Damages Issues in Recent Canadian Decision

The case is Rovi Guides, Inc. v. Videotron Ltd., 2022 FC 874, decision by Mr. Justice Lafrenière.  The court holds that the claims of the patents in suit, which relate to interactive television program guides, are invalid, so the discussion of damages (beginning at para. 543) is dictum only (but could be relevant, I assume, if on appeal the invalidity or infringement determinations were to be reversed).  The plaintiff sought an accounting of profits or, in the alternative, a reasonable royalty. 

The defendant initially agreed to a portfolio license of Rovi patents, according to the court, primarily to avoid suit:  “freedom from suit was the primary motivating factor that led Videotron to accept to pay the royalty rates that were ultimately negotiated, and not the value of any particular patents in Rovi’s portfolio, as evidenced by the fact that Videotron did not perform any analysis of the market value of different features covered by the patents in the Rovi portfolio before entering into the Licence Agreement” (para. 568).  When it came time to renew the license, Rovi sought a much higher rate; Videotron agreed to a one-year extension, but the parties never came to terms on a longer extension, and litigation ensued (paras. 572-78).

First, then, on the issue of accounting of profits, the court writes “In Apotex Inc v Bayer Inc, 2018 FCA 32 at para 15, the Federal Court of Appeal reiterates the various factors to consider in deciding whether to award an accounting of profits. These factors include: (i) whether there has been undue delay in commencing or prosecuting the litigation; (ii) the patentee’s conduct; (iii) the infringer’s conduct; (iv) whether the patentee practiced the invention of the patent in Canada; and (v) complexity of calculating an accounting of profits” (para. 581).  Here, the court finds that factors (i), (iii), and (iv) are neutral, but that (ii) and (v) weigh against an accounting.  On (ii), the court states, inter alia, that “[w]hile Rovi kept touting the value of its patent portfolio, it was never prepared to disclose what that portfolio actually comprises,” and “would not reveal a complete list of its patents that it thought Videotron infringed, or even what it referred to as its ‘best patents’” (para. 589).  It also refers to “Rovi’s apparently deliberate strategy of delaying the prosecution of its patents,” which could result in patent holdup (para. 590); states that “the reason why Rovi declined to reveal to Videotron a complete list of specific patent claims it considered infringed was to prevent Videotron from designing around them” (para. 592); and that Rovi did not send a cease and desist letter before commencing litigation (para. 593).  On factor (v), after summarizing the parties’ submissions the court finds that “[w]hile the complexity of the evidence could be overcome, I am not satisfied that using any methods proposed by Rovi’s expert to calculate profits, which would be fraught with insufficient, speculative, and contradicted evidence would allow me to arrive to reliable and appropriate amount reflecting Videotron’s profits” (para. 607).

Second, as for reasonable royalties, the court writes:

            Videotron submits that should a particular Videotron system feature be found to infringe a valid claim in the Asserted Patents, the appropriate remedy is a one-time reasonable royalty, capped at no more than Videotron’s cost to remove or design-around the subject-matter of the relevant asserted patent claim. The uncontroverted evidence at trial was that the approximate cost for such a design change would have been $150,000 per feature. . . .

 

            Rovi’s expert, Dr. Bazelon agreed that "“non-infringing alternatives do come into willingness to pay and willingness to accept”" and if the infringer has an alternative to practicing it, such a design-around cost is a reasonable upper bound for a royalty.

 

            I am satisfied that Videotron had the wherewithal to come up with workable non-infringing alternatives for the implicated user interface components, which would not have affected its subscriber base. This is evidenced by their regular upgrades to their system.

 

            Taken into account the particular facts of this case, I consider that an appropriate and reasonable royalty would be $150,000 per feature as proposed by Videotron (paras. 611, 620-21, 623).

Assuming the correctness of the court’s analysis of the facts, its legal analysis seems right to me, in particular its recognition (1) of the risk of patent holdup under some circumstances, and (2) the relevance of noninfringing alternatives to the calculation of reasonable royalties.

Hat tip to Professor Norman Siebrasse for calling this case to my attention.

Update:  Professor Siebrasse has published his post on the decision here.  

Barnett and Kappos on Enhanced Damages in Lieu of Injunctive Relief

Jonathan Barnett and David Kappos have posted a paper on ssrn titled Restoring Deterrence: The Case for Enhanced Damages in a No-Injunction Patent System, forthcoming in 5G and Beyond: Intellectual Property and Competition Policy in the Internet of Things (eds. Jonathan M. Barnett and Sean M. O'Connor, Cambridge University Press 2022).  Here is a link to the paper, and here is the abstract:

 

Since the Supreme Court’s 2006 decision in eBay, Inc. v. MercExchange, LLC, increasingly large portions of the patentee population have no realistic expectation of securing injunctive relief against adjudicated infringers. This judicially imposed quasi-compulsory licensing regime induces well-resourced infringers to decline a license, appropriate patented technology, and negotiate the terms of use through litigation. Costly and protracted litigation is unlikely to adequately remunerate the patent owner whenever infringers have greater litigation resources, lower opportunity costs, and limited expectations of enhanced damages, which can induce the patent owner to settle for an amount that undervalues its technology. These litigation and settlement dynamics are illustrated through case studies of “holdout” tactics employed by well-resourced infringers in recent litigations involving standard-essential patents. To correct for the underdeterrence and undercompensation effects inherent to a no-injunction regime, it is proposed that courts enhance damages by an appropriately calibrated multiplier in all infringement litigations in which injunctive relief is not a practically available remedy.

Though I certainly don't agree with everything in this paper, it's an interesting read and makes a plausible argument that, in cases in which courts are unlikely to award injunctive relief, some form of monetary enhancement may be necessary to prevent opportunistic behavior by potential infringers.  I’m a little surprised, though, that the authors didn’t cite some of the existing literature that might be relevant to their argument.  For example, the "hypothetical bargain" construct that U.S. courts use to determine reasonable royalties, regardless of whether an injunction is granted or not, is supposed to "recreate the ex ante licensing negotiation scenario and to describe the resulting agreement,” based on the counterfactual assumption that the parties bargained knowing “that the asserted patent claims are valid and infringed.”  Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1325 (Fed. Cir. 2009).  The counterfactual assumption is necessary to avoid a double discounting problem, as David Taylor and others have previously noted, and in principle might seem to require courts to enhance the rate charged in comparable licenses negotiated under some uncertainty as to validity and infringement—though to be fair, how one would carry this out in the real world is not so clear, as my coauthors and I discuss in the Reasonable Royalties chapter of Patent Remedies and Complex Products: Toward a Global Consensus 6, 37-39 (C. Bradford Biddle, Jorge L. Contreras, Brian J. Love & Norman V. Siebrasse eds.  Cambridge Univ. Press 2019) (citing, among others, works by David Taylor and Jonathan Masur).  In addition, courts often do award ongoing, postjudgment royalties at a higher royalty rate than that which applies to the prejudgment royalty award.  See Christopher B. Seaman, Ongoing Royalties in Patent Cases After eBay: An Empirical Assessment and Proposed Framework, 23 Tex. Intell. Prop. L.J. 203, 239 (2015); cf. Mark A. Lemley, The Ongoing Confusion Over Ongoing Royalties, 76 Mo. L. Rev. 695 (2011).  Similarly, courts in Germany and France sometimes enhance damages by some extent to compensate for the fact that an infringer avoids some of the risk that a willing licensor incurs, see id. at 9, though the Federal Circuit has given somewhat mixed signals on the availability under U.S. law of such damages “kickers,” see id. at 48, and sources cited therein.  Moreover, the narrower point that courts could use enhanced damages as a substitute for injunctive relief, in SEP cases in particular, to deter unwilling licensees has been noted by Dan Burk in his article Punitive Patent Liability:  A Comparative Examination, 37 Rev. Litig. 327 (2018).  All that said, the authors’ proposal goes farther than these others in recommending that “in any infringement litigation in which the injunction remedy is unlikely to be granted as a matter of law or practice, courts should apply a multiplier to enhance the monetary damages owing to the patentee under the reasonable royalty standard,” and in proposing legislation to this effect.

A few other points I would suggest considering are as follows.  First, at least in relatively small-stakes patent litigation, I would think that the defendant’s prospect of incurring just its own attorneys’ fees—which, according to the annual surveys AIPLA publishes, can be in the hundreds of thousands of dollars even in small-stakes cases—can provide a substantial incentive to negotiate rather than to litigate.  (I don’t think the authors would disagree, and much of their analysis is focused on deep-pocket defendants such as Apple, but the point might be worth noting.)  Relatedly, while eight-, nine-, and even ten-figure damages awards are not everyday occurrences—and usually wind up being trimmed on appeal—I do have some worries that making enhancements more common could exacerbate the risk of what already may be some overcompensatory awards.  Second, I’d recommend that the authors cite Karen Sandrik’s recentempirical study of enhanced damages awards, in addition to the other sources they cite on this topic.  Third, the authors may be stating a bit too strongly the effect of a recent amendment to the German Patent Act, which authorizes courts to stay (or deny altogether) injunctions in some cases.  They write:

 

. . . the shift in the German patent injunction regime is paired—as this paper proposes—with an increased ability to obtain enhanced damages. In the same amendment making injunctive relief more difficult to obtain, the German Patent Act was amended to provide “[i]n th[e] case [where injunctive relief is denied], the injured party shall be granted appropriate financial compensation [that] shall not affect the claim for damages pursuant to Paragraph 2 [traditional patent remedies of actual damages, unjust enrichment and reasonable royalties].” . . . Thus, as the German system transitions away from an “automatic” injunction regime, legislators had the foresight to implement an enhanced damages regime to deter infringers from engaging in hold-out tactics. Hopefully, Congress can look to Germany as an example of our proposal in action (p.16).

By most accounts, however, such stays or denials are likely to rare--and so far, at least, the German courts haven't exercised their authority to grant any, much less award any compensation for the relevant time period.  If and when they do so, however, it is possible they will provide some measure of enhancement, though the amounts by which damages will be enhanced, if any, are for now unclear.  For a variety of views, see the articles published in the 5/2022 issue of GRUR (previously noted on this blog here), including Fabian Hoffmann, Der Ausgleichsanspruch im Patentrecht:  Die leistungsgerechte Monetasierung eines Drohpotenzials, 2022 GRUR 286, 290-93 (suggesting that courts consider enhancements of double or triple damages to encourage implementers to investigate existing patents, to negotiate voluntary licenses, and to avoid holdout); Gerhard Wagner, Die Aufopferung des patentrechtlichten Unterlassungsanspruchs, 2022 GRUR 294, 297-99 (suggesting more modest enhancements); Christian Osterrieth, Kritirien der Angemessenheit des Ausgleichs nach § 139 I 4 PatG, 2022 GRUR 299, 302 (recommending a case-by-case approach); and Ansgar Ohly, Der Ausgleichsanspruch gemäß § 139 I 4 PatG als Rechtsfortwirkungsanspruch, 2022 GRUR 303 (recommending, if I understand correctly, no enhancement).  See also Ansgar Ohly & Martin Stierle, Unverhältnismäßigkeit, Injunction Gap and Geheimnisschutz im Prozess: Das Zweite Patentrechtsmodernisierungsgesetz im Überblick, 2021 GRUR 1229, 1233-36.

 

Federal Circuit Vacates $2.75 Billion Verdict Against Cisco

Here is the opinion in Centripetal Systems, Inc. v. Cisco Systems, Inc., Judge Dyk writing for the panel.  Without going into greater detail than necessary here, the district judge discovered that his wife owned stock in Cisco after having drafted an opinion in this bench trial but before having finalized it.  He thereafter entered judgment against Cisco in the amount of $2.75 billion, which included an enhancement for willful infringement.  The judge and his wife had put the stock into a blind trust after learning of her ownership, and the judge had expressed concern that if the family sold the stock after his having indicated that he might award Centripetal enhanced damages, that in itself would “'would defeat the very purpose of the Rules,' implying concern about insider trading" (p.6).

The Federal Circuit nevertheless concludes that, under the applicable federal statute, "the district court judge was disqualified from hearing the case once he became aware of his wife’s ownership of Cisco stock on August 11, 2020" (p.2).  The fact that the judge entered judgment against Cisco doesn't matter, says the court:  "Where a judge becomes aware of a possible appearance of impropriety, there is a substantial risk that he or she might bend over backwards to rule against that party to try to prove that there is no bias" (p.23). (The court also disagrees on the insider trading point, see p.14 n.9.)  The court therefore "reverse[s] the Opinion & Order denying Cisco’s Motion for Miscellaneous Relief (ECF No. 619), see Recusal Op., 492 F. Supp. 3d 615, we vacate the Opinion & Order re Infringement and Damages (ECF No. 621), see Merits Op., 492 F. Supp. 3d 495, and the Opinion & Order Denying Post-Judgment Motions & Declaring the Case Final (ECF No. 638), and remand[s] for further proceedings before a newly appointed judge, who shall decide the case without regard for the vacated opinions and orders" (p.27).  

The court also notes at the end of the opinion that the district judge died last month.  Judge Morgan, a graduate of Washington & Lee Law School, was 87.

For further discussion, see this story on Bloomberg Law.

Fifth Circuit Withdraws February Opinion in Continental v. Avanci, Affirms Per Curiam on Section 1 and 2 Grounds

As I wrote back in March:

On February 28, the United States Court of Appeals for the Fifth Circuit held in Continental Automotive Systems, Inc. v. Avanci, L.L.C., that Continental--a maker of telematics control units (TCUs) used in automobiles--lacked article III standing to pursue its claims that Avanci, a patent pool, and its SEP owner codefendants (including Nokia, Optis, and Sharp entities) violated sections 1 and 2 of the Sherman Act by refusing to license FRAND-committed SEPs to Continental (as opposed to end-user automobile manufacturers). 

Last week, the court withdrew the February opinion and stated that a revised opinion would be forthcoming.  That opinion was handed down yesterday, and it's a bit, well, anticlimactic--and, as Florian Mueller notes, it is designated as nonprecedential.  In a very brief per curiam opinion, the court now states that "Having reviewed the district court's detailed order, and considered the oral arguments and briefs filed by the parties and amicus curiae, we AFFIRM the judgment of the district court that Continental failed to state claims under Sections 1 and 2 of the Sherman Act. See Cont'l Auto. Sys., Inc. v. Avanci, LLC, 485 F. Supp. 3d 712 (N.D. Tex. 2020)."  So the appellate court withdraws its previous conclusion on article III standing, which I thought was kind of weak, and does not address the district court's alternative holding on antitrust standing, but rather affirms on substantive grounds alone (albeit nonprecedentially).  That's still potentially a big deal, though, since the district court specifically disavowed cases such as Broadcom v. Qualcomm, flatly stating that "The Court does not agree with those cases concluding that deception of an SSO constitutes the type of anticompetitive conduct required to support a § 2 claim."  

There are articles also on Bloomberg Law and on Law 360.