Imputed liability: How to determine when parent companies should be held liable for the patent infringements of their subsidiary companies.

AuthorTracy, Emma
PositionNOTE
  1. Introduction

    The issuance of a patent allows the patentee the legal right to exclude others from manufacturing, using, selling, or importing the patented invention. (1) This legal right exists for as long as the patentee holds the patent. (2) Although most patents are not owned by their creators, (3) both inventors, who spend years laboring over an idea that comes to fruition, and those who obtain patent rights via other means may wish to profit from their patent. consequently, infringements are not taken lightly. When a company in a subsidiary position infringes upon another company's patent, the victims of patent infringement are frequently not being compensated for harm caused by a subsidiary company's infringements. Subsequently, when a subsidiary company cannot pay the damages arising from its infringement, the liability is traditionally imputed to the parent company. (4)

    This Note examines the theory and principles behind three traditional methods used to hold parent companies liable for the infringing actions of their subsidiaries. These methods include traditional agency principles of tort law, piercing of the corporate veil, and inducement principles outlined in [section] 271(b) of the Patent Act. This Note then discusses how these three methods differ in both the underlying theories they employ, and the subsequent outcomes they achieve, when it comes to fundamental issues of inducement liability. This analysis will include what type of conduct is required and what level of knowledge is necessary to impute liability under each theory.

    Part II of this Note introduces the historical and legal background of the three traditional methods of imputing liability. Part III then highlights the recent developments with respect to these three methods and how they apply to patent infringement cases. Part IV of this Note examines the similarities and differences between the three traditional methods (paying special attention to inducement under [section] 271(b)) and analyzes them as they apply to both corporate business cases and patent law cases. Finally, this Note concludes in Part V with a brief comment on the future use of these methods and why the judicial system should try to adhere to bright line rules--as opposed to unpredictable balancing tests--whenever possible when determining imputed liability, leaving balancing tests only for the situations that demand increased flexibility and adjustability.

  2. LEGAL BACKGROUND

    This Part traces the history of the three most common methods of imputing liability to parent companies and shows how and when courts decide which method to use. A common reason for creating a subsidiary company (5) is to limit the parent's potential liability. (6) However, these liability limitations may frustrate the parent company if the subsidiary is unable to remedy its own violations due to underfunding--when the subsidiary does not have enough assets to fulfill a judgment. When a subsidiary company infringes a patent, a plaintiff will often sue the parent company, in addition to the subsidiary company, in hopes of recovering a greater amount, even if the subsidiary is capable of providing relief on its own. (7) To be considered an infringement, a person or organization lacking authority to do so must "make[], use[], offer[] to sell, or sell[] any patented invention." (8) Though there are other ways that liability can be imputed to a parent company, this Note will focus on the three traditional methods of holding parent companies liable for the infringements of their subsidiaries: imputing liability via agency law principles, imputing liability by means of piercing the corporate veil, and imputing liability through standard 271(b) inducement principles.

    1. Imputing Liability Through Agency Principles

      One way to impute liability is through principles of agency law. As Justice Wiley Rutledge once said in a 1944 Supreme Court case, "Few problems in the law have given greater variety of application and conflict in results than the cases arising in the borderland between what is clearly an employer-employee relationship and what is clearly one of independent entrepreneurial dealing." (9) To be deemed an "employee" or an "employer" within the context of agency principles, courts typically perform a "right to control" analysis. (10) Using this analysis, courts consider factors such as an employer's desire to preserve control or the ability to manipulate the employee. (11) Courts use this employee-employer test when deciding whether a parent-subsidiary relationship exists and have noted that the "[d]ominion may be so complete... that by the general rules of agency the parent will be a principal and the subsidiary an agent." (12)

      When determining whether a subsidiary is considered an agent of the parent corporation, courts look to whether there exists "a close business relation between the two companies." (13) If the subsidiary is an agent of the parent, the subsidiary must be conducting business for the parent on the parent's behalf and under the parent's control, (14) and the parent may therefore be held liable for acts executed by the subsidiary that fall "within the scope of the agency." (15) To impute liability using this method, courts have stated that:

      When... it is charged that [a corporation] is a mere agency... of [another corporation] and is used as an instrumentality to perpetrate fraud, justify wrong[,]... or generally to escape liability for what are in substance its own acts, courts will put aside the screen and... determine affirmatively the truth and place responsibility where it actually belongs. (16) Courts agree on many of the above-referenced factors, but courts have disagreed as to whether an element of fraud is required (17) or whether a simple injustice in the absence of fraud suffices. (18)

      Claimants are permitted to proceed with their claims of infringement on a number of methods of agency law, (19) but the three most traditional methods discussed in this Note are actual authority, apparent authority, and ratification. (20) The Restatement (Third) of Agency, though not binding authority, is often referenced by the courts as persuasive authority. (21) These three theories are used to impute liability to a parent company by showing the parent had actual knowledge of an infringement. (22)

      1. Actual Authority

        Instances of actual authority arise when the principal, through its speech or conduct, objectively leads the agent to reasonably believe that he may act on behalf of the principal. (23) Actual authority is also referred to as "true authority" or "express authority." (24) When an agent follows through with an action on behalf of the principal, the agent's consent is subsequently established. (25) The crux of deciding if an agent took action with "actual authority" centers around whether the agent had "reasonable understanding" that he had the authority "at the time the agent takes action" to then take the executed infringing action. (26)

      2. Apparent Authority

        The next theory by which claimants are usually allowed to proceed in infringement cases is apparent authority. Apparent authority, also known as "customary authority," (27) arises when the principal's speech or conduct objectively leads the claimant to reasonably believe that an actor is an agent of the principal and may act on the principal's behalf. (28) Unlike actual authority, apparent authority does not have the same ramifications regarding the principal and agent's relationship. (29) For example, if an agent acting under apparent authority, but without actual authority, acts on behalf of the principal, he would be breaching his duty owed to the principal by acting outside the scope of his authority, (30) and the principal would have the right to seek recovery from the agent of any losses. (31) The Second Circuit has gone so far as to say "a principal may be estopped from denying apparent authority [and will be held liable as if an agency relationship existed] where 'the principal's intentional or negligent acts, including acts of omission, created an appearance of authority in the agent.'" (32)

      3. Ratification

        The final theory of agency law discussed in this Note is ratification. Ratification arises when the principal affirms an act, which did not originally bind him, that then generates the same consequences that would have ensued if the agent had performed the act with actual authority. (33) Ratification has a knowledge element, and because the act of ratification requires conduct on behalf of the principal that suggests consent, a principal cannot be held liable if the ratification was made without some form of knowledge of the material facts. (34) For example, in a patent case, it must be shown that the parent company, through its subsidiary, was aware of both the patent at issue and that the acts induced or products sold would have constituted an infringement. (35)

    2. Imputing Liability by Piercing the Corporate Veil

      The phrase "pierc[ing] the corporate veil" refers to a procedural tool in which the judicial system overrides the intrinsic principles of limited liability to impute a subsidiary's liability to a parent corporation. (36) The crux of corporate law is that corporations are legally distinct from the persons who manage and own them; therefore, a corporation's directors and shareholders do not share the same liability as their subsidiaries. (37) With respect to parent-subsidiary relationships, one parent corporation often acts as the sole shareholder of many subsidiaries that operate independently from the parent. (38) It is economically pragmatic to have more effective "risk-bearers" receive liability in certain circumstances. (39) The reasoning behind this is that many investors would be discouraged from investing in a certain company if that company's demise would permit creditors to gain access to the entirety of an investor's assets. (40)

      1. Veil Piercing

        Though the law...

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