The Franchise Memorandum

Patent litigation remains a topic of discussion in franchise circles, as more and more franchisors have been named as defendants in large cases involving some element of their franchise system technology. This week the United States Supreme Court issued two unanimous decisions likely to benefit franchisors facing patent infringement allegations. In Nautilus, Inc. v. Biosig Instruments, Inc., No. 13-369 (U.S. June 2, 2014), and Limelight Networks, Inc. v. Akamai Technologies, Inc., No. 12-786 (U.S. June 2, 2014), the Supreme Court clarified the enforceability of certain patents and the reach of liability under certain circumstances.

In Nautilus, the Court addressed the "definiteness" requirement of patent law. In patent-speak, the "definiteness" requirement states that a patent must put the public on notice of what it covers. A patent can be held invalid if it is "indefinite." Until the Court's ruling on Monday in the Nautilus case, a patent's claim was sufficiently definite so long as it was "amenable to construction," and not "insolubly ambiguous." The Court held that the "insolubly ambiguous" test does not satisfy the Patent Act's definiteness requirement. Instead, "a patent is invalid for indefiniteness if its claims, read in light of the specification delineating the patent, and the prosecution history, fail to inform, with reasonable certainty, those skilled in the art about the scope of the invention." This "reasonable certainty" test appears to increase the potential that a patent may be invalidated as indefinite.

The Limelight decision addressed the concept of "induced infringement," which has been alleged in franchising. Prior to Monday's decision, a party could be liable for inducing infringement when "a defendant carries out some steps constituting a method patent and encourages others to carry out the remaining steps—even if no one would be liable as a direct infringer in such circumstances." Thus, even if no one individual or entity was practicing a patent, the prior Federal Circuit test held entities liable in certain circumstances if they performed just some of a claim's elements. This theory has been used by plaintiffs in some of the so-called "patent troll" cases filed against franchisors. The Supreme Court this week reversed the Federal Circuit and made clear that in order for a party to be held liable for inducing infringement, there must be at least one individual or entity that actually practices every element of a claim. The Limelight decision adds certainty to the law and eliminates one theory of liability particularly popular in software patent infringement cases.

Any franchisor facing patent troll litigation should welcome this week's rulings, particularly the decision in Limelight, in that franchising inherently involves the use of software by multiple actors at different levels.