"Ongoing Royalty" Order Remanded Only for Further Economic Analysis

In Paice LLC v. Toyota Motor Corp (October 18, 2007), the Federal Circuit remanded the imposition of an ongoing royalty (that was not a compulsory license) of $25 per vehicle for a patent that was asserted by a non-manufacturing patent holder on claims directed to a hybrid electric vehicle:

. . . we think it prudent to remand the case for the limited purpose of having the district court reevaluate the ongoing royalty rate. Upon remand, the court may take
additional evidence if necessary to account for any additional economic factors arising out of the imposition of an ongoing royalty. The district court may determine that $25 is, in fact, an appropriate royalty rate going forward. However, without any indication as to why that rate is appropriate, we are unable to determine whether the district court abused its discretion.

The district court’s order had read:

Defendants are hereby ORDERED, for the remaining life of the ’970 patent, to pay Plaintiff an ongoing royalty of $25.00 per infringing Prius II, Toyota Highlander, or Lexus RX400H (the “infringing vehicles”). Royalties shall be paid quarterly and shall be accompanied by an accounting of the sales of infringing vehicles. Payments shall begin three months after the date of signing this judgment and shall be made quarterly thereafter. The first payment shall include royalties for all infringing vehicles sold that were not accounted for in the jury’s verdict. Payments not made within 14 days of the due date shall accrue interest at the rate of 10%, compounded monthly. Plaintiff shall have the right to request audits. It is anticipated that the parties may wish to agree to more comprehensive and convenient terms. The parties shall promptly notify the Court of any such agreement. The Court maintains jurisdiction to enforce this portion of the Final Judgment.

In obtaining that order, Paice had been unsuccessful with all of the usual arguments to the lower court as to why the absence of an injunction would have an adverse effect on its ability to license the patented technology. As noted by Circuit Judge Prost,

With respect to irreparable injury, Paice argued that the absence of an injunction would have an adverse effect on its ability to license the patented technology. The court rejected this argument, however, noting that Paice had only adduced vague testimony that the company was “sidelined” in its business dealings during litigation. The court also pointed to evidence in the record suggesting that Paice’s inability to reach an agreement with Chrysler, for example, was due to public isrepresentations Paice allegedly made about its relationship with Chrysler, and was not due to the absence of an injunction. Id. Moreover, since Paice does not actually manufacture any goods, the court concluded that there was no threat that Paice would lose name recognition or market share without an injunction. Id. slip op. at 9.

Intertwined with its consideration of irreparable injury was the court’s analysis of
the adequacy of monetary damages. Given the relatively small reasonable royalty
awarded by the jury—which amounted to approximately $25 per accused vehicle—in
comparison to the overall value of the vehicles, the court concluded that monetary damages would suffice. Id. The adequacy of monetary damages was further bolstered, in the court’s opinion, by the fact that Paice had offered a license to Toyota during the post-trial period. Id. slip op. at 9-10.

With regard to the balance of hardships, Paice contended that it “faces extinction” without an injunction, whereas Toyota would suffer “only minor economic losses.” This contention was rejected by the court because, in its view, an injunction against Toyota (1) would disrupt “related business, such as dealers and suppliers;” (2) could have an adverse effect on the “burgeoning hybrid market;” and (3) might damage Toyota’s reputation. Id. slip op. at 10. The court further concluded that Paice’s “extinction” argument was unsound because it was based on the rejected premise that “only injunctive relief [of the type requested] will lead to a successful licensing program.” Consequently, the court held that the balance of hardships favored Toyota. Id.

Lastly, the court determined that the public interest favored neither party. Id. Accordingly, the court denied Paice’s motion for a permanent injunction. Id. slip op. at 11. However, rather than leaving the parties to their own devices with respect to any future acts of infringement, the court imposed an “ongoing royalty” of $25 per Prius II, Toyota Highlander, or Lexus RX400h vehicle sold by Toyota during the remaining life of the patent and entered final judgment. Paice LLC v. Toyota Motors Corp., No. 2:04-CV- 211, Docket No. 228, slip op. at 2 (E.D. Tex. Aug. 16, 2006).

The decision by Circuit Judge Prost began by clarifying, in footnote 13, that this "ongoing royalty order" was not a "compulsory license:"

The term “compulsory license” implies that anyone who meets certain criteria has congressional authority to use that which is licensed. See, e.g., 17 U.S.C. § 115 (“When phonorecords of a nondramatic musical work have been distributed . . . under the authority of the copyright owner, any other person . . . may, by complying with the provisions of this section, obtain a compulsory license to make and distribute phonorecords of the work.” (emphasis added)). By contrast, the ongoing royalty order at issue here is limited to one particular set of defendants; there is no
implied authority in the court’s order for any other auto manufacturer to follow in
Toyota’s footsteps and use the patented invention with the court’s imprimatur.

Circuit Judge Prost then went on to consider whether the district court had the statutory authority to issue this order, and whether Paice was denied its right to a jury trial under the Seventh Amendment to determine the amount of the ongoing royalty rate:

We begin with the language of 35 U.S.C. § 283, which provides in relevant part: "The several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable." Perhaps the most apparent restriction imposed by § 283 is that injunctions granted thereunder must “prevent the violation of any right secured by patent.” We have previously held that this statutory language limits the scope of activities that may be enjoined. See, e.g., Joy Techs. v. Flakt, Inc., 6 F.3d 770, 777 (Fed. Cir. 1993) (holding that noninfringing acts may not be enjoined). The more difficult question raised by this case, however, is whether an order permitting use of a patented invention in exchange for a royalty is properly characterized as preventing the violation of the rights secured by the patent.

Under some circumstances, awarding an ongoing royalty for patent infringement in lieu of an injunction may be appropriate. In Shatterproof Glass Corp. v. Libbey–
Owens Ford Co., 758 F.2d 613, 628 (Fed. Cir. 1985), this court upheld a 5% courtordered royalty, based on sales, “for continuing operations.” Although the parties in that case contested the amount of the royalty, styled a “compulsory license” by the court, there was no dispute as to the district court’s authority to craft such a remedy. See id. In the context of an antitrust violation, “mandatory sales and reasonable-royalty licensing” of relevant patents are “well-established forms of relief when necessary to an effective remedy, particularly where patents have provided the leverage for or have contributed to the antitrust violation adjudicated.” United
States v. Glaxo Group Ltd., 410 U.S. 52, 59 (1973).

But, awarding an ongoing royalty where “necessary” to effectuate a remedy, be it for antitrust violations or patent infringement, does not justify the provision of such relief as a matter of course whenever a permanent injunction is not imposed. In most cases, where the district court determines that a permanent injunction is not warranted, 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.

Should the parties fail to come to an agreement, the district court could step in to
assess a reasonable royalty in light of the ongoing infringement. In this case, the district court, after applying the four-factor test for a permanent injunction and declining to issue one, imposed an ongoing royalty sua sponte upon the parties. But, the district court’s order provides no reasoning to support the selection of $25 per infringing vehicle as the royalty rate. Thus, this court is unable to determine whether the district court abused its discretion in setting the ongoing royalty rate. Accordingly, we think it prudent to remand the case for the limited purpose of having the district court reevaluate the ongoing royalty rate. Upon remand, the court may take additional evidence if necessary to account for any additional economic factors arising out of the imposition of an ongoing royalty.

[FOOTNOTE 15. This process will also, presumably, allow the parties the opportunity to present evidence regarding an appropriate royalty rate to compensate Paice and the opportunity to negotiate their own rate prior to the imposition of one by the court, as the concurrence suggests.]

The district court may determine that $25 is, in fact, an appropriate royalty rate going forward. However, without any indication as to why that rate is appropriate, we are unable to determine whether the district court abused its discretion. Cf. Hensley v. Eckerhart, 461 U.S. 424, 437 (1983) (“It [is]
important . . . for the district court to provide a concise but clear explanation of its
reasons for the fee award.”). The district court should also take the opportunity on
remand to consider the concerns Paice raises about the terms of Toyota’s permissive continuing use.

Finally, we address Paice’s argument that it was entitled to a jury trial to determine the amount of the ongoing royalty rate. “The Seventh Amendment provides that ‘in Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved . . . .’” Markman v. Westview Instruments, Inc., 517 U.S. 370, 376 (1996). “The constitutional question of whether a party is entitled to a jury trial is a question of law that this court reviews de novo.” Tegal
Corp. v. Tokyo Electron Am., Inc., 257 F.3d 1331, 1339 (Fed. Cir. 2001).16 “[W]e ask, first, whether we are dealing with a cause of action that either was tried at law at the time of the founding or is at least analogous to one that was.” Markman, 517 U.S. at 376. “If the action in question belongs in the law category, we then ask whether the particular trial decision must fall to the jury in order to preserve the substance of the common-law right as it existed in 1791.” Id.

In contending that it was improperly deprived of a jury trial, Paice merely states
that “[i]t is well settled that the determination of damages is a legal question which
carries a Seventh Amendment right to a jury trial.” Appellee’s Br. 64. While Paice may be correct as a general matter, not all monetary relief is properly characterized as “damages.” See, e.g., Root v. Ry., 105 U.S. 189, 207 (1882) (“When, . . . relief was
sought which equity alone could give . . . in order to avoid a multiplicity of suits and to do complete justice, the court assumed jurisdiction to award compensation for the past injury, not, however, by assessing damages, which was the peculiar office of the jury, but requiring an account of profits . . . .”); cf. Bowen v. Massachusetts, 487 U.S. 879, 910 (1988) (“[E]ven if the District Court’s orders are construed in part as orders for the payment of money by the Federal Government to the State, such payments are not ‘money damages’ . . . . That is, since the orders are for specific relief (they undo the Secretary’s refusal to reimburse the State) rather than for money damages (they do not provide relief that substitutes for that which ought to have been done) they are within the District Court’s jurisdiction . . . .”). As such, the fact that monetary relief is at issue in this case does not, standing alone, warrant a jury trial. Accordingly, Paice’s argument falls far short of demonstrating that there was any Seventh Amendment violation in the proceedings below.

Concurring Circuit Judge Rader wrote separately to opine that the "Federal Circuit should do more than suggest that "the district court may wish to allow the parties to negotiate a license amongst themselves . . . before imposing an ongoing royalty:"

Instead, this court should require the district court to remand this issue to the parties, or to obtain the permission of both parties before setting the ongoing royalty rate itself.

District courts have considerable discretion in crafting equitable remedies, and in a limited number of cases, as here, imposition of an ongoing royalty may be ppropriate. Nonetheless, calling a compulsory license an "ongoing royalty" does not make it any less a compulsory license. To avoid many of the disruptive implications of a royalty imposed as an alternative to the preferred remedy of exclusion, the trial court's
discretion should not reach so far as to deny the parties a formal opportunity to set the terms of a royalty on their own. With such an opportunity in place, an ongoing
royalty would be an ongoing royalty, not a compulsory license.

. . . Evidence and argument on royalty rates were, of course, presented during the course of the trial, for the purposes of assessing damages for Toyota’s past infringement. But pre-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. When given choices between taking additional evidence or not, and between remanding to the parties or not, a district court may prefer the simplest course – impose its own compulsory license. This simplest course, however, affords the parties the least chance to inform the court of potential changes in the market or other circumstances that might affect the royalty rate reaching into the future.

In most cases, the patentee and the infringer should receive an opportunity at least to set license terms that will apply to post-suit use of the patented invention. This general principle has deep roots in both law and policy. Projecting the costs to be incurred for what would otherwise be future acts of infringement is necessarily a speculative exercise, even for the most stable markets and technologies. As licenses
are driven largely by business objectives, the parties to a license are better situated
than the courts to arrive at fair and efficient terms. After all, it is the parties, rather than the court, that will be bound by the terms of the royalty. Particularly in the case of the patentee, who has proven infringement of its property right, an opportunity to negotiate its own ongoing royalty is a minimal protection for its rights extending for the remainder of the patent term.

For these reasons, I would require the district court to allow the parties an opportunity to set the ongoing royalty rate, or, at least to secure the permission of both parties before setting the rate itself. Of course, if the parties cannot reach agreement, the court would retain jurisdiction to impose a reasonable royalty to remedy the past and ongoing infringement.