Tuesday, July 19, 2016

WBIP v. Kohler: First Post-Halo Federal Circuit Opinion on Willfulness

This morning the Federal Circuit issued an opinion in WBIP, LLC v. Kohler Co. (link here), its first one to consider the impact of the Supreme Court's decision last month in Halo v. Pulse on enhanced damages (see blog post here).  The opinion is by Judge Moore, joined by Judges O'Malley and Chen.  

According to the opinion, the plaintiff and defendant are competitors in the market for marine generators used on houseboats, and the patents in suit  "are directed to marine engine exhaust systems that reduce the amount of carbon monoxide released in the exhaust" (p.3).  Plaintiff sued defendant for infringement and prevailed on liability and damages.  On the latter issue, the jury awarded a reasonable royalty of $9,461,206, which the district court (for reasons not explained in the Federal Circuit opinion, since neither party appealed the amount of actual damages, see p.21 n.5) reduced to $3,775,418.  The district court nevertheless found that the infringement was willful, under the now-defunct Seagate standard, and awarded a 50% enhancement of the actual damages plus attorneys' fees.  The court denied a permanent injunction, however, on public interest grounds, and awarded an ongoing royalty instead.  On appeal, the Federal Circuit affirms on liability, devoting most of its opinion to the questions of nonobviousness and written description (which for purposes of this discussion I will pass by).  It also affirms the finding of willfulness and the amount of the enhancement, but remands for reconsideration of whether a permanent injunction is warranted.

On the issue of willfulness, the district court as noted above found the infringement to be willful under the Seagate standard, because in its view the plaintiff proved by clear and convincing evidence that the proffered defenses were objectively unreasonable.  Perhaps it's not too surprising, then, that under the more plaintiff-friendly Halo standard, the Federal Circuit affirms:
Under Halo, we review the district court’s determination to award enhanced damages under 35 U.S.C. § 284 for abuse of discretion. . . .  As with awards of attorney’s fees under 35 U.S.C. § 285, a party seeking enhanced damages under § 284 bears the burden of proof by a preponderance of the evidence . . . .
As to Kohler’s first argument—that its defenses were objectively reasonable—the Supreme Court’s decision in Halo expressly rejected the notion that objective recklessness must be found in every case involving enhanced damages for willful infringement. . . .  Applying reasoning similar to Octane Fitness, the Court explained that an infringer’s subjective bad faith alone may support an award of enhanced damages. . . .   And it explained that the appropriate time frame for considering culpability is by assessing the infringer’s knowledge at the time of the challenged conduct. . . . 
. . . Kohler does not dispute that its obviousness defense was created during litigation, years after it began engaging in culpable conduct. . . .  But as the Supreme Court explained in Halo, timing does matter.  Kohler cannot insulate itself from liability for enhanced damages by creating an (ultimately unsuccessful) invalidity defense for trial after engaging in the culpable conduct of copying, or “plundering,” WBIP’s patented technology prior to litigation.  See Halo, 136 S. Ct. at 1933.  Proof of an objectively reasonable litigation-inspired defense to infringement is no longer a defense to willful infringement (pp. 33-35).
The court also finds that there was sufficient evidence for the jury to find that the defendant knew of the patents in suit:
. . . Knowledge of the patent alleged to be willfully infringed continues to be a prerequisite to enhanced damages. . . .  We do not interpret Halo as changing the established law that the factual components of the willfulness question should be resolved by the jury . . . .
We conclude that there was substantial evidence for the jury’s finding that Kohler had knowledge of the patents in suit at the time of infringement.  At trial, WBIP presented testimony from John (“Jack”) Westerbeke, the inventor and majority-owner of Westerbeke Corporation, that Westerbeke’s low–carbon monoxide gen-sets have been marked with the patents in suit since their issuance.  Supporting this testimony, WBIP submitted an email Mr. Westerbeke sent the day after the ’044 patent issued in 2008, which states “I have to get a patent label on all gas EFI products immediately” and that the label would say “U.S. Pat. No. 7,314,044; Other patents pending.”  J.A. 17,192.  WBIP submitted representative photographs of Westerbeke’s low–carbon monoxide gen-sets that are clearly marked with both patents in suit.  J.A. 17,261.  It also presented testimony that Westerbeke and Kohler were the only two companies in the market that provide low–carbon monoxide gen-sets, and documentary evidence, such as Kohler’s November 2004 internal request for funding to develop low–carbon monoxide gen-sets, demonstrating that Kohler was aware of Westerbeke patents covering Westerbeke’s Safe-CO gen-sets.  The district court also had before it Kohler’s admission in its Statement of Undisputed Facts in support of its Motion for Summary Judgment of Non-Infringement that Kohler “first became aware of the ’044 Patent at the latest by August 20, 2010” when it received an inquiry “regarding its knowledge of any WBIP patents on low carbon emission marine generator products.”  J.A. 2880.  The jury had record evidence upon which it could have inferred that Kohler had knowledge of the patents at issue, and thus its finding is supported by substantial evidence (pp. 36-38).
The court also discusses evidence presented on the question of the defendant's copying, which was relevant to the nonobviousness inquiry, at pp. 26-27.

As for the amount of the enhancement, the court doesn't go into detail but notes that whether to enhance and by how much is a matter entrusted to the trial judge's discretion, and finds no abuse of that discretion here (pp. 38-39).  As for the plaintiff's cross-appeal of the denial of a permanent injunction:
. . . The district court originally denied WBIP’s motion for a permanent injunction, reasoning the public interest factor weighed against an injunction because, as WBIP was a much smaller producer of low–carbon monoxide gen-sets than Kohler, it “would deprive the consuming public of access to a potentially life saving product.”  J.A. 10,381–82.  It determined that, based on its public interest finding, it need not address the remaining factors identified in eBay Inc. v. MercExchange, LLC, 547 U.S. 388, 391 (2006).  WBIP moved for reconsideration, arguing that the district court misunderstood WBIP’s manufacturing capacity, which was sufficient to manufacture generators for Kohler’s customers.  The district court declined to reconsider its denial of a permanent injunction, stating that “[e]ven if [WBIP] has a larger manufacturing capability than previously estimated, the Court is persuaded that it is in the public interest to have more than one company manufacture low–carbon monoxide generators” such that an ongoing royalty was a “more appropriate solution.”  J.A. 10,671.   
On appeal, WBIP argues that the district court erred in its consideration of the eBay factors.  We agree that the district court’s analysis is sufficiently flawed to constitute an abuse of discretion warranting vacating the judgment.  Before the district court WBIP argued, inter alia, that there is a “public interest to uphold patent rights.”  J.A. 8127.  But the district court did not explain how this public interest was outweighed by the public interest of having more than one manufacturer of gen-sets that produce low–carbon monoxide in their exhaust, especially   if WBIP does have the manufacturing capacity to meet the industry’s needs.  The district court’s decision is based on its reasoning that having more manufacturers of a lifesaving good in the market is better for the public interest.  But this reasoning is true in nearly every situation involving such goods, such that, if it alone is sufficient, it would create a categorical rule denying permanent injunctions for life-saving goods, such as many patented pharmaceutical products.  As the Supreme Court has warned, categorical rules regarding permanent injunctions are disfavored.  See eBay, 547 U.S. at 394 (“Just as the District Court erred in its categorical denial of injunctive relief, the Court of Appeals erred in its categorical grant of such relief.”).  And Congress has expressly indicated that injunctions may be granted in cases involving lifesaving goods, such as pharmaceutical drugs.  See 35 U.S.C. § 271(e)(4)(B) (“[I]njunctive relief may be granted against an infringer to prevent the commercial manufacture, use, offer to sell, or sale within the United States or importation into the United States of an approved drug, veterinary biological product, or biological product.”).  In denying WBIP a permanent injunction on these grounds, the district court abused its discretion.  We note that the district court limited its analysis to the public interest factor alone and that its decision to deny an injunction cannot be affirmed on this basis in light of this record.  We vacate its judgment and remand for the district court to conduct a more thorough analysis of the eBay factors in the first instance (pp. 39-40).   
As I said at the outset, it's not too surprising that (as long as the court affirmed on liability) it would affirm a finding of willfulness that was entered under what was a more stringent test than the one that prevails today.  And if the opinion's recitation of the evidence is accurate, there would appear to be evidence that the defendant knew of the patents in suit before infringing them.  On the injunction, no big surprise either that the court would want the district court to consider all of the eBay factors, not just (one aspect of) public interest; and given that the parties are competitors, one would expect some or all of the other factors to weigh in the plaintiff's favor.  It's interesting that for actual damages the plaintiff was awarded a reasonable royalty, not lost profits, but (without reviewing the record) I imagine this could have been either because the plaintiff lacked the capacity to make some or all of the sales the defendant made, or because the plaintiff thought it would be easier (as it often is) to quantify the amount of a reasonable royalty.

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