Dec 31 2007

Does the future of patent law portend compulsory licensing by judicial fiat?

I hope not, but that is one risk created by the Supreme Court’s decision in the Ebay case and by the actions of some courts who have denied permanent injunctions in successful infringement cases.  But the fact that a permanent injunction does not issue after a judgment of infringement does not mean that the infringer (by losing the case) obtains a right to use the patent owner’s property in the future.  It simply means that the court declined to add the coercive force of an injunction to the statutory right to exclude as to future infringing conduct.

            Although most patent cases that result in a finding of infringement yield a permanent injunction, in some circumstances, injunctive relief will be more difficult to obtain.  This is especially true if the defendant is not in competition with the patent owner or is a patent holding company (sometimes referred to as a patent troll) that engages in no business other than licensing patents it acquired from third persons.


But what is the appropriate remedy if the court holds that a permanent injunction is not warranted, but that infringement has occurred and may occur in the future? 


One response is simply to assess damages as to past infringement, leaving any future use of the patent for a voluntary agreement of the parties (a license) or a subsequent infringement suit for the subsequent infringements.  That is clearly the preferable option, although it does raise limited issues of judicial economy.


A second alternative is to permit subsequent use by the defendant subject to the payment of a reasonable royalty imposed by the court.  This is a form of compulsory licensing that rewards the wrongdoer, unless the remedy has been requested by the patent owner.  Nevertheless, a panel of the Federal Circuit indicated that such a remedy may be appropriate.  One wonders why.


            In Paice LLC v. Toyota Motor Corp., 2007 WL 3024994 (Fed. Cir. 2007), after a finding of infringement and damages of $25 per use of infringing drive trains for hybrid motors, the District Court denied the patent holder’s request for a permanent injunction, and instead sua sponte issued an order permitting Toyota to continue to produce the infringing items subject to payment of a $25 per motor royalty.  The refusal to grant an injunction was not appealed, but the Federal Circuit noted that the court’s decision was based on at least the following factors:


·         In context, the absence of an injunction would not adversely affect the patent holder’s ability to license the patent to others. 

·        The patent holder did not actually manufacture any goods, and there was no threat that it would lose name recognition or market share without an injunction.

·        Monetary damages were adequate as suggested by the fact that the patent owner had offered to license Toyota during the post-trial period.

·        The balance of hardships favored Toyota since issuing an injunction would disrupt not only its business, but that of suppliers, dealers and others.


This gives you some idea of the type of issues likely to adversely influence a patent owner’s ability to obtain injunctive relief.  They depict a plaintiff company whose only interest in control of the patent is to obtain licenses or judgments of infringement, rather than to build or protect an existing or potential market.


            Should a denial of permanent injunctive relief automatically require judicially forced licensing?  The answer is no.


The Federal Circuit suggested that courts have long had the ability to order ongoing royalties as a remedy in appropriate cases, but carefully said that the District Court may do so, not that this result is ever required.  Even then, the cases it cited – an antitrust remedies case and an infringement case in which the ongoing royalty was not contested – do not support the conclusion that broad judicial power exists to make an award that effectively takes away the winning party’s property without being requested by the prevailing party.  Indeed, the Patent Act talks about granting injunctions to prevent violation of the property rights, while this remedy permits use of the invention.


But even if a court has power to make such an award, what is an appropriate case?  The one “appropriate” case the Federal Circuit mentioned was where, after the judgment of infringement, the parties attempt but fail to agree on a license for future use.  The court commented that that this may be a case for granting ongoing royalties as a remedy, not that this was required.  The court commented:


But, awarding an ongoing royalty where “necessary” to effectuate a remedy … does not justify … such relief … whenever a permanent injunction is not imposed. In most cases, where … a permanent injunction is not warranted, the district court may wish to allow the parties to negotiate a license amongst themselves … before imposing an ongoing royalty. Should the parties fail to come to an agreement, the district court could step in to assess a reasonable royalty in light of the ongoing infringement.


But why is a failed bargain as to future conduct grounds for the court to step in and impose a bargain of its own forcing the injured party to allow continued use of its property, even though the owner did not request that remedy?  The court did not explain this strange reversal or comment on whether a rights owner who does not want the court to control its future income would be better off not negotiating an attempted license at all.


            In Paice, the court remanded because the lower court’s order contained nothing to show why the selected royalty was appropriate.  But there is a more fundamental issue.  Judge Radar, writing a concurrence, directly approached that issue.  To him, giving the parties an opportunity to negotiate a license should be a precondition to the court having any power to impose an ongoing royalty.  He commented:


[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. District courts have considerable discretion in crafting equitable remedies, and in a limited number of cases, as here, imposition of an ongoing royalty may be appropriate. Nonetheless, calling a compulsory license an “ongoing royalty” does not make it any less a compulsory license.


The preconditions should be both an opportunity to negotiate a license and, failing a bargain, a request by both parties for the court to impose a royalty as part of the remedy for infringement.  A patent creates a right to exclude and, where the patent owner prefers to exercise that right, it should not be forced into a licensing arrangement resulting from a case in which it prevailed on the infringement claim.  There may be some cases in which vital public policy interests justify this result, but those cannot be grounded simply in the fact that the court denied a permanent injunction or the parties have not agreed to license terms.  A remedy should not penalize the person to whom the remedy is awarded.


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