Chief Judge Irma E. Gonzalez of the Southern District of California (San Diego) released an opinion on August 5, 2010 that set an ongoing (i.e., post-judgment ) royalty of 12% of the wholesale price of the infringing capacitors. Presidio Components Inc. v. American Technical Ceramics Corp., 08-CV-335-IEG (NLS). Judge Gonzalez also awarded "supplemental damages" to the plaintiff in the amount of $235,172.68. Ongoing royalties raises some interesting issues and has been the subject of numerous opinions over the past couple years. We'll discuss both issues below.
Supplemental damages is a fairly broad term that refers to damages that accrue between the last date of damages presented to the jury and the conclusion of post-trial motions. A plaintiff's damages expert will only have data from the defendant relating to infringing sales up to a certain point prior to the jury trial. If the defendant is still selling infringing goods (or otherwise infringing and earning money from the infringement) through the trial and post-trial motions, and the jury returns a verdict for the plaintiff, the damages awarded will be incomplete. It will be lacking the supplemental damages between the last date of sales data the expert had and the conclusion of post trial motions.
Courts routinely conduct an accounting to determine supplemental damages. However, a minority of courts have taken a strict procedural view and ruled that supplemental damages are waived unless the plaintiff's complaint expressly requests an accounting, or the plaintiff makes such a request in its pre-trial memo. See Braintree Laboratories, Inc. v. Nephro-Tech, Inc., 81 F. Supp. 2d 1122 (D. Kansas 2000); Lucent Technologies, Inc. v. Newbridge Networks Corp., 168 F. Supp. 2d 269 (D. Del. 2001); Tristrata Technology, Inc. v. ICN Pharmaceuticals, Inc., 2004 WL 769357 (D. Del. April 7, 2004); Phillips Electronics North America Corp. v. Contec Corp., 2004 WL 1622442 (D. Del. July 12, 2004).
The Fish & Richardson damages web page addresses the issue of supplemental damages. http://www.fr.com/supplementaldamageswaiver/Generic.aspx
In Presidio, the court granted Presidio's motion for supplemental damages, finding that they should be calcuated consistent with the damages in the jury verdict. The jury had awarded lost profits to Presidio, and thus the court computed Presidio's lost profits between the last reported infringing sales and the end of post-trial motions. The supplemental damages amounted to roughly 1/4 the lost profits awarded by the jury--thus, a substantial component of the overall damages award. Citing numerous cases from other jurisdictions, the court rejected defendant ATC's argument that the damages should not have been based on lost profits, but rather the ongoing royalty rate, which would have resulted in a much lower supplemental damages award.
The court then considered the ongoing royalty rate. First, the court addressed Presidio's suggestion that its lost profit per capacitor ($1.34 per capacitor) be installed as the ongoing "royalty." The court rejected this suggestion for two reasons: (1) it is an average lost profit per unit and not a royalty rate, and (2) it is not "reasonable" because it would have amounted to 140% of ATC's operating profit and would in effect enjoin ATC.
Second, the court considered whether the parties' bargaining positions had changed based on the infringement verdict. The court observed that, when calculating a reasonable royalty rate under the Georgia-Pacific hypothetical negotiation, the negotiation is based on the assumption that the patent is valid and infringed. Thus, the jury awards damages based on that same assumption. The court considered whether the existence of the actual verdict changed the bargaining position because the assumption is now confirmed by the verdict. The court answered the question in the negative:
"Where, as here, an injunction is no longer proper, the Court is hard pressed to find in what material respect the situation is different now than it was during trial. In determining the reasonable royalty rate during trial, both parties assumed the [patent-in-suit] was valid and infringed. The jury's verdict has now confirmed this asumption. Accordingly, with permanent injunction off the table, the bargaining positions of a willing patentee and infringer are substantially the same as they would have been at the time the infringement began."
Slip op. at 6 (emphasis in original) (citations and footnote omitted).
Having decided that the bargaining positions of the parties had not changed from the date of the original hypothetical negotiation (i.e., when the infringement began), the court went on to conduct a Georgia-Pacific-like analysis to determine the ongoing royalty. In a footnote the court noted that other courts have split on whether the Georgia-Pacific factors should control in a post-judgment context. Slip op. at n.7 (citing cases). Ultimately, the court found that, while not controlling, an examination of the Georgia-Pacific factors could be helpful in determining the royalty rate post-judgment. Id.
The court then turned to the issue of the appropriate date for the post-judgment hypothetical negotiation. The court held that this date is when the court upheld the jury's verdict and denied the request for permanent injunction.
The court then considered, under Georgia-Pacific, whether it should adopt Presidio's suggested rate of 12% or ATC's rate of 2-4%. (According to the court, Presidio's damages expert had found the 12% rate to be a reasonable rate pre-trial. Slip op. at 10.) The court applied several of the Georgia-Pacific factors in deciding that Presidio's 12% rate was proper. The court found that this rate would adequately compensate Presidio and at the same time allow ATC to sell its capacitors at a reasonable profit. One important factor in causing the court to side with Presidio was its policy of not licensing its patent. The court was in effect installing a compulsory license, against Presidio's will (as it wanted an injunction), and the court reasoned that Presidio was entitled to a higher royalty because it was forced to grant a license. The court also observed that any rate lower than 12% would have given ATC a windfall at Presidio's expense.
A very interesting case, to say the least. Comments are welcome.