On September 20, 2007, the Court of Appeals for the Federal Circuit in BMC Resources, Inc. v. Paymentech, L.P., Civ. No. 2006-1503 (Fed. Cir. Sept. 20, 2007) clarified the standard for direct infringement where multiple parties are involved in performing steps of a method claim, which was previously confused by a statement made in the opinion for On Demand Machine Corp. v. Ingram Industries, Inc., 442 F.3d 1331 (Fed. Cir. 2006). The Federal Circuit confirmed that direct infringement requires a single party to perform all steps of an asserted method claim, and that direct infringement under a theory of joint or divided infringement requires a single party that does not perform all of the steps to direct or control the other party or parties in performing the missing steps of the asserted method claim. Accordingly, because Paymentech neither performed all of the steps of the asserted method claims, nor directed or controlled the other parties to perform the missing steps, the Federal Circuit affirmed the district court’s determination that Paymentech did not directly infringe on BMC Resources’ patents. BMC Resources, at 14.

In its suit against Paymentech, BMC Resources asserted U.S. Patent Nos. 5,718,298 (the ‘298 patent) and 5,870,456 (the ‘456 patent), both directed towards methods for processing debit transactions without a personal identification number (also referred to as PIN-less debit bill payment (PDBP)). Id. at 1. The patented invention provides an interface between a standard telephone and a debit card network. Id. at 2. On this interface, a customer may perform real-time bill payment transactions with only the telephone keypad. Id. The invention includes an interactive voice response unit (IVR) that prompts the customer to enter an access code, account number, debit card number, and payment amount. Id. The entered information is provided to a debit network and then to a bank or financial institution. Id. Thus, the claimed inventions generally disclose methods for performing PDBP transactions featuring the actions of several participants, including an interface owner, a debit network, and a bank or financial institution.

For example, asserted Claim 7 of the ‘456 patent includes the following steps:

prompting the caller to enter a payment number from one or more choices of credit or debit forms of payment;

prompting the caller to enter a payment amount for the payment transaction; accessing a remote payment network associated with the entered payment number;

the accessed remote payment network determining, during the session, whether sufficient available credit or funds exist in an account associated with the payment number to complete the payment transaction;

and upon a determination that sufficient available credit or funds exist in the associated account, charging the entered payment amount against the account with the entered payment number;

adding the entered payment amount to an account associated with the entered account number;

and storing the account number, payment number and payment amount in a transaction file of the system.

Id. at 4. Accordingly, an interface owner would perform at least the prompting and accessing steps, a debit network would perform the determining step, and a financial institution would perform the charging and adding steps. Asserted Claim 2 of the ‘298 patent contains similar method steps. See id. at 5.

Paymentech processes PDBP transactions by collecting payment information received from a merchant’s IVR and forwarding that information to a debit network, which in turn forwards the information to an affiliated financial institution. Id. at 2. If the transaction is approved by the financial institution, then Paymentech receives indication of the approval from the debit network and forwards the approval to the merchant. Id. at 3. Accordingly, as stipulated by both parties, Paymentech performs only some of the steps in a PDBP process, while the debit network and the financial institution perform other steps in the process.

Notwithstanding its recognition that Paymentech does not perform all of the steps in each of the asserted claims, BMC Resources relied on On Demand to allege that Paymentech directly

infringed the asserted patents under a theory of joint infringement. In On Demand, a case primarily addressing claim construction, the Federal Circuit stated that there was “no flaw in [the] instruction as a statement of law” that included: “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.” BMC Resources, at 9-10 (citing On Demand, 442 F.3d at 1344-45).

Since On Demand, there has been some confusion about the standard for direct infringement involving multiple parties carrying out the claimed steps, also referred to as divided infringement. For example, in Freedom Wireless, Inc. v. Boston Communications Group, Inc., Civ. No. 00-CV-12234, (Fed. Cir. Oct. 12, 2006), a jury verdict resulted from similar jury instructions that stated “[e]ven if no single company performs all the steps of the claim, the companies are jointly responsible.” The Federal Circuit granted an emergency injunction, recognizing the that the appellants “demonstrated the existence of a substantial question whether the theory of liability … departs from this court’s precedents regarding vicarious liability for infringement ….” Freedom Wireless, Inc. v. Boston Communications Group, Inc., Civ. No. 2006-1020 (Order), at 6 (Fed. Cir. 2005). However, because the parties in Freedom Wireless settled before the case was decided, the joint infringement questions were not clarified.

Accordingly, BMC Resources’ appeal provided the Federal Circuit the opportunity to clarify any inconsistent statements previously made regarding joint or divided infringement. BMC Resources appealed the district court’s grant of summary judgment for Paymentech, finding that it did not infringe because it did not perform all of the steps of the asserted method claims. BMC Resources, at 1. The district court dismissed the Federal Circuit’s statement from On Demand regarding joint infringement as dicta.

On appeal, the Federal Circuit laid out the proper analysis for a direct infringement action. The court then discussed infringement under alternative theories, including indirect infringement and the theory of joint or divided infringement, as alleged by BMC Resources. Finally, the court further reviewed the notion of vicarious liability, as applied to infringement under a multiple actor situation. The court first stated that “[d]irect infringement requires a party to perform or use each and every step or element of a claimed method or product.” Id. at 8 (citing Warner-Jenkinson Corp. v. Hilton Davis Corp., 520 U.S. 17 (1997)). Both BMC Resources and Paymentech agreed that Paymentech did not carry out each step of the asserted claims.

The court next discussed indirect infringement, particularly inducement to infringe, stating that a party who “encourages infringement but does not directly infringe” still requires “a finding that some party amongst the accused actors has committed the entire act of direct infringement.” Id. However, under a theory of vicarious liability, a party can directly infringe if it “controlled the conduct” of another party in carrying out some of the steps. Id. at 8-9 (citing Engle v. Dinehart, 213 F.3d 639 (5th Cir. 2000)). Though, in BMC Resources, the court agreed with the district court that there were insufficient facts to show that Paymentech controlled or directed the conduct of the debit networks or the financial institutions, and thus Paymentech was not vicariously liable for those parties’ acts. Id. at 13.

In affirming the district court’s summary judgment finding of non-infringement by Paymentech, the Federal Circuit stated that the district court interpreted the opinion in On Demand correctly – by dismissing the controversial statement regarding joint infringement as dicta. See id. at 10. The court confirmed that “infringement requires … a showing that a defendant has practiced each and every element of the claimed invention” and that divided infringement is “refused … where one party did not control or direct each step of the patented process.” Id. at 11.

Finally, the Federal Circuit academically posited that “the standard requiring control or direction for a finding of joint infringement [under a theory of vicarious liability] may in some cases allow parties to enter into arms-length agreements to avoid infringement.” Id. at 12. Notwithstanding this concern, the court refused to expand the standards of direct infringement. Id. Furthermore, the court suggests that any concerns over a party avoiding infringement by arms-length cooperation can usually be offset by proper claim drafting, perhaps by drafting claims to focus on one party. Id. at 12-13. Unfortunately, the court provided no further guidance regarding how this might be accomplished. In this case, given that BMC Resources chose to draft claims that included multiple parties performing different acts, the Federal Circuit concluded that BMC Resources must bear the cost of failing to seek patent protection in the form of claims having a single-actor focus.