ruling was Wordtech’s failure to prove the elements required for contributory infringement. Specifically, the court found that Wordtech failed to identify evidence that Khatemi or Assadian was involved in selling Robocopiers or nonstaple components and that any parts that may have been sold were especially designed for infringing products. The court also noted that the jury did not find any direct infringement resulting from Khatemi or Assadian’s alleged contributory infringement. Indeed, during oral argument Wordtech was unable to identify any findings of direct infringement by INSC customers.

Damages Verdict Speculative And Not Supported By Evidence

The Federal Circuit vacated the $250,000 damages award, finding it to be against the clear weight of the evidence and excessive. As a threshold matter, the court only reviewed defendants’ motion for a new trial, finding that defendants failed to preserve, and therefore waived, their JMOL arguments on damages. The court then engaged in a detailed review and analysis of the evidence put forth by Wordtech on damages at trial.

The Federal Circuit noted that Wordtech “sought only a hypothetically negotiated royalty, and the jury received damages instructions for this theory alone.” Wordtech asked for a lump-sum royalty of at least 12% of INSC’s $950,000 in alleged infringing sales, or $114,000. However, the jury’s $250,000 lump-sum award amounted to a 26.3% royalty on the $950,000 alleged sales. Reviewing the record, the Federal Circuit found inadequate support for this award.

Offering no expert opinion, Wordtech relied on the testimony of its President, David Miller, concerning 13 past licenses with third parties.

Only two of these were lump-sum licenses, however, and they were not probative because “[n] either license describes how the parties calculated each lump sum, the licensee’s intended products, or how many products each licensee expected to produce.” Thus, the two lump-sum licenses shed no light on what INSC would have paid for a lump-sum license. Turning to the other 11 licenses, which used running royalties, the court acknowledged that they could be relevant to lump-sum damages, but only if there were some basis in the record for comparing the running royalty rates in those licenses with the lump sum rate awarded by the jury. The Federal Circuit found no basis for such a comparison. The majority of the licenses stated royalty rates in the range of 3 to 6% of the licensees’ sales, which was far less than the 26.3% rate that the jury awarded. And several of these licenses arose after initiated or threatened litigation by Wordtech, which, the court noted, “can skew the results of the hypothetical negotiation.”

The court also found that “Wordtech’s use of INSC’s invoices raised doubts about the sales volume to which the jury could have applied the royalty rate.” Wordtech told the jury that INSC’s Robocopier sales totaled $950,000, but on appeal argued that ISNC’s sales totaled “at least $1,278,133” without supplying evidence to explain the sudden increase. Moreover, the court found the $950,000 calculation itself to be dubious because it was done by Miller, who was not qualified as a damages expert. The court rejected Wordtech’s final argument that the jury award was supported by the fact that all of INSC’s profits were attributable to its infringement of the patents-in-suit. Not only was this theory not presented to the jury, the court noted, it also rested on speculation. Because the verdict was “clearly not supported by the evidence” and “based solely on speculation or guesswork,” the court reversed the district court’s denial of defendants’ motion for a new trial and remanded for a new trial on damages.