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Uncertain Times: Three Distinct Approaches to Ongoing Patent Royalties
12/15/2010
The Supreme Court’s 2006 decision in eBay Inc. v. MercExchange overturned decades of Federal Circuit precedent by
rejecting the Federal Circuit’s “general rule” of granting a permanent injunction upon a finding of patent infringement. 547 U.S.
388 (2006). Any court that declines to grant a permanent injunction must now decide whether and how to award an “ongoing
royalty rate” for future damages following a verdict of patent infringement. In the absence of Federal Circuit precedent, district
courts have crafted three different approaches to the ongoing royalty issue, each of which presents benefits and drawbacks.
The “General Rule” Prior to eBay v. MercExchange
Prior to the Supreme Court’s decision in eBay v. MercExchange, courts traditionally granted a permanent injunction following a
finding of infringement. As the Federal Circuit explained in Smith Int’l Inc. v. Hughes Tool, 718 F.2d 1573 (Fed. Cir. 1983),
denying an injunction would “seriously undermine” the constitutional purpose of patent rights and curtail the patentee’s right to
exclude. Smith, 718 F.2d at 1578. The Federal Circuit went on to state in Richardson v. Suzuki Motor Co. Ltd, 868 F.2d 1226,
1247 (Fed. Cir. 1989), that “[i]t is the general rule that an injunction will issue when infringement has been adjudged, absent a
sound reason for denying it.” District courts applied this general rule almost without exception, and any prevailing patentee
could expect to obtain a permanent injunction barring post-verdict infringement.
eBay v. MercExchange and the Four Factor Test
The Supreme Court’s decision in eBay abolished the Federal Circuit’s general rule. The patentee in that case, MercExchange,
initially sought a permanent injunction following a jury verdict finding that eBay infringed MercExchange’s business method
patents. The district court applied a traditional four-prong analysis by considering (i) whether the plaintiff would suffer
irreparable harm in the absence of an injunction; (ii) whether the plaintiff had inadequate remedies at law; (iii) whether the
balance of hardships weighed in favor of issuing an injunction; and (iv) whether the public interest would be harmed if an
injunction issued. Examining these factors, the district court denied MercExchange’s request for a permanent injunction. eBay,
547 U.S. at 390.
The Federal Circuit reversed, citing its “general rule that courts will issue permanent injunctions against patent infringement
absent exceptional circumstances.” Id. at 391. On appeal, the U.S. Supreme Court unanimously vacated the Federal Circuit’s
judgment, holding that a plaintiff seeking injunctive relief must satisfy the traditional four-prong analysis for a permanent
injunction.
In the wake of eBay, courts can no longer automatically impose a permanent injunction upon a determination of infringement,
but must now satisfy the traditional four-prong analysis. As a result, district courts have been less inclined to issue permanent
injunctions following a finding of infringement. See Stephen M. Ullmer, 24 Berkeley Tech. L.J. 75, 76 (2009). Accordingly,
parties began to ask district courts to impose ongoing royalties if the court declined to issue a permanent injunction. Given the
longstanding general rule that imposed permanent injunctions almost automatically, there was little precedent to guide district
courts in deciding whether to award ongoing royalties.
The Federal Circuit’s Initial Foray into the Post- eBay World
The Federal Circuit’s first post-eBay decision addressing ongoing royalties, Paice LLC v. Toyota Motor Corp., 504 F.3d 1293
(Fed. Cir. 2007), established some guiding principles, but failed to prescribe a uniform approach. In Paice, the Federal Circuit
vacated the district court’s award of ongoing royalties because it failed to articulate reasoning to support its award, leaving the
Federal Circuit “unable to determine whether the district court abused its discretion in setting the ongoing royalty rate.” Id. at
1315. The Federal Circuit explained that the district court must provide an indication of why the chosen royalty rate was
appropriate and suggested that it consider the effect of the infringer’s ongoing use of the patent on the patentee. While
vacating, the Federal Circuit went out of its way to state on remand that “the district court may wish to allow the parties to
negotiate a license amongst themselves . . . before imposing an ongoing royalty.” Id. The Federal Circuit also suggested the
district court “take additional evidence if necessary to account for any additional economic factors arising out of the imposition
of an ongoing royalty. . . .” a process that would “allow the parties the opportunity to present evidence regarding an appropriate
royalty.” Id. at 1315, n.15.
