No Injunction In Video-on-Demand Litigation

No Irreparable Harm

The Federal Circuit ruled that the injury suffered by ActiveVideo would be compensable by money damages and would not be irreparable. The court did not identify any factors favoring irreparable injury. It found the following factors weighed against irreparable injury:

• The parties are not direct competitors;
• ActveVideo's license to its existing licensee, Cablevision, is non-exclusive. ActiveVideo could maintain its existing license to Cablevision and also license Verizon;
• Ease of quantifying a license fee ' Cablevision paid ActiveVideo 17 cents a month per subscriber, therefore Verizon could be required to pay monthly per subscriber;
• Only if Verizon was unable to pay royalties would there be irreparable injury
• Absence of evidence of damage to ActiveVideo's brand name ' ActiveVideo's licensee Cablevision markets its service using the “io” name, not the ActiveVideo name, so retail customers are unlikely to associate Activision with the service;
• Verizon's service increases demand for video-on-demand overall and therefore increases opportunities for ActiveVideo;
• Absence of evidence of price erosion resulting from Verizon's infringement;
• ActiveVideo sought to broadly license its patents, including to Verizon prior to the litigation; and
• ActiveVideo was willing to extend the sunset licensing period.

The Federal Circuit explained that loss of business opportunity or brand recognition could constitute irreparable injury, but neither was proven. The court gave no weight to the following factors:

• Though ActiveVideo incurred substantial litigation costs, these cannot constitute irreparable harm; and
• If Verizon takes customers away from ActiveVideo's licensee Cablevision, the only harm ActiveVideo suffers is loss of a license fee from Verizon.

Balance of Hardships

The Federal Circuit held that the balance of hardships favored the infringer, Verizon, based primarily on two factors:

1. The sunset licensing fee alone would generate, in one month, 70% of what the patent owner earned in its entire 23 year history; and
2. The patent owner would only suffer any harm if it were not compensated.

The court gave no weight to the patent owner's small size.

Public Interest

However, the Federal Circuit held that it was not clear error for the district court to find that the public interest in enforcing the patent owner's right to exclude outweighed the interest the infringer's customers have in maintaining their access to entertainment. But the court held that the public interest factor could not outweigh the others. It explained that if the public interest in upholding patent rights alone were enough to justify injunctive relief, we would be back to a general rule that a successful plaintiff should always receive an injunction against infringement. That is precisely the rule the Supreme Court rejected in eBay v. MercExchange.

Sunset Royalties

A sunset royalty, as its name implies, is a royalty an infringer must pay while it phases out its infringing product. The district court imposed a sunset royalty far greater than the amount paid by ActiveVideo's licensee, Cablevision. The Federal Circuit upheld the higher royalty amount, explaining: “The district court accepted ActiveVideo's expert testimony that Verizon received an incremental profit of $6.86 per FiOS-TV subscriber per month. The court analyzed the respective bargaining positions of the parties post-verdict, and concluded that 'it would have been reasonable for the parties to make an agreement whereby Verizon would receive 60[%] of the profits and ActiveVideo would receive 40[%] of the profits.' This
results in the $2.74 per subscriber per month royalty. [Verizon had wanted the court to set a $0.17 per subscriber, per month royalty.] The district court rejected Verizon's suggestion that it should pay the same rate as Cablevision. The district court found that after the patent is held not invalid and infringed by Verizon, ActiveVideo is in a much better bargaining position with Verizon than it was with Cablevision in 2009. Based on the fact that Verizon may be able to design around, but does not know precisely how effective such a design around might be, the court discounted the profit split from the 50/50 to 60/40 (in favor of Verizon).”

“This may seem high,” the appeals court added, “and while it is likely true that Verizon would not have agreed to that amount prior to litigation, Verizon has been adjudicated to infringe and the patent has been held not invalid after a substantial challenge by Verizon. The district court is correct; there has been a substantial shift in the bargaining position of the parties.”

Future Royalties

Because the Federal Circuit vacated the injunction, it now becomes necessary for the district court to fix a royalty for the infringer to pay going forward. The court offered the following comparison of sunset and ongoing royalties, and guidance for the district court on remand:

We held in Amado [v. Microsoft Corp., 517 F.3d 1353 (Fed. Cir. 2008),] that an assessment of prospective damages for ongoing infringement should 'take into account the change in the parties' bargaining positions, and the resulting change in economic circumstances, resulting from the determination of liability.' And, although Amado dealt with the imposition of royalty damages while an injunction was stayed during appeal, this holding applies with equal force in the ongoing royalty context. Though we vacate the district court's injunction, we see no error in its post-verdict royalty calculation. The district court, on remand, should determine an appropriate ongoing royalty, an inquiry that is much the same as its sunset royalty analysis. The district court may wish to consider on remand additional evidence of changes in the parties' bargaining positions and other economic circumstances that may be of value in determining an appropriate ongoing royalty. Indeed, ActiveVideo's bargaining position is even stronger after this appeal.

The appeals court further explained that some of the factors considered by the district court in its sunset royalty analysis might not be appropriate to consider when calculating an ongoing royalty. Those might include the defendant's likelihood of success on appeal, the ability of the defendant to immediately comply with the injunction, and the evidence and arguments found material to granting the permanent injunction.

The digital content era has moved patent issues to the forefront for the entertainment industry. In one recent case, even after winning a patent infringement case, a video-on-demand company still may not get an injunction prohibiting ongoing infringement by defendant Verizon Communications. In ActiveVideo Networks Inc. v. Verizon Communications Inc., 2011-1538 (Fed. Cir. 2012), the U.S. Court of Appeals for the Federal Circuit further explained why that is, illustrated how various factors should be weighed to determine whether to issue an injunction and offered guidance concerning how to calculate an appropriate royalty in the event an injunction does not issue.

A jury found that Verizon's FiOS-TV service infringed ActiveVideo's method patents pertaining to video-on-demand technology, but the Federal Circuit held that the district court erred by imposing a permanent injunction prohibiting future use. The Federal Circuit vacated the injunction and remanded the case for the district court to determine the royalty Verizon should pay. The case illustrates the real world impact of the Supreme Court's 2006 ruling in eBay v. MercExchange, 547 U.S. 388 (2006), that injunctions should not automatically issue in patent infringement cases.

As phrased by the Federal Circuit, there are four elements courts must consider when deciding whether to impose an injunction after liability has been established: 1) whether the harm to the patent owner is irreparable; 2) whether the harm is compensable with money damages; 3) the balance of the hardships depending on whether the court issues the injunction; and 4) the public interest.

No Irreparable Harm

The Federal Circuit ruled that the injury suffered by ActiveVideo would be compensable by money damages and would not be irreparable. The court did not identify any factors favoring irreparable injury. It found the following factors weighed against irreparable injury:

• The parties are not direct competitors;
• ActveVideo's license to its existing licensee, Cablevision, is non-exclusive. ActiveVideo could maintain its existing license to Cablevision and also license Verizon;
• Ease of quantifying a license fee ' Cablevision paid ActiveVideo 17 cents a month per subscriber, therefore Verizon could be required to pay monthly per subscriber;
• Only if Verizon was unable to pay royalties would there be irreparable injury
• Absence of evidence of damage to ActiveVideo's brand name ' ActiveVideo's licensee Cablevision markets its service using the “io” name, not the ActiveVideo name, so retail customers are unlikely to associate Activision with the service;
• Verizon's service increases demand for video-on-demand overall and therefore increases opportunities for ActiveVideo;
• Absence of evidence of price erosion resulting from Verizon's infringement;
• ActiveVideo sought to broadly license its patents, including to Verizon prior to the litigation; and
• ActiveVideo was willing to extend the sunset licensing period.

The Federal Circuit explained that loss of business opportunity or brand recognition could constitute irreparable injury, but neither was proven. The court gave no weight to the following factors:

• Though ActiveVideo incurred substantial litigation costs, these cannot constitute irreparable harm; and
• If Verizon takes customers away from ActiveVideo's licensee Cablevision, the only harm ActiveVideo suffers is loss of a license fee from Verizon.

Balance of Hardships

The Federal Circuit held that the balance of hardships favored the infringer, Verizon, based primarily on two factors:

1. The sunset licensing fee alone would generate, in one month, 70% of what the patent owner earned in its entire 23 year history; and
2. The patent owner would only suffer any harm if it were not compensated.

The court gave no weight to the patent owner's small size.

Public Interest

However, the Federal Circuit held that it was not clear error for the district court to find that the public interest in enforcing the patent owner's right to exclude outweighed the interest the infringer's customers have in maintaining their access to entertainment. But the court held that the public interest factor could not outweigh the others. It explained that if the public interest in upholding patent rights alone were enough to justify injunctive relief, we would be back to a general rule that a successful plaintiff should always receive an injunction against infringement. That is precisely the rule the Supreme Court rejected in eBay v. MercExchange.

Sunset Royalties

A sunset royalty, as its name implies, is a royalty an infringer must pay while it phases out its infringing product. The district court imposed a sunset royalty far greater than the amount paid by ActiveVideo's licensee, Cablevision. The Federal Circuit upheld the higher royalty amount, explaining: “The district court accepted ActiveVideo's expert testimony that Verizon received an incremental profit of $6.86 per FiOS-TV subscriber per month. The court analyzed the respective bargaining positions of the parties post-verdict, and concluded that 'it would have been reasonable for the parties to make an agreement whereby Verizon would receive 60[%] of the profits and ActiveVideo would receive 40[%] of the profits.' This
results in the $2.74 per subscriber per month royalty. [Verizon had wanted the court to set a $0.17 per subscriber, per month royalty.] The district court rejected Verizon's suggestion that it should pay the same rate as Cablevision. The district court found that after the patent is held not invalid and infringed by Verizon, ActiveVideo is in a much better bargaining position with Verizon than it was with Cablevision in 2009. Based on the fact that Verizon may be able to design around, but does not know precisely how effective such a design around might be, the court discounted the profit split from the 50/50 to 60/40 (in favor of Verizon).”

“This may seem high,” the appeals court added, “and while it is likely true that Verizon would not have agreed to that amount prior to litigation, Verizon has been adjudicated to infringe and the patent has been held not invalid after a substantial challenge by Verizon. The district court is correct; there has been a substantial shift in the bargaining position of the parties.”

Future Royalties

Because the Federal Circuit vacated the injunction, it now becomes necessary for the district court to fix a royalty for the infringer to pay going forward. The court offered the following comparison of sunset and ongoing royalties, and guidance for the district court on remand:

We held in Amado [v. Microsoft Corp., 517 F.3d 1353 (Fed. Cir. 2008),] that an assessment of prospective damages for ongoing infringement should 'take into account the change in the parties' bargaining positions, and the resulting change in economic circumstances, resulting from the determination of liability.' And, although Amado dealt with the imposition of royalty damages while an injunction was stayed during appeal, this holding applies with equal force in the ongoing royalty context. Though we vacate the district court's injunction, we see no error in its post-verdict royalty calculation. The district court, on remand, should determine an appropriate ongoing royalty, an inquiry that is much the same as its sunset royalty analysis. The district court may wish to consider on remand additional evidence of changes in the parties' bargaining positions and other economic circumstances that may be of value in determining an appropriate ongoing royalty. Indeed, ActiveVideo's bargaining position is even stronger after this appeal.

The appeals court further explained that some of the factors considered by the district court in its sunset royalty analysis might not be appropriate to consider when calculating an ongoing royalty. Those might include the defendant's likelihood of success on appeal, the ability of the defendant to immediately comply with the injunction, and the evidence and arguments found material to granting the permanent injunction.