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Ongoing Patent Royalties: How Should They Be Calculated?

September 2, 2010

Ongoing Patent Royalties: How Should They Be Calculated?

September 2, 2010

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by Craig Countryman

Until recently, patent holders that prevailed in an infringement suit could usually obtain an injunction to prohibit future infringement. But eBay v. MercExchange, 547 U.S. 388 (2006) changed this norm by holding that injunctions in patent cases are appropriate only if the patentee can show that future infringement is an irreparable injury for which damages are an inadequate remedy. After eBay, many lower courts have denied injunctions where the patentee does not practice its patent because permitting the defendant to pay an ongoing royalty to continue its activity can compensate for the future injury. This has raised many new issues about when, how, and by whom the ongoing royalty should be calculated.

The Federal Circuit resolved some of the procedural questions in Paice v. Toyota, 504 F.3d 1293 (Fed. Cir. 2007). It held that district courts “may” impose an ongoing royalty but encouraged them to first let the parties try to negotiate the terms themselves. It also held that determination of the ongoing royalty rate is for the judge, not the jury, because it is an equitable remedy. These holdings leave other questions unanswered, though. Should courts let the parties present their evidence regarding the appropriate post-verdict royalty rate at trial and get an advisory jury verdict, or just hold a separate post-trial evidentiary hearing? Or should the court simply permit the patentee file a new lawsuit to address post-verdict infringement if its negotiations with the defendant fail?

Courts have split on whether to elicit an advisory jury verdict on the appropriate post-verdict royalty. Some have submitted the issue to the jury. Cummins-Allison v. SBM, 584 F. Supp. 2d 916 (E.D. Tex. 2008); Ariba v. Emptoris, 567 F. Supp. 2d 914 (E.D. Tex. 2008). Others have considered the post-verdict royalty separately after trial. Presidio Components v. American Technical Ceramics, 2010 WL 3070370 (S.D. Cal.); Creative Internet Advertising v. Yahoo!, 674 F. Supp. 2d 847 (E.D. Tex. 2009); Boston Scientific v. Johnson & Johnson, 2009 WL 975424 (N.D. Cal.); Paice v. Toyota, 609 F. Supp. 2d 620 (E.D. Tex. 2009); Joyal v. Johnson Electric, 2009 WL 512156 (D.N.J.).

The latter course seems prudent. A separate hearing – or at least separate briefing – allows the court to carefully consider the evidence unique to the ongoing royalty calculation and spares the jury from considering an issue that may become moot if it finds the defendant is not liable or if the court grants an injunction. And, whatever the jury’s advice, the court must explain the ongoing royalty it imposes anyway, so an advisory verdict might not save much work. On the other hand, a separate, post-trial hearing consumes judicial resources. And, if the parties are permitted to negotiate before an ongoing royalty is imposed, the negotiations may benefit from the guidance of the advisory jury verdict. Alternatively, the advisory verdict might create more uncertainty if one party thinks the judge will impose something much different while the other does not.

Most courts have imposed an ongoing royalty if the parties fail to reach agreement, instead of permitting the patentee to file a new lawsuit. This is wise, so long as the patentee is adequately compensated for forgoing that suit. It conserves judicial resources by resolving all issues in one lawsuit, presided over by one judge. Although collateral estoppel would simplify a second lawsuit, it would still consume more judicial resources, and entail more delay, than a post-trial motion.

How should courts approach calculating the ongoing royalty? Two Federal Circuit decisions – Paice and Amado v. Microsoft, 517 F.3d 1353 (Fed. Cir. 2008) – provide guidance. Paice vacated a district court’s order setting the ongoing royalty at the same rate as the past damages award because it did not explain the basis for doing so. Paice permitted the district court on remand to consider additional evidence regarding “economic factors arising out of the imposition of an ongoing royalty” and issues “about the terms of Toyota’s permissive continuing use.” Paice had argued for a higher post-verdict rate because the ongoing royalty would prevent it from granting an exclusive license and because Toyota’s post-verdict infringement would be willful in the absence of a court-imposed ongoing royalty, thus potentially subject to treble damages and attorney fees. The court said the appropriate ongoing royalty may be the same as the rate for past infringement, but that, whatever the rate, it required a separate explanation. A concurrence stressed that “pre-suit and post-judgment acts of infringement are distinct, and may warrant different royalty rates given the change in the parties’ legal relationship and other factors.”

Two related questions have arisen after Paice: Should the court use the rate for past infringement as a starting point when calculating the future rate and does the change in the parties’ legal relationship brought about by the verdict warrant a higher future rate? Amado suggests answers to both. Amado addressed a royalty for post-verdict sales made while a permanent injunction was stayed pending appeal. The district court set the royalty by taking the pre-verdict rate and tripling it because the post-verdict sales were allegedly willful infringement. The Federal Circuit reversed, and, citing Paice, explained the jury’s verdict was an improper starting point because “there is a fundamental difference” between pre-verdict damages and post-verdict royalties. It also rejected tripling because “willfulness, as such” was not the issue. Rather, the district court had to consider the change in the parties’ bargaining positions after the verdict and could impose a royalty anywhere between the pre-verdict rate and an amount 50 times higher, provided it was adequately explained.

Most courts, following Amado, have declined to use the pre-verdict rate as a starting point, including the Paice remand opinion, Creative Internet, Boston Scientific, and Joyal. But others have carried the pre-verdict rate forward, such as Presidio and Orion IP v. Mercedes-Benz, No. 05-cv-322, Doc. 638 (E.D. Tex. Mar. 28, 2008), or have started from that rate, then adjusted upward. Cummins-Allison v. SBM, 669 F. Supp. 2d 774 (E.D. Tex. 2009). The former course seems correct given Amado. True, Amado dealt with a situation where an injunction would eventually issue. But why should that matter? Amado’s comment that there is a “fundamental difference” between pre- and post-verdict infringement was a general one and citedPaice (a non-injunction case) as support. The possibility of an eventual injunction might affect the extent to which the parties’ bargaining positions changed post-verdict but not the method of computing the post-verdict royalty. Starting from the pre-verdict rate gives too much weight to a non-comparable data point. The court can still consider the pre-verdict rate as one factor without presuming it is the appropriate post-verdict rate.

Most courts have also set the post-verdict ongoing royalty higher than the pre-verdict rate, including the Paice remand, Creative Internet, Cummins-Allison, and Boston-Scientific. This seems correct. The ongoing royalty compensates the patentee for surrendering its right to file a new lawsuit to address the continued infringement. In that lawsuit, collateral estoppel would prevent the defendant from raising any defenses on the merits. And a willfulness finding would be almost certain because the defendant could not believe in good faith that its actions were permissible, which would expose it to the risk of treble damages and attorney fees. A defendant would surely pay much more to avoid such risk than it would have paid pre-verdict.

Others, like Presidio and Orion, have set the ongoing royalty equal to the pre-verdict rate. They say the verdict does not change the parties’ negotiating position because the pre-verdict royalty is based on a hypothetical negotiation between the parties in which the patent is assumed valid and infringed and that the verdict simply confirms this assumption. They also worry that setting the post-verdict rate too high is functionally equivalent to an injunction. But the pre-verdict royalty calculation – and corresponding assumption of validity and infringement – is separate from any issue of willful infringement. The patentee can still pursue pre-verdict willfulness and enhanced damages at trial. So the pre-verdict royalty calculation need not (and does not) consider those issues. By contrast, the post-verdict royalty must compensate the patentee for giving up a new lawsuit in which a willfulness finding is almost assured because the verdict leaves the defendant with no good faith defenses.

The Federal Circuit will eventually settle these issues. When it does, it should focus on what the patentee is being forced to surrender in exchange for the ongoing royalty and compensate it accordingly.

Craig Countryman is an attorney with Fish & Richardson in San Diego.

Posted with the permission of Daily Journal Corp. (2010).

The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.
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