CHAPTER 31
CASES WHERE COURTS AWARDED ONGOING ROYALTIES

A patent owner seeks to stop the infringement and be compensated for the past infringement. Generally, the patent owner has a few ways to seek justice and compensation, including pursuing litigation, through either a jury or bench trial. What about compensation/remedies after these trials? Some verdicts and awards contemplate a payment through the life of the patents. Some cases will involve an injunction, enjoining the infringer from further use of the patented technology. In other cases, the courts will award what is called an ongoing royalty, a court-enforced royalty so the infringer can continue using the patented technology, rather than granting an injunction. This chapter will highlight memorable cases involving these ongoing royalties, escrow royalties, and sunset royalties.

ROYALTIES

ONGOING ROYALTIES

The Federal Circuit first distinguished an ongoing royalty from damages for past infringement in its 2007 decision in Paice LLC v. Toyota Motor Corp. ("[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.").1 Paice dealt with infringement allegations against Toyota regarding three patents relating generally to drive trains for hybrid electric vehicles. The District Court for the Eastern District of Texas entered a judgment that Toyota infringed claims 11 and 39 of U.S. Patent No. 5,343,970 under the doctrine of equivalence.2

In Paice, the district court determined that an injunction was not warranted and instead granted an ongoing royalty of $25.00 per infringing vehicle. The royalties were to be paid quarterly and accompanied by an accounting of infringing vehicles. In addition, if payments were not made within 14 days of the due date, they were to accrue interest at the rate of 10%, compounded monthly. The district court retained the right to enforce this portion of the Final Judgment. In reviewing the district court decision, the Federal Circuit stated, "under some circumstances, awarding an ongoing royalty for patent infringement in lieu of an injunction may be appropriate."3 Given that the district court did not provide reasoning to support its selection of $25 per infringing vehicle as the ongoing royalty rate, the Federal Circuit remanded the case so the district court could reevaluate the ongoing royalty rate and provide the reasoning as to why the ongoing rate was appropriate.

In Prism Technologies LLC. v. Sprint Spectrum L.P., a case involving patented technology regarding access to information over untrusted networks. The Federal Circuit confirmed that 35 U.S.C. § 283 provides that a court may grant an injunction "to prevent the violation of any right secured by patent, on such terms as the court deems reasonable."4 Citing Paice, the Federal Circuit interpreted that provision to permit a court to award "an ongoing royalty for patent infringement in lieu of an injunction" barring the infringing conduct. "If the court determines that a conduct-barring injunction is not warranted, it may instruct the parties to try to negotiate an ongoing royalty and, if the parties cannot agree, award a royalty."5

Escrow Royalties

In Amado v. Microsoft Corp., after a finding of infringement, related to a patent directed to a "point and shoot interface for linking database records to spreadsheets whereby data of a record is automatically reformatted and loaded upon issuance of a recalculation command," and a jury award of $0.04 per infringing unit, the court stayed a previously issued permanent injunction and awarded a $0.12 (trebled from the $0.04 award) royalty per unit, an escrow royalty.6 The Federal Circuit found this increase to be different from the ongoing royalty rate awarded in Paice, where an injunction was denied, because in Amado, Microsoft was enjoined and allowed to continue the infringing activity only by virtue of the court-ordered stay of the injunction, pending the appeal.7 Again, because the Federal Circuit found that not enough information was provided to give a clear explanation for the fee award, it vacated the increased royalty of $0.12 during the stay and remanded for reconsideration.8

Sunset Royalties

In ActiveVideo Networks, Inc. v. Verizon Commcn's, Inc., ActiveVideo asserted four patents, dealing generally with interactive television systems and methods for delivering interactive television to subscribers, against Verizon for its video on demand feature.9 Verizon counter-claimed with its own patents and alleged that ActiveVideo infringed the Verizon patents dealing with interactive television features, including internet access, two-dimensional channel navigation, and advertising. After a three-week jury trial, the jury found that the parties infringed each other's patents and awarded ActiveVideo $115 million and Verizon $16,000 in damages. After the trial, the district court entered an injunction against Verizon and awarded what is termed the "sunset royalty," for any infringement from date of judgment until the injunction was to take effect.10 The sunset royalty was based on an eight-month period that Verizon requested in order to complete a design around the ActiveVideo patents.11 The district court granted a six-month stay and awarded a sunset royalty to mitigate the harm to public and provide Verizon considerable time to implement the award.12

Verizon then requested, and was granted an additional stay, pending the appeal. On appeal, Verizon argued the sunset royalty should be at most $0.17 per subscriber per month.13 ActiveVideo sought $3.40 per subscriber per month. In awarding $2.74 per subscriber per month, the district court accepted Active Video's expert testimony that Verizon received an incremental profit of $6.86 per subscriber per month.14

The district court then analyzed the bargaining positions of ActiveVideo and Verizon after the jury 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."15 Applying 40% to the $6.86 profit results in the awarded $2.74 per subscriber per month. The Federal Circuit reversed the grant of the injunction but found no error with the sunset royalty amount awarded.

Thus, on remand the district court was to determine an ongoing royalty, much the same analysis as it conducted in determining the sunset royalty, and consider additional evidence of changes in the parties' bargaining positions and "other economic circumstances that may be of value in determining an ongoing royalty."16 The Federal Circuit even went so far as to confirm that Active Video's bargaining position was even stronger after the appeal. After this decision, ActiveVideo and Verizon entered into a settlement agreement for $260 million and an undisclosed additional amount. "In connection with the settlements with ActiveVideo and TiVo, we recorded a charge of $0.4 billion in the third quarter of 2012 and will pay and recognize over the following six years an additional $0.2 billion."17

CONSIDERATIONS IN ONGOING ROYALTY RATE CASES

WhitServe

WhitServe LLC v. Computer Packages, Inc., 694 F.3d 10, 35 (Fed. Cir. 2012) dealt with several patents related generally to onsite backup for Internet-Based Data processing, automating delivery of professional services and technology for backing up data. In WhitServe, the Federal Circuit found that to provide relief against ongoing infringement, a court can consider several remedies: "(1) it can grant an injunction; (2) it can order the parties to attempt to negotiate terms for future use of the invention; (3) it can grant an ongoing royalty; or (4) it can exercise its discretion to conclude that no forward-looking relief is appropriate in the circumstances."18 In WhitServe, the Federal Circuit affirmed a finding of willful infringement on four patents but vacated and remanded the damages award. First, the Federal Circuit found that the jury was entitled to find that $41 per infringing transaction accurately represented the average service fee charged for the infringing products to be included in the royalty base. However, the Federal Circuit also found that the reasonable royalty awarded was speculative because the damages expert for WhitServe made "multiple errors" that resulted in an unsupported royalty rate, which was 16-19%.19 The expert presented evidence regarding a rate of 31.8% that had no probative value because it was based on a proposed, not accepted licensing offer and used the now defunct 25% rule to increase the estimated royalty rate from the lump sum amounts in plaintiff's license agreements. The Federal Circuit found "the royalty rate suggested by Dr. Shapiro does not support the verdict because his testimony is conclusory, speculative and, frankly, out of line with economic reality."20 Plaintiff also sought an injunction but was denied without explanation. The Federal Circuit found...