In a decision issued last week, Muniauction, Inc. v. Thomson Corp.,1 the U.S. Court of Appeals for the Federal Circuit applied its recent “control or direction” standard for patent infringement allegations that are premised on the combined actions of multiple entities. Last year, the Federal Circuit for the first time addressed the proper standard for such allegations, ruling that a party who does not itself perform all the limitations of a patent claim must “control or direct” the actions of another with respect to the missing limitations.2 The Muniauction decision is the first appellate ruling to apply the announced standard.

In Muniauction, the Federal Circuit ruled as a matter of law that the provider of an online auction system did not infringe method claims in which at least one step is performed by users of the system. Specifically, the court held that controlling access to the Internet-based auction system and instructing bidders on the use of the system is not sufficient to incur liability for direct infringement of the method claims at issue.

The Federal Circuit’s ruling in Muniauction affirms that method claims may be directly infringed only when the accused infringer performs every step of the claimed method or “controls or directs” another party to perform steps on its behalf. The Federal Circuit further explained that “the control or direction standard is satisfied in situations where the law would traditionally hold the accused direct infringer vicariously liable for the acts committed by another party that are required to complete performance of a claimed method.”3 Because multi-actor claims are relatively prevalent in patents directed to newage technologies—particularly electronic networks and Internet-based systems—the Federal Circuit’s continued strict application of the “control or direction” standard for so-called “divided infringement” claims is likely to bear on numerous pending litigations and patent prosecution files.

Background of Divided Patent Infringement Claims

Multi-actor patent claims (also called “distributed” or “divided” patent claims) are claims that are drafted such that no single party performs every step of the claimed method.4 Accordingly, a multiactor method claim is directly infringed, if at all, only when one party either performs or “controls or directs” the performance of every step of the claimed invention. Multi-actor claims are most common in patents relating to business methods, Internet-based systems and network computing. For example, a process involving network computing may include certain steps performed on the client side (such as inputting and transmitting data), while other required steps are performed by another entity on the server side (such as receiving and processing the data).

To prove direct infringement of a multi-actor claim, patentees must rely on a theory called “divided” infringement. To understand this theory, it is helpful to note that there are, broadly speaking, two types of patent infringement: Direct and indirect. Direct infringement is a strict liability offense and requires a party to perform or use each and every step of a claimed method or process. In contrast, so-called “indirect” infringement—which includes inducement of infringement and contributory infringement— occurs when a party participates in or encourages infringement but does not directly infringe a patent. Indirect infringement requires evidence of specific intent to induce infringement by another (for inducement of infringement), or requires evidence of sales of components or materials with knowledge that they are especially made or adapted for use to infringe (for contributory infringement). Notably, indirect infringement requires, as a predicate, a finding that a single party has committed the entire act of direct infringement. Thus, concepts of indirect infringement do not address the issue of truly divided infringement allegations, where by definition multiple actors combine to perform the entirety of the claimed process.

The patent laws thus seemed to leave a gap for patent claims that inherently require multiple actors in order to perform all the steps of the claimed invention. The divided infringement theory was developed by the lower courts to fill this gap, and thus prevent a party from avoiding infringement simply by contracting out steps of a patented process to another entity.5 In these situations, the controlling party would be deemed to have performed every step of the claimed invention and would be liable for direct infringement.

It was not until 2007, however, that the standard for divided infringement was clarified by the Federal Circuit. In BMC Resources, Inc. v. Paymentech, L.P., the Federal Circuit held that where the actions of multiple parties combine to perform every step of a claimed process, the claim is directly infringed only if one party exercises “control or direction” over the entire process, such that every step is attributable to the controlling party. In BMC Resources, and again in Muniauction, the Federal Circuit referred to this party as the “mastermind” of the infringing activities.6

In BMC Resources, the Federal Circuit rejected the patentee’s proposed “participation and combined action” standard, which would have encompassed a broader range of activities.7 The Federal Circuit acknowledged that the “control or direction” standard for divided infringement “may in some circumstances allow parties to enter into arms-length agreements to avoid infringement,” but explained that the standard was necessary to maintain the distinction between direct and indirect infringement. That is, if direct infringement (a strict liability offense) could be proven merely by showing the “participation and combined action” of multiple actors, then “a patentee would rarely, if ever, need to bring a claim for indirect infringement” (an offense that requires proof of intent or knowledge).8

Although the BMC Resources court clarified the standard for divided infringement (and made clear that the gap for multi-actor claims will be filled only in narrowly tailored circumstances), it did not specify what types of actions would satisfy the “control or direction” standard. There, the patents-in-suit claimed a method for processing debit transactions without a personal identification number (PIN). The patent-holder based its infringement theories on the combined actions of several participants, including a payee’s agent, a remote payment network and certain card-issuing financial institutions.9 Although there was evidence that the accused infringer provided data (for example, debit card number, name and amount of purchase) to the payment network, the Federal Circuit held as a matter of law that such evidence was inadequate to show “control or direction” of the payment network, particularly where there was no evidence that the accused infringer provided instructions or directions (express or inferred) regarding the use of the data.10 Further, the court ruled that there was insufficient evidence to support “control or direction” of the financial institutions, noting that “the record contained no evidence even of a contractual relationship” between the accused infringer and the financial institutions.11

The BMC Resources court seemed to define opposite ends of the divided infringement spectrum, without providing guidance for situations that fall within the two extremes. On one end of the spectrum, “control or direction” may be shown by evidence of an agency relationship or evidence that the party contracted out steps of the patented process, or perhaps even with evidence that the party provided explicit or implicit instructions or directions to another. On the other end of the spectrum, an armslength relationship, or the mere provision of data to another will not suffice to impose liability based on divided infringement. In resolving the divided infringement dispute in Muniauction, the Federal Circuit provided the patent community with another data point along this spectrum.

The Muniauction Case: Applying the “Control or Direction” Standard for Divided Infringement

The Muniauction decision provides guidance on where to draw the line for proving “control or direction” in the context of divided infringement claims. Specifically, the court declined to impose liability where the accused infringer merely controlled access to its system and instructed others on its use. The ruling demonstrates that this fairly typical relationship among actors involved in an Internet-based system does not qualify as “control or direction” for purposes of divided infringement.

Muniauction’s patent-in-suit, U.S. Patent No. 6,161,099, relates to original issuer municipal bond auctions conducted over an electronic network (such as the Internet) using a web browser.12 Muniauction asserted that Thomson Corporation and I-Deal, LLC (“Thomson”) infringed method claims in which at least one step was completed by the bidder (for example, “inputting data associated with at least one bid”) and the remaining steps were performed by the auctioneer’s system (for example, “automatically computing at least one interest cost value”), such as Thomson’s accused BidComp/Parity® system.13 It was undisputed that no single party performed every step of the asserted claims.14

At trial, Muniauction won a jury verdict based on its theory of divided infringement.15 Thomson then filed a motion for judgment as a matter of law, or alternatively a new trial, arguing that the jury instructions—which permitted liability if there was a “sufficient connection” between Thomson and the bidders—incorporated an incorrect legal standard.16 The district court denied Thomson’s motion and entered a final judgment, and Thomson appealed.17

While the case was on appeal, the Federal Circuit issued its opinion in BMC Resources, holding, as described above, that “where steps of a method claim are performed by multiple parties, the entire method must be performed at the control or direction of the alleged direct infringer.”18 Based on the intervening decision in BMC Resources, Muniauction argued in its appeal brief that the evidence of record showed both control and direction by Thomson of the bidders:

All parties are required to use the same software written by Thomson and operating on Thomson’s central servers; all users are told how to use the software and are held in an interlocking network of contractual obligations that require irrevocable offers and the like. Most importantly, issuers and bidders must follow Thomson’s detailed instructions (that is, Thomson’s “direction”) just to use the infringing system . . . . If users have no passwords, if they fail to operate their computers properly (or if Thomson shuts off its central server computers), no auction can occur.19

The Federal Circuit disagreed with Muniauction and reversed the district court’s infringement judgment, holding that Thomson does not infringe the multi-actor method claims as a matter of law.20 Specifically, the Federal Circuit held that Thomson’s actions in controlling access to its Internet-based auction system and providing instructions to bidders on the use of that system is not enough.21 Elaborating, the court explained:

Under BMC Resources, the control or direction standard is satisfied in situations where the law would traditionally hold the accused direct infringer vicariously liable for the acts committed by another party that are required to complete performance of a claimed method. In this case, Thomson neither performed every step of the claimed methods nor had another party perform steps on its behalf, and Muniauction has identified no legal theory under which Thomson might be vicariously liable for the actions of the bidders. Therefore, Thomson does not infringe the asserted claims as a matter of law.22

Implications of the Muniauction Decision

The Muniauction opinion confirms that multi-actor patent claims may be infringed only where one party “controls or directs” the actions of another. Notably, the decision states, albeit in dicta, that this standard is satisfied in situations where the law would traditionally hold the accused direct infringer vicariously liable for the acts committed by another.

In the patent litigation context, the court’s pronouncements in both BMC Resources and now Muniauction concerning divided patent infringement claims inherently instruct defense counsel to consider early substantive challenges when faced with divided infringement claims. In this regard, Muniauction likely will be more analogous to pending cases than BMC Resources due to the prevalence of patent infringement lawsuits concerning Internet-based systems. Further, from an offensive point-of-view, both decisions highlight the importance of basing one’s allegations on the actions of a single entity. Where that cannot be done, patent-holders must be prepared to establish an agency relationship, to show vicarious liability, or to concoct another way of proving that the accused infringer controlled or directed the actions of others involved in the process.

Likewise, in the patent prosecution context, Muniauction underscores the need to draft claims that focus on a single entity. This can be done by considering, for example, whether a particular entity receives or supplies the elements of the claims, and crafting the claims accordingly.23 Moreover, patent practitioners should consider filing continuation or reissue applications where only multi-actor claims have been presented or issued. In BMC Resources, the Federal Circuit warned that “this court will not unilaterally restructure the claim or the standards for [divided] infringement to remedy [such] illconceived claims.”24 Considering Muniauction, it appears that the Federal Circuit was not bluffing.