Post-EBay: Permanent Injunctions, Future Damages

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1 Portfolio Media, Inc. 648 Broadway, Suite 200 New York, NY Phone: Fax: Post-EBay: Permanent Injunctions, Future Damages Law360, New York (March 02, 2009) -- The Supreme Court in ebay v. MercExchange, 547 U.S. 388 (2006) overturned the Federal Circuit s general rule of automatically issuing a permanent injunction after a finding of patent infringement.[1] District courts must now exercise equitable discretion in deciding whether to issue a permanent injunction, and decisions regarding the issuance of permanent injunctions must be analyzed under the traditional four-factor test for injunctive relief.[2] Since ebay, numerous district court cases have applied the four-factor test, and, as a result, permanent injunctions have become more difficult to obtain.[3] In approximately one-fourth of post-ebay decisions, no injunction was obtained.[4] This trend represents a remarkable change from the pre-ebay world. The ebay decision significantly altered the landscape for assessing damages. Because patent holders can no longer rely on the issuance of permanent injunctions, their leverage in negotiating damages settlements or licensing agreements after a finding of liability may be substantially reduced. Moreover, ebay requires district courts to deal with the issue of future damages. Traditionally, monetary damages were available to the patentee for past infringement while injunctive relief protected the patentee from future infringement. But now, a patentee may prevail on its patent infringement claim and be denied a permanent injunction, leaving no recourse to prevent the infringer from continuing its infringement in the future. The current damages law of course deals extensively with compensation to a patent owner for past infringement.[5] But, the Patent Act is silent on future damages.

2 In the wake of ebay, district courts are now struggling with how to impose and measure future damages. How is the patent holder to be fairly compensated for the future of its invention? How should a future royalty be determined? What is the district court s authority for awarding an ongoing royalty? These are emerging issues that we will address in this paper.[6] District Courts Have the Authority to Award an Ongoing Royalty Where Necessary to Effectuate a Remedy The Federal Circuit has found the authority to award an ongoing royalty in 35 U.S.C Section 283 empowers the district courts to grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent. [7] In Paice v. Toyota Motor Corporation, the Federal Circuit described this issue as whether an ongoing royalty permitting the use of a patented invention in exchange for a royalty prevents the violation of the rights secured by the patent.[8] The court looked to antitrust law and found that reasonable royalty licensing of patents is a well established form of relief. [9] Thus, an ongoing royalty is appropriate where necessary to effectuate a remedy.[10] The court made it clear, however, that an ongoing royalty is not justified as a matter of course whenever a permanent injunction is denied. Several parties have argued that this approach to ongoing royalties denies the right to a jury trial under the Seventh Amendment.[11] The Seventh Amendment provides that in suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved. [12] Although the Federal Circuit has not firmly decided this issue, Paice implies that an ongoing royalty need not be determined by a jury. Subsequently, the Northern District of California followed this result, explaining that [t]he Federal Circuit s disposition in Paice suggests that it would be permissible for this Court to determine, after an evidentiary hearing, a reasonable rate for an ongoing royalty. [13] The court concluded that it may consider evidence and set an ongoing royalty rate without violating the Seventh Amendment. A License Agreement is Preferred to an Ongoing Royalty Some courts suggest that, before an ongoing royalty is imposed, the parties should attempt to negotiate a license.

3 The Federal Circuit addressed this issue in Paice, where the court reviewed the district court s imposition of an ongoing royalty rate of $25 per accused vehicle, noting that an ongoing royalty rate is not automatic whenever a permanent injunction is denied. For example, an ongoing royalty is not necessary where the parties negotiate the terms of a license themselves. The court suggested that a negotiated license is the preferred remedy in most cases. Then, if the parties fail to come to an agreement, a court could step in to assess a reasonable royalty based on the ongoing infringement. In a concurring opinion in Paice, Judge Rader recommended that the parties always be given the opportunity to negotiate a license before the district court orders an ongoing royalty: "This general principle has deep roots in both law and policy. Projecting the costs to be incurred for what would otherwise be future acts of infringement is necessarily a speculative exercise, even for the most stable markets and technologies. "As licenses are driven largely by business objectives, the parties to a license are better situated than the courts to arrive at fair and efficient terms. After all, it is the parties, rather than the court, that will be bound by the terms of the royalty. "Particularly in the case of the patentee, who has proven infringement of its property right, an opportunity to negotiate its own ongoing royalty is a minimal protection for its rights extending for the remainder of the patent term."[14] Several district courts have followed the reasoning of Paice. In Finisar Corp. v. DirecTVGroup Inc., Finisar was awarded $104 million in damages by a jury and moved for a permanent injunction.[15} The Eastern District of Texas denied the motion for injunctive relief and granted an ongoing royalty. In its final judgment order, the court ordered defendants to pay an ongoing royalty rate of $1.60 per infringing device for the life of the infringed patent. Although the judgment order was brief, the court made a point to encourage the parties to license for more comprehensive or convenient terms. Like Paice, the court in Finisar recognized that the parties were sophisticated entities with experience in licensing agreements. In a more recent opinion, Telcordia Technologies Inc. v. Cisco Systems, the District of Delaware followed Judge Rader s approach.[16] After a jury returned a verdict against Cisco for willful infringement, Telcordia was denied a permanent injunction. Instead of ordering the payment of an ongoing royalty,

4 however, the court ordered the parties to negotiate the terms of a reasonable ongoing royalty rate. If the parties failed to reach an agreement, the court said that it would then asses the merits of the competing proposals. All of these cases exhibit a strong preference of the courts for license agreements between the parties over ongoing royalties imposed by the court. An Ongoing Royalty Rate Must be Based on Additional Factors Beyond the Jury s Reasonable Royalty Rate The determination of an ongoing royalty rate is different from the reasonable royalty rate determined by the jury. In Paice, the Federal Circuit vacated and remanded the case because the district court did not evaluate the additional economic factors arising out of the imposition of an ongoing royalty. The district court awarded the reasonable royalty rate determined by the jury as the ongoing royalty rate without significant discussion. The court only mentioned that the reasonable royalty rate determined by the jury was appropriate for future damages because [t]he jury, based on the entire record, determined an appropriate reasonable royalty rate that can be easily calculated on future sales of the accused devices thereby removing uncertainty from future damages calculations. [17] Beyond this statement, the court gave no indication as to why that rate was appropriate. In a more recent case, Boston Scientific v. Johnson & Johnson, Judge Illston of the Northern District of California explained that the change in the parties bargaining positions and the resulting change in economic circumstances resulting from the determination of liability are important factors to consider.[18] These cases suggest that it is not permissible for a court simply to assign the reasonable royalty rate determined by the jury as the ongoing royalty rate, without more. A specific inquiry must be made about the ongoing reasonable royalty rate to ensure that it will adequately compensate the patent holder for future infringement. A Delayed Injunction May be an Alternative to an Ongoing Royalty Rather than immediately awarding a permanent injunction or ongoing royalty rate for future infringement, perhaps the courts should allow for a transition period that would allow infringers to switch to non-infringing alternatives.

5 In Schneider AG v. SciMed Life Systems, the infringer produced a catheter that was strongly preferred by surgeons in the industry.[19] Instead of immediately entering a permanent injunction, the court imposed a one-year delay before the injunction would take effect.[20]the court reasoned that the year-long delay would allow surgeons to switch to non-infringing alternatives. In the meantime, the court provided for an escalating royalty rate during the one-year delay. This remedy balanced the right of the patentee to compensation for its invention and the public interest in an efficient and non-disruptive changeover from the preferred infringing medical device and other non-infringing alternatives. A Finding of Willful Infringement May Entitle a Patentee to an Enhanced Ongoing Royalty In the context of willful patent infringement, a court might order an ongoing enhanced royalty for future infringement. One could argue that this approach would mitigate the harshness of an injunction against the infringement, while providing patent holders with an equitable remedy. The z4 and Voda courts invited the parties to brief the issues relating to future damages, and required the defendants to report quarterly sales in the interim.[21] In both cases, the defendants infringed willfully and indicated an intention to continue their infringing activities after trial. Arguably, the willful infringement verdict entitled the patentees to enhanced damages for any infringement going forward. The Voda court cautioned that absent establishment of an escrow account, prejudgment interest will accrue on any post-verdict infringement damages, but it did not specifically address whether enhanced damages would apply to the ongoing royalty.[22] How do courts determine an ongoing royalty for an infringer who is not found to have willfully infringed? Again, there is certainly an argument that the infringement verdict, even though not finding willfulness, should trigger enhanced damages for future infringement because an infringer can no longer claim it was unaware of its infringing conduct with an infringement verdict in hand. No court to date, however, has awarded a patent owner treble damages for future infringement. In summary, the Federal Circuit and a handful of district courts have laid out several important guideposts for dealing with the issue of future damages where no injunction is issued.

6 First, the Federal Circuit has held that the district courts have the statutory authority to award an ongoing royalty. Although the district courts have this authority, an ongoing royalty is not automatic as soon as a permanent injunction is denied. Second, the courts prefer a license agreement negotiated by the parties over imposing an ongoing royalty on the parties. Third, the determination of ongoing royalty must be based on factors beyond the reasonable royalty rate set by the jury. In the future, courts may consider issuing delayed injunctions as an alternative to ongoing damages or awarding ongoing treble damages for willfulness to deter future infringement. --By Harry J. Roper and Emily C. Johnson, Jenner & Block LLP Harry Roper is a partner with Jenner & Block in the firm's Chicago office. Emily Johnson is an associate in the firm's Chicago office. Associate Michael G. Babbitt assisted in writing this paper. The opinions expressed are those of the authors and do not necessarily reflect the views of Portfolio Media, publisher of Law360. [1} ebay v. MercExchange LLC, 547 U.S. 388, 394 (2006). [2] Id. at 391 ( To obtain a permanent injunction, a patent holder must demonstrate that: (1) it has suffered an irreparable injury; (2) no adequate remedy at law (such as damages) exists; (3) the balance of hardships between the plaintiff and defendant warrants a remedy in equity; and (4) the public interest would not be disserved by a permanent injunction. ). [3] See Patent Litigation Statistics, Post ebay Permanent Injunction Rulings By District Courts to 1/07/09, available at (last visited Jan. 22, 2009). [4] Id. (showing that district courts denied 20 out of 80 permanent injunctions between 5/15/06 and 1/7/09). [5] See, e.g., Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp (S.D.N.Y. 1970). [6] The law is substantially more developed post-ebay as to when injunctions should or should not issue. While this topic is beyond the scope of this paper, we have summarized some of the more recent decisions in the Appendix. [7] 35 U.S.C. 283 (West 2009).

7 [8] Paice LLC v. Toyota Motor Corp., 504 F.3d 1293, 1314 (Fed. Cir. 2007). [9] Id. [10] Id. [11] Id. at ; Boston Scientific v. Johnson & Johnson, No , at *3-5 (N.D. Cal. Nov. 25, 2008). [12] U.S. Const. amend. VII. [13] Boston Scientific, No at *4-5. [14] Id. at [15] Finisar Corp. v. DirecTVGroup Inc., No (E.D. Tex. July 7, 2006) (final judgment order). [16] Telcordia Tech. Inc. v. Cisco Sys., 2009 WL 32717, at *15 (D. Del. Jan. 6, 2009). [17] Paice LLC v. Toyota Motor Co., 2006 WL , at *5 (E.D. Tex. Aug. 16, 2006), vacated and remanded, 504 F.3d 1293 (Fed. Cir. 2007). [18] Boston Scientific, No , at *7 (citing Amado v. Microsoft Corp., 517 F.3d 1353, 1356 (Fed. Cir. 2008)). [19] Schneider AG v. SciMed Life Sys., 852 F. Supp. 813, (D. Minn. 1994). [20] Id. at [21] z4 Techs. Inc. v. Microsoft Corp., 434 F. Supp. 2d 437, (E.D. Tex. 2006); Voda v. Cordis Corp., 2006 WL , at *6 (W.D. Okla. Sept. 5, 2006). [22] Voda, 2006 WL , at *6.