Blog

The Latest From the Federal Circuit on Injunctions, Sunset Royalties, and Future Royalty Rates

Even if you win your patent infringement case, you still may not get an injunction prohibiting ongoing infringement.  In a case decided last month by the Federal Circuit, ActiveVideo v. Verizon, a jury found that Verizon infringed ActiveVideo’s method patents pertaining to video-on-demand technology, but the Federal Circuit held that the district court erred by imposing a permanent injunction prohibiting Verizon from future infringement.  This is a stark example of the impact of the Supreme Court’s 2006 ruling in Ebay v. MercExchange that injunctions should not automatically issue in patent infringement cases, and worthy of analysis.  Also worthy of scrutiny is what Federal Circuit wrote concerning the appropriate royalty Verizon should be required to pay for future use.

I.               Injunction

There are four elements courts must consider when deciding whether to impose an injunction after liability has been established:  (1) whether the harm to the patent owner is irreparable; (2) whether the harm is compensable with money damages; (3) the balance of the hardships on each of the parties depending on whether the court issues the injunction; and (4) the public interest.

A.             Irreparable Harm/Efficacy of Money Damages

The Court determined that the injury suffered by ActiveVideo as a result of Verizon’s infringement would be compensable by money damages, and would not be irreparable.  The following chart depicting the manner in which the court weighed facts pertaining to irreparable injury.

Factors Favoring Irreparable Harm Factors Weighing Against Irreparable Injury Non-Factors
The parties are not direct competitors Litigation costs – the Federal Circuit held that litigation costs cannot constitute irreparable harm
License non-exclusive – ActiveVideo could maintain its existing license to Cablevision and also license Verzion Loss of market share by ActiveVideo’s licensee Cablevision – the Federal Circuit held that if Verizon takes a customer away from ActiveVideo’s licensee Cablevision, the only harm ActiveVideo suffers is loss of a license fee from Verizon
Ease of quantifying a license fee – Cablevision paid ActiveVideo 17 cents a month per subscriber, Verizon could be required to pay monthly per subscriber also Loss of business opportunity or brand recognition could constitute irreparable injury, but neither was proven
Verizon is able to pay the license fee – the Federal Circuit distinguished the Bosch v. Pylon Mfg. case, in which the Federal Circuit held that the fact that the defendant might not be able to pay a license fee contributed to irreparable injury
No evidence of damage to ActiveVideo’s brand name because Cablevision markets its service using the “io” name, not the Activevision name, so retail customers are unlikely to associate Activision with the service
Verizon’s service increases demand for VOD overall and therefore increases opportunities for ActiveVideo
No evidence of price erosion
ActiveVideo sought to broadly license its patents, including to Verizon
ActiveVideo wiling to extend sunset licensing period

B.             Balance of Hardships

The Federal Circuit held that the balance of hardships favored the infringer.  It analyzed the factors as follows.

Factors Favoring Patent Owner Factors Favoring Infringer Non-factors
Sunset licensing fee alone would generate, in one month, 70% of what patent owner earned in its entire 23 year history Patent owner’s small size
Patent owner would only suffer if not compensated

C.            Public Interest

The Federal Circuit upheld the district court’s finding that the public interest in enforcing the patent owner’s right to exclude outweighed the interest the infringer’s customers may have in maintaining their access to entertainment.  But the court held that the public interest factor could not outweigh the other two, explaining:

If the general public interest in upholding patent rights alone was sufficient to mandate injunctive relief when none of the other three factors support injunctive relief, then we would be back to the general rule that a patentee should always receive an injunction against infringement. But the Supreme Court rejected the idea that there is a general rule that courts should issue permanent injunctions against patent infringement. eBay, 547 U.S. at 393-94. We vacate the grant of a permanent injunction in this case and remand for the district court to consider an appropriate ongoing royalty rate for future infringement by Verizon.

II.             Sunset Royalties

A sunset royalty is, as its name implies, a royalty an infringer must pay while it phases out its infringing product.  The district court imposed a sunset royalty far greater than the amount paid by ActiveMedia’s licensee, Cablevision.  The Federal Circuit upheld the higher royalty amount, explaining:

The district court accepted ActiveVideo’s expert testimony that Verizon received an incremental profit of $6.86 per FiOS-TV subscriber per month. The court analyzed the respective bargaining positions of the parties post-verdict, and concluded that “it would have been reasonable for the parties to make an agreement whereby Verizon would receive 60% of the profits and ActiveVideo would receive 40% of the profits.”  This results in the $2.74 per subscriber per month royalty. The district court rejected Verizon’s suggestion that it should pay the same rate as Cablevision. The district court found that after the patent is held not invalid and infringed by Verizon, ActiveVideo is in a much better bargaining position with Verizon than it was with Cablevision in 2009. Based on the fact that Verizon may be able to design around, but does not know precisely how effective such a design around might be, the court discounted the profit split from the 50/50 to 60/40 (in favor of Verizon).

This may seem high, and while it is likely true that Verizon would not have agreed to that amount prior to litigation, Verizon has been adjudicated to infringe and the patent has been held not invalid after a substantial challenge by Verizon. See Paice [LLC v. Toyota Motor Corp.], 504 F.3d at 1317 (Rader, J., concurring) (“[P]re-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.”); Amado [v. Microsoft], 517 F.3d at 1362 (“Prior to judgment, liability for infringement, as well as the validity of the patent, is uncertain, and damages are determined in the context of that uncertainty. Once a judgment of validity and infringement has been entered, however, the calculus is markedly different because different economic factors are involved.”). The district court is correct; there has been a substantial shift in the bargaining position of the parties. See Amado, 517 F.3d at 1362 (“There is a fundamental difference, however, between a reasonable royalty for pre-verdict infringement and damages for post-verdict infringement.”). We reject Verizon’s argument that the district court erred in concluding that the jury verdict placed ActiveVideo in a stronger bargaining position.

III.           Future Royalties

Because the Federal Circuit vacated the injunction, it now becomes necessary for the district court to fix a royalty for the infringer to pay going forward.  The court offered the following comparison of sunset and ongoing royalties, and guidance for the district court on remand:

We held in Amado that an assessment of prospective damages for ongoing infringement should “take into account the change in the parties’ bargaining positions, and the resulting change in economic circumstances, resulting from the determination of liability.” Amado, 517 F.3d at 1362. And, although Amado dealt with the imposition of royalty damages while an injunction was stayed during appeal, this holding applies with equal force in the ongoing royalty context.  Though we vacate the district court’s injunction, we see no error in its post-verdict royalty calculation. The district court, on remand, should determine an appropriate ongoing royalty, an inquiry that is much the same as its sunset royalty analysis. The district court may wish to consider on remand additional evidence of changes in the parties’ bargaining positions and other economic circumstances that may be of value in determining an appropriate ongoing royalty. See Paice, 504 F.3d at 1315 (“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.”). Indeed, ActiveVideo’s bargaining position is even stronger after this appeal. We leave the procedural aspects of how to proceed on the issue of prospective damages to the discretion of the district court.

The Federal Circuit further explained that some of the Amado factors considered by the district court in its sunset royalty analysis might not be appropriate to consider when calculating an ongoing royalty. Those might include the defendant’s likelihood of success on appeal, the ability of the defendant to immediately comply with the injunction, and the evidence and arguments found material to granting the permanent injunction.

IV.           Effect on Apple v. Samsung

The Federal Circuit’s teachings in the ActiveVideo case are likely to have significant influence on Judge Koh’s upcoming decision on Apple’s request for an injunction prohibiting future sales of infringing smartphones in the Apple v. Samsung case.  In the fist instance, she is likely to be guided by the ActiveVideo opinion in determining whether to impose the injunction Apple wants.  If she decides not to impose the injunction, then she will likely refer to it if she needs to impose an ongoing royalty.

 

 

2 Comments to The Latest From the Federal Circuit on Injunctions, Sunset Royalties, and Future Royalty Rates

  1. September 13, 2012 at 9:40 pm | Permalink

    This is just the quality of writing I like to read. I like how well this has obviously been researched. The main points are tangible, interesting and well thought out. This is really good reading.

  2. September 15, 2012 at 7:01 am | Permalink

    Thank you for sharing. Not to many people in your position are so gracious. Your article was very poignant and understandable. It helped me to understand very clearly. Thank you for your help.

Leave a Reply