Technology & Information Law Blog by Charles Gideon Korrell

Category: Uncategorized

  • Federal Circuit Reverses Infringement Verdict in CloudofChange v. NCR: A Case Study in Divided Infringement and System Claims

    On December 18, 2024, the Federal Circuit issued a significant opinion in CloudofChange, LLC v. NCR Corporation, a case concerning direct infringement of system claims under 35 U.S.C. § 271(a). The decision clarifies the application of Centillion Data Systems, LLC v. Qwest Communications International, Inc. and Akamai Technologies, Inc. v. Limelight Networks, Inc., two pivotal cases addressing the standards for direct infringement of system and method claims. Ultimately, the Federal Circuit reversed the jury’s verdict of infringement and vacated the $13.2 million damages award against NCR.

    Key Issues in the Case

    The appeal focused on whether NCR directly infringed U.S. Patent Nos. 9,400,640 and 10,083,012, which claim a web-based point-of-sale (POS) system that allows non-expert business operators to build and modify POS terminals remotely. The infringement question centered on NCR’s “NCR Silver” product, a web-based POS solution. NCR argued that it could not be liable for direct infringement because it did not “use” the claimed system—only its customers (merchants) did.

    1. What Constitutes “Use” of a System?

    Under Centillion, direct infringement of a system claim requires that an entity (1) control the system as a whole and (2) obtain benefit from it. The Federal Circuit reaffirmed that customers must be the ones who “use” a system when they initiate interactions with it and derive its benefits. In this case, NCR’s merchants, not NCR itself, performed these actions:

    • Merchants provided their own POS hardware and internet access.
    • They initiated actions on their POS terminals, such as building or modifying menus.
    • They benefitted directly from the system’s functionality.

    Thus, the court found that NCR did not “use” the system under Centillion, and its merchants were the actual users.

    2. Vicarious Liability and Divided Infringement

    Recognizing that Centillion alone did not end the inquiry, the court next considered whether NCR was vicariously liable for its customers’ use of the system. The Federal Circuit applied the Akamai framework, which allows direct infringement liability when one entity “directs or controls” another’s performance of the claim elements.

    CloudofChange argued that NCR’s Merchant Agreement, which required merchants to maintain internet access, established control over their use of the system. The district court had agreed, analogizing NCR’s role to that of an infringer who contracts with another party to perform part of the claim.

    The Federal Circuit, however, rejected this reasoning, emphasizing that:

    • NCR did not contractually require merchants to use the POS system in any particular way.
    • NCR’s merchants acted independently, choosing whether and how to use the system.
    • Merely requiring internet access as a prerequisite to use does not amount to “direction or control” over system usage.

    Since NCR did not control the merchants’ use of the POS system, it could not be held vicariously liable for their infringement.

    Conclusion: A Cautionary Tale for System Claims

    This decision underscores the challenges of proving direct infringement of system claims when multiple parties are involved. Patent holders alleging infringement of such claims must demonstrate that the accused infringer, not just its customers, uses the system in a legally meaningful way. Additionally, claims involving distributed systems must account for the complexities of divided infringement and vicarious liability.

    For technology companies, this case highlights the importance of structuring agreements and customer interactions to minimize exposure to direct infringement claims. As CloudofChange v. NCR demonstrates, courts are unwilling to stretch the definition of “use” beyond the clear framework established in Centillion and Akamai.

    By Charles Gideon Korrell

  • Keeping Patent Damages Expert Opinions In Check

    The Federal Circuit has taken the unusual step of granting en banc review in EcoFactor Inc. v. Google LLC to address fundamental questions about patent damages. The order vacates the previous decision and calls for new briefing on whether the district court properly applied Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc. in its allowance of testimony from EcoFactor’s damages expert. This is the first time since 2018 that the Federal Circuit has taken an en banc case involving a utility patent.

    The dispute centers on testimony from EcoFactor’s damages expert, David Kennedy. Google was found by a jury to infringe EcoFactor’s patent related to smart thermostat technology. Mr. Kennedy opined that Google should pay a specific per-unit royalty rate for infringement, a rate spelled out in three license agreements between EcoFactor and three other companies. Each agreement contained a “whereas” clause stating that EcoFactor “believes” that the royalty payment was based on a particular per-unit rate, and the operative provisions of the agreements explicitly stated that the payment is not based upon sales and does not reflect or constitute a lump sum. Despite these arguably contradictory provisions, and without analyzing any underlying sales data or documentation showing how the lump sums were calculated, Mr. Kennedy testified that the licenses reflected an agreed-upon per-unit license rate applicable to Google.

    Google challenged this methodology.  Google argues that the royalty rate does not reflect the value of the asserted patent but instead reflects the value of EcoFactor’s entire portfolio. The licenses included all of EcoFactor’s patents and patent applications. Google further argues that the expert failed to properly apportion the royalty rate to just the asserted patent.

    EcoFactor argues that the case is a poor candidate for en banc review, and that the majority properly applied the deferential standard of review to find that the district court did not abuse its discretion in admitting the damages opinion. EcoFactor argues that the per-unit royalty rate is spelled out in three different arms-length patent license agreements. EcoFactor further argues that the agreements settled infringement allegations involving comparable patents against specific smart thermostat features, making them sufficiently comparable to the case at bar. EcoFactor argues that Mr. Kennedy did apportion between the asserted and non-asserted patents.

    The Federal Circuit’s decision in this case is likely to have some impact on the way damages are calculated in patent cases in the future. The court is being asked to clarify when damages theories “cross the line” from permissible approximation to unreliable speculation. The court has requested briefing limited to the narrow issue of the admissibility of the expert’s testimony. However, the amicus briefs raise broader policy issues. The briefs in support of Google or a neutral position emphasize:

    • the importance of rigorous application of Federal Rule of Evidence 702 and *Daubert* to ensure that only reliable and relevant expert testimony is presented.
    • the need for damages experts to appropriately apportion the value of the patented technology.
    • concerns about “royalty stacking,” where combined royalties on a product could exceed the product’s total value.

    The briefs highlight a fundamental tension in patent damages: while estimation is inherent in the hypothetical negotiation framework, that framework must be grounded in the analysis of prior licenses and sound economic reasoning. They urge the court to balance the need for flexibility while ensuring reliability and ensuring fair compensation for the patent holder. Ultimately, the decision will likely shape how courts evaluate the use of prior licenses in damages, particularly in the context of patent portfolios.

    Case History:

    • EcoFactor initially sued Google over Nest thermostats in the Western District of Texas.
    • The case went to trial and a jury found Google liable for infringement. The jury awarded EcoFactor \$20 million in damages.
    • Google appealed the judgment, arguing in part that EcoFactor’s damages expert opinion was based on an unreliable methodology.
    • A panel of the Federal Circuit affirmed the district court’s decision, finding that the expert opinion was admissible.
    • Google petitioned for en banc rehearing, and the full court granted the petition limited to the issue of the damages expert testimony.

    What’s next…

    • Google’s opening brief is due 45 days from September 25, 2024.
    • Amicus briefs supporting Google are due 14 days after service of Google’s opening brief.
    • Amicus briefs supporting EcoFactor are due 14 days after service of EcoFactor’s response brief.

    Issues to watch for:

    • How will the court balance the need for flexibility in damages calculations with the requirement of reliability?
    • Will the court adopt a more stringent standard for the admissibility of damages expert testimony?
    • What guidance will the court provide on the use of prior licenses in calculating damages?
    • How will the decision impact the calculation of damages in cases involving patent portfolios?

    This case is being closely watched by patent practitioners and academics, as it could have a significant impact on patent damages law. The outcome is likely to have implications for both patent holders and accused infringers.

    By Charles Gideon Korrell

  • Federal Circuit Revives False Advertising Claim Against Crocs: Key Patent Law Issues

    The Federal Circuit recently issued a significant ruling in Crocs, Inc. v. Effervescent, Inc., reversing the District Court for the District of Colorado’s summary judgment in favor of Crocs, Inc. The ruling addresses key issues at the intersection of patent law and false advertising under the Lanham Act, providing a critical clarification on how misrepresentations regarding patent protection can impact commercial competition.

    Background of the Case

    The litigation between Crocs, Inc. and its competitors has spanned over a decade, with disputes arising over patent infringement, false advertising, and unfair competition. In this case, Crocs sued Dawgs, a competing footwear manufacturer, for patent infringement. In response, Dawgs counterclaimed, alleging that Crocs engaged in false advertising by misrepresenting that its proprietary material, “Croslite,” was patented when, in fact, it was not.

    The District Court’s Ruling

    The District Court granted summary judgment in favor of Crocs, holding that Dawgs failed to state a claim under Section 43(a) of the Lanham Act. The court determined that Crocs’ statements regarding its product’s patent status were akin to claims of inventorship and, under precedent established in Dastar Corp. v. Twentieth Century Fox Film Corp., such claims do not give rise to a cause of action under the Lanham Act.

    The Federal Circuit’s Decision

    On appeal, the Federal Circuit reversed the District Court’s decision, holding that false claims of patent protection can, in certain circumstances, form the basis for a false advertising claim under Section 43(a)(1)(B) of the Lanham Act. The court reasoned that:

    1. Misrepresentation of Patent Status Can Mislead Consumers – The court emphasized that Crocs’ statements about Croslite being “patented” could mislead consumers into believing that its competitors’ products were inferior or unauthorized copies, thereby affecting purchasing decisions.
    2. Distinguishing False Patent Claims from Authorship Claims – The court clarified that while Dastar precludes claims based on misrepresentation of authorship, it does not shield companies from liability when they falsely claim patent protection in a way that misrepresents the qualities of their products.
    3. Legal Standards for False Advertising Under the Lanham Act – The Federal Circuit reiterated that to establish a claim under Section 43(a)(1)(B), a plaintiff must show that a false or misleading statement was made in commercial advertising, deceived or had the tendency to deceive consumers, and was material to purchasing decisions. The court found that Dawgs sufficiently alleged these elements.

    Implications for Patent Law and False Advertising

    This ruling underscores the potential legal risks for companies that overstate the patent protection of their products. Businesses must ensure that their marketing materials accurately reflect their intellectual property status to avoid false advertising liability. The decision also signals that courts may be more willing to scrutinize patent-related claims in advertising, particularly when they have the potential to mislead consumers and stifle competition.

    Conclusion

    The Federal Circuit’s ruling in Crocs, Inc. v. Effervescent, Inc. highlights the fine line between intellectual property protection and misleading commercial statements. By reversing the summary judgment in favor of Crocs, the court reaffirmed that companies cannot use false claims of patent protection to gain an unfair competitive advantage. This case serves as an important precedent for businesses navigating the complex interplay between patent law and consumer protection statutes.

    By Charles Gideon Korrell