EDTX considers post-trial motions re the intersection of patent misuse and damages, EMVR, and ongoing royalties
The Eastern District of Texas in Soverain Software LLC v. J.C. Penney Corp., Case No. 6:09-CV-274 (E.D. Tex., Aug. 9, 2012), issued an opinion that addresses the cross-section of patent misuse and damages, the entire market value rule for a patented on-line ordering system, and ongoing royalties. All three issues are interesting and worth consideration. In particular, the conclusion on EMVR seems flawed and will be a good issue for appeal. Similarly, there are substantive issues for appeal for the ongoing royalties analysis.
Patent misuse generally applies when a patentee attempts to obtain market benefits beyond that provided by the statutory patent right. Patent misuse may be found when the patentee seeks post-expiration royalties via a licensing agreement or ties the patented invention to required purchases of non-patented products.
Here, the patentee submitted a damages theory based on a noninfringing alternative to the patented system, arguing that, in the hypothetical negotiation, the defendant would have considered the cost of implementing the alternative system in determining the reasonable royalty rate. However, the defendant was able to establish on cross-exam that maintenance costs used by patentee in calculating the cost of the alternative system would have extended beyond the expiration of the patents-in-suit.
The court found this did not constitute patent misuse. The court reasoned that the patentee did not attempt to extract post-expiration royalties but rather was considering the entire cost of the alternative system in order to determine what the defendant would have paid for the patented system in the hypothetical negotiation. The court observed that misuse is a narrow doctrine, and the facts here did not fit.
Entire Market Value Rule—Royalty Base Is Total Revenue from Products Ordered Using Patented On-Line Ordering System
The court considered an interesting EMVR fact pattern—patents directed to an on-line ordering system. The patentee’s expert used the value of the products sold via the infringing web sites as the royalty base, then determined the profit earned on these products, and finally evaluated the cost of implementing an embodiment of the patents-in-suit (a system called Transact). He used the cost of Transact as a starting point to arrive at his rate.
In a questionable stretch of logic, the court found this was not an impermissible use of EMVR. According to the court, the patents covered features of the web sites, and the patentee did not use the cost of implementing the entire web site as the royalty base, which the court suggested would have violated EMVR. The court reasoned the patented system allowed on-line sales, but then allowed the entire cost of the products sold via that system to act as the base. This is not the value of the patented invention, but rather a windfall to the patentee because each product ordered via the patented system would be factored into the base, regardless of how expensive the product or its relationship to the patented feature.
The court’s analysis for the rate, on the other hand, appears to be acceptable—using the cost of implementing this system to arrive at the rate—but the base is where the problem lies. It is well-settled that a low rate applied to a base that is inflated by misapplication of EMVR is legally improper. This seems like a circumstance where EMVR was misapplied (or not applied at all, when it should have been), resulting in a larger base than was warranted.
The issue here was the multiplier advocated by patentee—for ongoing royalties it sought 4X of the jury’s royalty rate. The patentee argued changed circumstances in the hypothetical negotiation and willful infringement justified the 4X kicker.
After failing to arrive at an ongoing rate in court-ordered mediation, the patentee moved for ongoing royalties. It cited four examples of changed circumstances between the original hypothetical negotiation date and the date for the ongoing royalty (which is when judgment is entered):
- Litigation expenses
- Defendants’ enhanced profitability in 2012 versus 1998 (the original hypo date)
- The proven success of e-commerce technology in 2012 versus 1998
- The cost of implementing Transact in 2012 versus 1998
The patentee argued that these factors justified a 2X kicker, and that willful infringement should double that rate again. The patentee applied the Read v. Portec factors for willful infringement to arrive at this second 2X kicker.
The court first considered the four factors above and concluded that the jury had heard evidence on each changed circumstance under the “Book of Wisdom” principle. The court concluded that there were no changed circumstances that should alter the verdict rate.
But the court’s willfulness analysis provided a different outcome—a 2.5X enhancement for each defendant. The court arrived at this enhancement based on the Read factors, finding several of them favoring enhancement. The court concluded: “Defendants have challenged [patentee’s] allegations of infringement and the validity of the patents. The jury, supported by substantial evidence, determined that Defendants infringe and that the patents are not invalid. Thus, should Defendants continue infringing, they do so in a willful manner.” Slip op. at 22.
The court did spend a paragraph analyzing the 9 Read factors, but found only a small subset of them favoring enhancement. Nevertheless, in the cursory passage above, the court took the facts that will inhere in every plaintiff’s verdict—a defendant who challenges validity and infringement and a finding against defendant on both issues—and parlayed that into a 2.5X kicker for the patentee.
While the willful infringement factor may be considered in determining ongoing royalties, there should be more consideration of the facts before enhancing nearly the full 3X permitted by statute for willful infringement. It would seem a more reasoned analysis is warranted when an infringer is about to be sanctioned, equitably, for future royalties. Simply jumping from the necessary outcome of every plaintiff’s verdict to a 2.5X kicker for willful infringement—even more in this case than the patentee requested—seems insufficient and inequitable.