Patent Infringement Risks Under the Defense Production Act
Following President Trump’s executive order to prevent hoarding of certain medical resources necessary to respond to the spread of COVID-19, the Department of Health and Human Services (HHS) issued a listing of critical materials facing a nationwide shortage. That listing includes respirators, ventilators, face masks, surgical masks, face shields, and gloves, among other materials.
In order to address the shortfall of products, manufacturers with excess capacity are exploring the possibility of retooling their plants to manufacture these critical materials. In addition to evaluating the cost of the retooling, these manufacturers also need to consider the potential of patent infringement as they embark in a new field in which they have little familiarity as to the patent landscape.
The easiest way for a manufacturer to minimize the risk of patent infringement is to partner with an existing company in the market that lacks sufficient manufacturing capacity to meet the demand. The new manufacturer can request an indemnification from the existing company or rely on the Uniform Commercial Code’s implied warranty regarding patent infringement if it makes the product for the existing company using specifications provided by the existing company.
If the new manufacturer cannot locate a willing partner, it will be solely responsible for any claims that its product infringes a third party’s patent. In normal practice, a reasonable manufacturer would obtain an opinion of counsel regarding patent infringement before introducing a new product, especially one in a new field of art. However, given the immediate shortage and critical need for these materials, waiting for the issuance of a well-reasoned opinion may not be practical.
Typically, if a patent owner believes a competitor is infringing on one of its patents, it will first send a cease and desist letter demanding the competitor stop the infringement and/or demanding the competitor take a license with terms generally favorable to the patent owner. The competitor then faces the dilemma of taking an unfavorable license or being an unlicensed manufacturer and risk a patent infringement lawsuit.
Risks of Patent Infringement
An accused infringer faces the risks of a court issuing an injunction preventing further manufacture and sales of the accused product and a court awarding damages to the patent owner. Should an injunction be issued, the unlicensed manufacturer will be denied the opportunity to recoup the costs expended in developing new tooling and purchasing raw materials. However, an injunction is an equitable remedy and a court must balance the equities in deciding whether to issue an injunction. Given the shortage of the materials on the HHS list, it is unlikely that a court would determine that the balance of equities would favor the imposition of an injunction preventing the unlicensed manufacture and sale of these critical products.
Even if an injunction is not imposed, the unlicensed manufacturer is still liable for damages for any patent infringement. Under the patent statute, a patent owner is entitled to damages in an amount sufficient to compensate for the infringement, but in no event less than a reasonable royalty. A patent owner is entitled to the profits it would have made on the sales of the infringer if it can demonstrate that it would have made those sales but for the act of infringement. Because there is a critical shortage for these materials which the patent owner is unable to satisfy, the patent owner would not be able to demonstrate the prerequisite for a recovery of lost profits. This limits the damage award to a reasonable royalty which is the license rate that fully knowledgeable businesses would agree to in an arm’s length negotiation. Although the unlicensed manufacturer would prefer not to pay any damage award, limiting the damages to a reasonable royalty could provide sufficient incentive for the unlicensed manufacturer to invest in new tooling.
One further complication is the potential for a finding of willful infringement. If the unlicensed manufacturer is aware that the product is protected by patents, or is recklessly indifferent to the possibility, it could be found to be a willful infringer if it does not undertake a patent review. In such a case, the unlicensed manufacturer could be subject to a trebling of the awarded damages and compensating the prevailing patent owner for its attorney fees. These awards are discretionary with the court and it is possible that given the exigent circumstances a court would decline to enhance the damages absent some egregious conduct on the part of the unlicensed manufacturer.
U.S. Government Authorization for the Unlicensed Manufacturer
The President has invoked, and activated, the Defense Production Act (DPA) – a rare occurrence most often reserved for war time scenarios. Should an unlicensed manufacturer be required by the U.S. government to act on behalf of the U.S. government, that manufacturer could still be liable for patent infringement. The DPA does not provide an immunity for tort liability, and patent infringement is typically a tort. However, under the DPA, where an unlicensed manufacturer is required to engage in potential patent infringement, that action is deemed a taking for which the U.S. government has waived sovereign immunity. It is important that the unlicensed manufacturer, in contracting with the U.S. government pursuant to the DPA, obtain the necessary authorization and consent and refrain from offering indemnification to the U.S. government for any ensuing potential patent infringement.
Once the DPA is invoked and activated, the only remedy available to a patent owner is to bring a claim against the United States for an eminent domain-like taking in the form of unauthorized patent use before a special court called the Court of Federal Claims (CFC) pursuant to 28 USC § 1498(a) to receive “reasonable and entire compensation.” Because the patent infringement is deemed a taking, as opposed to a tort, in the CFC and because the statute specifies that a reasonable recovery constitutes “entire” recovery, the only remedy available to the patent owner is a limited reasonable royalty.
In order to avoid liability for patent infringement, unlicensed manufacturers who are called upon by the U.S. government to address a shortfall of critical materials should contract directly with the U.S. government and ensure that all proper governmental authorizations are in place to protect them from any ensuing charge of patent infringement. This will spare the unlicensed manufacturers from being subjected to a patent infringement lawsuit in a federal District Court for answering the call to address the shortage of critical materials in a time of national crisis.
Options for Patent Holders
It is in the interest of patent holders who manufacture in affected technologies to oversee the manufacture and supply of their products and avoid U.S. government intervention to the greatest extent possible. To the extent they are unable to supply sufficiently to meet demand, patent owners should contract directly with other manufacturers to fulfill the shortfall in supply in order to maintain control over the exploitation of their proprietary technology. If the market is being fully supplied, the patent owner can enforce its patent rights against any unauthorized manufacturer using the full complement of remedies (e.g., injunctive relief, lost profit damage awards, attorney fees and willful infringement enhancements) which can be significantly higher than the limited reasonable royalty awards available in the CFC.
However, in a climate where government intervention has already occurred, as with the recent activation of the DPA, cooperation with the U.S. government may be the only available choice for patent holders.