“Ongoing Royalties” for Post-Verdict Patent Infringement

By Lisa Tittemore.

December 2009 IP Update

The Supreme Court’s 2006 decision in the eBay v. MercExchange case has caused trial courts to look more closely before issuing injunctions in favor of patentees who have proven infringement. The decision has also resulted in the re-introduction into the legal lexicon of the concept of “ongoing royalties.”

While not an entirely new idea, many more courts have awarded ongoing royalties since eBay. When infringement is found, but the court does not find an injunction appropriate, the defendant is permitted to continue to practice the claimed invention. But district courts are often setting an ongoing royalty rate to compensate the patentee for what amounts to a compulsory license to an infringer.

These awards are controversial, and the procedures used in calculating them have been challenged by litigants and by legal analysts alike. Those involved in patent litigation should be aware of this new body of case law, as both procedural and substantive rights can be affected by these awards.

Post-eBay decisions from the Federal Circuit rest a significant amount of discretion in the district courts as to how and by whom an ongoing royalty rate will be determined. The specifics of how the ongoing rate will be determined and the logistics for its implementation are still evolving. Federal Circuit decisions encourage district courts to give the parties a post-verdict interval in which to attempt to negotiate a rate, but, if they fail, suggest that either the judge or the jury – during trial or perhaps even in a separate trial – may set the rate.

Further, these Federal Circuit decisions state that post-verdict royalties for future infringement should be considered “fundamentally different” from royalties awarded for pre-verdict infringement. Whether the royalty for infringing sales occurring post-verdict will be routinely higher than the royalty set for pre-verdict infringement remains unsettled.

District courts addressing this issue reflect a diversity of approaches, with the judges of the Eastern District of Texas and Northern District of California leading the way.

Recent cases reflect trial courts’ attempts to think about the issue in advance and to design and implement procedures that will allow both efficient and fair results.

One popular procedure has been to consider potential ongoing royalties in the context of the initial jury trial, although many litigants have objected, arguing that it unnecessarily complicates the presentation to the jury, especially when the circumstances suggest that the patentee is entitled to a permanent injunction.

Alternatives to this approach include the use of a post-trial hearing, typically an evidentiary hearing, to enable the judge (without the jury) to determine royalties for future sales, or a procedure by which the issue of future damages is set aside for determination in a separate action. These alternatives do not satisfy all participants.  Many have argued that an evidentiary hearing is inconsistent with the right to a jury trial under the Seventh Amendment, while others consider a separate action inefficient.

Yet another approach may be to dismiss the case after awarding damages for past infringement, and let the plaintiff bring a new lawsuit if the defendant continues to infringe. This option, which has not yet gained traction, may be disfavored for efficiency reasons, although it would avoid issues regarding the Seventh Amendment, statutory authority and the like.

Courts employing these procedures have also faced the question of whether post-verdict royalties should be considered damages for willful infringement, thus warranting an enhanced award. Claims by patentees for enhanced damages for post-verdict infringement have had some success in the Eastern District of Texas and the Northern District of California.

The case law suggests that future damages may be more likely to be enhanced when they are considered post-verdict. Continued uncertainty on this issue makes it harder for parties to reach agreement in negotiations regarding ongoing royalties prior to any court rulings on the issue.

The recent and thoroughly reasoned opinion from Magistrate Judge Love in the Eastern District of Texas, addresses these issues in significant detail. The court ordered defendant Yahoo! to make quarterly payments of 23% of all post-verdict revenues earnings, including those derived from “new versions” of products of which the “old version” had been found to infringe.

Significantly, the jury had already found Yahoo’s pre-verdict infringement with respect to the “old versions” to be willful, and had applied a 20% royalty rate, thus providing a basis for the 23% rate for post-verdict activity. In setting that rate, the court relied on Federal Circuit decisions instructing “that post-verdict infringement should typically entail a higher royalty rate than the reasonable royalty found at trial.”

For a more detailed analysis of the growing body of case law addressing this issue, click here to see my article, “The Controversy Over ‘Ongoing Royalty’ Awards in the Evolving Landscape of Remedies for Patent Infringement,” in the November/December 2009 issue of The Federal Lawyer, published by the Federal Bar Association.