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Prejudgment interest is an overlooked area of patent damages law. Frequently, it is not even considered as part of a damages case until the very end, as a sort of addendum to the basic damages calculations themselves. This is unfortunate because, quite often, prejudgment interest can equal or exceed the basic damages award.
I. Authority to Award Prejudgment Interest
An award of prejudgment interest is not mandatory, and it is within the discretion of the court. See General Motors Corp. v. Devex Corp., 461 U.S. 648, 656 (1983). Courts derive their authority to award prejudgment interest from Section 284 of the Patent Act:
Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, … together with interest … as fixed by the court.
However, the Supreme Court has stated that “it may be appropriate to limit prejudgment interest, or perhaps even deny it altogether, where the patent owner has been responsible for undue delay in prosecuting the lawsuit.” Id. at 657. Following the Supreme Court’s holding, the Federal Circuit, in Crystal Semiconductor Corp. v. TriTech Microelectronics Inter., Inc., upheld a district court’s refusal to grant prejudgment interest. See 246 F.3d 1336, 1361 (Fed. Cir. 2001). The Federal Circuit held that because the patent holder delayed in filing suit for self-serving reasons and there was sufficient evidence to show same, the district court did not abuse its discretion in denying plaintiff prejudgment interest. See id. at 1362. Generally, however, denying prejudgment interest is not the standard: “prejudgment interest should be awarded under § 284 absent some justification for withholding such an award.” General Motors Corp. v. Devex Corp., 461 U.S. at 657.
II. The Potential Effects of Prejudgment Interest on a Damages Award
In the seminal prejudgment interest case, General Motors Corp. v. Devex Corp, the Supreme Court upheld a prejudgment interest award of $11 million to Devex Corp. that was more than 1.3 times the damages award of $8.8 million. 461 U.S. 648, 658 (1983). Indeed, other cases have borne equally substantial prejudgment interest awards. Recently in Mars, Inc. v. Coin Acceptors, Inc., the District Court of New Jersey awarded Mars, Inc. more than $12.4 million in prejudgment interest in addition to an approximate $14.4 million award in reasonable royalties. See Mars, Inc. v. Coin Acceptors, Inc., 513 F.Supp.2d 128, 138 (D.N.J. 2007); see also Polaroid Corp. v. Eastman Kodak Co., 16 U.S.P.Q.2d 1481 (D. Mass. 1990), amended on recons., 17 U.S.P.Q.2d 1711 (D. Mass. 1991) (about half of the $873 million awarded in the 1991 award to Polaroid against Kodak was prejudgment interest); Kearns v. Chrysler Corp., 32 F.3d 1541, 1552 (Fed. Cir. 1994) (affirming a district court’s award of $11.3 million in damages and $8.1 million in prejudgment interest).
III. Calculating Prejudgment Interest
When calculating prejudgment interest, one must keep in mind its central purpose: “to compensate for the delay a patentee experiences in obtaining money he would have received sooner if no infringement had occurred.” Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11, 23 (Fed. Cir. 1984). The prejudgment interest on a damages award “merely serves to make the patent owner whole, since his damages consist not only of the value of the royalty payments but also the foregone use of the money between the time of infringement and the date of the judgment.” General Motors Corp. v. Devex Corp., 461 U.S. at 655-56 (emphasis added).
When calculating the prejudgment interest, the appropriate interest rate and whether and when to compound the interest, among other calculation nuances, are points of contention between the patentee and infringer. “The rate of prejudgment interest and whether it should be compounded or uncompounded are matters left largely to the discretion of the district court.” Bio-Rad Labs., Inc. v. Nicolet Instrument Corp., 807 F.2d 964,969 (Fed. Cir. 1986); see also Uniroyal, Inc. v. Rudkin-Wiley Corp., 939 F.2d 1540, 1545 (Fed. Cir. 1991) (holding “[a] trial court is afforded wide latitude in the selection of interest rates, and may award interest at or above the prime rate”).
A. Determining the Appropriate Interest Rate
Varying types of interest rates, such as the prime rate, the prime rate plus a percentage, the US Treasury rate, state statutory rate, and corporate rate, among others, have been considered and applied in calculating prejudgment interest. See Junker v. HDS Corp., 2008 WL 3385819, at *6-7 (N.D. Cal. 2008); see also Baden Sports, Inc. v. Kabushiki Kaisha Molten, 2007 WL 2790777, at *7-8 (W.D. Wash. 2007) (“Courts have applied various interest rates, including the prime rate, corporate bond rates, a consumer credit rate, the rate the patentee paid for borrowed funds, and the rate the patentee earned on spare funds.”).
A survey of the case law shows a tendency for courts to determine an applicable prejudgment interest rate based on whether the patent owner had to actually borrow money during the period of infringement or simply lost the opportunity to invest the damages during the same period. See, e.g., Mars, Inc., 513 F. Supp. 2d at 133 (opining “in order to make [the patent holder] whole, the Court must determine whether it would have used the money to invest, or to avoid borrowing, determine the percentage yield that [the patent holder] either would have earned, or avoided paying, and then charge that rate to the [infringer] as prejudgment interest”).
If the patent owner is viewed as having been in a “borrowing” situation, a court is more likely to award prejudgment interest based on prime rate, prime rate plus an additional percentage, the patent owner’s actual borrowing rate, or commercial or consumer credit rates. Such rates are more likely to compensate the patent owner for money actually lost as a result of borrowing.
Conversely, if the patent owner is viewed as having been in an “investing” position, a court is more likely to award prejudgment interest based on the Treasury bill rate, state statutory rate, the patent owner’s actual earned interest rate, a corporate bond rate, or some arbitrary fixed rate. Such rates are more likely to compensate the patent owner for lost opportunity income. See, e.g., id. (“The vast majority of courts award either the T-Bill rate or the prime rate as a rough estimation of what the infringed patent holder could have earned, or could have avoided paying, respectively.”).
B. Determining Whether to Compound and the Appropriate Compounding Period
Prejudgment interest calculations can be simple or compounded. If the interest is compounded, it can be done in a variety of periods, such as daily, weekly, monthly, yearly,or some other measure of time. Courts typically choose to compound prejudgment interest “[b]ecause a patentee’s damages include the forgone use of money, [and thus] compounding is needed to account for the time value of money.” Mars, Inc., 513 F.Supp.2d at 137 (citing AMP Inc. v. Lantrans, Inc., 1991 WL 253796, at *7 (C.D.Cal. 1991)). “[C]ourts have approved annual compounding and even daily compounding.” Id.
The issue of what form of compounding to apply varies from court to court and case to case. For example, a curt in the Central District of California found it appropriate to compound prejudgment interest on a quarterly basis. See U.S. Philips Corp. v. KXD Technology, Inc., 2007 WL 4984150, at *2 (C.D.Cal. 2007). However, in Mars, Inc. v. Coin Acceptors, Inc., the curt in the District of New Jersey held that the prejudgment interest should be compounded annually. See 513 F. Supp. 2d at 137. In fact, a prejudgment interest award that was calculated using a daily compounding method has even been affirmed by the Federal Circuit. See Uniroyal, Inc. v. Rudkin-Wiley Corp., 939 F.2d 1540, 1545 (Fed. Cir. 1991).
Prejudgment interest can be a very substantial portion of a damages award in a patent case. While it is almost certain that prejudgment interest will be assessed, the method of calculating the interest widely varies. Given the impact of a prejudgment interest award on the size of the total damages award, thought and consideration regarding its calculation should not wait until the eve of trial. For example, perhaps experts should consider opining on the method of calculating prejudgment interest in their expert opinions. Furthermore, in considering the potential exposure (or recovery) in a case, it may be worthwhile factoring the impact of prejudgment interest.
Post-judgment interest is available on damages awarded in federal civil cases from the date of entry of final judgment.
I. Authority to Award Post-Judgment Interest
The standard for post-judgment interest in all federal civil cases is defined by 28 U.S.C.A. § 1961, which provides in pertinent part (emphasis added):
(a) Interest shall be allowed on any money judgment in a civil case recovered in a district court. Execution therefore may be levied by the marshal, in any case where, by the law of the State in which such court is held, execution may be levied for interest on judgments recovered in the courts of the State. Such interest shall be calculated from the date of the entry of the judgment, at a rate equal to the coupon issue yield equivalent (as determined by the Secretary of the Treasury) of the average accepted auction price for the last auction of fifty-two week United States Treasury bills settled immediately prior to the date of the judgment. The Director of the Administrative Office of the United States Courts shall distribute notice of that rate and any changes in it to all Federal judges.
(b) Interest shall be computed daily to the date of payment except as provided in section 2516(b) of this title and section 1304(b)(1) of title 31, and shall be compounded annually.
II. Special Issues Regarding Calculation of Post-Judgment Interest
Post-judgment interest applies to patent cases and is mandatory. See also 28 U.S.C.A. § 1961; Goodwall Constr. Co. v. Beers Constr. Co., 991 F.2d 751, 759 (Fed. Cir. 1993); Mathis v. Spears, 857 F.2d 749, 760 (Fed. Cir. 1988). Furthermore, the general federal case law of post-judgment interest is applicable to patent litigation awards, and the courts must look to regional circuit law for guidance on its application. See Tronzo v. Biomet, Inc., 318 F.3d 1378, 1381 (Fed. Cir. 2003). Until recently, little case law developed relating to any special issues involving the application of § 1961 to awards in patent cases. However, in March 2009, the Federal Circuit in Mars, Inc. v. Coin Acceptors, Inc. issued an opinion on post-judgment interest as it relates to final judgment and appeals. See 557 F.3d 1377 (Fed. Cir. 2009).
In Mars, Inc. v. Coin Acceptors, Inc., the Federal Circuit failed to provide instructions regarding interest calculations in its mandate to the district court when it modified the damages award and remanded for a damages recalculation. See id. at 1378. Federal Rule of Appellate Procedure 37(b) requires that “[i]f the court modifies or reverses a judgment with a direction that a money judgment be entered in the district court, the mandate must contain instructions about the allowance of interest.” Id. Furthermore, the Federal Circuit held that “[t]he responsibility and authority for [determining whether a party to an appeal is entitled to post-judgment interest] is assigned to the appellate tribunal.” Id. at 1378 (citing Tronzo v. Biomet, 318 F.3d at 1381).
Mars, Inc. requested the Federal Circuit to recall its mandate and issue an amended mandate addressing post-judgment interest. See id. While the court noted that the power to recall a mandate should be “exercised sparingly,” it held that “recall is appropriate when a mandate does not contain instructions concerning the allowance of interest on a money judgment as required by Rule 37(b).” Id.
In summary, if an appeal is made and a money judgment is affirmed, post-judgment interest is payable from the date when the district court’s judgment was entered, unless the law provides otherwise. See FEDERAL RULE OF APPELLATE PROCEDURE 37(a). If a money judgment is modified or reversed on appeal, the appellate court’s mandate must contain instructions about the allowance of interest. See FEDERAL RULE OF APPELLATE PROCEDURE 37(b); see also Mars, Inc. v. Coin Acceptors, 557 F.3d at 1378. However, if the appellate court’s mandate fails to provide such instructions, the patent holder may request the Federal Circuit to amend the order to include instructions on post-judgment interest. See id. If the mandate does not address post-judgment interest and the patent holder does not seek an amendment to the mandate, the district court is powerless to award interest other than as provided in 28 U.S.C.A. § 1961 – that is, from the date the district court enters judgment on return of the mandate, not the date of the district court’s original judgment. See Tronzo v. Biomet, 318 F.3d at 1380.