The ongoing confusion over ongoing royalties.

AuthorLemley, Mark A.
PositionEvolving the Court of Appeals for the Federal Circuit and Its Patent Law Jurisprudence
  1. INTRODUCTION

    In eBay Inc. v. MercExchange, L.L.C., the United States Supreme Court correctly concluded that courts had both the power and the responsibility to decide whether a successful patent owner needed injunctive relief and whether the imposition of that relief would unduly harm either the defendant or the public. (1) The Court's application of the traditional four-factor equity test led, for the first time, to a significant number of cases in which courts found patent infringement but refused to enjoin continued infringement. That, in turn, has raised the question "what happens then?"

    As a matter of policy, the basic answer seems clear: while the patentee can't enjoin infringement, the infringer should have to pay for the right to continue infringing. But that answer conceals three subsidiary questions. First, do courts have the authority to award an ongoing royalty? Second, who decides what that royalty should be? Finally, how should that royalty be calculated? To date, courts have spent little time thinking about the first and second questions. While they have addressed the third question, they haven't done so in a satisfactory manner. In this article, I endeavor to answer these questions.

  2. AUTHORITY TO ORDER ONGOING ROYALTIES

    Section 283 provides that upon a finding of infringement, a court "may grant injunctions in accordance with the principles of equity." (2) Section 284 requires a court to award damages "adequate to compensate for the infringement, but in no event less than a reasonable royalty." (3) The traditional understanding of these remedial provisions is that section 283 operates prospectively, while section 284 operates retrospectively. (4) That is, patentees are entitled to damages to compensate them for past acts of infringement and to an injunction that prevents any future infringement.

    Ebay throws this basic remedial structure into disarray by holding that injunctions against future infringement aren't always appropriate. (5) In the wake of eBay, courts largely have granted injunctive relief to plaintiffs who practice the patent or otherwise participate in the market, but not to non-practicing entities (NPEs). (6) If NPEs can't obtain injunctions against future infringement, what remedy do they have against such infringement?

    One possible answer is "none." Paul Janicke suggests that courts have no statutory authority to award ongoing royalties to prevailing patentees in the form of a compulsory license. (7) Tomas Gomez-Arostegui argues in an historical tour-de-force that under the old English system, equity courts did not grant prospective financial rewards and that under recent Supreme Court decisions, federal courts exercising their equity power cannot order any awards that were not available in traditional English equity. (8) Gomez-Arostequi also points out that some courts applying a related statute involving patent suits against the government (9) have read it to award only retrospective relief. (10) Combining the work of these scholars, one might conclude that patentees who cannot obtain injunctive relief have no recourse in either law or equity, at least in their current lawsuit. While some may use this conclusion as a reason to argue for injunctive relief (on the theory that otherwise plaintiffs get nothing), taking this approach seriously in the wake of eBay may present a bleak prospect for prevailing patent plaintiffs: no injunction and no ongoing royalty.

    If courts in fact have no authority to grant ongoing royalties, one possible workaround is to file successive lawsuits to obtain past damages for each new period of infringement. (11) A district court in Texas has taken this approach, declining to award ongoing royalties in lieu of damages, instead ordering the plaintiff to file a new lawsuit for damages based on the ongoing infringement. (12) Because remedies for future infringement become remedies for past infringement with the passage of time, the filing of a successive array of suits could allow the award of damages for each new period. (13) And it would have the advantage of providing courts an opportunity to revisit the decision to deny an injunction should circumstances change. Still, it seems odd to say that the only possible solution is to doom the parties, Zeno-like, to an endless succession of lawsuits presenting the same issue and leading (hopefully, at least) to the same outcome.

    Courts need not resort to such a trick, however. ongoing royalty awards should be available under one of two theories. First, section 284 arguably gives courts the authority to award forward-looking as well as backward-looking damages. The statute not only permits but also requires courts to award "damages adequate to compensate for the infringement." (14) In General Motors Corp. v. Devex Corp., the Supreme Court gave the statute a broad reading, finding Congress's purpose to have been "affording patent owners complete compensation." (15)

    The statute does not identify what "the infringement" is. Gomez-Arostegui assumes that the term refers only to past infringement, (16) but it isn't necessarily so limited. If a defendant infringes over a period of ten years, seven before the judgment and three after the judgment, one possible reading of the statute is that all of the defendant's sales of the same product are "the infringement" for which the patentee must be compensated. While damages are generally backward-looking, the law in many circumstances gives forward-looking damages based on estimates of losses caused by past acts of infringement. Courts will, in appropriate circumstances, grant damages based on the consequences for future market relationships of past acts of patent infringement, compensating patent owners for future lost sales resulting from the inability to grow fully because of past infringement. (17) Similarly, tort law compensates plaintiffs exposed to toxic chemicals for an increased risk of cancer rather than requiring plaintiffs to wait and see if they develop cancer before suing. (18)

    True, there is a difference between compensating patentees for predicted future consequences of patent infringement and compensating patentees for actual future infringement when it occurs. But the step from one to the other is not that large. Trade secret law expressly compensates for future infringement, (19) as does real property law. (20) Tort law compensates plaintiffs for expected future losses in the form of lost income, future pain and suffering, and the like. (21) Patent law could do so as well, using section (284) as authority. (22) Even the routine grant of post-verdict interest in patent cases is an example of a monetary award based on future losses, albeit ones caused by past infringement. (23) Whether or not the Federal Circuit will embrace this authority is unclear, given its rejection of ongoing damages in patent suits against the government. (24) But a fair reading of section 284 suggests it could.

    Equity provides a second theory under which courts could award ongoing royalties in patent cases. Courts have the general power in equity to order accountings and constructive trusts. (25) Courts have recognized and applied this authority in many situations. For instance, they have required an individual who wrongly patented an invention made by another to hold the profits from that patent in constructive trust for the true inventor. (26) This equity power easily could justify the award of ongoing royalties. Strictly speaking, such equity awards are not damages, but they serve the same purpose: to compensate the patentee for injury that would otherwise go unremedied. (27)

    In short, while the question is not free from doubt, there are reasonable arguments for treating ongoing royalties as within either the law or the equity power of the courts rather than resorting to a series of continuing lawsuits for past damages. Courts seem to agree that at least some authority exists for such an award; those courts that deny injunctive relief overwhelmingly award an ongoing royalty in its place.

  3. WHO SETS THE ONGOING ROYALTY?

    Ongoing royalty awards almost always are set by the district judge as part of post-trial briefing. (28) The Federal Circuit generally endorsed this approach in both Paice LLC v. Toyota Motor Corp. and Amado v. Microsoft Corp. (29) In Paice, the Federal Circuit grounded the court's authority to do so in equity; it did not consider whether section 284 could justify ongoing royalties as an award of damages. (30)

    The source of authority bears directly on the question of who should set the ongoing royalty. Patent damages are legal remedies that are subject to the Seventh Amendment. (31) Consequently, those remedies must be set by the jury, assuming one is requested (and one virtually always is). (32) So, if the basis for awarding ongoing royalties lies in section 284, those royalties must be assessed by...

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