October 8, 2012
LES Insights
By John C. Paul; D. Brian Kacedon; Robert C. MacKichan III
Authored by D. Brian Kacedon, Robert C. MacKichan III, and John C. Paul
Technology-licensing company Soverain Software sued a number of online retailers in an infringement case involving two of Soverain's online-shopping-cart patents. The suit1 named eighteen defendants, although only two remained for trial. The jury trial resulted in an infringement verdict and $17.9 million in damages. Following the jury verdict, the defendants moved for a new trial on several grounds, and Soverain moved for the imposition of an ongoing royalty against the defendants' continued infringement. The court refused, however, to overturn the jury's verdict and set an ongoing royalty at a rate two-and-a-half times that found by the jury, reasoning that post-judgment infringement would be willful.
The court acknowledged that seeking post-expiration royalties through a licensing agreement could constitute patent misuse. But it held that Soverain did not try to extract post-expiration royalties but rather "considered the entire cost of implementing an alternative system for the purpose of determining what reasonable royalty rate would have been agreed to as part of the hypothetical negotiation." The court was persuaded by testimony of Soverain's expert that parties to a hypothetical negotiation would have considered the entire cost of the alternative system in determining a reasonable royalty rate. The court also noted that the defendants emphasized this aspect of the royalty model during cross-examination; thus, the jury was able to consider whether the maintenance costs, which went beyond the 2015 expiration date of the patents-in-suit, should form the basis of a reasonable royalty. Further, the court pointed to the expert's testimony concluding that the discounted maintenance and support costs would become virtually nothing beyond 20 years.
Next, the court rejected the defendants' arguments that Soverain violated the entire-market-value rule. Specifically, the royalty base was the value of products sold on the infringing websites. The court held that the entire-market-value rule would be implicated only if Soverain had used the cost of implementing a defendant's entire website. According to the court, it was proper to base the royalty on the value of online sales enabled by the patented technology. The court also briefly endorsed the methodology of using the cost of Transact as the starting point for a reasonable-royalty model and deferred to the jury's findings on which expert's analysis should prevail. The court also addressed an odd twist in the damages award. Specifically, one of the defendants had sold 95% of its goods through one website and the rest through a second website. The jury, however, apportioned 95% of the damages to the second website. The court relied on its power to correct clerical errors, switching the verdict so the damages against the defendant represented the actual sales apportionment. It reasoned that defendant's counsel had transposed the two amounts in its own demonstrative—showing that it was easy to confuse the two—and that the evidence only supported the corrected verdict.
The court declined to impose a higher post-judgment royalty rate due to changed circumstances. The jury, according to the court, considered evidence regarding changed circumstances in arriving at its royalty rate. Specifically, the court noted that Soverain's expert considered post-1998 evidence in arriving at his damages model, which included the costs of implementing Transact through the life of the patents-in-suit and also pointed to trial testimony on how the patented technology was used to improve the profitability of the defendants' businesses and the success of e-commerce sales in 2004 and 2009.
The court did agree with Soverain, however, that continued infringement after judgment warranted a higher royalty rate and imposed a post-judgment royalty of two-and-a-half times that found by the jury. In its analysis, the court found four factors weighing in favor of enhancement of the post-verdict royalty. The first two—whether defendants had a good-faith belief that the patents are invalid or not infringed and the closeness of the case—both strongly favored enhancement. Because the defendants were now adjudged infringers and the patents were deemed not invalid, the court reasoned that the defendants could not assert a good-faith belief of noninfringement or validity. Further, it found that the defendants' statuses as "large, profitable" companies favored enhancement. Finally, it found that consideration of remedial action "favors enhancement because there is no evidence that defendants have taken any steps to stop infringement." Accordingly, the court found that an ongoing royalty of two-and-a-half times the jury's royalty was appropriate under the circumstances.
1 The Soverain Software case is not currently available online.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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