Patent Damages
15May/12Off

EDTX Post-Trial Order on Multiple Issues: Ongoing Royalty Base and Payment of Ongoing Royalties; Supplemental Damages & Prejudgment Interest; Foreign Tax Laws; Extending Ongoing Royalties to Successors and Assigns; Stay of Supplemental Damages and Ongoing Royalties Pending Appeal

On April 30, 2012, in Mondis Tech. Ltd. v. Chimei InnoLux Corp., Civil Action No. 2:11-cv-378-JRG (EDTX), Judge Gilstrap issued a post-trial order on a number of damages issues:  (a) the definition of the royalty base for ongoing royalties; (b) the timing and frequency of reports and payments; (c) whether prejudgment interest should be assessed on the supplemental damages; (d) whether a portion of the judgment must be withheld due to Taiwanese tax laws; (e) whether the ongoing royalties extend to Innolux’s successors and assigns; (f) whether Mondis is entitled to additional discovery related to a  possible transfer of assets from Innolux to Hon Hai Precision Ltd. (which is not addressed in this summary); and (g) whether the supplemental damages award and the ongoing royalty award should be stayed pending appeal.

  • (a) Ongoing royalty base

The parties disputed what constitutes an infringing product for purposes of the damages base and ongoing royalties (i.e., post judgment royalties).  Innolux contended that it should be only products identified in the infringement contentions and specially found by the jury to infringe.  Not surprisingly, Mondis sought a much broader definition, sweeping in any TV or computer monitor that complies with or implements a variety of industry standards, including VESA.

The court sided with Innolux, holding that royalties would only be due on TVs and monitors that were actually accused, and “those that are not colorably different from” with respect to the claims.  The court rejected Mondis’ proposal because the asserted claims required specific combinations of hardware and software that may, or may not, be required to implement the standards.  Mondis had failed to prove that all implementations of these standards would necessarily infringe the asserted claims—i.e., Mondis had not shown the claims were essential to the standards.

The court used “not colorably different from” instead of Innolux’s proposal of “essentially the same as” because such language was previously used in two injunction cases.  TiVo, Inc. v. EchoStar Comm. Corp., 446 F. Supp. 2d 664, 667 (E.D. Tex. 2006), aff’d in part, rev’d in part on other grounds and remanded, 516 F.3d 1290; ActiveVideo Networks, Inc. v. Verizon Comm. Inc., 2:10-cv-248, 2011 WL 5878365, at *9 (E.D. Va. Nov. 23, 2011).

  • (b) Timing and frequency of ongoing royalty reports and payments

EDTX standard practice is quarterly reports and payments due 60 days after the close of the quarter.  Mondis sought a monthly schedule because it contended Innolux was in financial trouble and was seeking to transfer its monitor business to corporate affiliate, Hon Hai.

The court decided not to deviate from its standard practice of quarterly payments and reporting because of the burden of compiling and preparing sales reports.  But it did condense the normal 60-day window down to 30 days from quarter close.  And it ordered Innolux to notify Mondis of any material change to its business of importing or selling the accused products within 14 days of any such change.

  • (c) Prejudgment interest on supplemental damages

Supplemental damages are generally referred to as damages that accrue between the date of the last expert reports and the verdict (or judgment).  Here the parties disputed whether prejudgment interest is applicable on supplemental damages.

The court agreed with Mondis and awarded prejudgment interest on the supplemental damages.  The court reasoned that supplemental damages are conceptually the same as the jury award:

An award of supplemental damages is simply recognition that, at the time the verdict was entered, the jury did not have access to all of the sales data. From a conceptual standpoint, the Supplemental Damages awarded on September 30, 2011 are no different than the $15 million jury award. Such Supplemental Damages simply recognize that if the jury had the benefit of real-time sales data when it reached its verdict, it would have included such supplemental damages ($1,971,810) as part of its December 31, 2007 lump-sum award. Accordingly, the Court holds that prejudgment interest on the Supplemental Damages should be calculated on the full $1,971,810 (conceptualized as a lump-sum) from December 31, 2007 through the date of this Order.

  • (d) Impact of foreign tax laws on U.S. judgment

Innolux contended that Taiwanese tax laws and UK tax laws (as Mondis is a UK corporation) required Innolux to withhold 20% tax on all royalty payments.  The court disagreed because, at a minimum, one of the two Innolux entities in the lawsuit was a U.S. corporation, and the verdict runs against the defendants jointly and severally.  “This Court has previously held that where foreign and U.S. entities are jointly and severally liable, U.S. judgments must be paid in full, regardless of foreign withholding taxes. See QinetiQ Ltd. v. Samsung Telecomms. Am., L.P., No. 2:03-cv-22, 2005 U.S. Dist. LEXIS 47881 (E.D. Tex. Sept. 7, 2005).”  The court thus required that all payments made pursuant to the judgment be made in full in U.S. dollars and delivered to the U.S. without any reductions or withholdings.

  • (e) Extending ongoing royalties to successors and assigns

Innolux contended that ongoing royalties are specific to a particular defendant and the relationship between that defendant and the plaintiff, suggesting that an ongoing royalty would not survive to the benefit of a non-party successor or assign.  Innolux relied on Paice LLC v. Toyota Motor Corp., 609 F. Supp. 2d 620, 623-24 (E.D. Tex. 2009), which stated that damages for past infringement are separate and distinct from damages for future infringement and may require different royalty rates depending on a change in the parties’ relationship.  Innolux also argued that, given the fact that ongoing royalties are frequently influenced by willfulness factors, it would be improper and unjust to apply the ongoing royalty rate to a successor or assign that was not a party to the litigation.

Mondis equated the ongoing royalty to an injunction, contending that injunctions are clearly applicable to successors and assigns of the enjoined party.  Mondis cited Kloster Speedsteel AB v. Crucible, Inc., 793 F.2d 1565, 1581-83 (Fed. Cir. 1986), overruled on other grounds by Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed. Cir. 2004), in which the defendant sold its assets to a non-party prior to entry of judgment and a permanent injunction. The district court included language in the injunction binding the defendants and their “successors in interest and assigns.” Id. at 1569, 1581. The Federal Circuit affirmed, over the objection of the non-party successor, noting that “[c]ourts have repeatedly found privity where, after a suit begins, a nonparty acquires assets of a defendant-infringer.” Id. at 1583.

The court analyzed whether the basis for an ongoing royalty is derived from the injunction power of FRCP 65, concluding that it does.  The court gave thoughtful analysis to this issue:

After carefully considering the issue, the Court finds that [ongoing royalties derive from the injunctive power].  “Injunctive relief” is not limited to prohibitions against manufacture and sale.  The Supreme Court has explicitly rejected the argument that application of Rule 65 is limited to prohibitory injunctions:

A short answer to petitioners’ argument might appear to be that, because the Board’s supplemental order to All American required only reinstatement and backpay, and not that All American cease and desist from future unlawful activity, no injunctive relief was ordered, and therefore Rule 65(d) need not be considered. But we have previously found Rule 65(d) applicable to mandatory injunctions and have noted that the court of appeals have applied it “not only to prohibitive injunctions but to enforcement orders and affirmative decrees as well.”

Golden State Bottling Co. v. NLRB, 414 U.S. 168, 178 n.4 (1973) (quoting Int’l longshoremen’s Assn. v. Philadelphia Marine Trade Assn., 389 U.S. 64, 75 & n.14 (1967)). In many cases, injunctions include or govern a requirement of monetary payment. See Innogentics, N.V. v. Abbott Labs., 512 F.3d 1363, 1381 & n.9 (Fed. Cir. 2008) (vacating permanent injunction in patent infringement case under eBay, and remanding to the district court to enter “[a]n injunction delineating the terms of the compulsory license,” and noting that such a compulsory license could “clearly condition[] the future sales of the infringing products on payment of the running royalty.”)

For these reasons, the Court is persuaded that an award of ongoing royalties is equitable in nature and exists as a form of injunctive relief that may properly extend to successors and assigns.  While this Court recognizes that applying ongoing royalties to successors and assigns may conflict to some degree with the principle that royalties are dependent upon the specific positions and bargaining power of the parties, the Court believes that the alternative of adopting a blanket rule that ongoing royalty payments terminate when an infringer changes legal status or sells a portion of its business would eviscerate the purpose of ongoing royalties as a remedy in lieu of a prohibitory injunction. Otherwise any adjudicated infringer could simply spin-off or sell its infringing line of business to a competitor and completely avoid that infringing line of business’ obligation to pay ongoing royalties. The failure to extend ongoing royalties to successors and assigns would in practice make them a nullity, and every first year law student knows that the law abhors a nullity and demands that such be avoided wherever possible.

  • (f) Stay of ongoing royalties award pending appeal

The Federal Circuit ruled on April 2, 2012 that a Rule 62 does apply to an award of ongoing royalties.  See ActiveVideo Networks, Inc. v. Verizon Comm’ns, Inc., 2011-1538, 2012 U.S. App. LEXIS 6764, at *5 (Fed. Cir. April 2, 2012) (“The fact that the district court regarded the requirement that Verizon make royalty payments during the six-month sunset period as a necessary condition for temporarily staying the injunction does not alter the fact that the royalty payments constitute monetary relief that is normally subject to Rule 62(d)”).  Accordingly, the EDTX stayed execution of the judgment, including ongoing royalties, pending appeal, but conditioned the stay on Innolux posting a supersedeas bond.

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