Court: District Court, E.D. New York; August 17, 2016; Federal District Court
Carson Optical Inc. initiated a patent infringement lawsuit against eBay Inc., alleging that eBay has induced infringement by allowing the sale of items on its platform that infringe Carson's patents. Carson holds two patents: U.S. Patent No. 6,116,729, concerning a head magnifying glass, and U.S. Patent No. 6,215,601, related to a head belt for the magnifying glass, both embodied in Carson's product, the 'MagniVisor Deluxe.' The product has gained commercial success, leading to significant illegal copying by manufacturers, particularly from China.
eBay, as an online marketplace, connects buyers and sellers without taking possession of the items sold. It provides various services to vendors, such as payment facilitation and sales improvement tips, while generating revenue through a complex fee structure. The platform hosts approximately 800 million listings and has annual revenues exceeding $17.9 billion. eBay also has the Verified Rights Owner Program (VeRO), enabling intellectual property owners to report listings that infringe their rights through Notice of Claimed Infringement (NOCI) forms.
Carson asserts that from February 7, 2014, it began submitting NOCI forms under the VeRO program after discovering numerous infringing items but faced eBay's refusal to remove the listings without a court or International Trade Commission determination of infringement. eBay's motion to dismiss the Amended Complaint has been partially granted and partially denied.
Plaintiff alleges that defendant failed to remove listings of infringing products and did not assess the appropriateness of these listings under its policies. The plaintiff initiated the action on June 29, 2015, asserting three claims: (1) inducement of infringement of the ’729 patent, (2) inducement of infringement of the ’601 patent, and (3) unfair competition under New York law. Defendant moved to dismiss the complaint, supported by a memorandum, to which the plaintiff responded and the defendant replied.
In evaluating the motion to dismiss, all factual allegations in the complaint are accepted as true, and inferences are drawn in favor of the plaintiff. A complaint must provide a clear statement of the claim and sufficient factual matter to suggest a plausible entitlement to relief, even if actual proof seems unlikely. Although Federal Circuit law governs the case, regional circuit law applies when assessing whether the complaint states a claim for relief.
The Federal Patent Act outlines two forms of liability: direct infringement and inducement to infringe. Plaintiff claims induced infringement under 35 U.S.C. § 271(b), which necessitates that the defendant knew of the patent, was aware that the induced acts were infringing, and intended to encourage that infringement. Induced infringement requires a specific mental state, including knowledge of the patent and the infringing acts.
Inducement of patent infringement requires that the alleged infringer knowingly induced the infringement and had the specific intent to encourage it. Liability for inducement arises only when there is direct infringement by another party. The knowledge requirement for inducement liability under § 271(b) can be satisfied through willful blindness, characterized by the defendant's subjective belief in a high probability of a fact existing and taking deliberate steps to avoid learning that fact. The distinction is made between willfully blind defendants, who are liable, and those who are merely reckless or negligent, as the latter do not meet the knowledge requirement.
Intent to induce infringement can be proven through circumstantial evidence, and the allegations regarding inducement for two specific patents are treated similarly in this analysis. The defendant, eBay, is acknowledged to have had knowledge of the patents at least since February 7, 2014, when it received a Notice of Claimed Infringement (NOCI). Even without NOCI procedures, a federal complaint identifying the patents suffices to establish a defendant's knowledge for claims of induced infringement occurring post-filing.
Additionally, the plaintiff has sufficiently alleged direct infringement by non-party eBay merchants, which is necessary for a claim of induced infringement. It is not required to identify a specific direct infringer if the facts allow for an inference that at least one exists.
Plaintiffs' indirect infringement claims necessitate an underlying act of direct infringement, which is sufficiently alleged through the claim that 'end users' of the defendants’ products infringe the ’789 patent. The listing of allegedly infringing items on the defendant's website supports the assertion of direct infringement necessary for the plaintiffs' induced infringement claims. The defendant challenges the sufficiency of the pleadings, specifically regarding its knowledge of the infringement and intent to encourage it.
To establish a claim for inducing infringement, the plaintiff must demonstrate that the defendant knew the acts were infringing, which can be shown via actual knowledge or willful blindness. The plaintiff claims the defendant had actual knowledge or was willfully blind. However, the court finds the allegations of actual knowledge inadequate due to inconsistencies with the claim of willful blindness. The plaintiff’s assertion of actual knowledge is contradicted by specific allegations that the defendant refused to evaluate potential patent infringement issues raised by the plaintiff. Courts are not required to reconcile contradictory pleadings, and specific allegations typically take precedence over general ones. Consequently, the generalized claim of actual knowledge is weakened by the more precise assertion that the defendant knowingly neglected to assess the infringement claims.
Plaintiff has not sufficiently pled that defendant had actual knowledge of infringement. However, induced infringement claims may still proceed if the plaintiff can demonstrate that the defendant was willfully blind. Willful blindness requires that the alleged inducer (1) subjectively believe there is a high probability of a fact existing and (2) take deliberate steps to avoid learning about that fact. The plaintiff has adequately alleged that the defendant was willfully blind.
Regarding the first element, the plaintiff's complaint, taken as true, indicates that the defendant believed there was a high probability of infringement at least by the time the complaint was filed. The complaint included the relevant patents, detailed descriptions, and illustrations of both the patented inventions and allegedly infringing items. It also stated that the plaintiff followed procedural notice requirements and engaged in informal communications with the defendant about the infringement prior to filing the complaint.
The court finds that these allegations are sufficient for the pleading stage. Referencing the case of Alibaba.com Hong Kong L.T.D. v. P.S. Products, Inc., the court noted that induced infringement claims could survive summary judgment when there are disputed facts regarding whether the defendant took steps to avoid learning about infringement. In Alibaba, the plaintiff had notified the defendant about infringing products, and there was ambiguity regarding when those products were removed from the defendant's platform. The court determined that a reasonable jury could find the defendant had induced infringement by keeping the infringing items listed for an extended time.
The plaintiff's complaint parallels the facts of the Alibaba case, alleging that eBay's website hosted items infringing its patents and that copies of the patents were provided to eBay. Unlike Alibaba, where there was a dispute over the timing of item removals, eBay seemingly admits it did not remove the infringing items. eBay argues it cannot be liable for induced infringement since it does not possess the items and lacks expertise in the relevant art. The court expresses skepticism towards this position, suggesting that such an interpretation of § 271(b) could exempt eBay from liability despite active inducement of infringement. The court acknowledges that the ordinary skill in the relevant art can sometimes align with that of a layperson, particularly when the technology is straightforward. The plaintiff initially alerted eBay to the potential infringement through NOCI forms in 2013 and 2015 and later through the current complaint. Consequently, the court concludes that the plaintiff has adequately demonstrated eBay's subjective belief regarding the likelihood of infringement, referencing legal precedents that support the assertion of inducement liability based on a subjective belief of infringement risk.
Plaintiff alleges that defendant engaged in deliberate actions to avoid learning about patent infringement complaints. Despite the defendant's public statements about not allowing counterfeit items and its VeRO program for reporting infringement, plaintiff claims that defendant explicitly refused to evaluate the patent infringement issues raised. This refusal to assess the validity of infringement claims, despite having a policy to do so, may suggest willful infringement. The complaint states that the defendant ignored notices of infringing products available on its platform and did not take action to remove or suspend infringing vendors, potentially aiding in infringement. The court references similar cases indicating that ignoring infringement claims could indicate willful blindness.
Additionally, the parties dispute the relevance of 35 U.S.C. § 298, which states that failing to obtain advice of counsel cannot be used to prove willful infringement or intent to induce infringement. If applicable, this statute would prevent the plaintiff from arguing that the defendant's lack of legal counsel is relevant to the issue of liability for infringement.
The dispute centers on the applicability of § 298, which was enacted as part of the Leahy-Smith America Invents Act (AIA) and is not about the substantive language of the section. Prior to § 298, evidence of a defendant's failure to obtain counsel on asserted patents was admissible in court, as per the Federal Circuit's Broadcom decision. However, § 298 was designed to abrogate this precedent to protect attorney-client privilege and alleviate pressure on accused infringers to secure legal opinions for litigation.
Section 298 applies to findings of willfulness and intent to induce infringement but became effective one year after the AIA's enactment on September 16, 2011, meaning it only applies to patents issued on or after September 16, 2012. Consequently, § 298 does not apply to the patents-in-suit, specifically the ’344 and ’562 patents issued in 2007. Courts have consistently refused to apply § 298 to patents issued before this date, leading to potential complications in litigation involving multiple patents. The application of § 298 is thus contingent on the issuance date of the patents rather than the filing date of the lawsuit, which could generate complex litigation scenarios unless future legislation addresses these issues. The original intent of the AIA was for § 298 to apply universally to civil actions filed after its effective date, rather than on a per-patent basis, to simplify patent litigation.
Concerns regarding the effective date of § 298 of the AIA led Congress to pass the Leahy-Smith America Invents Technical Corrections Act, enacted on January 14, 2013. This law clarified that § 298 applies to any civil action initiated on or after its enactment, overriding previous effective dates. Consequently, even if the patents involved were issued in 2000 and 2001, § 298 governs this case, meaning the plaintiff cannot use the defendant’s lack of a legal opinion on infringement to prove inducement. The reliance on the Suprema case to argue that § 298 does not apply is incorrect; Suprema dealt with International Trade Commission proceedings predating January 14, 2013, and such proceedings do not qualify as "civil actions" under the relevant law. Furthermore, Suprema is unpublished and thus non-precedential. Therefore, the court concludes that § 298 is applicable to this case, and the plaintiff is barred from relying on the defendant's failure to seek counsel to establish infringement. The court will next examine the requirement for alleging specific intent under § 271(b).
Intent for establishing liability in patent infringement cases can be demonstrated through circumstantial evidence, as direct evidence is often unavailable. Active steps taken by a defendant to promote infringing uses, such as advertising or instructing on infringing methods, indicate affirmative intent. In the current case, the plaintiff's complaint sufficiently alleges the defendant's specific intent to infringe by providing detailed descriptions of the patents and the allegedly infringing products. The complaint also states that the defendant continued to sell these infringing items despite being notified of the infringement. At this preliminary stage, these allegations are adequate to support the plaintiff’s claims. Relevant cases, such as Alibaba and Paone, illustrate that knowledge of a patent and the continued sale of an infringing product are sufficient to meet the intent requirement at the pleading stage. The defendant contends that the precedents cited by the plaintiff are inapplicable; however, the standard for inducing infringement remains consistent across these cases, emphasizing the need for knowledge of the patent and understanding that the actions constitute infringement.
Knowledge of direct infringement by a defendant is established through their awareness of how accused products functioned and were manufactured. However, the defendant does not make, use, sell, or possess the accused products, and cites no legal precedent requiring such actions for indirect infringement liability. Possession of infringing products is not a prerequisite for inducing infringement liability. The defendant argues it is impractical to monitor patent infringement among approximately 800 million items on its website and insists that judicially-ordered injunctions are necessary to avoid adjudicating abstract infringement claims. The defendant references the Second Circuit's Tiffany decision, which upheld eBay's efforts against intellectual property infringement as a validation of its good faith practices. Despite acknowledging the defendant's concerns, the court finds that the plaintiff has presented sufficient allegations to withstand a motion to dismiss, emphasizing that the plaintiff need not prove its case at this stage but must show plausible facts indicating the defendant's intent for customers to infringe the patent. The court highlights that a well-pleaded complaint can proceed even if actual proof seems improbable. The court notes that the Tiffany case's validation of anti-fraud procedures came after a full trial with evidence, contrasting it with the Alibaba case, where summary judgment was not granted against allegations of direct or induced infringement.
Plaintiffs' allegations of induced infringement regarding the ’729 and ’601 patents are deemed sufficient to withstand the defendant's motion to dismiss. Additionally, the plaintiff raises an unfair competition claim based on two factual assertions: (1) the defendant's bad faith infringement against the plaintiff’s competing product, and (2) the defendant's unfair practices related to the VeRO program. The defendant contends that these claims are preempted by the Federal Patent Act, asserting that the alleged conduct is tied to patent infringement. In response, the plaintiff argues that the unfair competition claim involves additional elements beyond those required for patent infringement and focuses on issues of commercial immorality and misappropriation of goodwill, rather than patent infringement itself.
The analysis of potential preemption, governed by the Supremacy Clause, hinges on whether the state law conflicts with federal law, specifically within the patent context. Conflict preemption arises when state law obstructs federal objectives. Federal patent law preempts state claims that attempt to provide patent-like protections inconsistent with federal law. The applicable standard examines the nature of the defendant's conduct; if such conduct is protected by federal patent law, state law remedies are preempted, but if not, they may proceed. The preemption analysis aligns with the Supreme Court’s approach regarding state unfair competition laws, allowing for state claims that contain additional elements not addressed in federal patent law and do not attempt to offer patent-like protections.
Two recent patent cases illustrate the preemption of state unfair competition claims by federal patent law. In Soñas, plaintiffs alleged that defendants, aware of the plaintiffs' patent, willfully infringed upon it with a product identical to the plaintiffs' product. The court ruled that the unfair competition claim was purely based on allegations of patent infringement and thus preempted by federal law. Similarly, in Carson, the court found that claims against a manufacturer and retailer for copying patented designs and trade dress were also preempted, as the allegations failed to specify wrongful conduct separate from patent infringement.
In the current case, the plaintiff alleges unfair competition based on the defendant's "bad faith and willful inducement of infringement" of two specific patents. However, this allegation lacks the detail found in Carson and essentially equates inducement of infringement with unfair competition. As such, the claim is also preempted by federal patent law. The plaintiff argues that its allegations of bad faith should exempt it from preemption, but this reasoning does not hold, given the precedents established in prior cases.
An argument previously rejected in Carson indicates that plaintiffs' claims of defendants’ bad faith, based on accusations of unlawful copying and misappropriation of patented designs, do not convert patent infringement claims into an independent common law claim of unfair competition. The court agrees with Carson's rationale, deeming the plaintiffs' allegations of bad faith too vague to support a viable unfair competition claim. The reference to Matthews International Corp. v. Biosafe Engineering underscores that mere assertions of bad faith are insufficient for establishing such claims, particularly when federal law preempts them.
The plaintiffs' reliance on Rodime is also criticized, as the circumstances differ significantly; Rodime involved a claim based on the defendant’s efforts to prevent licensing, which was not directly linked to patent infringement, unlike the current claims. The court clarifies that federal patent law will not preempt unfair competition claims if they present additional elements absent from patent law and do not attempt to provide patent-like protections.
Additionally, the plaintiffs allege that the defendant misrepresented its VeRO intellectual property protection program, claiming the defendant's website misleadingly presents its commitment to protecting intellectual property rights. According to the plaintiffs, the process for reporting infringements reveals that the defendant will not act to remove infringing listings without a court order, contradicting public representations made on the website.
Defendant fails to adhere to its own VeRO program and claims a lack of time to review infringement notices from intellectual property rights holders. Even if the plaintiffs’ claims based on this non-adherence were not preempted, the court finds the complaint insufficient to establish a claim for unfair competition under New York law. The essence of an unfair competition claim requires evidence that the defendant misappropriated the efforts of another with bad faith intent. New York law encompasses a broad range of unfair practices, but the court emphasizes that the tort is not all-encompassing and depends heavily on specific facts. The New York Court of Appeals recognizes two theories of common-law unfair competition: "palming off" and "misappropriation." "Palming off" involves selling one manufacturer’s goods as those of another, while "misappropriation" prevents individuals from misusing the skills and efforts of competitors. The plaintiffs' argument that the defendant's failure to follow its VeRO program constitutes unfair competition does not fit within these recognized theories.
VeRO-related allegations fail to establish a claim for palming off, which occurs when one party promotes products under another's name, or vice versa. The plaintiff does not allege that the defendant is promoting its own products as the plaintiff’s or vice versa, rendering the palming off theory irrelevant to the unfair competition claim. Additionally, the plaintiff does not sufficiently plead that the defendant misappropriated the plaintiff's labor, skills, expenditures, or goodwill, which is necessary for a misappropriation claim. In traditional misappropriation cases, a defendant misleads the public regarding a product's identity. The essence of unfair competition involves a product so similar to another that it confuses the public regarding their identities. Even if the defendant's VeRO program was misleading, it does not constitute misappropriation. Allegations of bad faith alone do not equate to unfair competition, and the plaintiff does not demonstrate misappropriation of labor or resources. The plaintiff's reliance on a single, distinguishable case (Roy Export Co.) further weakens their claim, as that case involved clear appropriation of the plaintiffs' work, unlike the current situation where no such misappropriation is alleged.
Plaintiff's allegations against the defendant concerning the violation of its stated intellectual property policy do not constitute a valid claim for unfair competition, as they do not involve the appropriation of the plaintiff's skills, resources, or efforts. Consequently, the court finds that the unfair competition claims are either preempted or fail to establish a legal basis. The court partially grants the defendant's motion to dismiss, allowing the plaintiff's claims of induced infringement of the ’729 and ’601 patents to proceed, while dismissing the unfair competition claim with prejudice. The court notes issues in the complaint regarding repeated paragraph numbers, opting to reference page numbers instead. The defendant's motion to dismiss included NOCI letters dated December 30, 2013, and May 19, 2015. The court reiterates that under Section 271(a), direct patent infringement is a strict liability offense with no mental state requirement. It also references relevant case law, including the Alibaba case, which highlighted factual disputes regarding the defendant's knowledge of potential infringement and the nature of its offerings. In design patent cases, courts may utilize a side-by-side analysis of the patent and the accused design, as permitted by the Federal Circuit. The court finds no error in considering the photographs of the accused designs.
Determining design patent infringement involves comparing the patented design's drawings to the accused products' appearances, with photographs serving as visual evidence. During a legislative hearing, then-Senator John Kyi expressed concerns that allowing adverse inferences from a failure to seek legal opinions fosters an industry that negatively impacts the patent system. Legislative history indicates that amendments to certain provisions of patent law, including H.R. 6621, clarify that the Advice of Counsel section pertains only to civil actions initiated post-enactment. The Congressional Research Service noted that the amendment bars the use of an accused infringer's failure to seek counsel's advice to prove willful or induced infringement, effective one year after the AIA's enactment.
There is ambiguity regarding whether specific provisions apply to ITC proceedings, as they mention courts or juries, which do not exist in ITC contexts. Some court rulings imply that protections under these provisions do not apply if a defendant attempts to counter claims of willful infringement by referencing reliance on legal advice.
In the Amended Complaint, the plaintiff originally included a count for deceptive trade practices under New York law but later abandoned it, opting instead to pursue a common law unfair competition claim. The court noted that it would not consider statements from the defendant's website that were not included in the Amended Complaint, reinforcing the principle that only allegations presented in the complaint are considered at this stage.
