Chapter §20.03 Ongoing Royalties for Future Infringements

• Jurisdiction: United States

§20.03 Ongoing Royalties for Future Infringements

[A] Generally

After the Supreme Court's 2006 decision in eBay, Inc. v. MercExchange, LLC³²³ clarified that prevailing patentees should not automatically be awarded a permanent injunction, district courts in certain cases have denied permanent injunctions (thus allowing ongoing infringement) while requiring that the infringer pay royalties for each infringing sale made during the remaining life of the patent.³²⁴ As one commentator has observed, "while understandably relieved that they may elect to continue their infringing conduct, [such adjudged infringers] are presented with an interesting conundrum if designing around the patent is not possible or practical: continue infringing the patent and risk paying onerous post-verdict ongoing royalties—and possibly enhanced damages—or stop infringing, thereby granting the patentee a de facto injunction."³²⁵

[B] Illustrative Decisions

The Federal Circuit in 2007 approved the imposition of ongoing royalties in Paice LLC v. Toyota Motor Corp.³²⁶ Paice owned and licensed patents directed to drive train technology for hybrid cars but did not manufacture or sell any products.³²⁷ After a jury found that Toyota's hybrid vehicles infringed certain claims of Paice's patents under the doctrine of equivalents, a district court denied Paice's motion for a permanent injunction against Toyota. Applying the four-factor test of eBay,³²⁸ the district court found that Paice would not be irreparably harmed in its ability to license its patents absent a permanent injunction, that monetary damages were adequate given the relatively small dollar value of the infringing component as a subset of Toyota's entire accused vehicle, and that the balance of hardships favored Toyota.³²⁹ In lieu of imposing a permanent injunction, the district court sua sponte imposed an "ongoing royalty" of $25 per infringing vehicle that Toyota would sell during the remaining life of the Paice patent. The court's $25/vehicle ongoing royalty rate was numerically the same as the jury's reasonable royalty award for past infringements.³³⁰

The Federal Circuit in Paice LLC did not reject in principle the district court's imposition of an ongoing royalty, but nevertheless required remand because the district court's order did not explain how it had arrived at the $25/vehicle ongoing royalty. The Federal Circuit observed that awarding an ongoing royalty in lieu of an injunction may be appropriate under some circumstances, including patent infringement or antitrust violations. Such relief should not be awarded "as a matter of course," however.³³¹ Rather than acting sua sponte as in the case at bar, a court "[i]n most cases, whe[n] determin[ing] that a permanent injunction is not warranted, . . . may wish to allow the parties to negotiate a license amongst themselves regarding future use of a patented invention before imposing an ongoing royalty."³³² If the parties fail to negotiate a license, however, "the district court could step in to assess a reasonable royalty in light of the ongoing infringement."³³³

In Telcordia Techs., Inc. v. Cisco Sys., Inc.,³³⁴ the Federal Circuit in 2010 again affirmed a remedy of ongoing royalties and approved a district court's direction to the parties to negotiate the ongoing royalty rate. The district court had denied patentee Telcordia's motion for a permanent injunction, and directed the parties to negotiate a reasonable royalty for ongoing infringement. The Federal Circuit observed that "[a]n award of an ongoing royalty is appropriate because the record supports the district court's finding that Telcordia has not been compensated for Cisco's continuing infringement. Therefore, the district court did not abuse its discretion by directing the parties to negotiate the terms of the appropriate royalty."³³⁵

In Bard Peripheral Vascular, Inc. v. W.L. Gore & Associates, Inc.,³³⁶ the patent in suit was directed to prosthetic vascular grafts used to bypass or replace blood. After a jury found the patent infringed and not invalid, a district court found that it was in the public interest to allow competition in the medical device arena, and accordingly denied a permanent injunction.³³⁷ A divided panel of the Federal Circuit in Bard affirmed the district court's denial of a permanent injunction and its imposition of ongoing royalties for future infringement in lieu thereof.³³⁸ The Federal Circuit majority in Bard observed that "[t]he award of an ongoing royalty instead of a permanent injunction to compensate for future infringement is appropriate in some cases."³³⁹

With respect to setting the appropriate royalty rate for ongoing infringement, the Federal Circuit majority in Bard noted that district courts may wish to allow parties to negotiate such rates themselves. When the parties cannot agree, however, district courts can step in to assess a reasonable royalty. So that the Federal Circuit may meaningfully review whether a district court abused its discretion when setting such a rate, the district court must explain its reasoning.³⁴⁰

In Bard, the parties did not agree on an ongoing royalty rate. Patentee Bard proposed a royalty rate of 35% for infringer Gore's surgical graft products and 20% for Gore's infringing stent grant products. Gore proposed a royalty rate of 5.25% for all its infringing products. The district court set rates varying between 12.5% to 20% for each of Gore's infringing products.³⁴¹

The Federal Circuit majority approved the district court's range of royalty rates.³⁴² The district court had...