Guandong LED Magazine: Risk Management for U.S. Patent Infringement Lawsuits

Washington, DC – April 1, 2014 – The article co-authored by Lei Mei and titled “Risk Management for U.S. Patent Infringement Lawsuits” was published in the March 2014 edition of Guangdong LED Magazine.

A copy of the article (English Version) is reproduced below:

The Chinese LED market is growing rapidly in the past few years. It is becoming an important player in the world market. It is obvious that the LED industry is more and more popular, as indicated by the growing litigation cases in the United States.

On September 11, 2013 Nichia sued Everlight Electronics in federal court in Marshall, Texas for alleged infringement of U.S. Patent No. 7,432,589 (“the ’589 patent”). The complaint alleges that Everlight’s LED model 61-238/RSGBB7C-B02/ET infringes the ’589 patent. The ’589 patent is directed to a semiconductor device capable of preventing an adhesive for die bonding from flowing to a wire bonding area. This is not the first lawsuit between these LED rivals.

On September 30, 2013, the United States District Court for the Central District of California issued a Final Judgment and Order imposing an injunction that prohibits Lights of America from making any misrepresentations about its LED products. The decision also includes a substantial monetary judgment, ordering Lights of America to pay the Federal Trade Commission over $21 million dollars.

Moreover, on September 20, 2013, the Trustees of Boston University filed patent infringement litigation against more than 20 companies in federal court in Boston regarding its LED patent 5,686,738. Defendants include Acer, Nikon, Sony, Dell, Fuji and others.

All these cases remind us about the importance of our own risk management. This section will discuss how Chinese companies may develop risk management strategies for U.S. patent infringement lawsuits.

I. Identify Potential Risks

As for any risk management, the starting point is to identify potential risks. Regarding U.S. patent infringement lawsuits, potential risks come in two forms: direct risks and indirect risks.

Direct risks, prevalent among semiconductor manufacturers, may come from product design. For example, during the R&D process, engineers might have studied competitors’ technology or patents to develop their own solutions. If the final product has features that would be covered by third party patents, it creates direct risks of potential patent infringement lawsuits.

Indirect risks, common among packaging companies that source semiconductor materials from manufacturers, may come from contracts and purchasing agreements. For example, when a packaging company enters a contract to purchase semiconductor components from a component manufacturer, the contract may be silent on potential IP liabilities regarding the components, or even release manufacturers from any future liabilities. As a result, the packaging company may be liable for patent infringement because of the components it purchased. Certainly, bargaining powers among the contracting parties may determine the wording of these contract provisions, but one must be aware of this type of indirect risks.

In addition, Chinese companies that do not directly import or sell components in the U.S. may face indirect risks of patent infringement lawsuits in the U.S. For example, customers of Chinese companies may buy and package the components in Asia and then sell final products in the U.S. A U.S. patent owner may then petition the United States International Trade Commission (ITC) to institute a Section 337 investigation that may exclude importation into the U.S. of any products containing infringing components.

To fully evaluate direct and indirect risks, Chinese companies should engage competent U.S. counsel to perform due diligence at every step of the production cycle.

II. Minimize Potential Risks

After identifying potential risks, Chinese companies will need to minimize potential risks of patent infringement lawsuits. Generally speaking, successful companies have adopted three common approaches.

First, design around to avoid your competitors’ patents. To minimize expenses, designing around should take place in the early phase of R&D, and one must continue to monitor competitors’ patenting efforts throughout the R&D process. Naturally, Chinese companies should not design around alone without input of competent U.S. counsel, because determining the scope of patent claims requires in-depth legal analysis.

Second, when designing around is not preferable (too costly or difficult), Chinese companies may retain competent U.S. counsel to render opinions on validity or infringement or both. Although an opinion letter is not required to defeat willful infringement (and potential treble damages) under recent U.S. case law, it is still desirable to have one because it will save future litigation costs and remove some uncertainties of the litigation.

Third, strategically patent the technologies that will cover your competitors’ products. Typically, in the semiconductor industry, products may be covered by many patents owned by different companies. Owning patents that cover a competitor’s products may enable you to negotiate a cross licensing deal so that both companies will be able to make and sell products without facing each other’s patent infringement lawsuit.

III. Manage Actual Risks

Unfortunately, some potential risks are inevitable to avoid. Therefore, Chinese companies must also be prepared to face and manage actual risks. For example, in the U.S., patent holding companies operate under a business model where they do not make any products themselves (thus unlikely to be sued for infringing other companies’ patents), but seeks royalties through licensing and patent enforcement. Therefore, Chinese companies need to learn how to handle U.S. patent infringement lawsuits.

This section will discuss two areas that are particularly relevant to Chinese companies: personal jurisdiction and electronic discovery. When you receive a copy of the complaint of a U.S. patent infringement lawsuit, you may consider taking several strategic steps in response.

First, evaluate your position in the stream of commerce. For example, do you sell products in the U.S.? Do you import products to the U.S.? Do you sell products in China, but your customers sell or import products into the U.S.?

On the one hand, if you sell or import products into the U.S., it is most likely that at least one U.S. district court has jurisdiction. The question then becomes which U.S. district court has jurisdiction. If the products are not sold in or imported into a particular district (e.g., Maryland), then this particular U.S. district court may not have jurisdiction. The plaintiff, however, may bring a suit in the appropriate U.S. district court.

On the other hand, if you sell the products only in China, but eventually the products are imported to and sold in the U.S., the situation becomes more complicated and requires careful analysis by U.S. counsel. For example, in Technology Patents, LLC v. Deutsche Telekom AG, No. AW-07-3012, slip op. at 2 (D. Md. Aug. 29, 2008), China Mobile and Singapore Telecom were named as two of many defendants in a U.S. district court in Maryland, but did not sell products in the U.S., as they merely allowed its existing users to send text messages while traveling in Maryland through agreements with U.S. wireless carriers. Therefore, they were not subject to personal jurisdiction in Maryland.

In contrast, if you sell your products to a customer, knowing that the customer will either import the products directly to the U.S. or package them with other components and import the final products to the U.S., it is more likely that you will be subject to personal jurisdiction in at least one U.S. district court.

Second, develop defense strategies by working with U.S. counsel to determine, for example, whether the company should file a motion to dismiss the lawsuit for lack of personal jurisdiction. Obviously, the decision depends on specific facts in individual cases. Additionally, U.S. counsel will help you identify potential issues, access risks, and develop appropriate defenses.

Third, prepare for document production if the lawsuit is not dismissed. As discussed earlier, discovery is a major component of U.S. patent litigation, and failure to produce relevant documents will result in severe sanctions. For example, in Qualcomm Inc. v. Broadcom Corp., No. 05 Civ. 1958, 2008 WL 66932 (S.D. Cal. Jan. 7, 2008), the judge ordered more than $8.5 million against Qualcomm, the plaintiff, for failure to produce relevant emails.

Typically, the judge will set a discovery schedule in the beginning of the case, so each party must be prepared to preserve the evidence and produce relevant documents timely. Accordingly, Asian companies should work with competent counsel to develop a discovery plan including identifying all relevant documents for production.

With careful preparation, Asian companies can learn to manage actual risks and handle patent infringement lawsuits smoothly.