District Court Finds Indirect Competition Sufficient to Support a Permanent Injunction and Determines a Sunset Royalty Rate For Application Before Injunction Takes Effect

Authored by D. Brian Kacedon, John "Jack" A Kelly, and John C. Paul

Following the Supreme Court's decision in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), it has become increasingly difficult for parties to obtain a permanent injunction against anyone other than a direct competitor. A judge in the district court for the Eastern District of Virginia, in ActiveVideo Networks, Inc. v. Verizon Communications, Inc., No. 2:10-cv-248 (E.D. Va. Nov. 23, 2011),¹ has recently held that indirect competition, whereby the patent owner licenses the infringer's competitor, can be an appropriate circumstance for a permanent injunction. Also of note was the judge's application of the Federal Circuit's factored analysis for determining the royalty rate when an injunction is stayed pending appeal. Although the judge denied the stay, he had to determine the royalty rate that applied before the injunction took effect, i.e., the sunset royalty rate.

Background

In its suit against several Verizon defendants, including Verizon Communications, Inc., in the Eastern District of Virginia, ActiveVideo Networks, Inc. alleged that Verizon's Video on Demand service infringed four of its patents. Following a trial, the jury found infringement of each of the patents and determined a reasonable royalty for past infringement. A reasonable royalty (as opposed to lost profit damages) was appropriate in this case given that ActiveVideo was an indirect, as opposed to direct, competitor of Verizon's. This is because, unlike Verizon, ActiveVideo does not sell television services itself; rather, it develops telecommunications technology and licenses it to telecommunications providers. One of ActiveVideo's licensees was Cablevision, one of Verizon's largest competitors. Before the court was ActiveVideo's request for a permanent injunction.

The ActiveVideo Decision

In determining whether a permanent injunction was appropriate, the district judge carefully considered the first of the four eBay factors: whether ActiveVideo would suffer irreparable harm. Concluding that it would, the judge rejected several of Verizon's arguments. First, it concluded that this would not be the first time when an indirect competitor was granted an injunction, citing Federal Circuit precedent. Second, it found that ActiveVideo's prior willingness to grant a license to Cablevision did not in and of itself indicate that any harm suffered by ActiveVideo could be compensated by money damages. Finally, the court concluded that Verizon's use of infringing technology caused ActiveVideo to lose market share, profits, goodwill, and/or the chance to strengthen its reputation. At bottom, the judge found that there was no way to determine how many customers Cablevision lost, and correspondingly unearned royalties that ActiveVideo failed to receive if it were not for Verizon's infringing activities. Therefore, the judge ruled that ActiveVideo had suffered irreparable harm. Interestingly, the judge even bolstered this conclusion by noting that ActiveVideo was forced to divert millions of dollars from developing other technologies and improving its business to bring the lawsuit against Verizon.

Turning to the factor of whether the remedies at law were inadequate, the court concluded that money damages—which is legal relief, as opposed to equitable relief in the form of an injunction—were inadequate. As for the third factor, the balance of hardships between the parties, the judge concluded that not granting ActiveVideo an injunction would cause a greater hardship to it than granting one would cause to Verizon. Verizon was then developing a noninfringing alternative and is a much larger corporation, offering an array of services. Finally, considering the public-interest factor, the court concluded that the public has a greater interest in preserving the right to exclude offered by a patent than any brief inconvenience Verizon's subscribers might face, given that an alternative design was under development.

Rather than stay the injunction pending appeal, the judge issued one with a sunset provision, whereby it would come into effect six months after a specified date. This was based in large part on Verizon's pending development of a noninfringing alternative. The task for the court, however, was to determine the appropriate royalty rate during the sunset period. Rejecting the Georgia-Pacific factors as inappropriate given their focus on a hypothetical prejudgment, as opposed to a post-judgment, negotiation, the court believed that the jury's finding of infringement could substantially improve ActiveVideo's leverage, making the Georgia-Pacific factors inapplicable.

Because the Federal Circuit had not yet discussed the appropriate factors to consider when determining a sunset royalty, the district judge borrowed from the five factors the Federal Circuit had previously used for determining a royalty when a district court stays an injunction pending appeal. Given the many complex issues Verizon appealed, the court could not conclude that Verizon's likelihood of success on appeal was negligible. As for Verizon's ability to comply with the injunction, the court found that although it was working on an alternative, it was by no means certain that Verizon would have a satisfactory one by the time the sunset expired.

The judge disregarded the third factor—the parties' reasonable expectations if a stay was entered by consent or stipulation—as not pertinent in this context. For the fourth factor—considering the evidence and arguments found material in granting the injunction—the court reiterated the strength of ActiveVideo's case for an injunction. Finally, considering the strength of the evidence and arguments against a stay of an injunction, the judge overwhelmingly found that this factor favored ActiveVideo because the judge in fact denied the stay. The judge ultimately concluded that ActiveVideo was in a better position following the jury's verdict and, as a result, it awarded a sunset royalty rate much larger than the one advocated by Verizon, which was based on Cablevision's license with ActiveVideo. The court reasoned that ActiveVideo's leverage over Verizon postverdict far surpassed any advantage that may have been present in the standard business negotiation with Cablevision.

Strategy and Conclusion

(1) Being an indirect competitor and willingly licensing others in the industry do not necessarily undermine a finding of irreparable harm. While ActiveVideo itself did not directly compete with Verizon, it was an indirect competitor by licensing Cablevision, among others. Similarly, the mere fact that ActiveVideo licensed other members of Verizon's business, like Cablevision, did not mean that money damages were adequate to compensate it. Instead, the court found the share of the business that Cablevision lost incalculable due to Verizon's infringement, which cost ActiveVideo an unquantifiable amount in royalties.

(2) At least one district court has applied the Federal Circuit's factors for royalty rates following a stayed injunction pending appeal to sunset royalty rates. Confronted with the situation where the Federal Circuit had not yet explained the factored analysis needed to determine the royalty rate before the injunction goes into effect, a district judge borrowed from a test the Federal Circuit has used in the context of royalties for injunctions stayed pending appeal. It remains to be seen, however, how the Federal Circuit will view this approach. 

Endnotes

¹  The ActiveVideo decision: http://scholar.google.com/scholar_caseq=ActiveVideo+Networks+v.+Verizon+Communications&hl=en&as_sdt=2,9&as_vis=1&case=16873772926535281199&scilh=0

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