Federal Circuit finds Successor Company Liable for Infringement by Prior Company

In Funai v. Daewoo (DEC, DEAM, DECL, and DECA), 2010 U.S. App. LEXIS 18237 (Fed. Cir., September 1, 2010), Funai is the owner of six patents relating to reducing a cost of manufacturing of video cassette recorders (VCRs) and disclosed electrical and mechanical features of the VCRs.  In May 2004, Funai Electric Co., Ltd. (Funai) brought suit against Daewoo Electronics Corp. (DEC) and its U.S. subsidiary, Daewoo Electronics America, Inc. (DEAM) and also the two entities’ predecessors, Daewoo Electronics Co., Ltd. (DECL) and Daewoo Electronics Corp. of America (DECA) in the U.S. District Court for the Northern District of California for infringement of six of Funai’s U.S. patents.

DECL and DECA stopped participating in the lawsuit in May 2005 by presenting no defense against the accusations and by refusing discovery. Consequently, the District Court entered default judgment against DECL and DECA, and awarded $6,956,187 in damages to Funai.  DECL and DECA did not appeal the decision, nor did they pay the penalties assessed against them.  As such, Funai asserted that DEC and DEAM, which were the successors to DECL and DECA were liable for the judgment.

After pre-trial motions, the District Court held that three of the six patents were not infringed and that the remaining patents (Patent Numbers: 6,021,018; 6,421, 210; and 6,064,538) would be under consideration in the infringement trial.  The jury found that Funai’s ‘018 and ‘210 patents were willfully infringed by Daewoo under the doctrine of equivalents and that the ‘538 patent was willfully infringed under either the doctrine of equivalents or was literally infringed and awarded Funai $7,216,698 against DEC and $2,298,590 against DEC and DEAM as well as attorney fees and expenses.

The District Court handled the matter as to whether DEC and DEAM were liable for the judgment against DECL and DECA.  The District Court chose to apply the successor liability law of South Korea and found that neither DEC or DEAM were liable for the judgment against DECL and DECA.  Daewoo appealed the findings of infringement, claim indefiniteness and damages, and Funai cross-appealed the findings of no enhanced damages and no successor liability.

Holder Gear Limitation

The ‘018 patent is directed towards movement of a cassette in a VCR and attending features that allow such movement while decreasing a size of the VCR and claim 1 recites a “holder drive gear for driving said cassette holder via a gear mechanism so said cassette holder is positioned in the initial position when said slide arm is positioned at a first position, and is positioned in said play position when said slide arm is positioned at a second position.”  The District Court granted summary judgment that the “holder driver gear” limitations were not literally infringed, but the jury found infringement of the limitation under the doctrine of equivalents.  Funai appealed the decision that claims 1-4 of the ‘018 patent are not literally infringed.  With respect to a cassette ejection sequence, the Federal Circuit Court stated, that “[t]he Daewoo ejection sequence is similar, but the actions occur in the reverse order.”  The Federal Circuit further noted that the District Court held that Daewoo’s cassette decks could not be literally infringing because they use a slide arm cam, pin and springs to move the cassette holder.  Therefore, the Federal Circuit affirmed the District Court’s holding of no literal infringement.

Insulating Material Limitation

The ‘210 patent’s recitation of “insulating material” was also raised as an issue in appeal.  The ‘210 patent recites “a motor which is mounted on said deck chassis…said motor being electrically insulated form said deck chassis…said direct driving motor including…a bearing holder…wherein said bearing holder is made of an insulating material.”  The District Court found that Daewoo did not literally infringe the ‘210 patent with respect to the insulating material.  Funai challenged the finding of no literal infringement and Daewoo challenged the District Court’s definition of “insulating material,” and asserts that prosecution history estoppel bars infringement under the doctrine of equivalents.

On review, the Federal Circuit noted that the District Court interpreted “insulating material” to be “a material with poor electrical conduction.” Daewoo asserted that such an interpretation is fatally flawed because it uses comparative language, in that “poor” is a relative term.  Daewoo argued that a numerical value, corresponding to the ‘210 specification, should be used.  Funai argued that one of ordinary skill in the art would understand what “poor electrical conduction” means.  The Federal Circuit Court stated that “[t]he use of comparative and functional language to construe and explain a claim term is not improper,” and found that “[n]o error can be attributed to this use of comparative and functional explanation in construing these claims.

Funai next appealed the District Court’s judgment that Daewoo’s material was not an insulating material as defined by the District Court.  The Federal Circuit Court noted that both the Funai and Daewoo products use Lexan, which is brand name polycarbonate resin.  However, Daewoo’s expert testified that Daewoo’s material contained carbon fibers, which increased the thermal and electrical conductivity.  Daewoo’s expert also stated, on cross-examination, that the Daewoo polycarbonate is 1 million to 100 million times less conductive than metal.  Funai asserted that the cross-examination admission would let a reasonable jury find that Daewoo’s polycarbonate is an insulating material, as recited in the ‘210 patent.  The Federal Circuit noted that the District Court stated that Funai “failed to produce any evidence that one of ordinary skill in the art would consider Daewoo’s bearing holders to be made of material with ‘poor electrical conduction,’” and that such a finding by the District Court was supported by the evidence produced in the cross-examination and at other places.  The Federal Circuit went on to state that even if summary judgment was improperly granted, infringement was decided with respect to the doctrine of equivalents, and thus, literal infringement was not tried.

No Prosecution History Estoppel Where Claim Made Independent For Reasons Other Than Feature Used for Equivalency

On the issue of infringement under the doctrine of equivalents, the jury found infringement of the ‘210 patent under the doctrine of equivalents.  Daewoo appealed this finding because prosecution history estoppel precluded infringement under the doctrine of equivalents.  However, because the insulating material was not a ground for rejection during the prosecution of the ‘210 patent, the District Court stated that prosecution history estoppel does not apply and denied summary judgment on this matter.

The Federal Circuit noted that, during the prosecution of the ‘210 patent, the Examiner rejected claims 1-3 and 6 in view of two pieces of prior art viewed in combination, one of which was relied upon to disclose the motor electrically insulated from the deck chassis.  The Examiner also stated that claim 4 had allowable subject matter, so the applicant cancelled the rejected claims and rewrote claim 4 to be in independent form, which issued as claim 1.  Daewoo, in appeal, asserts that the scope between claims 1 and 2 and 4 was surrendered, and cites Honeywell, 370 F.3d at 1141, which states that “[a] presumption of surrender…arises if rewriting the dependent claims into independent form, along with canceling the original independent claims, constitutes a narrowing amendment.”  Funai, in contrast, asserted that cancelling claims 1 and 2 is not a narrowing amendment because there was no rejection with respect to the insulating material.  In finding to estoppel, the Federal Circuit noted the insulating material had no bearing on the allowance of claim 4, and thus, the insulating material was “merely tangential.”  The Federal Circuit went on to find that “the district court correctly held that the cancellation of claims 1 and 2 did not surrender access to equivalency with respect to the insulating material.  The district court appropriately tried the question of equivalency to the jury,” and the Federal Circuit Court affirmed the judgment of the jury.

Series Circuit Feature: Interpretation Which Excludes Embodiments Not Allowed

The ‘538 patent is directed towards an oscillation circuit of magnetic erasing heads used in VCRs. Daewoo appealed the District Court’s claim construction, and asserted that the jury’s finding of infringement is predicated upon such.  Specifically, the Federal Circuit noted that Daewoo contests how the District Court construed the claim 1 limitation of “series circuit” with respect to the phrase “through a series junction point.”  The District Court’s construction found that the series junction point does not need to be between two heads of the VCR recited in claim 1.  The District Court relied upon the specification, which has figures showing the junction point at various locations both between and not between the heads of the VCR.

The Federal Circuit affirmed the District Court’s claim interpretation because Daewoo’s interpretation would exclude embodiments included in the figures of the ‘538 patent.  Daewoo also contested the validity of the claims 1, 3 and 4 of the ‘538 patent for failure to meet claim definiteness, an issue that was decided by the District Court as a matter of law if the jury found the claims to be infringed.  Daewoo asserts that there are grammatically inconsistent uses of the terms “at least,” “between,” and “one of,” and that such terms, and in particular “at least,” are inconsistent with ordinary use.  However, the Federal Circuit found that the District Court “construed the terms to implement their meaning as manifested in the specification and the prosecution history, and correctly rejected Daewoo’s charge of indefiniteness.”

Notice and Damages

The Federal Circuit Court also addressed the damages awarded to Funai.  At issue was when Funai gave notice of infringement to Daewoo.  Funai claimed that notice was given by a letter on April 3, 2003, naming the six patents, and naming two models of Daewoo’s VCRs as the infringing products.  Daewoo disputed that the letter was sufficient notice as per any other Daewoo VCRs, and thus, damages assessed against those other Daewoo VCRs being further limited than from the date of the Funai letter.  The Federal Circuit relied upon Gart v. Logitech, Inc., 254 F.3d 1334, 1346 (Fed. Cir. 2001) for proposition that “a letter must be sufficiently specific to support an objective understanding that the recipient may be an infringer.” The Federal Circuit further noted that “[t]he letter must communicate a charge of infringement of specific patents by a specific product or group of products.” Armsted Industries Inc. v. Buckeye Steel Castings Co., 24 F.3d 178, 187 (Fed. Cir. 1994).  Moreover, the Federal Circuit went on to state that “when the threshold specificity is met, the ensuing discovery of other models and related products may bring those products within the scope of the notice.”  The Federal Circuit thus held that a reasonable jury could have considered these factors in the jury’s calculation of damages, as it was instructed to do in this case, and that it has not been shown that the jury’s award does not implement this instruction.

Patent Marking and Damages

Funai asserted that damages should have been awarded from the date of Daewoo’s start of infringement, with respect to the ‘018 patent because it was marked, and thus there was constructive notice.  The jury was instructed on marking requirements, and Daewoo did not object to the instructions.  On appeal, Daewoo asserted that the marking statute permits no shortcoming in completeness of marking.  Funai states that it marked 88%-91% of its retail products, and that the remaining sales were done by Funai’s original equipment manufacturer (OEM).

The Federal Circuit noted that evidence showed that 88% of Funai’s products were retail sales marked with the ‘018 patent in 2003 and that, in 2004, 91% were.  Daewoo’s argument for lack of completeness of marking relied upon American Medical Systems, Inc., v. Medical Engineering Corp., 6 F.3d 1523, 1537 (Fed. Cir. 1993), which states that a marking “must be substantially consistent and continuous in order for the party to avail itself of the constructive notice provisions of the statute.”  However, the Federal Circuit Court notes that a “rule of reason” is provided by Maxwell, 86 F.3d at 1111-12, which states that the rule is “consistent with the purpose of the constructive notice provision—to encourage patentees to mark their products in order to provide notice to the public of the existence of the patent and to prevent innocent infringement.”  The Federal Circuit affirmed the District Court’s finding that “th[e] evidence constitutes substantial evidence from which the jury could find that Funai’s marking of products that incorporated the ‘018 was ‘substantially consistent and continuous.’”

Successor Liability for Awarded Damages

The Federal Circuit addressed the issue of successor liability.  As noted above, at the outset of the present lawsuit, Funai brought action against four Daewoo entities, DEC and DEAM, and their respective predecessors, DECL and DECA, and DECL and DECA stopped participating in the lawsuit.  The District Court entered a default judgment against DECL and DECA, jointly and severally, for patent infringement between January 1, 2001 and October 25, 2002.  Neither DECL nor DECA paid the judgment of $8,066,112.  Funai entered a motion that the judgment be assessed against DEC and DEAM. The District Court rejected this motion by applying South Korea law, which does not allow for successor liability unless it is assumed by contract.

Funai appealed the District Court’s decision as South Korean law is not applicable to the successor liability of DECA and DEAM, because they are U.S. companies and because it’s claim against DEAM and DECA is not a contract claim.  However, Funai did not challenge the District Court’s decision as to the South Korean companies, DECL and DEC.

The Federal Circuit summarized Funai’s argument as being “Funai stresses that the issue is the liability of a successor to a United States company for the judgment of a United States court for infringement of United States patents by activities in the United States by a United States corporation doing business in the United States,” and that such actions should be governed by U.S. laws and the applicable state law.

As to the application of South Korean law, the District Court held that it applied to the transfer between DECA and DEAM in the U.S. because:

“Korea has a strong interest in having its law applied because the Transfer Agreement was a contract entered in Korea between tow Korean corporations, where most of the assets transferred were also in Korea…to the extent that the transfer between DECA and DEAM was an outgrowth of the Transfer Agreement…the same expectation would apply to the issue of successor liability in that context.”

The Federal Circuit stated that it did not need to consider successor liability as per the South Korean companies DECL and DEC, but rather only needs to look at the successor liability of DEAM for infringement conducted by DECA.  Further, the Federal Circuit noted that the issue at hand is “whether a domestic corporation incurring a judgment of a United States court is insulated from that judgment if the judgment would not be enforceable under the laws of its foreign parent.”  The Federal Circuit went on to note that the District Court emphasized the interests of Daewoo over the interests of New Jersey in applying New Jersey law to businesses operating in New Jersey.  However, the Federal Circuit held that the District Court was in error in applying South Korean law so as to not apply successor liability to DEAM for the judgment against DECA.  The Federal Circuit stated that “[t]his is not a question of conflict with foreign law, or choice between domestic and foreign law, for no foreign law is involved in this question of successor liability for a default judgment for violation of United States law,” and thus, reversed the District Court’s decision to apply South Korean law.

The Federal Circuit went on to address which U.S. state law was applicable to DEAM and DECA as per successor liability.  The Federal Circuit analyzed the California and New Jersey law as per successor liability, and noted that DEAM is a Florida corporation.  The Federal Circuit also noted that neither party of the lawsuit finds there to be a material difference between the successor liability laws of New Jersey, California and Florida, and that Funai argues that New Jersey law should be applied, with the District Court relying upon New Jersey law when comparing U.S. law to South Korean law.  The Federal Circuit also chose to apply the law of New Jersey because that state was found to be the principal place of business for DECA and DEAM.

In reviewing DECA’s transfer to DEAM, the Federal Circuit Court stated that “[i]t is not disputed that DECA’s sales activities in the United States continued as DEAM without interruption, at the same corporate headquarters and sales facilities in New Jersey, with substantially the same managers and other employees,” and notes that New Jersey precedent presents a four factor test for successor liability, Woodrick v. Jack J. Burke Real Estate, Inc., 703 A.2d 306, 312:

(i)   continuity of management, personnel, physical location, assets, and general business operations;  (ii)       a cessation of ordinary business and dissolution of the predecessor as soon as practically and legally possible; (iii)assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the predecessor; and (iv) continuity of ownership/shareholders.

The Federal Circuit noted that Woodrick also states that “the most relevant factor is the degree to which the predecessor’s business entity remains intact.  In applying this rule, the Federal Circuit found that DEAM continued the business operations of DECA, and that “the transfer between DECA and DEAM was simply a “new hat” for DECA,” and thus found DEAM to be liable for the default judgment against DECA in the present case, thus overturning the District Court’s decision as per successor liability.  Thus, the Federal Circuit Court upheld the District Court’s decisions as per the infringement of the ‘018, ‘210 and ‘538 patents, and reversed the District Courts decision as per successor liability, thus finding DEAM liable for DECA’s patent infringement.

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