Outline
On May 26, 2023, the Intellectual Property High Court (IPHC) made a landmark decision that finds patent infringement on an internet-related invention beyond a national border. In the lawsuit, DWANGO Co., Ltd., a Japanese web service company of which one of the major services is a video distributing service called “niconico Video”, claimed that FC2 and another defendant allegedly infringed their patent right regarding a video distributing system. FC2 had provided a video distributing service to users in Japan from a server located overseas. A point at issue in this case is whether such activity infringes a patent right in Japan in light of the territoriality principle. The litigation has been drawing strong interest as there are only a few case laws regarding so-called extra territorial application of patent rights in Japan. The IPHC turned down the first instance decision by deeming that the video distributing service of FC2 infringes a patent right owned by Dwango, and ordered FC2 to suspend the video distributing service and pay 11 million JPY (about 70 thousand USD) in damages.
Original Decision
Continuing from the original decision, Dwango alleged that the FC2’s activity of distributing files to users’ devices in Japan from FC2’s server located in the U.S. falls under “production” of the system which is a patented invention of Dwango. Under Japanese Patent Law, “production” is deemed to be one example of the working of a patented invention in addition to “usage”. It is noteworthy that this dispute has arisen addressing a cross-border issue in view of “production of a system”.
The allegation made by Dwango at the first instance can be summarized as follows:
Although the “production” of the FC2 system begins by an action occurring overseas, the “production” should be deemed as a domestic act since the user devices which occupy a large part of the system are located in Japan. Further, Dwango alleged another reason which is that the location of the working of the patented invention can be considered to be Japan by pointing to one of the features of the distribution services, which displays streaming comments on the screen without overlapping, and such action is conducted in Japan.
However, in the original decision, the Tokyo District Court judged that the FC2 system does not infringe the patent by strict application of the territoriality principle and concluded that the FC2 system cannot be considered to be created in Japan as long as its server, which is a part of the system, is located outside of Japan.
Key Point of the Present Decision
In the present decision, the IP High Court stated that it is not reasonable that the working of a network system invention is uniformly construed as not falling under the working of a patented invention stipulated in Japanese Patent Law, Article 2(3) on grounds that a part of the constitutional elements of the system is located outside of the country under strict application of the territoriality principle. This may lead to easily avoiding patent infringement by only installing the server overseas and hence patents related to the system invention cannot be sufficiently protected. Moreover, the IPHC indicated that the “production” of a network type system can be assumed to be a domestic action even if the part of its system is located outside of Japan under the following conditions.
1) Specific circumstances of the action to create the system
2) Functions and roles of each constitutional element of the invention in the system that exists in Japan
3) The location where the effects of the invention are achieved by using the system
4) The impact which the use of the system may have on economic benefits of the patentee of the patent invention
In this context, the IPHC judged that the production of the video distribution system provided by FC2 is deemed as a domestic activity falling under 1) to 4) above as follows.
1) The act of data transmission/reception which is needed to produce the system is inseparable and, it can be recognized to be practiced in Japan.
2) User devices in Japan perform the function of adjusting locations of displayed comments which is the main function of the patented invention.
3) Improvement of recreational pastimes which is the effect of the invention is achieved in Japan
4) Use of the system may have an impact on the economic benefits that Dwango may obtain by using the system in Japan.
In addition, with regard to the agent of “production” of the FC2 system, the IPHC stated that all the servers for the system are controlled by FC2 and the file transmission which is necessary for production of the system is automatically executed without additional operation by users. Thus, the agent which “produced” the system was FC2.
Other Litigation
In parallel with the above IPHC case, Dwango had filed another suit against FC2 for patent infringement, where the patented invention is related to user devices unlike with the present case. In this case, the IP High Court rendered a decision stating a similar view such that “any act which circumvents the law, such as transferring their own server abroad in a bid to dodge one’s responsibility for possible patent infringement, must be prohibited as it is clearly contrary to justice”, and the IPHC found patent infringement by FC2 since the act of downloading the video playing program from the overseas server can be deemed to be working of the invention in Japan.
Our Comments
Our feeling is that the judgement helps spur a trend where it is not reasonable to transfer a server abroad in a bid to dodge one’s responsibility for possible patent infringement in view of viability of the patent system. The above decision of the IPHC appears to be similar to a U.S. decision where the CAFC judged that “the use of a claimed system under section 271(a) is at the place at which the system as a whole is put into service, i.e., the place where control of the system is exercised and beneficial use of the system obtained” even if part of the constitutional elements of the system is situated overseas (August 2, 2005 , CAFC, NTP, INC. v. RESEARCH IN MOTION, LTD.).
On the other hand, the main functions of the patented invention are implemented in users’ devices located in Japan, and the present case shows that this point is one of the factors to be considered when the Court deems working of a patented invention to be domestic. Accordingly, in cases where image and data processing are mainly worked overseas and devices located in Japan only display them, such cases may be beyond this rule. In this regard, some experts are raising questions that the patent protection system may not be adequate.
In addition, while the Court decision clarifies the usefulness of “system production” strategy for a cross-border problem, drafting claims with a single composition element in a network may remain dominant and important. The issue of which forms of claims are effective for cross-border issues should be further discussed.