Japanese Supreme Court: Building a System That Includes a Server Located Outside Japan Constitutes Patent Infringement
On March 3, 2025, the Japanese Supreme Court held that building a network-based system comprised of a server located in the United States, connected via a network to user terminals in Japan, constitutes "producing a product" under Article 2, paragraph (3), item (i) of the Patent Act and infringes a Japanese patent related to a system for a streaming service with comments.
Japanese patent rights are effective only in Japan pursuant to the territorial principle. Accordingly, the act of "producing a product" under the Patent Act has to be completed entirely in Japan for a finding of infringement. In this case, the court of first instance (the Tokyo District Court) held that the defendant, a U.S. company, did not infringe system claims of the plaintiff's patent. The court reasoned that the defendant did not "produce" the accused system in Japan because some of the recited steps in the patent claims were performed by the server located in the United States.
On appeal, the IP High Court ("IPHC") reversed, holding that building a network-based system can constitute "producing a product" in Japan under the Patent Act, even if a part of the system is located outside Japan, as long as it can be evaluated as producing a product within Japan from a comprehensive perspective by taking into account, without limitation, the following factors:
- The specific mode of the accused act;
- The function or role of each element located in Japan of the accused system;
- The place where the effects of the invention occur from the use of the accused system; and
- The impact of the use of the accused system on the economic interests of the patent owner of the claimed invention.
The IPHC's reasoning sought to strike a balance between the rights of the patent owner and those of other economic actors. It noted on the one hand that uniformly allowing someone to avoid infringement of a network-based system patent by simply installing a server overseas, because of a strict interpretation of the territorial principle, would provide insufficient patent protection, and that on the other hand, uniformly finding that a system constitutes "producing a product" in Japan simply because the system's user terminals are located in Japan would lead to excessive patent protection and cause disruption to economic activity.
The Supreme Court upheld the IPHC's decision by adopting the same basic reasoning, and confirmed that a Japanese patent is effective against building a network-based system that is partially located outside Japan as long as it can, as a whole, be evaluated as producing a product within Japan.
This decision shows a flexible approach to the application of the territorial principle and is likely to be received favorably by tech companies that conduct research and development of network-based systems and patent owners in general, as it reduces the ability to avoid infringement by simply moving or having a part of a system located outside Japan. This also means that web hosting companies like the defendant in this case and other companies outside Japan can no longer rely on a strict application of the territorial principle and need to be more careful going forward about not infringing Japanese patents. The Japan Patent Office is currently looking into possible amendments to the Patent Act to provide more protection for rights in network-related inventions.
DWANGO v. FC2, Supreme Court Judgment, March 3, 2025, Case No. R5 (Jyu) 2028 (petty bench)
