|Sellers Beware – Importance of Proper IP Clearance in Business|
Intellectual property is an important asset for companies which could be used to recover investments on research and development (R&D) by imposing market hurdles on competitors, or by driving competitors out of the market and penalized them when competitors are found in the market.
While the importance of IP in modern day economy has been well noted, it is alarming that many companies still choose to take a blind-fold approach when dealing with practical IP issues. For example, it has been observed that many companies choose to rely on non-qualified personnel to make important IP decisions at critical decision points. Such a practice is often repeated until luck runs out and the adverse consequence could be disastrous!!
A recent court decision of the United States confirming an award of US$5 million against a company operating in Hong Kong would provide good reference materials and a good opportunity for company managements to review and reflect on their current strategies.
In this case, the Hong Kong company was sued for infringement of a US patent, and found to have “induced infringement” of the patent, even though the Hong Kong company only sold on a “FOB” basis ex. Hong Kong or mainland China factory.
The damages awarded was based on a gross profit margin of 40-50%.
A summary of the case of SEB S.A. et al. v Global-Tech et al (case 2009-1099, -1088,1119) as reported is set out below.
l SEB S.A. (“SEB”) is a French company that specializes in home-cooking appliances.
l SEB is the owner of US Patent No. 4,995,312 (the “‘312 patent”), entitled “cooking appliance with electric heating”.
l Claim 1 of the ‘312 patent is as follows.
“An electrical deep fryer comprising a metal pan (1) having a wall, and an electric heating resister (2) that heats said wall directly by conductive heating to a temperature higher than 150° C., said pan (1) being surrounded by a plastic skirt (3), wherein said skirt (3) is of plastic material which does not continuously withstand a temperature of 150° C., said skirt (3) entirely surrounding the lateral wall (1a) and the base (1b) of the pan and being separated from said wall and said base by an air space (4) of sufficient width to limit the temperature of the skirt (3) to a value which is compatible with the thermal resistance of the plastic material of the skirt (3), said skirt (3) being completely free with respect to the pan (1) with the exception of a ring (5) which joins only the top edge (3a) of the skirt to the top edge (1c) of the pan and to which this latter is attached, said ring (5) being of heat-insulating material which is continuously resistant to the temperature of the top edge (1c) of the pan (1).“
l Global-Tech, a British Virgin Islands corporation, and its subsidiary Pentalpha, a Hong Kong Corporation, are manufacturer and seller of household appliances. (Pentalpha and Global-Tech will be collectively referred as “Pentalpha” in this Newsletter).
l In 1997, Pentalpha entered into an exclusive product supply agreement with Sunbeam Products, Inc (“Sunbeam”) that included deep fryers.
l There was no patent marking on the SEB deep fryer.
l In developing its deep fryer, Pentalpha purchased an SEB deep fryer in Hong Kong and copied its “cool touch” features. Shortly after agreeing to supply Sunbeam, Pentalpha obtained a “right-to-use study” from an attorney in Binghamton, New York.
l The attorney analyzed 26 patents and concluded that none of the claims in those patents read on Pentalpha’s deep fryer.
l Pentalpha did not inform the US attorney that it had copied an SEB’s deep fryer.
l In late August 1997, Pentalphs began selling deep fryers to Sunbeam free on board Hong Kong or China, and Sunbeam resold them in the United States.
l In March 1998, SEB sued Sunbeam in the United States District Court, alleging that Sunbeam’s sales infringed the ‘312 patent and ending in a settlement in which Sunbeam agreed to pay SEB US$2 million.
l In August of 1999, SEB sued Montgomery Ward, Global-Tech and Pentalpha for infringement of the ‘312 patent in New York district court.
l In April 2006, the district court ruled that Pentalpha had willfully directly infringed and induced infringement and SEB was awarded a reasonable royalty of US$4.65 million on Pentalpha’s sales.
1. The reported fact that “in developing its deep fryer, Pentalpha purchased an SEB deep fryer in Hong Kong and copied its ‘cool touch’ features”, would have triggered an IP clearance alarm.
2. However, this critical and alarming fact was not communicated for the purpose of IP clearance at the critical decision points!!!
3. In fact, the appeal judge specifically referred to the following facts when drawing a conclusion of induced patent infringement:
i. “Pentalpha hired an attorney to conduct a right-to-use study, but did not tell him that it had based its product on SEB’s product”, and that,
ii. The top management of Pentalpha “was well versed in the U.S. patent system and understood SEB to be cognizant of patent rights as well”.
4. It is also worth noting that “induced infringement” of the patent was found, even though the Hong Kong company only sold on a “FOB” basis ex. Hong Kong and mainland China.
5. As a conclusion, whilst a working knowledge of international IP by corporate management is indeed valuable, assuming the role of professional IP advisors at critical decision points when proper guidance should be sought could lead to disastrous and very expensive consequences.
The law and procedure on this subject are very specialized and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Please contact our Intellectual Property & Technology Practice Group – Patent:
+(852) 2107 0329
Published by ONC Lawyers © 2011