Parties should be aware that infringement liability may extend to both the parent and subsidiary under the theories of induced infringement or contributory infringement, even if the subsidiary is the primary participant in the alleged infringing acts.
What liability does a parent company have when a subsidiary’s actions allegedly constitute patent infringement?
That is the question answered in a recent patent infringement case, Akoloutheo, L.L.C. v. System Soft Technologies, Inc., No. 4:20-cv-985, 2021 WL 1947343 (E.D. Tx. May 14, 2021). In particular, Akoloutheo sheds light on the application of Rule 12(b)(7) in a situation where a subsidiary of the defendant parent company is the primary participant in the acts giving rise to the infringement action and could not be joined to the present infringement action. Based on the court’s determination, parent companies should not expect to escape infringement liability by pinning the blame on a subsidiary and seeking a dismissal via a 12(b)(7) motion when the subsidiary cannot be joined due to it being viewed as a joint tortfeasor and thus does not need to be joined to the present action under Rule 19. Further, the infringement statute may impute infringement liability on the parent through an inducement or contributory theory. Thus, despite the protection offered through the creation of separate corporate entities, parties should be aware that infringement liability may extend to both the parent and subsidiary under the theories of induced infringement or contributory infringement, even if the subsidiary is the primary participant in the alleged infringing acts.
Specifically, in Akoloutheo, the court considered the implications of multiple rules under the Federal Rules of Civil Procedure, including Rule 12(b), Rule 12(b)(7) and Rule 19.
- Rule 12(b) provides pretrial defenses that a party may assert by motion such as the lack of subject-matter or personal jurisdiction.
- Rule 12(b)(7) permits a district court to dismiss an action for failing to join a party under Rule 19.
- Rule 19 is drawn to the required joinder of parties to an action and inquires whether a party should be joined and whether joinder of that party would destroy the court’s jurisdiction, warrants continuing the action without the party or whether the case should be dismissed.
Akoloutheo sued System Soft alleging infringement of U.S. Patent No. 7,426,730 (’730 patent) entitled “Method and System for Generalized and Adaptive Transaction Processing Between Uniform Information Services and Applications.”
In particular, Akoloutheo’s complaint alleges that infringement of the ’730 patent occurred through software offered by System Soft’s subsidiary, Elysium Analytics, Inc. Following the failure to join Elysium to the infringement action, System Soft filed a motion under Rule 12(b)(7) seeking dismissal of the action. System Soft argued that because its subsidiary Elysium is the primary participant in the alleged infringing acts, it is a required party under Rule 19, and the failure to join Elysium warrants dismissal of the action. See Freeman v. Nw. Acceptance Corp., 754 F.2d 553, 559 (5th Cir. 1985) (finding the subsidiary in a conversion action to be a required party for joinder because the subsidiary was the primary participant).
The court disagreed with System Soft, finding that Elysium is not a necessary party under Rule 19(a). Patent infringement is a tort and both System Soft and Elysium would be seen as joint tortfeasors. See Schillinger v. United States, 155 U.S. 163, 168-69 (1894) (finding patent infringement to be in tort). Case law holds that Rule 19 does not require the joinder of joint tortfeasors and that joint tortfeasors are not required or indispensable parties. See Nottingham v. Gen. Am. Commc’ns Corp., 811 F.2d 873, 880 (5th Cir. 1987); see also Herpich v. Wallace, 430 F.2d 792, 817 (5th Cir. 1980). System Soft, as the parent company, could be found liable for infringement if it directly engaged in the infringing acts or if it induced or contributorily infringed under 35 U.S.C. 271. Elysium is not a required party even though System Soft may seek indemnity or contribution. Finding that the court would still be able to provide complete relief and that System Soft would not be subject to inconsistent obligations based on the failure to join Elysium, the court subsequently denied System Soft’s 12(b)(7) motion to dismiss.
Akoloutheo reiterates that patent infringement is a tort and because alleged infringers are viewed as joint tortfeasors, motions for dismissal under 12(b)(7) when a joint tortfeasor cannot be joined will ultimately fail because joint tortfeasors are not required parties under Rule 19. Furthermore, although the law typically shields a parent company from liability arising from the tortious acts of its subsidiaries without piercing the corporate veil, Akoloutheo provides a reminder that a parent company may still be held liable for the infringing acts of its subsidiary under 35 U.S.C. 271(b), which provides that “[w]hoever actively induces infringement of a patent shall be liable as an infringer.”
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