Should Ongoing Royalties be Enhanced for Bad Attitude?

In January 2013, Taiwan’s InnoLux Corp. filed an appeal with the Federal Circuit, requesting the Court to overturn an award of enhanced post-judgment (“ongoing”) royalties that appeared to be enhanced, at least in part, because the trial judge took offense at an out-of-court remark made by the defendant’s CEO, after losing at trial.

Specifically, in the case of Mondis Technology v. ChiMei InnoLux Corp., et al., No. 2:11-CV-378 (E.D. Tex. Sept. 30, 2011), a jury found InnoLux liable for infringing certain computer monitor patents and ordered it to pay $15,000,000 in damages, plus royalties of 0.5% per monitor sold in the final months prior to judgment, for which sales figures had not yet been available.

Following the verdict, the defendant’s CEO was quoted in a Taiwan newspaper as having said, “The issue of patent infringement is being taken too seriously sometimes.”

Regrettably, the case was still pending, ongoing royalties had not yet been decided, and plaintiff’s counsel brought that statement to the Court’s attention.  The Court then issued an Order setting ongoing royalties at 1.5% per monitor – three times the pre-judgment royalty rate determined by the jury.  While the Court gave several other reasons for trebling the royalty rate, it also stated as follows:

The Court finds this statement by InnoLux’s CEO shows InnoLux’s lack of respect for this Court and the jury’s verdict.  It is also an affront to the United States patent system. . . The Court, therefore, finds that this also warrants a strong enhancement because it further reflects the egregiousness of InnoLux’s conduct.

We’ll have to wait to see if the Federal Circuit confirms the above decision, but in the meantime one thing is certain: there is still disagreement among district courts on the proper method for calculating ongoing royalty rates.

The subject of ongoing royalties gained importance following the Supreme Court’s decision in eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), which reversed the rule of granting injunctions against infringers absent “exceptional circumstances” and now requires application of the standard, four-factor test for injunctive relief.  Since eBay, courts increasingly find that injunctions against adjudicated infringers may not be appropriate, particularly when the plaintiff is a non-practicing entity (NPE).

In such a case, where a defendant is found to have infringed a patent but injunctive relief is deemed inappropriate, the Federal Circuit has ruled that district courts may award ongoing royalties pursuant to 35 U.S.C. §283, for the defendant’s anticipated post-judgment infringement.  Paice LLC v. Toyota Motor Corp., 504 F.3d 1293 (Fed. Cir. 2007).  The judge, not the jury, should determine the appropriateness and amount of such an award (Id.), but exactly how the royalties should be calculated is less clear.

First, while it is common to order ongoing royalties in lieu of injunctive relief, the Federal Circuit has stated that they should not be granted as a “matter of course.”  Id. at 1314.  Second, before the court makes a determination concerning ongoing royalties, it should permit the parties to attempt to resolve the issue by negotiated agreement.   Id. at 1317.  After that, it gets fuzzy.

The Federal Circuit has found no particular reason why the rate for ongoing royalties should be the same as pre-judgment royalties, explaining that an ongoing rate requires its own justification, because “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.”  Id.  But the Court has not clearly defined how the ongoing rate should be determined.

Some argue (including the plaintiff in ChiMei InnoLux) that post-judgment royalties should be enhanced based on the plaintiff having stronger bargaining position after prevailing at trial, because royalty awards are meant to reflect the rate a hypothetical willing buyer and seller would agree to, and greater bargaining power should yield a higher rate.  Proponents of that argument find support in Amado v. Microsoft Corp., 517 F. 3d 1353, 1362 (Fed. Cir. 2008), which states “Prior to judgment, liability for infringement, as well as the validity of the patents is uncertain, and damages are determined in the context of that uncertainty.  Once a judgment of validity and infringement has been entered, however, the calculus is markedly different because different economic factors are involved.”

However, most courts (including the ChiMei InnoLux court) distinguish Amado (which involved an award of royalties during the period when an injunction was stayed on appeal) and suggest that language has been misconstrued, because “In determining the reasonable royalty rate during trial, both parties assumed the […] patent was valid and infringed.”  Presidio Components Inc. v. American Technical Ceramics Corp. (S.D. Cal. August 5, 2010).  “[I]t is logically inconsistent to argue that a calculation based upon assumptions of infringement and validity would change when those assumptions are replaced by jury findings of the same facts.”  Ariba, Inc. v. Emptoris, Inc., 567 F. Supp. 2d 914, 918 (E.D. Tex. 2008).  See, also, Cummins-Allison Corp. v. SBM Co., Ltd., 584 F.Supp.2d 916 (E.D. Tex. Nov. 3, 2008).

Similarly, some suggest post-judgment royalties should be enhanced on the ground that defendant is then a willful infringer.  See Paice LLC v. Toyota Motor Corp., 609 F. Supp. 2d 620, 626 (E.D. Tex. Apr. 17, 2009) (“Toyota never considers the fact that its continued infringement is willful and that a new lawsuit by Paice would likely result in treble damages.”); Bard Peripheral Vascular v. W.L. Gore & Assoc.,(D. Ariz. Sept. 8, 2009) (“As [plaintiff] has noted, there has been a post-verdict change in the Parties’ legal relationship in that [defendant] is now an adjudged willful infringer…”)

However, the Federal Circuit rejected that argument in Amado (517 F. 3d at 1362), and for good reason.  Not only does it seem odd for a court to punish a defendant for committing post-judgment acts that the court essentially permitted, but one could argue infringement is not willful until after the defendant has exhausted its appellate rights.  In fact, defendant made that argument in Chimei InnoLux, but the court rejected it, finding any post-judgment infringement by defendant to be willful.  Not only that, but the court seemed to take offense at the defendant’s position: “InnoLux would have the Court effectively adopt a standard that a party is not a willful infringer until after it has resolved all its rights on appeal and lost.  Implicit in this argument is InnoLux’s obvious lack of respect for the jury’s verdict or this Court’s judgment” [emphasis added].

Ouch!  Isn’t it possible InnoLux merely believed the trial court was mistaken and wished to file an appeal with the Federal Circuit – a perfectly legitimate procedure that many litigants engage in, often successfully?  Which brings us back to the initial question: Is it appropriate for a court to enhance an ongoing royalty rate based, at least partially, on a statement of frustration made by the defendant’s CEO following his company’s loss at trial?  It’s hard to see how such a statement changes the anticipated conduct that a defendant may engage in post-judgment, to the extent that it should be required to pay an increased ongoing royalty rate – especially three times the pre-judgment rate.

In any event, two things are clear.  First, the CEO should not have made that statement.  Corporate officers should refrain from making public statements about pending litigation and use extreme care to avoid taking actions that reflect badly on the company during the pendency of litigation.  Second, InnoLux’s counsel should have immediately objected to the statement.  Clearly it was inadmissible hearsay, but in response to a Motion for Reconsideration filed by InnoLux, the court explained that no timely objection had been made to admission of the statement so it was therefore binding upon the defendant.

Defendant’s Motion for Reconsideration was Denied.  The  case is now pending in the U.S. Court of Appeals for the Federal Circuit, as Mondis Technology Ltd. v. ChiMei InnoLux Corp., Case. No. 12-1304.