Wednesday, May 23, 2018

Federal Circuit Remands for Recalculation of Ongoing Royalty

The decision, XY, LLC v. Trans Ova Genetics, L.C., was published this morning (majority opinion authored by Judge Chen and joined by Judge Dyk; partial dissent on non-damages-related issues by Judge Newman).  The facts are complex, involving six patents relating to the sorting of X- and Y-chromosome bearing sperm cells, and there are several legal questions in dispute, including antitrust and collateral estoppel issues.  For purposes of this blog, the principal issue of interest is the calculation of an ongoing royalty for the use of XY's technology.  The jury awarded a royalty for past infringement using a rate of 15%  of the defendant's gross sales and 4% for "reverse sorting" services (described in the opinion at p.3 n.1).  The judge awarded an ongoing royalty using lower rates, respectively 12.5% and 2%.  This is unusual; typically, the rate for the ongoing royalty is higher than the rate for past infringement, in accordance with Federal Circuit case law holding that the ongoing royalty should reflect the change in circumstances now that the defendant has been adjudicated liable for infringing a valid patent.  I and others have critiqued this case law numerous times, on the ground that, since the rate for past infringement is supposed to reflect the bargain the parties would have struck ex ante knowing the patent to be valid and infringed, the rate for past and future infringement should be identical.  But the case law is what it is.  Here, in awarding a lower rate for future infringement, the district court erred in the opposite direction, adopting a rate that was in between the rate awarded by the jury for past infringement and the rate the parties themselves had agreed at one time, prior to the dispute that resulted in this litigation.  But the difference between those rates is what you would expect, given that a real-world ex ante rate will reflect some discount for the probability of invalidity and infringement, and the royalty awarded for past infringement should, again, reflect the assumption that the parties bargained knowing the patent to be valid and infringed.  Anyway, the Federal Circuit, without couching the matter in economic terms vacates the district court's judgment as to the ongoing royalty and remands, stating:
. . . The focus should have been on XY’s improved bargaining position and any other changed economic factors (as articulated in Amado, ActiveVideo, and Paice) rather than XY’s past acts.
XY points out that, if we were to affirm the result in this case, it would result in the “absurd practical result . . . that XY would have been better off forgoing the 12.5% ongoing royalty and suing Trans Ova repeatedly for future infringement at the jury’s 15% reasonable royalty rate.” XY Reply Br. at 13. Assuming no changed circumstances exist (either good or bad for XY) between the date of first infringement and the date of the jury’s verdict, we agree with XY that allowing the district court’s ongoing rates to stand in this case would create an odd situation. Although district courts may award a lower ongoing royalty rate if economic factors have changed in the infringer’s favor post-verdict—for example, if a newly developed non-infringing alternative takes market share from the patented products—the district court identified no economic factors that would justify the imposition of rates that were lower than the jury’s. . . (p.26).   

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