SoCal IP Institute :: September 24, 2012 :: Induced Infringement and Covenants Not to Compete

We will be discussing one Federal Circuit case and one California Court of Appeal case during our weekly SoCal IP Institute meeting on Monday, September 24, 2012. Brief synopses are presented below.

Akamai Techs., Inc. v. Limelight Networks, Inc., Case Nos. 2009-1372, -1380, -1416, -1417 and McKesson Techs., Inc., v. Epic Systems Corp., Case No. 2010-1291 (Fed. Cir. August 31, 2012) (attached).

This decision involved two cases that were decided together in this en banc rehearing.  In the first case, Akamai Technologies, Inc. owns a patent that covers a method for efficient delivery of web content.  Akamai alleged that Limelight Networks, Inc. directly infringed and induced infringement of their patent. The patent’s method claims required “placing some of a content provider’s content elements on a set of replicated servers and modifying the content provider’s web page to instruct web browsers to retrieve that content from those servers.” Limelight maintained a network of servers and placed some content elements on its servers. However, Limelight did not modify the content providers’ Web pages and instead taught its customers how to modify the pages.

In the other case, McKesson alleged that Epic induced infringement of their patent covering a method of electronic communication between healthcare providers and patients.  Epic licensed its software to healthcare organizations, which allowed healthcare providers to communicate electronically with patients.  Epic did not perform any of the steps of the method patent, rather the infringing steps were performed partially by patients, who initiate communications, and partially by healthcare providers.

The district courts found in both Akamai and McKesson that the defendants did not infringe the asserted patents because they neither performed all of the claimed steps themselves nor exhibited the necessary control over the other parties that did perform the claimed steps.

The Federal Circuit initially upheld the decision.  However, in this en banc rehearing, the Court considered whether a defendant may be held liable for induced infringement if the defendant has performed some of the steps of a claimed method and has induced other parties to commit the remaining steps (as in Akamai), or if the defendant has induced other parties to collectively perform all the steps of the claimed method, but no single party has performed all of the steps itself (as in McKesson).”

In overturning their earlier decision in BMC Resources, Inc. v. Paymentech, L.P., 498 F.3d 1373 (Fed. Cir. 2007), the Court held that a single actor is not required to perform all of the infringing steps. The Court stated that liability for induced infringement exists where the accused infringer knows of the patent and induces performance of the steps of the patented method by causing, urging, encouraging or aiding the performance of such steps.  In order for a party to be liable for induced infringement, it is no longer necessary to show that a single entity performed all the steps of the claimed method.   Furthermore, it is no longer necessary for the accused infringer to “control or direct” the actors who perform the steps of the method.

Fillpoint, LLC. v. Maas, Case No. G045057 (Cal. Ct. App. August 24, 2012) (attached).

Michael Maas was an employee of Crave Entertainment Group, Inc., which was acquired by Handleman Company.  As part of the acquisition, Maas executed a stock purchase agreement selling all of his stock in Crave to Handleman.  The stock purchase agreement contained a three-year non-compete clause.  Maas also entered into a new employment agreement with Crave containing a one-year non-compete, customer non-solicit, and employee non-solicit covenants, all of which would begin to run upon the termination of his employment. The stock purchase agreement included an integration clause referencing the form employment agreement. Additionally, Maas’ employment agreement referred back to the stock purchase agreement and stated that the stock purchase agreement would prevail in the event of any conflict between the agreements.

Maas eventually resigned from Crave three years after the acquisition and about six months later, began working for a competitor of Crave.  Fillpoint, LLC, which had acquired Crave from Handleman, brought suit against Maas for breach of his employment agreement. The Superior Court of Orange County concluded that: (1) the covenants in the stock purchase agreement and the employment agreement were separate; and (2) the covenants not to compete and not to solicit in the employment agreement were unenforceable under California’s general rule against such covenants (Business and Professions Code Section 16600).

On appeal, the Court of Appeal for the Fourth District found that the trial court erred in its conclusion that the covenants in the stock purchase agreement and the employment agreement were separate.  The Court of Appeal held that the agreements must be read together as an integrated agreement because of the cross references between the stock purchase agreement and employment agreement.  Furthermore, the two agreements were part of a single transaction because they were entered into between the same parties and around the same time. The Court then determined that the covenants in the employment agreement were intended to restrict Maas’ right to pursue his profession in the future and, thus, did not meet Section 16601’s limited exception.  For these reasons, the Court held that the covenants in the employment agreement could not “be reconciled with California’s strong public policy permitting employees the right to pursue a lawful occupation of their own choice” and were unenforceable.

All are invited to join us in our discussion during the SoCal IP Institute meeting on Monday, September 24, 2012 at Noon in our Westlake Village office. This activity is approved for 1 hour of MCLE credit. If you will be joining us, please RSVP to Noelle Attalla by 9 am Monday morning.