What Is Reasonable?

Several recent rulings from the U.S. Supreme Court have arguably tipped the scales toward alleged infringers involved in a patent battle. Specifically, the U.S. Supreme Court ('Supreme Court') in KSR Inter- national Co. v. Teleflex Inc., __ U.S. __, 127 S.Ct. 1727 (2007) modified the standard for obviousness thereby making it easier for alleged infringers to invalidate patents. In eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 126 S.Ct. 1837 (2006), the Supreme Court modified the standard for determining the propriety of injunctions, making it more difficult for certain plaintiffs to obtain permanent injunctions against infringers. Finally, in MedImmune, Inc. v. Genentech, Inc., __ U.S. __, 127 S.Ct. 764 (2007), the Supreme Court made it easier for alleged infringers to argue there is a case or controversy, and thereby prospectively haul patent holders into court by filing a declaratory judgment action. However, a recent decision from the Court of Appeals for the Federal Circuit ('Federal Circuit') may help tip the scales back toward patent holders and thereby provide some additional leverage to patent holders in discussions with alleged infringers. In Amado v. Microsoft Corp., __ F.3d __, 2008 U.S. App. LEXIS 4065 (Fed. Cir. Feb. 26, 2008), the Federal Circuit indicated that after a verdict of infringement, the infringing party may be subject to a different (higher) royalty for post-verdict sales of the infringing product than was determined for past (i.e., pre-verdict) infringing sales.

What Is Reasonable for Infringement Before Trial '

Carlos Armando Amado ('Amado') brought suit in the U.S. District Court for the Central District of California ('District Court') against Microsoft Corporation ('Microsoft') alleging that several versions of Microsoft's Office Suite product infringed his patent directed to a 'point and shoot interface for linking database records to spreadsheets whereby data of a record is automatically reformatted and loaded upon issuance of a recalculation command' (i.e., a software program combining the functionalities of spreadsheet and database software). At trial, the jury ruled that Amado's patent was valid and infringed by Microsoft, and awarded Amado damages equivalent to a 4 cents reasonable royalty for each infringing product sold. No willful infringement was found. Amado then sought a permanent injunction against Microsoft, which the District Court granted but then stayed pending appeal. The District Court further required that Microsoft deposit $2 into escrow for each infringing product sold during the stay.

Both parties appealed various portions of the District Court decision to the Federal Circuit, which, after affirming in all respects, remanded back to the District Court for a determination regarding the escrow funds. In this regard, the Federal Circuit noted:

[W]e do not read the district court's August 2, 2005, order ' requiring the creation of an escrow account as a condition of the stay of the permanent injunction ' as having determined the ultimate disposition of the funds required to be deposited in the escrow account. When the district court makes that determination, any party believing itself aggrieved by that order may appeal to this court. Amado v. Microsoft Corp., 185 Fed. Appx. 953 (Fed. Cir. 2006).

On remand, Amado argued that he was entitled to a reasonable royalty of $2 per infringing unit sold during the stay, which was the amount the District Court had initially required Microsoft to deposit into escrow. Microsoft argued that the royalty rate should be limited to 4 cents per unit, as initially determined by the jury. The District Court, however, chose neither party's suggested amount. Instead, it awarded Amado damages equivalent to a reasonable royalty of 12 cents per unit, representing treble the 4 cents per unit figure of the jury award. The District Court reasoned that the 4 cents per unit was an appropriate starting point and floor for post judgment infringement because '[a]t a minimum, Amado [was] entitled to receive what the jury found to be a reasonable royalty.' The District Court then trebled that figure, using trebling for willfulness under 35 U.S.C. '284 as a guideline, because after the jury ruling of infringement, and during the stay, Microsoft was on notice of its infringement. Moreover, even though Amado notified Microsoft that an acceptable 'fix' would remove the infringing functionality automatically, Microsoft instead chose to distribute a voluntary fix 'that relied upon its customers to remove the infringing functionality,' such that the products continued to be capable of infringement. Both parties appealed the award of a 12 cents per unit reasonable royalty.

' May Not Be Reasonable For Infringement After Trial

On appeal, Amado argued that the District Court abused its discretion by failing to award the full $2 deposited into escrow for each infringing unit sold during the stay. The Federal Circuit rejected Amado's contention that, in its initial decision, the District Court had explicitly set the amount Amado should receive by providing the $2 per unit amount. Rather, the District Court required $2 per unit escrow payments for each infringing sale simply to ensure that Microsoft set aside the absolute upper limit of any potential eventual damages award.

The Federal Circuit also rejected Microsoft's argument that the District Court could award no more than the 4 cents per unit reasonable royalty determined at trial for infringing sales made during the stay (i.e., after the trial). The 4 cents figure was based on Microsoft's infringing conduct occurring prior to the jury's verdict, but according to the Federal Circuit, '[t]here is a fundamental difference ' between a reasonable royalty for pre-verdict infringement and damages for post-verdict infringement.' The Federal Circuit explained that, citing its prior decision in Paice LLC v. Toyota Motor Corp., 504 F.3d 1293 (Fed. Cir. 2007):

Prior to judgment, liability for infringement, as well as the validity of the patent, 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 economic factors are involved.

Finally, the Federal Circuit analyzed the District Court's award of 12 cents per infringing unit sold during the stay. According to the Federal Circuit, the District Court's application of the 4 cents per unit jury award as its starting point was improper because that figure only accounts for the pre-verdict reasonable royalty. Moreover, the Federal Circuit found that the District Court also mistakenly centered its damages assessment on willful infringement, which is not the proper inquiry when the infringement is permitted by a court-ordered stay of an injunction. Rather, the Federal Circuit articulated that the correct approach requires that:

When a district court concludes that an injunction is warranted, but is persuaded to stay the injunction pending an appeal, the assessment of damages for infringements taking place after the injunction should take into account the change in the parties' bargaining positions, and the resulting change in economic circumstances, resulting from the determination of liability ' for example, the infringer's likelihood of success on appeal, the infringer's ability to immediately comply with the injunction, the parties' reasonable expectations if the stay was entered by consent or stipulation, etc. ' as well as the evidence and arguments found material to the granting of the injunction and the stay.

Without any indication that the District Court considered these factors, the Federal Circuit could not determine whether the 12 cents per unit figure was reasonable, and therefore vacated and remanded the District Court's award for reconsideration. While the Federal Circuit did not explicitly state what amount the eventual award should be, it did state that the proper amount should logically fall between the 4 cents per unit amount awarded by the jury as an appropriate pre-verdict reasonable royalty, and the $2 per unit figure Amado was willing to accept in exchange for a license.

The Amado decision leaves many unanswered questions. For example, Amado held that it was improper to per se apply the same reasonable royalty calculated for pre-verdict damages to post-verdict damages, because of the uncertainty regarding validity and infringement and a 'change in economic circumstances.' Yet, the hypothetical negotiation undertaken under the Georgia-Pacific factors for determining (pre-verdict) damages assumes validity and infringement. See Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp. 1116, 1120-22 (S.D.N.Y. 1970), modified, 446 F.2d 295 (2d Cir. 1971), cert. denied, 404 U.S. 870, 92 S.Ct. 105 (1971). Furthermore, the 'change in economic circumstances' arguably may not only enure to the benefit of the patent holder, though a patent holder that has secured an injunction gains bargaining power. Under Georgia-Pacific, pre-verdict damages are determined under the hypothetical negotiation as of the date of first infringement. See Georgia-Pacific, 318 F.Supp. at 1120. But circumstances may have changed between such date and the date of the verdict in favor of the infringer. For example, the patented technology may have seemed much more valuable back at the date of first infringement, and therefore able to net a greater royalty from a potential infringer. By the time of the verdict, however, it may have become clear that the patented-technology is only of marginal value, and thus able to attract a significantly lower royalty. Additionally, the infringer may have been able to develop an alternative, non-infringing product by the date of the verdict. Thus, a new hypothetical negotiation may or may not favor a patent holder.

Additionally, the Amado court maintained that the Paice case was different because that case involved assessing damages for ongoing infringement where no injunction was granted. But Amado did not explicitly state if or how the existence of an injunction actually leads to a different reasonable royalty for post-infringing sales. And, Paice itself did not explicitly state whether non-enjoined post-verdict infringing sales will necessarily warrant a higher royalty than pre-verdict infringement. It only held that a district court cannot automatically apply the same pre-verdict royalty to post-verdict infringement without providing its reasoning for doing so. Thus, it remains unclear what, if any, practical difference exists where ongoing infringement is subject to an injunction for purposes of calculating a reasonable royalty for post-verdict infringing sales.

Despite these and other uncertainties, the Federal Circuit clearly has given some leverage in the patent fight back to the patent holder. Once a court declares that a product infringes, the infringing party may be subject to paying an even greater amount than a pre-verdict reasonable royalty for each infringing product it sells during the post-verdict period. The post-verdict royalty will be determined as a consequence of the relative change in economic circumstances resulting from the determination of liability, not, as the District Court held, a consequence of willfulness. Thus, under the Federal Circuit's criteria, any award for post-verdict infringement will not necessarily be capped to an upper limit of treble damages. While the answer to the question 'What is reasonable?' may be subject to change, this case appears to add weight to the patent holder's side of the scale in a patent litigation.

Benjamin Hershkowitz is a partner in the New York office of Goodwin Procter LLP. He specializes in patent litigation and licensing primarily involving the high-tech industry and is the Editor-in-Chief of Patent Strategy & Management, a sister publication of this newsletter. Charles Wizenfeld is an associate in the firm's New York office. He focuses on patent litigation matters.

Several recent rulings from the U.S. Supreme Court have arguably tipped the scales toward alleged infringers involved in a patent battle. Specifically, the U.S. Supreme Court ('Supreme Court') in KSR Inter- national Co. v. Teleflex Inc. , __ U.S. __, 127 S.Ct. 1727 (2007) modified the standard for obviousness thereby making it easier for alleged infringers to invalidate patents. In eBay Inc. v. MercExchange, L.L.C. , 547 U.S. 388, 126 S.Ct. 1837 (2006), the Supreme Court modified the standard for determining the propriety of injunctions, making it more difficult for certain plaintiffs to obtain permanent injunctions against infringers. Finally, in MedImmune, Inc. v. Genentech, Inc. , __ U.S. __, 127 S.Ct. 764 (2007), the Supreme Court made it easier for alleged infringers to argue there is a case or controversy, and thereby prospectively haul patent holders into court by filing a declaratory judgment action. However, a recent decision from the Court of Appeals for the Federal Circuit ('Federal Circuit') may help tip the scales back toward patent holders and thereby provide some additional leverage to patent holders in discussions with alleged infringers. In Amado v. Microsoft Corp. , __ F.3d __, 2008 U.S. App. LEXIS 4065 (Fed. Cir. Feb. 26, 2008), the Federal Circuit indicated that after a verdict of infringement, the infringing party may be subject to a different (higher) royalty for post-verdict sales of the infringing product than was determined for past (i.e., pre-verdict) infringing sales.

What Is Reasonable for Infringement Before Trial '

Carlos Armando Amado ('Amado') brought suit in the U.S. District Court for the Central District of California ('District Court') against Microsoft Corporation ('Microsoft') alleging that several versions of Microsoft's Office Suite product infringed his patent directed to a 'point and shoot interface for linking database records to spreadsheets whereby data of a record is automatically reformatted and loaded upon issuance of a recalculation command' (i.e., a software program combining the functionalities of spreadsheet and database software). At trial, the jury ruled that Amado's patent was valid and infringed by Microsoft, and awarded Amado damages equivalent to a 4 cents reasonable royalty for each infringing product sold. No willful infringement was found. Amado then sought a permanent injunction against Microsoft, which the District Court granted but then stayed pending appeal. The District Court further required that Microsoft deposit $2 into escrow for each infringing product sold during the stay.

Both parties appealed various portions of the District Court decision to the Federal Circuit, which, after affirming in all respects, remanded back to the District Court for a determination regarding the escrow funds. In this regard, the Federal Circuit noted:

[W]e do not read the district court's August 2, 2005, order ' requiring the creation of an escrow account as a condition of the stay of the permanent injunction ' as having determined the ultimate disposition of the funds required to be deposited in the escrow account. When the district court makes that determination, any party believing itself aggrieved by that order may appeal to this court. Amado v. Microsoft Corp. , 185 Fed. Appx. 953 (Fed. Cir. 2006).

On remand, Amado argued that he was entitled to a reasonable royalty of $2 per infringing unit sold during the stay, which was the amount the District Court had initially required Microsoft to deposit into escrow. Microsoft argued that the royalty rate should be limited to 4 cents per unit, as initially determined by the jury. The District Court, however, chose neither party's suggested amount. Instead, it awarded Amado damages equivalent to a reasonable royalty of 12 cents per unit, representing treble the 4 cents per unit figure of the jury award. The District Court reasoned that the 4 cents per unit was an appropriate starting point and floor for post judgment infringement because '[a]t a minimum, Amado [was] entitled to receive what the jury found to be a reasonable royalty.' The District Court then trebled that figure, using trebling for willfulness under 35 U.S.C. '284 as a guideline, because after the jury ruling of infringement, and during the stay, Microsoft was on notice of its infringement. Moreover, even though Amado notified Microsoft that an acceptable 'fix' would remove the infringing functionality automatically, Microsoft instead chose to distribute a voluntary fix 'that relied upon its customers to remove the infringing functionality,' such that the products continued to be capable of infringement. Both parties appealed the award of a 12 cents per unit reasonable royalty.

' May Not Be Reasonable For Infringement After Trial

On appeal, Amado argued that the District Court abused its discretion by failing to award the full $2 deposited into escrow for each infringing unit sold during the stay. The Federal Circuit rejected Amado's contention that, in its initial decision, the District Court had explicitly set the amount Amado should receive by providing the $2 per unit amount. Rather, the District Court required $2 per unit escrow payments for each infringing sale simply to ensure that Microsoft set aside the absolute upper limit of any potential eventual damages award.

The Federal Circuit also rejected Microsoft's argument that the District Court could award no more than the 4 cents per unit reasonable royalty determined at trial for infringing sales made during the stay (i.e., after the trial). The 4 cents figure was based on Microsoft's infringing conduct occurring prior to the jury's verdict, but according to the Federal Circuit, '[t]here is a fundamental difference ' between a reasonable royalty for pre-verdict infringement and damages for post-verdict infringement.' The Federal Circuit explained that, citing its prior decision in Paice LLC v. Toyota Motor Corp ., 504 F.3d 1293 (Fed. Cir. 2007):

Prior to judgment, liability for infringement, as well as the validity of the patent, 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 economic factors are involved.

Finally, the Federal Circuit analyzed the District Court's award of 12 cents per infringing unit sold during the stay. According to the Federal Circuit, the District Court's application of the 4 cents per unit jury award as its starting point was improper because that figure only accounts for the pre-verdict reasonable royalty. Moreover, the Federal Circuit found that the District Court also mistakenly centered its damages assessment on willful infringement, which is not the proper inquiry when the infringement is permitted by a court-ordered stay of an injunction. Rather, the Federal Circuit articulated that the correct approach requires that:

When a district court concludes that an injunction is warranted, but is persuaded to stay the injunction pending an appeal, the assessment of damages for infringements taking place after the injunction should take into account the change in the parties' bargaining positions, and the resulting change in economic circumstances, resulting from the determination of liability ' for example, the infringer's likelihood of success on appeal, the infringer's ability to immediately comply with the injunction, the parties' reasonable expectations if the stay was entered by consent or stipulation, etc. ' as well as the evidence and arguments found material to the granting of the injunction and the stay.

Without any indication that the District Court considered these factors, the Federal Circuit could not determine whether the 12 cents per unit figure was reasonable, and therefore vacated and remanded the District Court's award for reconsideration. While the Federal Circuit did not explicitly state what amount the eventual award should be, it did state that the proper amount should logically fall between the 4 cents per unit amount awarded by the jury as an appropriate pre-verdict reasonable royalty, and the $2 per unit figure Amado was willing to accept in exchange for a license.

The Amado decision leaves many unanswered questions. For example, Amado held that it was improper to per se apply the same reasonable royalty calculated for pre-verdict damages to post-verdict damages, because of the uncertainty regarding validity and infringement and a 'change in economic circumstances.' Yet, the hypothetical negotiation undertaken under the Georgia-Pacific factors for determining (pre-verdict) damages assumes validity and infringement. See Georgia-Pacific Corp. v. United States Plywood Corp. , 318 F.Supp. 1116, 1120-22 (S.D.N.Y. 1970), modified , 446 F.2d 295 (2d Cir. 1971), cert. denied , 404 U.S. 870, 92 S.Ct. 105 (1971). Furthermore, the 'change in economic circumstances' arguably may not only enure to the benefit of the patent holder, though a patent holder that has secured an injunction gains bargaining power. Under Georgia-Pacific, pre-verdict damages are determined under the hypothetical negotiation as of the date of first infringement. See Georgia-Pacific, 318 F.Supp. at 1120. But circumstances may have changed between such date and the date of the verdict in favor of the infringer. For example, the patented technology may have seemed much more valuable back at the date of first infringement, and therefore able to net a greater royalty from a potential infringer. By the time of the verdict, however, it may have become clear that the patented-technology is only of marginal value, and thus able to attract a significantly lower royalty. Additionally, the infringer may have been able to develop an alternative, non-infringing product by the date of the verdict. Thus, a new hypothetical negotiation may or may not favor a patent holder.

Additionally, the Amado court maintained that the Paice case was different because that case involved assessing damages for ongoing infringement where no injunction was granted. But Amado did not explicitly state if or how the existence of an injunction actually leads to a different reasonable royalty for post-infringing sales. And, Paice itself did not explicitly state whether non-enjoined post-verdict infringing sales will necessarily warrant a higher royalty than pre-verdict infringement. It only held that a district court cannot automatically apply the same pre-verdict royalty to post-verdict infringement without providing its reasoning for doing so. Thus, it remains unclear what, if any, practical difference exists where ongoing infringement is subject to an injunction for purposes of calculating a reasonable royalty for post-verdict infringing sales.

Despite these and other uncertainties, the Federal Circuit clearly has given some leverage in the patent fight back to the patent holder. Once a court declares that a product infringes, the infringing party may be subject to paying an even greater amount than a pre-verdict reasonable royalty for each infringing product it sells during the post-verdict period. The post-verdict royalty will be determined as a consequence of the relative change in economic circumstances resulting from the determination of liability, not, as the District Court held, a consequence of willfulness. Thus, under the Federal Circuit's criteria, any award for post-verdict infringement will not necessarily be capped to an upper limit of treble damages. While the answer to the question 'What is reasonable?' may be subject to change, this case appears to add weight to the patent holder's side of the scale in a patent litigation.

Benjamin Hershkowitz is a partner in the New York office of Goodwin Procter LLP. He specializes in patent litigation and licensing primarily involving the high-tech industry and is the Editor-in-Chief of Patent Strategy & Management, a sister publication of this newsletter. Charles Wizenfeld is an associate in the firm's New York office. He focuses on patent litigation matters.