Nonpracticing Entity Wins Permanent Injunction after Presenting Evidence that Its Licensing Model Is Based on Exclusivity

Authored by Robert C. MacKichan III, D. Brian Kacedon, and John C. Paul

Abstract

A nonpracticing entity recently won a permanent injunction against a patent infringer after presenting evidence that the licensing model used by the nonpracticing entity is based on exclusively licensing its patent rights. In particular, a Utah court found that allowing the infringer to pay an ongoing royalty to continue infringing would disrupt the patent owner's relationships with its licensees and possibly even lead to a lawsuit against the patent owner by one of the licensees. Although the patent owner had many different licensees, its licenses were exclusive for each field of use within the market segments being licensed.

To obtain a court order permanently enjoining a party from infringing a patent, a patent owner must show, among other things, that it would be irreparably harmed without an injunction and that legal remedies, such as monetary damages, are inadequate to compensate for ongoing infringement. Past licensing activities of the patent owner—although not dispositive—can be considered in assessing irreparable harm and the adequacy of legal remedies. For example, a patent owner's willingness to license its patented technology may support a finding that a monetary remedy, such as an ongoing royalty, would be adequate to compensate for ongoing infringement. Recently, however, in Waterton Polymer Products USA, LLC v. Edizone, LLC,¹ a patent owner's licensing model was central to the court's decision to grant a permanent injunction against ongoing infringement.

Background

Edizone, LLC owns patents on gel-cushion technology that it licenses to manufacturers in the consumer-mattress market. Waterton Polymer Products filed suit against Edizone, seeking a declaratory judgment that its gel-cushion products did not infringe two of Edizone's patents. Edizone counterclaimed for infringement. The court determined that some of Waterton's products infringed Edizone's patents. Edizone then moved the court to enter judgment, seeking, among other remedies, permanent injunctive relief.

Despite not making or selling the patented products itself, Edizone argued that without an injunction it would suffer loss of market share, revenues, profits, goodwill, and brand recognition. In particular, Edizone argued that its licensees may seek to terminate their license agreements and that it may be forced to change its business model. But the district court initially denied Edizone's motion, citing a lack of supporting evidence, finding that most of the harm absent a permanent injunction would be suffered by Edizone's licensees, not Edizone. The court also noted that a reasonable royalty would compensate Edizone for Waterton's ongoing infringement given Edizone's history of licensing its patents. The district court, however, denied Edizone's motion without prejudice, which allowed Edizone to renew its motion for a permanent injunction after a jury trial on damages. After the jury awarded Edizone $625,000 in damages, Edizone renewed its motion, this time with success.

The Court's Decision

Relying on evidence in Edizone's renewed motion, and as presented at trial, the district court found that Edizone would suffer irreparable harm that could not be adequately remedied without an injunction. The district court was persuaded by evidence that, absent an injunction, Edizone's relationships with its licensees would be disrupted, resulting in loss of royalty payments and market share.

Specifically, the court noted evidence that Edizone would be forced to change its business model unless a permanent injunction issued. The court referred to discussions at trial establishing that Edizone's licensing model is based on providing exclusive licenses to partners in particular market segments. If unable to provide exclusive licenses, Edizone, the court reasoned, might "be forced to find other partners or create and sell product themselves." In the court's view, this harm was exacerbated by the little remaining term left on the patents.

As further evidence of irreparable harm, the court observed that at least one licensee might bring suit against Edizone if Waterton were allowed to pay an ongoing royalty to continue infringing. This, the court noted, could require Edizone to incur legal fees and expenses, and, if the suit succeeded, could lead to a loss of past and future royalty payments.

The court further concluded that the balance of hardships between the parties favored an injunction and that an injunction was in the public interest. Accordingly, the court permanently enjoined Waterton from future infringement.

Strategy and Conclusion

Licensing activity can be an important consideration in analyzing whether ongoing infringement would irreparably harm a patent owner who is seeking permanent injunctive relief. While evidence of licensing can indicate that royalty payments are adequate compensation, this decision shows that courts may look further at the patent owner's licensing business model to evaluate irreparable harm. A history of exclusive licensing by the patent owner, even if it is in several fields of use, might serve as evidence that a permanent injunction is necessary to protect the patent owner's business model, particularly where the remaining patent term is short and the patent owner could be subject to legal action by its licensees absent an injunction.

Endnotes

¹ The Waterton Polymer decision can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2015/WatertonPolymer_v_Edizone.pdf.