CAFC Approves Compulsory License (but calls it an “ongoing royalty”)

PatentLawPic077Paice v. Toyota (Fed. Cir. 2007)

A jury found that Toyota infringed Paice’s hybrid engine patent only under the doctrine of equivalents. In a post-verdict decision, the Texas district court denied injunctive relief — finding that a $25 per engine compulsory license rate was sufficient. On appeal, the CAFC affirmed the infringement decision — holding that the jury had sufficient evidence to both (1) find infringement under the doctrine of equivalents and (2) deny literal infringement.

The major question at issue in this appeal, however, is the ongoing royalty. (The CAFC majority refused to call the ongoing royalty a compulsory license — Judge Rader, concurring, noted that the two are identical).

No Relief and No License: Denial of injunctive relief does not equate with issuance of a compulsory license.  Here, the CAFC recognizes that after denying injunctive relief, a district court may choose simply to wait for the parties to either negotiate a license or stop infringing.  In fact, the court noted that an ongoing royalty should not be determined simply as a matter of course. Rather, such an extreme form of relief should be used only as “necessary.”

[A]warding an ongoing royalty where “necessary” to effectuate a remedy … 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.

Calculating the Reasonable Ongoing Royalty: In this case, the district court held that the ongoing royalty should be the same royalty rate as determined by the jury for past damages. On appeal, the CAFC found that much more should go into the determination of an ongoing royalty. And, of course, future royalties would likely be different than past royalties if only because of a shift in timing of the hypothetical negotiation.

Power to Order Compulsory License: Although settlement is preferred, the CAFC made clear that a district court judge has the power to declare an ‘ongoing royalty’ rate.  Further, because ongoing royalties are a form of equitable relief, there is no Seventh Amendment right to a jury decision.

Remanded for a recalculation of the ongoing royalty.

15 thoughts on “CAFC Approves Compulsory License (but calls it an “ongoing royalty”)

  1. I have a question about article 31(c) of the TRIPS agreement regarding compulsory licensing(apologies if this is in the wrong place).

    Basically,
    A.without the comma the final limitation [iii] should apply only to semi-conductors.

    B. But is the comma missing from my copy? And if so, should this be construed as applying to any field?

    Both seem logical interpretations of the same statute, but grammatics would favour the first interpretation(A).

    TRIPS, Art. 31…(c)- [i, ii and iii] added – copied below

    Where the law of a member state allows for other use of the subject matter of a patent without the authorization of the right holder, including use by the government or third parties authorized by the government, the following provisions shall be respected:
    a…b…
    (c) the scope and duration of such use shall be limited to the purpose for which it was authorized, and in the case of semi-conductor technology shall only be for public non-commercial use or to rememdy a practice determined after judicial or administrative process to be anti-competitive;

  2. I suggest that the compulsory licences should be provided in the case of human necessities sectin.I still argued that still infringement is going on.

  3. What prevents the patent holder from going after the customers of the infringing vehicles (e.g. car dealers). Despite the per unit damages payments, without the manufacturer having a license I would think that there is a good argument to be had that the products are still infringing. On the other hand, if the per unit payment does create a license, what are the terms? Can the license be terminated for failure to meet minimums? Is marking required?

  4. David French writes:

    Isn’t this a case where Toyota is now guilty of willful infringement? Notwithstanding the standards set in the August 2007 Seagate en banc opinion, Toyota should be liable to pay triple damages if it doesn’t settle directly. The issues are res judicata.

    That is certainly an incentive for settlement

  5. It has long been the law that patent misuse – like shatterproof glass, and the light bulb patent pools used to repress the commercialization of the florescent light bulb, could be required as part of the consent decree in an ANTI-TRUST enforcement action be forgo injunctive patent rights. None of these misuse factors apply to Pace.

    The gut check for cafc and the lower courts is whether they will now embrace the consequence of a refusal to enter an injunction (in equity) and impose the traditional equitable rule for an accounting:

    The case is Root v RY 105 US. 189 link to supreme.justia.com, cited in Pace, which is a case collecting patent cases that were brought at law (damages) or equity (injunction and accounting). Here’s what the Root court had to say about the ‘rule’ of accounting in equity:

    In Rubber Company v. Goodyear (9 Wall. 788), which was a bill for an injunction and account, a decree for a large sum was rendered in favor of the complainants, which was affirmed on appeal. ‘The rule,’ said Mr. Justice Swayne, delivering the opinion of the court, ‘is founded in reason and justice. It compensates one party and punishes the other. It makes the wrong-doer liable for actual, not possible, gains. The controlling consideration is that he shall not profit by his wrong. A more favorable rule would offer a premium to dishonesty and invite to aggression. The jurisdiction of equity is adequate to give the proper remedy, whatever phase the case may assume; and the severity of the decree may be increased or mitigated according to the complexion of the conduct of the offender.’

    Is cafc saying in pace that equitable accounting damages of $25 per car sounds low, but may be correct, under the ‘rule’ of equity? Note that $25 per car for legal damages was affirmed. The cafc demontrates its total cluelessness concerning any commercial reality in the concurrence. But without question, the commercial logic of the traditional equity rule is correct: “The controlling consideration is that he shall not profit by his wrong. A more favorably rule would offer a premium to dishonesty and invite to agression.” Clue for Rader – pace and toyota are in court because they cannot agree on a royalty – anything less than an equitably accounting for PROFITS in lue of the injunction – creates a rule of aggression (understatement of the year).

  6. Unfortunate that they called it an “ongoing royalty”. It would have been better and more accurate if they called it “continuing damages”. The practical difference may be slight but the philosophical differences are large.

  7. Well, Toyota is advantaged in negotiations, since they already know the judge previously considered $25 a sufficient ongoing royalty. I don’t know whether the Fed Cir’s decision will cause the judge to raise that amount, and by how much. But I assume (yes, I know the adage) that part of the decision to deny injunctive relief was the finding that Paice could be adequately compensated by $$. This was the point of Ebay v. MercExchange. So now it’s just a question of how much $$.

    The incentive for Toyota to negotiate is to find a royalty that they are willing to live with, rather than have one that is imposed on them by the judge. Of course, this assumes that the judge will impose a royalty that Toyota is not willing to live with. Yes, it’s unfair that Toyota has somewhat of a preview, but that still doesn’t settle the question.

  8. So … let me parse your quote of the CAFC opinion, Professor …

    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.

    Huh. So, without any threat of permanent injunction, the infringer has *what* incentive to meet with the inventor?

    This is a compulsory license. It’s a license imposed on the infringer so as to provide the inventor a (paltry) remedy for continued trespass on their patent.

  9. So what happens if I decide to go into the hybrid car business? Can I get the $25 non-compulsory compulsory license, or do I have to go through all the mess of a lawsuit? And what happens if my ongoing royalty is less than Toyota’s ongoing royalty?

    To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors [the exclusive Right to] an ongoing royalty for their respective Writings and Discoveries

    Sorry, it has been a while since my last political science class. When did they remove Article V from the Constitution?

  10. It has been quite a long time since I had the need to revisit the Shatterproof decision. Might someone have a public web link to the CAFC decision? I do not recall it ever having been cited for the proposition stated by the CAFC panel.

  11. Footnote 13 is highly unpersuasive:

    We use the term ongoing royalty to distinguish this equitable remedy from 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.

    —–
    How in the world does “compulsory license” imply that anyone gets to take the license? “Compulsory” simply means mandatory, as in the patent holder has no choice in the matter. That there is an “any-comers” compulsory license available to those who want a license under a some copyrights doesn’t make that the only kind of compulsory license. Hats off to Judge Rader for calling this what it is.

  12. A petition for rehearing/rehearing en banc is due 14 days from the date of the opinion, and an amicus supporting the petitioner has an additional seven days to file an brief. The brief must be received by the court (not mailed) by the due date. Get cracking.

    I might suggest arguing that the courts lack the power to entry this remedy — they have the power to enter injunctions, but not the power to enter the full scope of equitable remedies. For example, a district court cannot grant the equitable remedy of lost profits, only the legal remedy of damages specifically authorized by statute.

    An astonishingly horrible outcome, as the court sua sponte creates a remedy that Congress has refused to create — despite many attempts over the last century.

    I’m a little confused at how the court expects a negotiation to take place now — it’s very different now that the parties know no injunction will be entered. (Note that the court might have considered giving the infringer the option of taking a compulsory license or an injunction …)

    Pharmaceuticals are next.

  13. So it’s okay to deny the injunction and then just let the parties sort it out? It’s good to be an infringer these days.

  14. RADER, Circuit Judge, concurring, page 1:

    “Nonetheless, calling a compulsory license an ‘ongoing royalty’ does not make it any less a compulsory license.”

    I feel disgusted and speechless.

  15. As 35 USC 283 states:

    “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.”

    Despite the precedent upon which the court relies, I have a difficult time reconciling a “continuing royalty” with “…to prevent the violation of any right secured by patent…”

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