Cisco Can’t Raise ‘Good-Faith’ Defense in Patent Infringement Lawsuit

Josh LongIn a decision with intellectual-property implications for the litigious technology sector, the U.S. Supreme Court on Tuesday held that Cisco Systems Inc. could not raise a good-faith defense that it believed a patent was invalid.

The ruling against Cisco, the network equipment maker, could further embolden so-called patent trolls, entities that assert patents in order to obtain licensing fees.

Elimination of the good-faith defense also may contribute to more administrative proceedings at the Patent Trial and Appeal Board in which a defendant in a patent case is concerned about a frivolous action or wants to challenge a patent’s validity, said Margaret Duncan, an attorney specializing in patent law who is a Chicago-based partner with the international firm McDermott Will & Emery.

“It was an important defense and helpful to defendants,” Duncan said Wednesday in a phone interview with Channel Partners, commenting on the ruling. “You perhaps have to look for other avenues of defense.”

Cisco, Commil Disagreement

The spat between Cisco and Commil USA, LLC dates back to 2007 when Commil filed a patent infringement lawsuit against Cisco in federal court in the Eastern District of Texas. The patent relates to a method of implementing short-range wireless networks.

Following an initial trial in 2010, a jury awarded Commil damages of $3.7 million after finding its patent was valid and that Cisco had infringed it. However, Commil didn’t prevail on a claim that Cisco had induced others to infringe the patent by selling the infringing gear for them to use.

But the district court granted a second trial on the inducement claim and damages due to what the Supreme Court characterized as “inappropriate comments” by Cisco’s legal team during the first trial. In the spring of 2011, a jury found Cisco liable on Commil’s inducement claim and awarded damages of $63.7 million. A final judgment was entered granting $63.7 million in actual damages, $10.3 million in prejudgment interest, and $17,738 in costs.

Cisco appealed to the U.S. Court of Appeals for the Federal Circuit, arguing the trial court made a number of errors. Only one of the issues was decided by the Supreme Court.

Good-Faith Defense

In a decision authored by Supreme Court Justice Anthony Kennedy, the majority found Cisco could not …

… raise as a defense its good-faith belief that the patent was invalid in response to Commil’s claim that the networking equipment giant had induced others to infringe the patent.

The court said issues of infringement and a patent’s validity are distinct ones.

“Allowing this new defense would also undermine a presumption that is a ‘common core of thought and truth’ reflected in this Court’s precedents for a century,” Kennedy wrote. “Under the Patent Act, and the case law before its passage, a patent is ‘presumed valid.’ That presumption takes away any need for a plaintiff to prove his patent is valid to bring a claim. But if belief in invalidity were a defense to induced infringement, the force of that presumption would be lessened to a drastic degree, for a defendant could prevail if he proved he reasonably believed the patent was invalid.”

Kennedy also cited practical reasons for not permitting the defense. He pointed out a defendant in an infringement case could seek a declaratory judgment that the patent was invalid or request a review concerning the patent’s validity at the U.S. Patent and Trademark Office’s (USPTO) Patent Trial and Appeal Board. As Cisco did, a company also could seek a reexamination by the USPTO, and separately a company accused of infringing a patent could raise the affirmative defense that the patent is invalid, Kennedy pointed out.

The majority recognized the controversial practice of entities using patents to extract money from others, even when such intellectual property claims have no basis. But Kennedy said district courts have the authority to sanction lawyers for bringing frivolous lawsuits, and in extraordinary cases, award attorney’s fees to the winning party.

In a dissenting opinion in which Chief Justice John Roberts joined, Justice Antonin Scalia appeared to view the majority’s opinion eliminating the good-faith defense as nonsensical.

“Because only valid patents can be infringed, anyone with a good-faith belief in a patent’s invalidity necessarily believes the patent cannot be infringed,” Scalia wrote. “And it is impossible for anyone who believes that a patent cannot be infringed to induce actions that he knows will infringe it. A good-faith belief that a patent is invalid is therefore a defense to induced infringement of the patent.” 

Round III

The Supreme Court’s majority decision doesn’t affect a separate holding by the Federal Circuit in which it ordered a new trial on the inducement claim based on a finding that the district court gave an erroneous jury instruction. The Federal Circuit ruled Cisco must have had knowledge that …

… the induced actions infringed the patent in order to be held liable for the inducement claim. That ruling is consistent with a 2011 Supreme Court decision, which was handed down after the $63.7 million verdict against Cisco but before the judgment was entered.

“The federal circuit’s ruling vacating the jury verdict in this case still stands,” Cisco spokesperson Robyn Blum said in an emailed statement. “Today’s decision simply eliminates one of many strong defenses available to Cisco and we look forward to the retrial of the case.”

Duncan, who has led her law firm’s Chicago Intellectual Property Litigation practice for the past 12 years, pointed out that establishing the invalidity of a patent is a complete defense. Cisco asserted that defense in its long-running dispute with Commil, but as the majority pointed out, the USPTO affirmed the patent’s validity.

U.S. Patent No. 6,430,395 (“395 patent”), Commil’s patent, concerns “a method of providing faster and more reliable handoffs of mobile devices from one base station to another as a mobile device moves throughout a network area,” according to the Federal Circuit. Commil alleged that Cisco’s Wi-Fi access points and controllers infringed the patent.

The initial verdict may have stood but for a finding by the district court that Cisco’s counsel made improper comments that illustrated prejudices against Commil, which is based in Israel. Cisco argued on appeal that the second trial shouldn’t have been granted, an argument the Federal Circuit soundly rejected.

“There is ample evidence from which the district court could conclude that the jury was biased by Cisco’s actions,” the Federal Circuit wrote in its 2013 decision. “Throughout trial, Cisco attempted to instill in the jury, through irrelevant references to ethnicity and religion, an “us versus them” mentality. Cisco persisted in its course of conduct even after the court warned counsel and issued a curative instruction. And, in a case involving Jewish inventors and plaintiffs, Cisco’s counsel began his closing argument with a reference to the trial of Jesus Christ.”

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