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Post-Judgment Royalty Rates in Patent Infringement Cases Increase

Expert Witness: Fulcrum Inquiry
As part of the fallout from the Supreme Court’s eBay decision, trial courts must make separate non-jury findings regarding post-verdict damages when a permanent injunction is not granted. Under this recent case, all other things being equal, the royalty rate will always be higher than what the jury found.

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. District courts must now use a four-factor test to exercise equitable discretion in deciding whether to issue a permanent injunction. The four factors are:

“A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and
defendant, a remedy in equity is warranted; and (4) that the public interest would not be dissolved by a permanent injunction.”

From a practical perspective, eBay means that an injunction is almost always unavailable for patent holders that do not practice the patent. Since eBay, numerous district court cases applied this four-factor test and denied final injunctions much more frequently than before. Consequently, lower courts are now struggling with what relief to give prevailing plaintiffs in lieu of an injunction. Some courts permit plaintiffs to sue again later, but most trial courts have awarded future damages to plaintiffs. The future damages have most commonly taken the form of a continuing royalty for defendant's anticipated post-judgment infringements. Plaintiffs often object to future compensation awards as constituting compulsory licenses (which they obviously are). Because (i) patent holders can no longer rely on permanent injunctions and (ii) district courts are dealing with post-verdict damages, plaintiffs’ leverage in negotiating damages settlements and/or licensing agreements after a finding of liability have been substantially reduced.

With this background in mind, a recent Texas ruling, Paice LLC v. Toyota Motor Corp., No. 2:04-CV-211 (E.D. Tex. April 17, 2009), and the related decisions by the Federal Circuit Court could be quite important. As explained below, the Federal Circuit directed (i) the trial court to make a separate damage determination from what the jury decided, and (ii) that no right to a jury determination exists. Upon remand, the trail court switched positions and quadrupled the jury’s determination based (in part) on a thought process that will apply in every case.

In the initial post-judgment determination, District Judge David Folsom of the U.S. District Court for the Eastern District of Texas awarded the reasonable royalty rate that was determined by the jury as the appropriate post-judgment royalty rate. The Court concluded that the reasonable royalty rate determined by the jury was appropriate for future damages because:

“…the 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.”

In Paice LLC v. Toyota Motor Corp., 504 F.3d 1293, 1315 (Fed. Cir. 2007), cert. denied, 128 S. Ct. 2430 (2008), his rationale was insufficient for the Appellate Court. The Federal Circuit reversed, holding that the district court erred by imposing the same ongoing royalty awarded by the jury, without any explanation as to why that rate was appropriate. The Federal Circuit ruled as follows:

“… we think it prudent to remand the case for the limited purpose of having the district court reevaluate the ongoing royalty rate. Upon remand, the court may take additional evidence if necessary to account for any additional economic factors arising out of the imposition of an ongoing royalty.”

The Federal Circuit noted that the parties presumably would be given the opportunity “to negotiate their own rate”, but in the absence of such an agreement, the district court could award a royalty for ongoing infringement.

The Federal Circuit also addressed whether a jury was required for this post-trial determination, and concluded that no right to jury exists, as follows:

“…not all monetary relief is properly characterized as ‘damages.’ When … relief was sought which equity alone could give, … in order to avoid a multiplicity of suits and to do complete justice, the court assumed jurisdiction to award compensation for the past injury, not, however, by assessing damages, which was the peculiar office of the jury, but requiring an account of profits. … Even if the District Court’s orders are construed in part as orders for the payment of money … such payments are not ‘money damages’. … As such, the fact that monetary relief is at issue in this case does not, standing alone, warrant a jury trial. Accordingly, Paice’s argument falls far short of demonstrating that there was any Seventh Amendment violation.”

On remand, the Court accepted the Federal Circuit’s suggestion that post- and pre-judgment royalty rates may differ. The parties agreed that:

1. The appropriate framework was a hypothetical negotiation (i.e., no change from the initial trial and the standard perspective in such matters); and

2. The relevant date for the hypothetical negotiation was August 2006, the date judgment was entered.

Consistent with the Court’s initial decision that an injunction was not available (this was not altered by the Federal Circuit), the Court thus framed the question as “what amount of money would reasonably compensate a patentee for giving up his right to exclude yet allow an ongoing willful infringer to make a reasonable profit?” The Court then determined:

“Many of the factors noted by the Georgia-Pacific Court are also seemingly applicable to an ongoing royalty rate analysis. A post-judgment, ongoing royalty negotiation, however, is logically different from the pre-trial hypothetical negotiation discussed in Georgia-Pacific. In the case of an ongoing royalty, the hypothetical negotiation occurs post-judgment; therefore, the “willing licensee” in this negotiation is an adjudged infringer, unlike the situation described in Georgia-Pacific.”

“… the change in the legal relationship between the parties justifies a different ongoing royalty rate. Toyota is now an adjudged infringer of a valid patent, according to the jury and this Court’s final judgment. That verdict and judgment has been affirmed on appeal. Toyota’s continued infringement is both voluntary and intentional. Failing to take into account the change in legal relationship between the parties would be manifestly unjust to Paice. Failing to consider the parties’ changed legal status would create an incentive for every defendant to fight each patent infringement case to the bitter end because without consideration of the changed legal status, there is essentially no downside to losing.” [Citations omitted]

This conclusion is a bit odd because, in every economic damages calculation, the damage analyst assumes that liability is established and infringement exists. Consequently, contrary to the Court’s determination, every pre-judgment reasonable royalty calculation already contains a mandatory license of a defendant who is presumed to be an infringer. Nevertheless, the Court’s rationale in Paice instructs that, all other things being equal, every case should have a higher royalty rate on a post-judgment calculation.

The Court also considered updates in the economic situation that exist post-judgment. On pre-judgment determinations, it is widely accepted that the date of the reasonably royalty determination is immediately before the alleged infringement began. Of course, this is usually several years before judgment occurs. With a change in dates, many of the economic facts included in the 15 Georgia Pacific factors could change, causing the royalty rate to either increase of decrease.

The Court held a one-day damages hearing. Then, using the above thought process, the Court performed a reasonable royalty rate calculation using its own economic determinations. The result was that the Court approximately quadrupled the reasonable royalty rate that the jury determined. This is a bit surprising because:

1. The same judge initially accepted (see above quote) the jury’s determinations, and

2. Although the case-specific economic changes occurring from the use of two different dates would warrant a royalty rate increase, this could not account for the dramatic change contained in the Court’s ruling. In this regard, it is interesting that, although the parties agreed to an August 2006 valuation date for the hypothetical negotiation, the Court specifically relied on 2007 and 2008 information in justifying its determination of the ongoing royalty rate.

Even though the jury’s award was quadrupled, the Court concluded that the jury’s verdict should not be ignored. When explaining why the reasonable royalty rate should not be even higher, the Court wrote that plaintiff’s expert was incorrect because he failed to consider the jury’s award for past damages in his analysis.

The decision on remand has not yet been reviewed by the Federal Circuit. Regardless, since (i) the Federal Circuit determined that pre- and post-verdict royalty rates can differ, and (ii) the reasonable royalty rates can be highly case-specific and judgmental, post-verdict damages determinations will likely remain an area of significant uncertainly. Expert financial advice and testimony will be required.

Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials: CPA, MBA, CMA and ASA.

Copyright Fulcrum Inquiry

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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