By Any Other Name

Paice LLC v. Toyota Motor Corporation

Take a whiff of the Federal Circuit's opinion in Paice LLC v. Toyota Motor Corporation.  The court-imposed "ongoing royalty" (following a jury decision of patent infringement under the doctrine of equivalents) smells a lot like a compulsory license agreement to us.  While the court made sure to distinguish its arrangement from traditional "compulsory licenses"-- where anyone who meets certain criteria has congressional authority to use that which is licensed-the impact is the same.  In certain instances, parties in an infringement action who can't or won't agree now face the possibility of a forced, ongoing relationship, the terms of which neither party ever approved.

We've long suspected the potential availability of such a remedy. The facts of Paice reveal the particular circumstances where such court imposed "unions" may arise.  In Paice, the patent holder claimed that Toyota's hybrid vehicles infringed its patents for hybrid drive shaft technology. While the jury found no literal infringement, it determined that relevant features of Toyota's hybrid cars (the Prius II, the hybrid Highlander and the Lexus RX 400h) infringed Paice's patents under the doctrine of equivalents. The jury assessed damages at an amount equal to approximately $25 per accused infringing vehicle.

After the verdict Paice sought to permanently enjoin Toyota from further manufacture or sale of the infringing vehicles.  The district court applied the traditional four-part test for injunctive relief.  It concluded that the situation at hand did not meet the requirements necessary for a permanent injunction-particularly, because Paice could not show irreparable injury as it does not actually manufacture any competing goods.  However, rather than leaving the parties to sort out how they would deal with future acts of infringement, the court imposed an "ongoing royalty" for the life of Paice's patent.  Under the district court's order, Toyota was required to pay Paice $25 for each of the infringing hybrid vehicles it sold.

Paice appealed, alleging both that the court's order exceeded the authority of the patent statute and that it was entitled to a jury trial to determine the appropriate rate of any ongoing royalty.  The federal circuit had almost no trouble addressing either argument.

First, the Paice court reviewed 35 U.S.C §283, which authorizes the imposition of an injunction in order to prevent the violation of patent rights.  The query for the court in the instant case was whether "an order permitting use of a patented invention in exchange for a royalty is properly characterized as preventing the violation of rights secured by the patent." (Emphasis in original)

The answer?  Yes-but, the court cautioned, not always.  Rather, when infringement is present and an injunction is not warranted, district courts should first encourage the parties to negotiate a license agreement themselves. (The concurrence argues that this step should be mandatory-and that district court in the case in chief improperly skipped it).  District courts are only to step in and assess a "reasonable royalty" themselves if the parties fail to come to an agreement on their own.   

To survive review, the record must reflect sufficient information to determine whether the royalty set by the court meets standards of reasonableness.  District courts may take additional evidence to help set the rate.  Here, the record did not contain enough information to determine whether or not the district court had abused its discretion.  The federal circuit remanded for the sole purpose of establishing the appropriate royalty rate.

The Paice court made clear that district courts have the power to set the rate of this type of "ongoing royalty" without running afoul of the Seventh Amendment's requirement of a jury trial.  Because the royalty arises out of the court's equitable powers it is "monetary relief not properly characterized as damages."

Paice future implications remain unclear.  Infringers may be less willing to come to the bargaining table-if they can duck an injunction and just face royalties anyway, why bother?  Customers may claim implied licenses or may seek to re-negotiate if the court imposed rate is more advantageous.  Patent holders may have to spend more time and effort making sure all is well vis-à-vis patent rights and infringement.

Our advice?  Keep your nose clean-since Paice seems to add "your licensee friends" to the list of things you just might not be able to pick. 

The articles on our Website include some of the publications and papers authored by our attorneys, both before and after they joined our firm. The content of these articles should not be taken as legal advice.