Sua Sponte Award of Ongoing Royalty Remanded for Reevaluation of Royalty Rate
October 18, 2007
Last Month at the Federal Circuit - November 2007
Judges: Lourie, Rader (concurring), Prost
[Appealed from: E.D. Tex., Judge Folsom]
In Paice LLC v. Toyota Motor Corp., Nos. 06-1610, -1631 (Fed. Cir. Oct. 18, 2007), the Federal Circuit affirmed the district court’s denial of the parties’ motions for JMOL regarding infringement and noninfringement, vacated the district court’s sua sponte award of an ongoing royalty for future infringement, and remanded for the district court to reevaluate the ongoing royalty rate.
Plaintiff Paice LLC (“Paice”) sued Defendants Toyota Motor Corporation, Toyota Motor North America, Inc., and Toyota Motor Sales, U.S.A., Inc. (collectively “Toyota”), alleging infringement of U.S. Patent Nos. 5,343,970 (“the ’970 patent”), 6,209,672 (“the ’672 patent”), and 6,554,088 (“the ’088 patent”). These patents relate to drive trains (or “transaxle units”) for hybrid electric vehicles. More specifically, they disclose a system of combining and controlling the torque supplied by an internal combustion engine (“ICE”) and an electric motor. The ’970 patent describes a microprocessor-based system to control the torque inputs, whereas the ’672 and ’088 patents describe a control system that uses a clutch. Of importance to the appeal, the ’970 patent recites a “controllable torque transfer unit” (“CTTU”), which the district court defined as “a multi-input device or component that is controlled to transfer variable amounts of torque.”
In 2003, Toyota began marketing a hybrid electric vehicle, known as the “Prius II,” which has a drive train that combines the torque from an ICE with the torque from an electric motor. Like the one described by the ’970 patent, the Prius II drive train uses a microprocessor-based system to control the amount of torque provided by the ICE and the electric motor. After a trial, the jury found that the Prius II drive train lacks either a CTTU recited in the claims of the ’970 patent or a clutch recited by the claims of the ’672 and ’088 patents, and thus did not literally infringe those patents. But the jury found that the Prius II drive train infringes claims 11 and 39 of the ’970 patent under the DOE and awarded $4,269,950 to Paice as a reasonable royalty.
Toyota and Paice filed cross-motions for JMOL asking the district court to overturn the jury’s findings on infringement and noninfringement, respectively. Paice also requested a permanent injunction. The district court denied the motions. Instead of a permanent injunction, the district court imposed an “ongoing royalty” of $25 per vehicle, the same amount awarded by the jury for past infringement. The parties appealed the denial of their motions on infringement. Paice also appealed the “ongoing royalty.”
As for Toyota’s appeal, the Federal Circuit found sufficient evidence to support a finding of infringement under the DOE. Toyota argued that the testimony from Paice’s expert witness was insufficient because the vast majority of that testimony was directed towards literal infringement. The Court rejected that argument, finding that the bulk of the expert’s testimony was not limited to literal infringement. In that regard, the Court noted that the expert gave a substantial amount of testimony—occupying over seventy pages of transcript—concerning the technology disclosed in the patents and the inner workings of the accused vehicles’ transaxle units before discussing the topic of infringement. Moreover, the Court found that the expert’s extensive testimony on literal infringement was implicitly incorporated into his more limited DOE analysis, thus satisfying the “particularized testimony” requirement. The Court also found a sufficient “linking argument” based in part on the substantial cross-examination of Paice’s expert by counsel for Toyota on the portion of Toyota’s drive train that corresponds to the CTTU.
Next, Toyota asserted that the written description of the ’970 patent criticizes the drive train design in two prior art patents, U.S. Patent Nos. 3,566,717 and 3,732,751 (“the Berman/TRW patents”), because the design required a user to manually switch between operating modes and was difficult to manufacture economically. Because Toyota’s drive train was allegedly based on the Berman/TRW patents, Toyota argued that Paice’s criticism of the ’970 patent prevented Paice from capturing Toyota’s design under the DOE. The Federal Circuit disagreed. Paice’s primary criticism regarding manual operation was overcome using a microprocessor-based system, which Toyota also used. And Paice’s criticism regarding manufacturability was “secondary and equivocal at best.” Id. at 26.
Thus, the Court distinguished this case from SciMed Life Systems, Inc. v. Advanced Cardiovascular Systems, Inc., 242 F.3d 1337 (Fed. Cir. 2001), “where the patentee selected one configuration for ‘all embodiments’ of the invention to the exclusion of the only other known configuration.” Slip op. at 26. Nor did the Court find this case to be like Gaus v. Conair Corp., 363 F.3d 1284 (Fed. Cir. 2004), and Dawn Equipment Co. v. Kentucky Farms Inc., 140 F.3d 1009 (Fed. Cir. 1998), “where the patentee touted the invention’s improvements over the very same subject matter sought to be recaptured under the doctrine of equivalents.” Slip op. at 26.
Finally, Toyota urged a reversal based upon opening statements made by counsel for Paice expressing the view that “Toyota can cut off damages tomorrow . . . [b]y going back to the Prius I,” which Toyota contended was a binding judicial admission of noninfringement by the Prius I design. Toyota argued that the Prius I and the Prius II share the same structural configuration relevant to infringement, and thus Paice’s admission implied that the Prius II also does not infringe. The district court agreed that counsel’s statement was a binding admission, but disagreed that the structural configurations of the accused vehicles were the same as the Prius I for purposes of determining infringement. The Federal Circuit found that, in effect, the district court treated the statement as an evidential admission—as opposed to a conclusive admission—and allowed the jury to weigh it against the other evidence presented at trial. The Federal Circuit found the decision to be well within the district court’s discretion and affirmed the denial of Toyota’s JMOL motion.
As for Paice’s appeal, the Federal Circuit first addressed the jury’s finding of no literal infringement. The Court cited expert testimony on the lack of a single “multi-input device or component” that would constitute a CTTU in Toyota’s design as sufficient support for a finding of no literal infringement of the ’970 patent. For the ’672 and ’088 patents, the Federal Circuit again concluded that expert testimony provided substantial evidence that the accused devices lacked the claimed “clutch.” The Federal Circuit specifically noted that Toyota’s expert testified that a combination of devices transferred torque in Toyota’s accused design, whereas the district court’s construction of “clutch” literally required “a device, not a number of devices” to act as the clutch.
Next, the Federal Circuit considered the district court’s ongoing royalty order “allow[ing] Toyota to continue using the invention of the ’970 patent at a cost of $25 per accused vehicle.” Paice argued that the district court lacked the statutory authority to grant such an award, and even if such authority existed, the district court denied Paice its right to a jury trial under the Seventh Amendment to determine the amount of the ongoing royalty rate.
The Federal Circuit began by analyzing the language of 35 U.S.C. § 283, providing courts the authority to “grant injunctions . . . to prevent the violation of any right secured by patent, on such terms as the court deems reasonable.” The Court noted that the “difficult question raised by this case . . . is whether an order permitting use of a patented invention in exchange for a royalty is properly characterized as preventing the violation of the rights secured by the patent.” Id. at 34. Citing Shatterproof Glass Corp. v. Libbey-Owens Ford Co., 758 F.2d 613, 628 (Fed. Cir. 1985), the Federal Circuit concluded that “[u]nder some circumstances, awarding an ongoing royalty for patent infringement in lieu of an injunction may be appropriate.” Slip op. at 34. The Court noted, however, that “awarding 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.” Id. at 35.
The Court instructed that “[i]n 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.” Id. “Should the parties fail to come to an agreement,” the Court stated, “the district court should step in to assess a reasonable royalty in light of the ongoing infringement.” Id.
In this case, the Federal Circuit noted that the district court, after applying the four-factor test for a permanent injunction and declining to issue one, sua sponte imposed an ongoing royalty. But the Federal Circuit concluded that the district court provided no reasoning for its decision to grant a $25 ongoing royalty rate. Because the Federal Circuit was “unable to determine whether the district court abused its discretion,” it remanded the case for “the limited purpose of having the district court reevaluate the ongoing royalty rate.” Id.
The Federal Circuit further instructed that, on remand, the district court “may take additional evidence if necessary to account for any additional economic factors arising out of the imposition of an ongoing royalty.” Id. Furthermore, the district court “should also take the opportunity on remand to consider the concerns Paice raises about the terms of Toyota’s permissive continuing use.” Id. at 36.
Finally, the Court considered and rejected Paice’s argument that the Seventh Amendment entitled it to a jury trial to determine damages. The Court noted that while Paice’s argument may be true as a general matter, “not all monetary relief is properly characterized as ‘damages,’” id. at 37, citing as an example the equitable remedy of an award requiring an account of profits. Because “the fact that monetary relief is at issue in this case does not, standing alone, warrant a jury trial,” the Court found that Paice’s argument “falls far short of demonstrating that there was any Seventh Amendment violation in the proceedings below.” Id.
Judge Rader wrote separately in a concurring opinion and stated that the Federal Circuit “should do more than suggest that ‘the district court may wish to allow the parties to negotiate a license amongst themselves.’” Rader Concurrence at 1. Instead, “this court should require the district court to remand this issue to the parties, or to obtain the permission of both parties before setting the ongoing royalty rate itself.” Id.
Judge Rader wrote that the parties should be given a formal opportunity to set the terms of the royalty. He noted that evidence and argument on royalty rates were, of course, presented during the course of the trial for the purposes of assessing damages for Toyota’s past infringement. Judge Rader observed, however, that presuit and postjudgment acts of infringement are distinct and may warrant different royalty rates, given the change in the parties’ legal relationship and other factors. Moreover, as licenses are driven largely by business objectives, the parties to a license are better situated than the courts to arrive at fair and efficient terms.
Accordingly, Judge Rader would allow the district court to impose a reasonable royalty only after the parties gave the court their permission or after the parties failed to reach an agreement on their own when given the opportunity.