When Can a Company Be Liable for Its Vendor’s Copyright or Patent Infringement?: Hollywood Studios’ IP Headache

The case of Rearden LLC et al. v. The Walt Disney Company et al., Nos. 3:17-cv-04006, 04191 & 04192 (N.D. Cal.), has been covered more in the Hollywood Reporter than in legal publications, but it is both a “Hollywood story” and a case with intellectual property issues that cover the spectrum of patent, copyright and (to a lesser extent) trademark law. The case revolves around a technology called MOVA Contour Reality Capture technology (“MOVA Contour”) that is used to create 3D animated characters that appear more human than ever, as used in movies such as Guardians of Galaxy and many others. Some of Hollywood’s biggest studios hired a vendor, DD3, which used this 3D technology as part of the process of creating 3D characters in the movies. Rather than suing DD3 for any IP violations, however, the plaintiff, Rearden, decided to sue those Hollywood Studios for alleged copyright, patent and trademark infringement. The case thus illustrates various issues and considerations as to when a party can be liable for the acts of a vendor it hires, if the vendor is (allegedly) committing copyright and patent infringement.

For example, on the copyright side, because the Studios created CG characters and movies that were allegedly derivative works of the DD3 software’s output files, one question is whether, and under what circumstances, copyright protection of computer software can extend to the output files created using that software. Other copyright issues presented in this case include determining under what circumstances a party can be vicariously liable when it contracts with another company that infringes a copyright, or when this relationship can result in contributory copyright infringement.

With respect to patent infringement, the case raises a question as to whether a system claim can be found to be directly infringed by a party entering into a contract with a vendor, even when the vendor possesses all the elements of the claim since it owns and uses the requisite hardware and software. If only an indirect infringement claim is plausible for this situation, can knowledge of the patents and that the services constituted infringement be sufficiently pled by pointing only to general IP due diligence performed by the defendant?

Background

The case pits Rearden, a company founded by Steve Perlman, a famous inventor and entrepreneur who was one of the creators of Apple’s QuickTime product, against several major Hollywood studios, including Disney, Marvel, 20th Century Fox and Paramount (“the Studios”). Rearden accused the Studios of infringing Rearden’s copyrights and patents (Disney only for patents) based on the Studios’ contracting and working with their vendor DD3 to create CG characters in various movies, allegedly using Rearden’s MOVA Contour technology to do so. Rearden also accused the Studios of trademark infringement based on using the MOVA name in the credits of the movies and other products.

According to the original Complaint, the MOVA Contour technology relates to “performance motion capture,” which is used to create a 3D animated character in a movie or video game in way that it moves like an actual human does. As early as 2000, “marker-based” motion capture systems could capture and track body movement, but tracking facial motion in a realistic manner had not been done. Rearden’s MOVA Contour technology allegedly solved this problem. Rearden thus offered MOVA Contour as a service to companies, such as film studios and video game companies, that wanted to track facial motion realistically. The technology was introduced at a conference in 2006, and Rearden patented the technology. MOVA Contour consists of both hardware – a series of synchronized lights, cameras and hardware that records an actor’s performance – and software that turns the recorded images into 3D scans per frame and then into data that can be used for computer generated images. Part of the process requires actors to use phosphorescent powder, as shown below.

This technology was allegedly used in the film The Curious Case of Benjamin Button to show Brad Pitt’s character at different ages of his life, for example.

Before Rearden sued the Studios, Rearden was involved in a dispute over who actually owned the MOVA Contour technology. In February 2015, Rearden was sued by Shenzhenshi Haitiecheng Science and Technology Company (“SHST”) over ownership of the physical equipment and intellectual property associated with the MOVA Contour technology. See Shenzhenshi, et al. v. Rearden, et al., No. 15-cv-00797 JST, ECF No. 1 (N.D. Cal. Feb. 20, 2015). The heart of this dispute involved a relationship between Mr. Perlman and his friend, Greg LaSalle, that fell apart. According to the court findings in that case, after founding Rearden (actually, a predecessor of it), Mr. Perlman hired Mr. LaSalle, an audio and visual engineer with a formal education in music, in 2000. Mr. Perlman and Mr. LaSalle became close friends while working together developing the MOVA Contour technology. Later, however, their relationship soured when they disagreed about who owned the technology. Mr. LaSalle asserted that Mr. Perlman transferred ownership of it to him for free, which Mr. Perlman denied. The court ultimately found that Mr. Perlman never intended to transfer the MOVA Contour technology from Rearden to Mr. LaSalle, and that Rearden was the owner of the technology – nullifying a supposed transfer of the technology from a Rearden subsidiary to SHST, which was associated with another company, Digital Domain 3.0 (“DD3”). Before the court’s ownership ruling, however, Mr. LaSalle had started working at DD3, and DD3 offered performance motion capture technology – allegedly using the MOVA Contour technology – as a service to Hollywood studios. According to the complaint, a number of those entities contracted for DD3 to provide this service in connection with the following movies: Beauty and the Beast, Avengers; Age of Ultron, Guardians of the Galaxy, Deadpool, Fantastic Four, Night at the Museum: Secret of the Tomb and Terminator: Genisys.

That takes us back to the current lawsuit. With a court holding that Rearden, not DD3, is the owner of the technology, Rearden decided to sue those Studios that had hired DD3, rather than suing DD3 itself. According to Rearden, when the Studios hired DD3 to use the MOVA Contour technology in those movies, the Studios infringed Rearden’s copyrights, patents and trademarks. The potential damages Rearden seeks to collect from the Studios presumably dwarfs any amount it could obtain from asserting similar claims against DD3. By going after the Studios, however, the theories of liability are more tenuous and have been challenged by two motions to dismiss, although the case is now proceeding on some of the claims.

Issues and Holdings Related to the Original Complaint

Copyright: Can a copyright in software extend to the software’s output files, and if so, what is required to state such a claim?

Rearden alleged in its original complaint that the Studios’ movies and CG characters in those movies were derivative works of the MOVA Contour software program. No code was used in the movies, of course, but Rearden alleged that its copyright in the software program extends to the MOVA Contour “output files” that were used in the process of creating the CG characters in the movies and that the CG characters in the movies were derivative works of those output files. These output files are data files of four types: skin texture, makeup pattern, captured surface, and tracking mesh.

In moving to dismiss, the Studios argued that the output files are similar to the photograph resulting from a photographer using a camera. The photographer owns the copyright in the photo, rather than the creator of the camera. The Studios likewise argued that they owned the copyrights to the CG characters, rather than the creator of the MOVA Contour technology that was used as part of the process of creating the characters.

The Studios also cited Design Data Corp. v. Unigate Enterprise, Inc., 847 F.3d 1169 (9th Cir. 2017), in which the Ninth Circuit had previously addressed whether the copyright in a computer program can extend to its output. The Ninth Circuit found that the copyright owner of CAD software used to design steel components did not own the output data – the 3D models of the steel components that were created by the users of the software. The court in Design Data noted, however, without deciding, that in at least one other case, Torah Soft Ltd. v. Drosnin, 136 F. Supp. 2d 276, 283 (S.D.N.Y. 2001), a court has suggested that copyright protection afforded to the computer program may also extend to the output files if the program does the “lion’s share of the work” in creating the output files and the user’s input is “marginal.” The Ninth Circuit in Design Data stated that it did not have to decide whether or not to adopt this rule because the plaintiff had not shown that the user’s participation in creating the output files was marginal.

In the Rearden case, the district court likewise assumed that an owner of the copyright in software can own the output files created by the software if the software does the lion’s share of the work and the user’s input is marginal. The court found that it was not plausible that the MOVA Contour output is created by the software without any substantial contribution from the actors or directors, however. It is the actors and directors who decide which facial expressions and motions of the actor will be used and input into the camera capture. The court found that this input by the actor and director is more than marginal.

The Studios also had another argument, which was that even if Rearden owned copyrights in the output files, the CG characters and movies are not derivative works of those output files. A derivative work (here, allegedly, the CG character or movie) must substantially incorporate protected material from the pre-existing work (here, the output file). The Studios argued that because the output files are not copied or incorporated into the CG character or movie, the CG character and movie is not a derivative work. Rearden argued that the CG characters in the film did incorporate the output files from the software, such as the tracking mesh output being incorporated into the 3D model of a CG head. The Studios responded that those tracking mesh wires were just a small component in creating the CG character and thus the CG character still is not “substantially similar” to the copyrighted work (i.e., the output file). The court did not address this issue, however.

Patent: (1) There can be no “divided” infringement when one party performs all the steps, even if directed and controlled by another; (2) Contracting with a vendor is not sufficient to be deemed putting a patented systems into use, and thus does not constitute direct infringement; (3) What level of knowledge is required to plausibly plead indirect infringement?

On the patent side, Rearden alleged that Disney directly and indirectly infringed certain patents.

For direct infringement, Rearden alleged “divided infringement.” Divided infringement occurs when more than one actor is involved in practicing the steps of a method claim. One entity will be held responsible for the other’s performance of some of those steps if: (1) the entity directs or controls the other’s performance or (2) the actors form a joint enterprise. See Akamai Techs., Inc. v. Limelight Networks, Inc., 797 F.3d 1020, 1022 (Fed. Cir. 2015). Rearden alleged that Disney directed and controlled DD3’s conduct. Rearden’s divided infringement claims were unusual, however, because the allegation was that DD3 performed all the steps of the patented method, albeit under Disney’s direction or control. Because Disney was not alleged to perform any of the steps, however, the court found no actual “divided” infringement and thus dismissed that claim.

Rearden alternatively argued that Disney directly infringed by “using” the patented system, citing to Centillion Data Sys. LLC v. Qwest Communs. Int’l, Inc., 631 F.3d 1279 (Fed. Cir. 2011). In Centillion, the Federal Circuit found that a patented software system containing a front-end and back-end was “used” by end user where that end user created a query that got transmitted from the front-end to the back-end, even though the back-end portion of the system was not operated or possessed by the user. Id. at 1285. Rearden argued that Disney put the MOVA Contour system into use by entering a contract with DD3 for DD3 to use the MOVA Contour system. The court rejected this argument, finding that entering a contract was not a “use” of the MOVA Contour system, and not comparable to a user creating a query on the front-end part of a software system as in Centillion.

Rearden also alleged indirect induced infringement by Disney, under 35 U.S.C. § 271(b), which requires that Disney actually knew of the specific patents, that it knew the services it asked DD3 to perform constituted infringement, and that it specifically intended for DD3 to infringe the specific patents. See DSU Med. Corp. v. JMS Co., 471 F.3d 1293, 1304-05 (Fed. Cir. 2006). Unlike the direct infringement allegations, the court found that this allegation was sufficiently pled. For knowledge, the court pointed to allegations in the complaint that Disney contracted with Rearden to operate the MOVA Contour systems in four films in 2010-12 and that Disney performed certain intellectual property diligence at that time. The court also pointed to a demand letter sent by Rearden to Mr. LaSalle in 2013, stating that he had taken the MOVA IP in violation of an agreement, and that this demand letter was provided by Mr. LaSalle to Disney. Also, Rearden alleged that Disney performed further IP due diligence when it contracted with DD3 to use the MOVA system in 2014-17. As to allegations of specific intent to induce infringement, the court found that the allegation that Disney “assisted or directed” in DD3’s infringement by contracting with Disney was sufficient.

While the indirect infringement claim survived, the court noted that these allegations were “inarguably thin,” including the allegation of knowledge of the patents. For example, the demand letter from Rearden to Mr. LaSalle did not specifically mention the patents, and the allegation of IP due diligence performed by Disney was not backed up by any evidence. Also, ownership of the patents was contested and not even determined to belong to DD3, rather than Rearden, until a court so ruled in the previous case in 2017. All of these facts would weigh strongly against Rearden’s claim that Disney knew of the patents and that the patents were being infringed by DD3. Perhaps for these reasons, Rearden later voluntarily dismissed these patent claims.

This is an example of how being able withstand a motion to dismiss is not always a good enough reason to pursue a claim. Additionally, the general difficulty of the patent allegations in this case illustrate that it can sometimes be difficult to pursue a case against entity with big pockets (Disney), rather than the entity that would be easier to prove directly infringes (DD3), because there may be no direct infringement and reliance on theories of indirect infringement or vicarious liability can be more difficult to prove.

Trademark claims: (1) To infringe a trademark, the actual mark must be used; (2) Claims will general not be dismissed at the pleadings stage based on the defense of nominative fair use.

For trademark infringement, Rearden must show that: (1) it has a protectible ownership interest in the mark, and (2) that the Studios’ use of the mark is likely to cause consumer confusion. See Dep’t of Parks & Recreation for State of California v. Bazaar Del Mundo Inc., 448 F.3d 1118, 1124 (9th Cir. 2006). The Studios argued that the claims should be dismissed on a number of different grounds, including because the marks were not used, the alleged use was by a third party rather than the Studios, and that the use of the marks constituted nominative fair use. The court dismissed the claims in which there was no allegation that the “MOVA” mark was even used by the defendants, but did not dismiss the other allegations.

For Disney, Rearden alleged that the credits to the Guardians of the Galaxy movie used the word “MOVA.” Disney argued that this described a company, not a technology, and there was thus no likelihood that the use could cause confusion that Rearden sponsored the movie. Disney also argued that such use was at most nominative fair use since it would be difficult to refer to the technology with calling it “MOVA.” The court rejected these arguments, finding it plausible for a movie viewer watching the credits to be confused and finding that nominative fair use issue should normally not be decided at the pleadings stage.

Similarly, Rearden alleged trademark infringements against Disney based on the MOVA service mark being used in the promotion of Guardians of the Galaxy and Beauty and the Beast, including in press releases, press conferences and other advertising and promotion. Disney alleged nominative fair use again, which the court again rejected.

Rearden’s other trademark allegation against Disney was that it used the MOVA service mark in the Beauty of the Beast Blu-ray disk “featurette” by including visual and narrative descriptions of the technology, even though the word “MOVA” was never used. The court dismissed this allegation because the trademark itself must be used to constitute trademark infringement.

For Fox, the analysis was similar. All nominative fair use arguments by Fox – including for “MOVA” being used in movie credits and commercial advertising and promotion of movies – were rejected by the court as premature.

For Paramount, the analysis was also similar. All nominative fair use arguments by Paramount – including use of the trademark in promotional materials – were rejected as premature. However, one trademark infringement claim based on a Facebook page’s use of the MOVA mark through only a link to a WIRED magazine video that used the mark, was dismissed, with the court again finding that Paramount must use the actual trademark to infringe, rather than link to another site using the mark.

Issues and Holdings Related to the Amended Complaint

Rearden next filed an amended complaint, attempting to cure its copyright claims and direct patent infringement claims. The Studios responded with another motion to dismiss, and the court recently denied that motion with respect to the new copyright allegations but dismissed the new direct patent infringement allegations.

In the amended complaint, Rearden changed its copyright allegations to assert infringement based on theories of vicarious liability and contributory infringement. According to the new allegations, DD3 directly infringes the copyright in the MOVA Contour software when it loads a copy of the software on the hard drive of the computer it uses, and each of the Studios is liable under theories of vicarious liability and contributory copyright infringement, because they contracted with DD3 to provide the facial motion capture services.

Copyright claims – vicarious liability: A service agreement can result in vicarious liability for copyright infringement by the vendor, based on the right to cancel the agreement and thus stop the infringing conduct.

For vicarious copyright liability, Rearden is required to show that the Studios: (1) had the right and ability to supervise the infringing conduct and (2) had a direct financial interest in the infringing activity. See Perfect 10, Inc. v. Visa Int’l Serv. Ass’n, 494 F.3d 788, 802 (9th Cir. 2007).

For the first prong, to have the right and ability to supervise, Rearden is required to show that the Studios had the legal right to stop or limit DD3’s infringing conduct and that the Studios had the practical ability to do so. See Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146, 1173-74 (9th Cir. 2007). The Studios argued that Rearden’s amended complaint only alleges that the Studios have a contractual right to cancel part of the services with DD3, which is not sufficient to constitute a legal right to stop DD3’s infringing conduct. The Studios analogized to the Perfect 10 case. In Perfect 10, Google did not meet the control requirement because even though it had a contractual right to terminate Perfect 10’s Adsense contract, that did not give Google the right to stop direct infringement by third party websites, which could continue to infringe after participation in the Adsense program ended. See Perfect 10, 508 F.3d at 1173-74.

The Studios argued that if they were found to have control over DD3 based on a contract, then all service agreements would potentially result in virtual copyright infringement. According to the Studios, for the element to be satisfied, there must be a contractual right for the Studios to control selection or operation of the software DD3 used.

The court disagreed, contrasting the Perfect 10 case with Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259, 262-63 (9th Cir. 1996), in which the Ninth Circuit found that a swap meet operator’s contract with its vendors satisfied the control requirement because of the right to terminate vendors for any reason, and A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1011 (9th Cir. 2001), in which the Ninth Circuit found that Napster’s right to prevent its users from engaging in the infringing activity of uploading file names and downloading the users’ music files through the Napster system was sufficient to satisfy the control requirement. The court found that the Studios were more similar to the swap operators and to Napster than to Google, because the Studios’ right to cancel the DD3 contract could stop the direct copyright infringement by DD3. In contrast, Google’s canceling of the Adsense contract with Perfect 10 would not end the infringement by the third party websites.

The Studios also argued that the amended complaint fails to sufficiently allege that the Studios had the practical ability to supervise. The Studios again argued that the allegation of a contractual right to terminate is not sufficient, nor is the actor’s and directors’ work in controlling the actors’ facial performances, because the Studios, actors and directors never actually interacted with the MOVA Contour software in the process, nor had any ability to observe and evaluate DD3’s selection, licensing or operation of the MOVA Contour software.

The court disagreed, finding that the amended complaint sufficiently alleged that the Studios were in a position to police DD3’s infringing acts, including the ability to observe and evaluate the services. The court found that interaction with the software itself was not necessary to state a claim, since it was not implausible that through observing and evaluating the services, without direct interaction with the software, the Studios could have observed the infringing activity and directed DD3 to stop using the software.

For the second prong, the Studios argued that the amended complaint does not allege that any Studio obtained a direct financial benefit from DD3’s loading of the software into RAM. The connection between loading the software into RAM and obtaining a wider audience to the movies is highly attenuated, according to the Studios, considering all the work performed by the actor and director, as well as the processing by computer artists. The Studios asserted that this theory of infringement was wrong and overbroad because otherwise any party using a vendor to provide services could be found vicariously liable.

The court disagreed yet again, however, stressing that at the pleadings stage, Rearden only has to plausibly allege a direct financial benefit and that the causal relationship between the infringing activity and financial benefit does not have to be substantial. The court held that Rearden plausibly alleged a direct financial benefit, based on the MOVA Contour performance motion capture making movie characters more believable, which in turn drew a larger audience to the films.

Copyright – contributory liability: When can a service agreement result in contributory copyright infringement?

For contributory copyright liability, Rearden is required to show that the Studios: (1) had knowledge of DD3’s infringing activity, and (2) induced, caused, or materially contributed to DD3’s alleged infringing activity. See Perfect 10, Inc. v. Visa Int’l Serv. Ass’n, 494 F.3d 788, 795 (9th Cir. 2007).

For the first prong, knowledge, the issue for defendant Disney again turned on whether Rearden’s allegation about the IP due diligence performed by Disney sufficiently alleged knowledge of DD3’s infringing activity. The court found this was sufficient to allege knowledge.

For defendants Fox and Paramount, Rearden could only allege “on information and belief” that they also performed some IP due diligence at some point. The court found that this allegation, on its own, would be insufficient to state a claim. However, another Rearden allegation was that the Studios, through employees and agents, reviewed Contour output works that were marked with Rearden’s copyright notice. The court found that allegation was sufficient, finding that “[e]ven if it is unlikely that a studio representative saw the copyright notice, it is not implausible.”

The Studios also argued that the second prong, material contribution, was not plausibly alleged because hiring a vendor does not amount to materially contributing to the vendor’s infringing use of unlicensed software, which requires substantial assistance in the infringement.

The court found that Rearden’s allegation was more than just hiring a vendor, however, and that there is also an allegation that the Studios directed DD3 to use the MOVA program by explicitly contracting with DD3 to use the MOVA Contour program. The court did not address the effect of some of Rearden’s other allegations (e.g., allegations that the Studios materially contributed by supplying performers and film crew and selecting particular outputs from the Contour program), and whether they could be sufficient, but the court noted that it was possible the Studios could prevail at summary judgment or trial if Rearden cannot prove that the Studios actually directed DD3 to use the copyrighted MOVA Contour program.

While both copyright infringement theories survived the motion to dismiss, the court noted some potential holes in the contributory infringement theory. The case thus demonstrates that when a company enters into a service agreement, the risks of being found liable for copyright infringement, based on the acts of the vendor, may be greater under a theory of vicarious liability than under a contributory infringement theory. Vicarious liability does not require proving knowledge of the copyright and copyright infringement.

Patent: Rearden’s second attempt to plead direct patent infringement fails. Even if a contract puts an invention into service, there is no infringement by the contracting party if it does not possess any elements of the patent claim.

Rearden’s amended complaint also alleged direct patent infringement by Disney again. Rearden’s revised allegation, similar to its new copyright claims, was that Disney directly infringed when it hired DD3 and instructed DD3 personnel when to take the facial motion capture. In moving to dismiss, Disney again argued that Rearden’s allegation does not constitute any “use” of the invention because there is still no allegation that Disney performed any claim limitation of the patent, unlike in Centillion.

Rearden argued that its amended complaint contains new allegations, including that Disney is responsible for at least the claim limitations in the patents that require a “performer” who provides the “performance” recited in the claims. Rearden further argued that Disney and DD3 were in joint possession of the MOVA Contour system, by virtue of the contract between them, which means, according to Rearden, that DD3 was practicing all the claim limitations of the patents subject to Disney’s direction and control.

The court recognized that the case presents an interesting issue in the analysis of system claims that involve more than one actor. Namely, while Centillion recognized that a party can “use” a system claim by putting the invention into service and obtaining a benefit from it, even if the party does not use each and every element of the system, can Centillion’s holding apply even if the party possessed none of the elements of the system? The court looked to a recent unpublished Federal Circuit decision, Grecia v. McDonald’s Corp., No. 2017-1672, 2018 WL 11762580 (Fed. Cir. Mar. 6, 2018). In Grecia, the system claim in the patent included various “modules.” Each module was (arguably) possessed and controlled by Visa, but the plaintiff alleged that McDonalds infringed every time it accepted Visa cards as payment for food purchases, by putting the system into use. The Federal Circuit found that Centillion could not be read so broadly to mean that a system can be put into use by a party that does not actually possess any of the elements of the system. Rather, the Federal Circuit determined that the Centillion only applies to situations in which there are multiple parties and each party possesses at least some of the elements of the system. Thus, McDonalds could not be infringing. (The Federal Circuit also determined that even if McDonalds was deemed to possess one of the elements of the system, the plaintiff’s failure to allege how McDonalds obtained a benefit from each and every element of the system warranted dismissal.)

Following Centillion and Grecia, the court thus determined that Rearden’s allegation was only that Disney contracted with DD3, and there was no allegation that Disney actually possessed any element of the patented system. Thus, even if Disney’s contract with DD3 could be considered putting the invention into service, that was insufficient to state a claim for infringement of the system claims.

As mentioned earlier, without being able to assert direct infringement, and its patent claims being limited to indirect infringement, Rearden decided to voluntarily dismiss its induced patent infringement claims against Disney shortly after the court’s decision. It seems likely that Rearden decided the indirect infringement claims (alone) were not worth pursuing after previously being described by the court as “inarguably thin.”

The case is now proceeding on the copyright and trademark claims.

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Some observations can be made from the Rearden case so far and its application to a party entering into a service agreement with a vendor that might infringe copyrights and/or patents.

On the copyright side, the Rearden case shows there can be copyright infringement risks when entering into a service agreement with a vendor, which a party might not even realize. A party can be liable for the vicarious copyright infringement if it has the ability to stop its vendor’s infringement (e.g., by cancelling the contract) and obtains a financial benefit from the infringement. Or, a party may be liable for contributory infringement if it knows of the vendor’s copyright and directs the vendor to use the copyrighted software for the project.

For patent infringement, the Rearden and Grecia cases limit direct infringement of a system claim (based on putting software into use) to those situations in which multiple parties possess elements of the claim. The cases thus somewhat limit patent infringement allegations based on infringement by a party’s vendor because the contract is not enough to constitute direct patent infringement. On the other hand, a party could be liable for induced patent infringement based on its vendor’s direct patent infringement, but to prevail, it still must be shown that the party knows of the patent(s), that the vendor’s services constitute infringement, and that the party intends the vendor to infringe the patent(s).