Corporate Officers Run Risk of Broad Personal Liability for Patent Infringement
ANN ARBOR, Mich.---Few corporate officers fully understand the risk of broad personal liability they now face for the patent infringement of their corporations, says Lynda J. Oswald, a professor of business law at the University of Michigan Business School.
Oswald says the U.S. Court of Appeals for the Federal Circuit has inadvertently, but radically, altered the nature of individual officer liability in patent infringement over the past two decades. As a result, officers of small and closely held corporations, in particular, have lost many of the protections afforded them by traditional corporate-law doctrine. Oswald believes the misapplication of the Patent Act's liability provisions could have far-reaching effects elsewhere in the legal system.
"By confusing or ignoring the traditional bases of corporate-officer liability in the patent-infringement area, the courts have eroded the very foundations of traditional corporate-law doctrine," she says. "The ramifications of these patent-infringement decisions may well reach far beyond the patent-law arena to create expanded personal liability for corporate officers in other contexts as well."
In her article, "The Personal Liability of Corporate Officers for Patent Infringement," forthcoming in IDEA: The Journal of Law and Technology, Oswald says the Federal Circuit has failed to distinguish between owner liability and officer liability. This has resulted in confusion over which standard of liability is applicable to corporate officers for patent infringement.
Under traditional corporate-law doctrine, corporate officers are shielded from personal liability for the illegal acts of their corporations, provided the officers have not personally participated in those wrongful acts.
Under current patent law, Oswald argues, corporate officers should be held liable only for "inducement of infringement" when they actively aid and abet their corporation in the direct infringement of a patent, i.e., in the manufacture, use or sale of any patented invention without the permission of the patent holder.
Liability, she adds, should not be imposed upon an officer merely because of his or her status within the corporation. Intent must be shown to substantiate an officer's liability in inducing patent infringement.
Oswald faults the Federal Circuit for misapplying another distinct standard of liability called "piercing of the corporate veil," which is properly used to hold the owners (shareholders)---but not the officers---liable for the illegal, fraudulent or unjust actions of the corporation. She argues that by incorrectly using piercing analysis to hold corporate officers, in their roles as officers, liable for direct infringement, the Federal Circuit has, in effect, subjected those officers to a form of strict liability.
"Although the courts purport to look for personal participation by the corporate officer, they typically gauge such personal participation by examining whether the corporate veil can be pierced to hold the officer personally liable for patent infringement in the corporation," Oswald says. "What the courts fail to recognize is that piercing analysis does not apply to issues of officer liability and can only be used properly to impose liability upon shareholders."
By couching the personal liability of corporate officers for direct patent infringement in terms of piercing, the courts have confused the issues and opened the gates for a flood of inappropriate impositions of personal liability.
Oswald urges the Federal Circuit to abandon its precedents and to apply the Patent Act's liability provisions correctly when assessing the liability of corporate officers.
"This would ensure that culpable corporate actors are held liable in appropriate circumstances, but would avoid the wholesale imposition of personal liability upon corporate officers for the patent infringement of their corporations," she says.
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