Damage Calculations Post eBay: The Economic Considerations

The May 2006 decision by the Supreme Court in eBay Inc. v. MercExchange L.L.C., 547 U.S. 388 (2006), ended the long-held belief that courts will routinely grant injunctive relief to successful plaintiffs in patent infringement matters. To the contrary, the Court highlighted that the Patent Act expressly provides that injunctions “may” issue “in accordance with the principles of equity.”

The Court further stressed that according to well-established principles of equity, a plaintiff seeking a permanent injunction 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 disserved by a permanent injunction. Such considerations are often referred to as the “four-factor test.”

While the eBay decision did not change the criteria upon which a permanent injunction may be granted, it has nonetheless resulted in an increase in the number of successful plaintiffs who are denied injunctive relief. Accordingly, in such instances, the courts are now challenged with determining the form and/or amount of monetary compensation to award plaintiffs for a defendant's continued use of the patented technology in the post-verdict time period.

This article provides an overview of how various courts have dealt with the question of post-verdict compensation in the wake of the eBay verdict. While the article is not a comprehensive study of all cases dealing with the issue, it nonetheless is intended to provide meaningful insight to litigators and experts considering the increasingly relevant issue of post-verdict compensation in patent infringement litigation.

Post eBay: The Court's Struggle

As might be expected, in the months immediately following the eBay decision there was limited consistency in how the courts addressed the question of post-verdict compensation. Such inconsistency is markedly evident in the following three cases from the Eastern District of Texas, which entered decisions on post-verdict compensation within three months of the eBay decision.

• First, on June 14, 2006, in the matter of z4 Technologies, Inc. v. Microsoft Corporation and Autodesk, Inc., the court awarded post-verdict damages based on the same reasonable royalty awarded for pre-verdict infringement.
• Second, on July 7, 2006 in the matter of Finisar Corporation v. DirecTV Group, Inc., the court listened to additional expert testimony related to the appropriate post-verdict royalty and granted an award that differed from the pre-verdict rate.
• Third, on Aug. 16, 2006, in the matter of Paice LLC v. Toyota Motor Corp., the court applied its own approach and awarded a post-verdict royalty that was not based on the royalty awarded for pre-verdict infringement or additional expert testimony. Rather, the court applied its own methodology and performed its own calculations before awarding a royalty that the Federal Circuit later remanded for further consideration.

While that initial inconsistency presented a moving target to patent litigators and damages experts alike, it ultimately led to an appeal of the Paice v. Toyota matter wherein the Federal Circuit found an absence of basis for the court's decision. More importantly however, as discussed in the following section, the Federal Circuit's decision in Paice v. Toyota brought into focus a key consideration in the determination of post-verdict royalties.

Paice, LLC v. Toyota Motor Corp.

In June 2004, Paice, LLC (“Paice”), a hybrid electric power train technology developer, filed a patent infringement lawsuit against Toyota Motor Corporation (“Toyota”). Paice alleged infringement of a patent relating to hybrid electric vehicles by three of Toyota's automobiles. In December 2005, a jury found Toyota liable for patent infringement and awarded Paice reasonable royalty damages of $4,269,950. However, despite the finding of liability, the court denied Paice's motion for a permanent injunction.

In awarding a post-verdict royalty to Paice, the District Court divided the royalty award by the number of accused units and arrived at an ongoing royalty rate of $25 per unit. On appeal, the Federal Circuit found that there was insufficient basis for an ongoing royalty of $25 per unit and remanded the case back to the District Court for the re-evaluation of the royalty rate. Notably, the Federal Circuit found that “the District Court may wish to allow the parties to negotiate a license amongst themselves regarding future use of a patented invention before imposing an ongoing royalty” and “the Court may take additional evidence if necessary to account for any additional economic factors arising out of the imposition of an ongoing royalty.”

After failing to negotiate a settlement, the parties brought their post-verdict royalty opinions before the court. Toyota opined for a royalty rate of less than $25 per accused vehicle. The company contended pre-trial and post-trial royalty negotiations, save differences in the incremental profit of accused vehicles, were equivalent and it could implement a non-infringing alternative for less than $25 per vehicle. Conversely, Paice argued for a royalty rate higher than $25, noting a change in legal relationship between itself and Toyota and an increased value of hybrid technology with regards to heightened oil prices.

Taking into consideration these differing opinions, the court found it reasonable to take into account the changed legal and factual circumstances and awarded ongoing royalty rates of 0.48% of the wholesale price for each Toyota Prius, 0.32% for each Toyota Highlander, and 0.26% for each Lexus RX400h. Paice, LLC v. Toyota Motor Corporation et al., No. 2:04-CV-211 (E.D. Tex. April 17, 2009)

Cordis Corp. v. Boston Scientific

Although the post-verdict royalty methodology utilized in Cordis Corp. v. Boston Scientific took into account “additional economic factors arising out of the imposition of an ongoing royalty,” it differed from the Paice methodology wherein the Cordis judgment was reached via the Georgia-Pacific factors.

In 2002, Boston Scientific Corporation (“BSC”) brought suit against Cordis Corporation (“Cordis”) in the Northern District of California for infringement of patents related to catheter technology. A 2007 jury trial found BSC liable of infringing Cordis' patents, however Cordis was denied injunctive relief. Post trial, Cordis sought pre-verdict damages based on a 2% royalty, and a post-verdict royalty of 7%. Although the court allowed time for the parties to negotiate a settlement or for BSC to discontinue its use of the patents, neither event occurred.

In October 2008, the court, citing Paice, held it may determine the post-verdict royalty of an infringing party and directed the parties to assume a hypothetical negotiation date of October 31, 2007, the date of the verdict. The court held an evidentiary hearing in February 2009 to hear expert testimony regarding the post-verdict royalty rate. At the hearing, Cordis argued that it would have negotiated a royalty of between 5.1% and 14.8% and would negotiate an ongoing royalty of 6%, in large part because it enjoyed an enhanced bargaining position as BSC would have taken its infringing products off the market. BSC countered that the parties would have negotiated within a range of 0.07% and 14.8% and would settle on 0.5% as the rate for an ongoing royalty. Differing from Cordis' opinion, BSC assumed that it would have continued to sell infringing products.

Upon hearing the opinions put forth by the experts, the court concluded that it was proper to assume that the jury finding of liability would have strengthened Cordis' bargaining position. Unlike in Paice however, the court then explicitly considered Cordis' enhanced bargaining position in light of the Georgia-Pacific factors. In performing its analysis, the court first considered Georgia-Pacific factor 15, the hypothetical negotiation between a willing licensor and willing licensee. In doing so, the court found Cordis had the capacity to meet market demand and that the jury's decision would have led the parties to conclude that Cordis had the option of preventing BSC from selling its infringing product. It concluded that the reasonable royalty rate was within the range of 5.1% to 14.8%. The court then turned to the remaining Georgia-Pacific factors to arrive at a specific royalty rate. Of particular note is that, with regard to Georgia-Pacific factor 1, that is whether royalties received by Cordis for licensing the patent in suit provide or tend to prove an established royalty, the court considered that the rates had been negotiated before a finding of infringement and therefore considered the high end of the royalty rate range suggested by the agreements. Finally, upon weighing all relevant Georgia-Pacific factors including, but not limited to, factors 1 and 15, the court arrived at a royalty rate of 5.1%, significantly more than the 2% royalty sought by Cordis for BSC's infringement prior to the verdict. Boston Scientific Corp. et al. v. Johnson & Johnson et al., No. 3:02-CV-00790 (N.D. Cal. April 9, 2009)

Conclusion

With an increase in courts denying injunctive relief in patent infringement litigations, counsel and damage experts alike are faced with the challenge of determining the appropriate amount and type of post-verdict compensation. While no standard approach has been established, the Federal Circuit, in Paice, provided some initial guidance indicating the need to consider economic factors occurring up to the date of the verdict. Although this article discusses two District Court decisions that have addressed the post-verdict compensation in light of the Paice decision, there are sure to be many more. Accordingly, counsel and experts alike should take note of the any such decisions and their relative impact on the determination of post-verdict compensation.

Michael K. Milani, a member of this newsletter's Board of Editors, is a Managing Director and Trevor M. Blum is an Analyst in Ocean Tomo, LLC's Expert Testimony practice, which is focused on assisting clients and counsel with the determination of economic damages in intellectual property infringement litigation. They are based out of the firm's Chicago office.

The May 2006 decision by the Supreme Court in eBay Inc. v. MercExchange L.L.C., 547 U.S. 388 (2006), ended the long-held belief that courts will routinely grant injunctive relief to successful plaintiffs in patent infringement matters. To the contrary, the Court highlighted that the Patent Act expressly provides that injunctions “may” issue “in accordance with the principles of equity.”

The Court further stressed that according to well-established principles of equity, a plaintiff seeking a permanent injunction 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 disserved by a permanent injunction. Such considerations are often referred to as the “four-factor test.”

While the eBay decision did not change the criteria upon which a permanent injunction may be granted, it has nonetheless resulted in an increase in the number of successful plaintiffs who are denied injunctive relief. Accordingly, in such instances, the courts are now challenged with determining the form and/or amount of monetary compensation to award plaintiffs for a defendant's continued use of the patented technology in the post-verdict time period.

This article provides an overview of how various courts have dealt with the question of post-verdict compensation in the wake of the eBay verdict. While the article is not a comprehensive study of all cases dealing with the issue, it nonetheless is intended to provide meaningful insight to litigators and experts considering the increasingly relevant issue of post-verdict compensation in patent infringement litigation.

Post eBay: The Court's Struggle

As might be expected, in the months immediately following the eBay decision there was limited consistency in how the courts addressed the question of post-verdict compensation. Such inconsistency is markedly evident in the following three cases from the Eastern District of Texas, which entered decisions on post-verdict compensation within three months of the eBay decision.

• First, on June 14, 2006, in the matter of z4 Technologies, Inc. v. Microsoft Corporation and Autodesk, Inc. , the court awarded post-verdict damages based on the same reasonable royalty awarded for pre-verdict infringement.
• Second, on July 7, 2006 in the matter of Finisar Corporation v. DirecTV Group, Inc., the court listened to additional expert testimony related to the appropriate post-verdict royalty and granted an award that differed from the pre-verdict rate.
• Third, on Aug. 16, 2006, in the matter of Paice LLC v. Toyota Motor Corp., the court applied its own approach and awarded a post-verdict royalty that was not based on the royalty awarded for pre-verdict infringement or additional expert testimony. Rather, the court applied its own methodology and performed its own calculations before awarding a royalty that the Federal Circuit later remanded for further consideration.

While that initial inconsistency presented a moving target to patent litigators and damages experts alike, it ultimately led to an appeal of the Paice v. Toyota matter wherein the Federal Circuit found an absence of basis for the court's decision. More importantly however, as discussed in the following section, the Federal Circuit's decision in Paice v. Toyota brought into focus a key consideration in the determination of post-verdict royalties.

Paice, LLC v. Toyota Motor Corp.

In June 2004, Paice, LLC (“Paice”), a hybrid electric power train technology developer, filed a patent infringement lawsuit against Toyota Motor Corporation (“Toyota”). Paice alleged infringement of a patent relating to hybrid electric vehicles by three of Toyota's automobiles. In December 2005, a jury found Toyota liable for patent infringement and awarded Paice reasonable royalty damages of $4,269,950. However, despite the finding of liability, the court denied Paice's motion for a permanent injunction.

In awarding a post-verdict royalty to Paice, the District Court divided the royalty award by the number of accused units and arrived at an ongoing royalty rate of $25 per unit. On appeal, the Federal Circuit found that there was insufficient basis for an ongoing royalty of $25 per unit and remanded the case back to the District Court for the re-evaluation of the royalty rate. Notably, the Federal Circuit found that “the District Court may wish to allow the parties to negotiate a license amongst themselves regarding future use of a patented invention before imposing an ongoing royalty” and “the Court may take additional evidence if necessary to account for any additional economic factors arising out of the imposition of an ongoing royalty.”

After failing to negotiate a settlement, the parties brought their post-verdict royalty opinions before the court. Toyota opined for a royalty rate of less than $25 per accused vehicle. The company contended pre-trial and post-trial royalty negotiations, save differences in the incremental profit of accused vehicles, were equivalent and it could implement a non-infringing alternative for less than $25 per vehicle. Conversely, Paice argued for a royalty rate higher than $25, noting a change in legal relationship between itself and Toyota and an increased value of hybrid technology with regards to heightened oil prices.

Taking into consideration these differing opinions, the court found it reasonable to take into account the changed legal and factual circumstances and awarded ongoing royalty rates of 0.48% of the wholesale price for each Toyota Prius, 0.32% for each Toyota Highlander, and 0.26% for each Lexus RX400h. Paice, LLC v. Toyota Motor Corporation et al., No. 2:04-CV-211 (E.D. Tex. April 17, 2009)

Cordis Corp. v. Boston Scientific

Although the post-verdict royalty methodology utilized in Cordis Corp. v. Boston Scientific took into account “additional economic factors arising out of the imposition of an ongoing royalty,” it differed from the Paice methodology wherein the Cordis judgment was reached via the Georgia-Pacific factors.

In 2002, Boston Scientific Corporation (“BSC”) brought suit against Cordis Corporation (“Cordis”) in the Northern District of California for infringement of patents related to catheter technology. A 2007 jury trial found BSC liable of infringing Cordis' patents, however Cordis was denied injunctive relief. Post trial, Cordis sought pre-verdict damages based on a 2% royalty, and a post-verdict royalty of 7%. Although the court allowed time for the parties to negotiate a settlement or for BSC to discontinue its use of the patents, neither event occurred.

In October 2008, the court, citing Paice, held it may determine the post-verdict royalty of an infringing party and directed the parties to assume a hypothetical negotiation date of October 31, 2007, the date of the verdict. The court held an evidentiary hearing in February 2009 to hear expert testimony regarding the post-verdict royalty rate. At the hearing, Cordis argued that it would have negotiated a royalty of between 5.1% and 14.8% and would negotiate an ongoing royalty of 6%, in large part because it enjoyed an enhanced bargaining position as BSC would have taken its infringing products off the market. BSC countered that the parties would have negotiated within a range of 0.07% and 14.8% and would settle on 0.5% as the rate for an ongoing royalty. Differing from Cordis' opinion, BSC assumed that it would have continued to sell infringing products.

Upon hearing the opinions put forth by the experts, the court concluded that it was proper to assume that the jury finding of liability would have strengthened Cordis' bargaining position. Unlike in Paice however, the court then explicitly considered Cordis' enhanced bargaining position in light of the Georgia-Pacific factors. In performing its analysis, the court first considered Georgia-Pacific factor 15, the hypothetical negotiation between a willing licensor and willing licensee. In doing so, the court found Cordis had the capacity to meet market demand and that the jury's decision would have led the parties to conclude that Cordis had the option of preventing BSC from selling its infringing product. It concluded that the reasonable royalty rate was within the range of 5.1% to 14.8%. The court then turned to the remaining Georgia-Pacific factors to arrive at a specific royalty rate. Of particular note is that, with regard to Georgia-Pacific factor 1, that is whether royalties received by Cordis for licensing the patent in suit provide or tend to prove an established royalty, the court considered that the rates had been negotiated before a finding of infringement and therefore considered the high end of the royalty rate range suggested by the agreements. Finally, upon weighing all relevant Georgia-Pacific factors including, but not limited to, factors 1 and 15, the court arrived at a royalty rate of 5.1%, significantly more than the 2% royalty sought by Cordis for BSC's infringement prior to the verdict. Boston Scientific Corp. et al. v. Johnson & Johnson et al., No. 3:02-CV-00790 (N.D. Cal. April 9, 2009)

Conclusion

With an increase in courts denying injunctive relief in patent infringement litigations, counsel and damage experts alike are faced with the challenge of determining the appropriate amount and type of post-verdict compensation. While no standard approach has been established, the Federal Circuit, in Paice, provided some initial guidance indicating the need to consider economic factors occurring up to the date of the verdict. Although this article discusses two District Court decisions that have addressed the post-verdict compensation in light of the Paice decision, there are sure to be many more. Accordingly, counsel and experts alike should take note of the any such decisions and their relative impact on the determination of post-verdict compensation.

Michael K. Milani, a member of this newsletter's Board of Editors, is a Managing Director and Trevor M. Blum is an Analyst in Ocean Tomo, LLC's Expert Testimony practice, which is focused on assisting clients and counsel with the determination of economic damages in intellectual property infringement litigation. They are based out of the firm's Chicago office.