Earlier this year, a student in my Patent Remedies course asked me a question about prejudgment interest to which I didn't know the answer. In stylized form, the question goes something like this. Suppose the plaintiff proves that the defendant infringed for, say, five years, and the court awards the plaintiff its damages over that five-year period. The court also awards prejudgment interest, as it usually will in the United States. Should the court simply take the amount of the award and award interest (whether simple or compound, at whatever rate it finds to be appropriate) on that amount from the date the infringement began? Or should it award interest on each increment as it accrued? For example, suppose the defendant made one infringing sale on January 1, 2015; another infringing sale on January 10, 2016; and so on, up through January 1, 2019. For each infringing sale, the appropriate royalty is, say, $1 million, so the total royalty is $5 million. Does the interest accrue on $5 million, beginning on January 1, 2015? Or does the interest accrue on $1 million as of January 1, 2015; on another $1 million, as of January 1, 2016; and so on? I was inclined to think that it would be too complicated to carry out the second option in the real world, and that the court should simply take the final damages amount and award interest accruing as of the date the infringement started (assuming it started within the relevant statute of limitations). But if that's right, perhaps it suggests that the interest rate should be a little lower than what the plaintiff's actual rate of return would have been, because in effect we'd be awarding interest on damages that didn't accrue until after the infringement started. But I honestly didn't know what the governing law, or common practice, was.
I posed the question to Professor Norman Siebrasse, who called my attention to a Canadian decision, Eli Lilly Co. v. Apotex Inc., 2009 FC 991, in which Justice Gauthier awarded interest "at the rate to be calculated separately for each year since the infringing activity began" (para. 674). Professor Siebrasse also reported that, according to one of his sources, there is no firm rule on this subject in Canada, but that year-by-year interest had become fairly common--though in some cases, the award is made by quarter by month. Anyway, I still didn't know what the U.S. practice was, but the Federal Circuit's opinion today in Schwendimann v. Arkwright Advanced Coating affirms a decision awarding prejudgment interest on a lump-sum royalty, beginning on the date the infringement began.
The principal issues in the case relate to standing, ownership, and assignment, and the majority's disposition of them elicits a dissent from Judge Reyna. Since this blog focuses on remedies, however, I will pass over these arguably more important (and rather complicated) issues and discuss the damages issues only. According to the majority opinion, authored by Judge Wallach and joined by Judge O'Malley:
Following a jury trial, a judgment of willful infringement was entered against Arkwright and the jury awarded Ms. Schwendimann damages in the amount of $2,624,228.00. J.A. 39–40. Subsequently, the District Court awarded prejudgment interest on the damages in the amount of $1,915,328.00. See Schwendimann, 2018 WL 3621206, at *23; see also J.A. 104–05. Relevant here, the District Court determined that it would award a 10 per-cent prejudgment interest rate, pursuant to Minnesota Statute § 549.09 (2015). See Schwendimann, 2018 WL 3621206, at *22.5/ First, the District Court rejected Arkwright’s proposed 1.42 percent interest rate, concluding that it was “unpersuaded” that such a rate “[wa]s sufficient to place [Ms.] Schwendimann ‘in as good a position as [s]he would have been in had [Arkwright] entered into a reasonable royalty agreement.’” Id. (quoting General Motors Corp. v. Devex Corp., 461 U.S. 648, 655 (1983)). Second, the District Court determined that the prejudgment interest rate should be calculated based on the amount of damages awarded by the jury and not of Arkwright’s final settlement offer, as Arkwright failed to provide a written offer. Id. Third, the District Court concluded that prejudgment interest should be calculated on the total damages and not based on the number of infringing sales per year. Id.
5/ Section 549.09 states that, “[f]or a judgment or award over $50,000, . . . the interest rate shall be ten per-cent per year until paid.” MINN. STAT. § 549.09(c)(2).
As for the choice of interest rate, the court states:
We afford district courts “wide latitude in the selection of interest rates,” and have permitted the use of statutory rates set by states, U.S. Treasury bill rate, and the prime rate. See Gyromat Corp. v, Champion Spark Plug Co., 735 F.2d 549, 556 (Fed. Cir. 1984) (citing cases); see also Uniroyal, Inc. v. Rudkin-Wiley Corp., 939 F.2d 1540, 1545 (Fed. Cir. 1991) (“A trial court is afforded wide latitude in the selection of interest rates . . . and may award interest at or above the prime rate.” (internal citations omitted)). We review the award of prejudgment interest for abuse of discretion, “basing the award on clearly erroneous factual findings, legal error, or a manifest error of judgment.” King Instruments Corp. v. Perego, 65 F.3d 941, 952 (Fed. Cir. 1995). . . .
As for the accrual date, the court writes:
The District Court did not abuse its discretion in granting a prejudgment interest rate of 10 percent, starting from the first date of infringement. Typically, “prejudgment interest should be awarded from the date of [the] infringement to the date of [the] judgment.” Nickson Indus., Inc. v. Rol Mfg. Co., 847 F.2d 795, 800 (Fed. Cir. 1988). Where a jury awards a lump-sum amount as compensation for infringement, the prejudgment interest is properly applied to the entire amount beginning on the first date of the infringement. See Comcast IP Holdings I LLC v. Spring Commc’ns Co., L.P., 850 F.3d 1302, 1315 (Fed. Cir. 2017) (affirming the “district court’s assessment of prejudgment interest against [an infringer] based on the entire royalty award” where the jury awarded a lump-sum amount).
On my reading of the above text and the Comcast decision, however, it is still an open question whether interest on a running royalty should accrue, for the entire award, from the date of first infringement, or in stages. Perhaps a court would have discretion to do it either way. Here, however, if I'm understanding correctly, the district court concluded that the date the infringement began was the correct choice under the Minnesota statute it was applying, writing in its opinion at 2018 WL 3621206, at *22 (emphasis in original):
. . . the Court must consider whether to calculate prejudgment interest based on the number of infringing sales per year. AACI argues, “In the hypothetical negotiation between Schwendimann and AACI, the parties would have agreed to a royalty rate, not a lump sum payment for any and all infringing future sales, regardless of what the actual sales numbers were.” (Mem. Opp’n Mot. to Amend J. at 8-9, Dec. 11, 2017, Docket no. 798.) Consistent with the plain language of Minnesota Statute § 549.09, the Court concludes that it is appropriate to calculate prejudgment interest on the total damages award and not based on the number of infringing sales per year.
I would be interested in hearing from readers, if any of you have any thoughts on how litigants and courts do, or should, address this issue.