Patent Damages
28Sep/10Off

Ongoing royalties — analysis and thoughts — guest post by Craig Countryman

Craig Countryman is an attorney at Fish & Richardson, San Diego, who practices patent litigation. He is a prolific writer, and his most recent article addresses ongoing royalties. He published the article in the LA Daily Journal on September 2, 2010 (see http://www.fr.com/patentroyalties ), and he was kind enough to generate a post for us on this same topic. Enjoy!

Ongoing Royalties:  How and When Should They Be Calculated, by Craig Countryman

Now that eBay has made it more difficult for some patent infringement plaintiffs to obtain a permanent injunction after winning at trial, district courts have been grappling with how to handle post-verdict sales of the infringing product. The Federal Circuit held in Paice v. Toyota, 504 F.3d 1293 (Fed. Cir. 2007) that district courts have the power, but not the obligation, to force the patentee to allow the defendant to continue selling the infringing products if it pays an ongoing royalty to compensate the patentee for those sales. The soundness of this holding is questionable because it based the court’s power to impose such a royalty on the vague pronouncement in 35 U.S.C. § 283 that district courts “may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent.” Imposition of an ongoing royalty would seem to abet, rather than prevent, continued violation of the patentee’s rights. But Paice held that this provision gives district courts the equitable power to impose an ongoing royalty. So the only questions now are whether, when, and how district courts should exercise that authority.

Most district courts have chosen to impose an ongoing royalty rather than simply leave the parties to their own devices after denying a permanent injunction. Judge Ward has been a notable exception, however: he requires the plaintiff to file a new lawsuit to address infringement that occurs after the plaintiff wins its initial case. Courts that tackle the ongoing royalty issue as part of the initial case have further split on when they address it. Most have dealt with it in a post-trial proceeding but others have had the parties present both their proposed pre- and post-verdict royalty rates at trial and have gotten an advisory jury verdict on the ongoing royalty issue. These options present interesting strategic considerations for the parties. Plaintiffs may want to present evidence on the post-verdict royalty to the jury because it puts the defendant in the awkward position of discussing the fact it wants to keep selling its infringing product even if the jury finds the patent valid and infringed. But a defendant could benefit from having the issue vetted at trial if it thinks it can convince the jury to apply the same rate to pre- and post-verdict infringement, thereby discouraging the judge from jacking up the post-verdict rate after trial. On the other hand, the parties may both want to defer the question until after trial to give themselves a better chance to fully vet the issue, rather than trying to cram it into an already limited about of trial time. Deciding the issue as part of the initial lawsuit in a post-trial proceeding seems like best solution for the court because it allows it to efficiently resolve all the issues in a single proceeding while avoiding the need to divert trial time to an equitable issue the court will ultimately have to resolve itself anyway.

Putting procedure aside, the remaining question is how courts should calculate the ongoing royalty. Paice instructed district courts to carefully explain their ongoing royalty awards, but it didn’t tell them how to calculate them. The only other Federal Circuit case related to the issue to date is Amado v. Microsoft. The court there addressed a post-verdict royalty that applied to court-authorized sales that were made during the stay of a permanent injunction pending appeal. The district court set the royalty by taking the jury verdict for pre-verdict infringement and tripling it because the sales were “willful” infringement. The Federal Circuit reversed for two reasons: (1) the district court shouldn’t have started with the jury verdict because there is a “fundamental difference” between pre- and post-verdict infringement, and (2) straight tripling was not appropriate because, since the sales were authorized by court order, willfulness per se was not the issue. These lessons apply equally to post-verdict royalties when a permanent injunction is denied. Indeed, Amado cited the Paice concurrence for the first proposition.

Following Amado, most district courts to address the issue have calculated the post-verdict royalty by conducting a new Georgia-Pacific analysis based on a hypothetical negotiation on the date of the verdict. This seems right, although one could imagine picking a different date (e.g., denial of JMOL, affirmance on appeal, etc.) In any case, the new hypothetical negotiation should logically occur before the court has decided whether it will impose an ongoing royalty but after it has decided not to issue an injunction. The cases have not devoted much attention to the timing of the hypothetical negotiation, though, and both sides should consider how the timing could impact their arguments.

Courts have split upon how the verdict will change the dynamics of the new hypothetical negotiation, with some arriving at a substantially higher post-verdict rate while others arrive at a rate equivalent to the pre-verdict rate. The better view is that the verdict will create substantial upward pressure on the royalty rate. After all, in the post-verdict hypothetical negotiation, the patentee is giving up the right to pursue the post-verdict infringement in a new lawsuit in which the defendant would be a willful infringer and would therefore risk treble damages and attorney fees. The patentee should be compensated accordingly, just as it would been compensated for temporarily giving up the benefit of the injunction in Amado. As in Amado, the issue is not that the post-verdict sales would be willful infringement per se – they would not be after the court imposes the ongoing royalty. But willfulness plays into the analysis in a way it did not in Amado because it influences the value of the second lawsuit the patentee is giving up. Note that assuming the hypothetical negotiation occurs before the court decides to exercise its power to impose an ongoing royalty is an important part of this analysis: if the hypothetical negotiation occurs after the court has decided it will impose an ongoing royalty, then there is no potential threat of a second lawsuit.

My recent article in the Los Angeles Daily Journal cites many of the cases analyzing these issues to date and considers these and other issues related to post-verdict royalties. A copy is available at http://www.fr.com/patentroyalties/ .

Comments (2) Trackbacks (1)
  1. last few days our group held a similar discussion on this subject and you show something we haven’t covered yet, thanks.

    – Laura


Leave a comment

You must be logged in to post a comment.