Following the Supreme Court decision in eBay, Inc. v. MercExchange, LLC,1 injunctions do not automatically follow from a finding that a patent is infringed and not invalid. In cases where an injunction is denied, in lieu of the injunction the district court has the power to award what are called “ongoing royalties,” a relatively new development in patent damages.
What’s in a name?
Historically, US courts rarely awarded compulsory licenses, other than as a remedy for proven antitrust violations. Hence, when courts first faced the prospect of awarding future damages in lieu of an injunction, a name other than “compulsory license” had to be found. It appears that Judge David Folsom in the Eastern District of Texas coined the name “ongoing royalties” in one of the first post-eBay cases to award such damages. The name was adopted by the Federal Circuit and has entered into general use.
Basis for awarding ongoing royalties
The Federal Circuit has ruled that district courts have the authority to award ongoing royalties under 35 U.S.C. § 283. That section authorizes district courts to grant injunctions against infringement on terms that are just. In 2007, the Federal Circuit indicated that Section 283 authorizes ongoing royalties as well.2 Because ongoing royalties are not “damages” in the sense of a remedy for past harm, no right to a jury trial attaches to awards of ongoing royalties. Some judges have submitted the question of ongoing royalties to juries, but such verdicts on ongoing royalties are advisory only.
Calculating ongoing royalties
Central to the award of ongoing royalties is the implicit royalty rate the jury already found for past damages. This is calculated by dividing the jury’s damage award by the number of infringing units, thus expressing the jury’s damage award on a per-infringing-unit basis. With the implicit jury royalty rate in hand, courts generally take one of two approaches to calculating ongoing royalties; I call these the “modified Georgia Pacific factors” approach and the “willful infringer” approach. With either approach, typically the district court first gives the parties a chance to negotiate the ongoing royalty by agreement.
What if the parties fail to agree? Then the most common approach is to begin by using the Georgia Pacific factors (long used to calculate past damages), modifying the analysis to take into account the changed economic circumstances and changes in the parties’ bargaining power following a jury verdict that the patents at issue are valid and infringed. For example, courts have modified the Georgia Pacific analysis to address the fact that the defendant is now an adjudicated willful infringer and that the damage award must adequately remedy the harm to the patentee. As a factor influencing the amount of the ongoing royalty, courts have also looked at the ability of the defendant to redesign its product to avoid the patent.
In contrast, the “willful infringer” approach to ongoing royalties accepts the jury’s implicit royalty rate for past damages as the starting point. Courts using this approach note that the Georgia Pacific analysis already assumes the patent is valid and infringed, and in this regard the jury verdict just confirms the assumptions made in calculating past damages. The significant difference post-verdict is that the defendant is now an adjudicated infringer and further infringement is almost always going to be willful. Hence, these courts determine if the jury’s implicit royalty rate should be enhanced for willful infringement, using the Read v. Portec factors that the Federal Circuit has long applied for determining if damages should be multiplied for willful infringement.3 The Read factors, which relate to things like the closeness of the case, the defendant’s intent to harm, the extent of the infringement and any mitigating factors, are used to determine the extent to which the implicit royalty rate found by the jury should be amplified.
It is going to cost more
Regardless of methodology, the ongoing royalty rate assessed by the court will almost always be higher than the implicit royalty rate derived from the jury verdict. The fact that the defendant is now an adjudicated willful infringer results in a higher royalty rate in nearly every case. District courts routinely reject a defendant’s request that the ongoing royalty should be lower than the jury’s implicit rate. In one case involving a university as the patent plaintiff, the court awarded the same royalty rate that the jury had implicitly found, declaring there were no changed circumstances post-trial justifying a higher rate.4
There is no standard amount by which ongoing royalties are enhanced over the jury’s implicit rate. Rather, the amount of enhancement is fact dependent. Doubling the implicit royalty rate is common, though many other degrees of enhancement have been awarded. A few courts have awarded ongoing royalties that are treble or even higher multiples of the jury’s implicit rate, though this is uncommon.
New, and with broad potential impact
Ongoing royalties are an important new feature of patent remedies in cases in which the court denies a permanent injunction. Cases involving non-practicing entities and perhaps cases involving standards-essential patents may be significantly influenced by this new development. Faced with the prospect of court-enhanced damages, some defendants are seeking to have the jury award past damages on a lump sum, paid-up basis.
For more information about ongoing royalties, please contact Joe Lavelle. You may also be interested in his more extensive article on this issue here.
547 U.S. 388 (2006).
2 Paice LLC v. Toyota Motor Sales, 504 F.3d 1293 (Fed. Cir. 2007).
3 Read Corp. v. Portec, Inc., 970 F.2d 816 (Fed. Cir. 1992).
4 Univ. of Pittsburgh v. Varian Med. Sys., Case No. 2:08cv01307-AJS, slip. op. (W.D. Pa. Apr. 25, 2012).