Expanded territorial reach of Japanese patents

Under recent case law developments in Japan, Japanese patents may cover internet-related activities outside Japan depending on circumstances.

On 26 May 2023, the Intellectual Property High Court granted a notable en banc decision (Dwango Co Ltd v FC2 Inc (Ne No. 10046) regarding the territoriality of Japanese patent rights for the invention of a network system in which servers and terminals are connected via a network such as the internet and operate organically as a whole.

This decision concluded that the act of creating a new network system constitutes “producing” under article 2(3)(i) of the Japan Patent Act, even if the server (which is one of the elements of the network system), is located outside Japan, if the act can be considered to have been performed in Japan, taking into account the four factors discussed below and other related circumstances.

According to this decision, even if a component of the claim, such as a server, is located outside Japan, Japanese patent rights might still reach it if the remaining components are located in Japan.

Outline of the case

The appellant, Dwango (also plaintiff of the first instance) is the owner of patent No. JP6526304, which relates to a comment distribution system. The appellee, FC2 (also defendant of the first instance) operates a video and comments distribution service on the internet.

The appellant claimed that the system related to the video distribution service operated by the appellee (the defendant’s system) falls within the technical scope of the patented invention, and that the appellee’s act of delivering files from a server located in the US to a user’s terminals located in Japan constitutes “producing” (article 2(3)(i) of the Japanese Patent Act) of the system, and infringes the patented inventions.

Issues in this lawsuit

In this case, because the server, which is part of the defendant’s system, was located in the US, user terminals located in Japan alone do not satisfy all of the claimed elements of the present patent. Whether the appellee “produced” (article 2(3)(i) of the Japanese Patent Act) the defendant’s system, and whether the Japanese patent right would reach to the defendant’s system in such a case was an issue.

Principle of territoriality

The principle of territoriality applies to Japanese patents as well. This principle means that the establishment, transfer, validity, etc., of patent rights in each country are determined by the laws of that country and that the effect of patent rights is recognised only within the territory of that country.

Whether the act of creating the defendant’s system, which existed in both the US and Japan, because the server is located in the US and the user terminals are located in Japan, constitutes “producing” under article 2(3)(i) of the Japanese Patent Act was an issue related to the territoriality.

Court rulings

With respect to the above-mentioned issue, the Tokyo District Court as an original court held that, in order to be covered by “producing” under article 2(3)(i) of the Japanese Patent Act, it is necessary that an object that satisfies all the elements of the patented invention is newly produced in Japan under the principle of territoriality (Dwango Co Ltd v FC2 Inc in Tokyo District Court 2019 [Wa No. 25152, decision rendered on 24 March 2022]), and concluded that the appellee (defendant of the first instance) did not “produce” the defendant’s system in Japan.

In contrast, this appellate court decision concluded that the appellee’s act of delivering files from a server located in the US to a user’s terminals located in Japan constituted “producing” under article 2(3)(i) of the Japanese Patent Act.

Taking into account the following two reasons, this decision established how to determine whether the act of creating a new network-type system constitutes “producing” under article 2(3)(i) of the act, from the point of view of properly protecting patent rights related to the invention of a network-type system.

First, the decision held that in a network system it is now common for the server to be located outside Japan, and even if the server is located outside Japan, if the terminals are located in Japan it is possible to use the system in Japan, and such use may affect the economic benefit that the patentee should obtain by using the invention in Japan.

Therefore, it is not appropriate to strictly interpret the principle of territoriality to conclude that the act of creating a new network-type system does not fall within the scope of “producing” under article 2(3) of the act merely because the server is located outside Japan, as this would result in insufficient protection of patent rights.

Second, this decision states that it is also not appropriate to interpret the act of creating a new network system as “work” under article 2(3) of the act merely because the user’s terminals are located in Japan, as this would result in excessive protection of the patent rights and would cause hindrance to economic activities.

Based on these two reasons, the decision held that, with respect to the act of creating a new network system, even if a server that is a part of the elements constituting the network system is located outside of Japan, the court should take into consideration: (1) the specific manner of the act; (2) the function or role played by the domestic component of the system in the invention; (3) the place where the effect of the invention is obtained by using the system; and (4) the effect of the use of the system on the economic interests of the patentee of the invention and other relevant circumstances; and the court should hold that it constitutes “producing” under article 2(3) of the act if the action can be evaluated to be performed in the territory of Japan.

The decision then stated that, with regard to (1), the reception of files by users in Japan is performed as an integral part of the transmission of files from the server located in the US, which completes the defendant’s system, and thus the transmission and reception can be considered to be performed in Japan.

With respect to (2), the decision also stated that the user terminals existing in Japan perform the functions of the constituent elements necessary to realise the main functions of the invention.

With respect to (3), the decision stated that the defendant’s system can be used from Japan via user terminals and that the effects of the invention are manifested in Japan.

With respect to (4), the decision indicated that the use of the defendant’s system from Japan could affect the economic benefits that the appellant should obtain by using the system of the present invention in Japan.

Taking into account (1) to (4), the decision concluded that the act of producing the defendant’s system constituted “producing” under article 2(3)(i) of the Japanese Patent Act with respect to the present inventions.

Impact of the decision

This decision listed the factors to be considered (1) to (4) and held that the act of creating a new network system may constitute “producing” under article 2(3)(i) of the Japanese Patent Act, even if some of the elements constituting the network system exist outside Japan.

This means that it is necessary to be careful about infringing a Japanese patent when creating a network system in Japan via a network, even if some of the elements exist outside Japan.

Conclusion

Under this decision, there is a possibility of infringement of a Japanese patent when some of the components are present in Japan when conducting business related to network systems. Therefore, such businesses are now recommended to make an appropriate assessment of the infringement risk of Japanese patents based on the factors to be considered in (1) through (4) of this decision.