Are Reasonable Royalties A JURY ISSUE?

1. Are Reasonable Royalties A JURY ISSUE? Texas International Law Journal Symposium February 18, 2011 David Healey Fish & Richardson, Houston

2. DISCLAIMER FOR OUR GC This presentation, accompanying speech, and any recording, are to promote academic discussion only and are not legal advice or legal opinions of Mr. Healey or of Fish & Richardson

3. Jury v. Judge: Law v. Equity • In a patent case, if the issue were one that would have been tried to a jury at common law at the time of the founding of our country, or analogous to such an issue, the Seventh Amendment requires a jury trial on that issue. Markman v. Westview Instr., 517 U.S. 370 (1996).

4. Some Damages Are Equitable Relief • Trial court’s future ongoing royalties were an equitable remedy in lieu of an injunction. • Actions that seek only injunctive relief, attorneys’ fees, costs, or other solely equitable relief do not give rise to Seventh Amendment protection. Paice LLC v. Toyota Motor Corp., 504 F.3d 1293 (Fed. Cir. 2007), cert. denied, 128 S.Ct. 2430 (2008). 

5. If Only Equitable Remedies –No Jury • Actions that seek only injunctive relief, attorneys’ fees, costs, or other solely equitable relief do not give rise to Seventh Amendment protection. Tegal Corp. v. Tokyo Electron Am., Inc., 257 F.3d 1331 (Fed. Cir. 2001).

6. Damages at Law • 1790 patent act all claims for patent infringement were actions at law and the statute explicitly required the jury to set the damages. • Federal Courts had no equity jurisdiction prior to 1819. • To bring an action in equity, for an injunction and accounting, the case had to be filed in a state court.

7. The Seventh Amendment Jury Is Gone • Seventh Amendment preserves the right to jury trial as it existed in England at time of U.S. Independence. • But current jury practice is not the same now as then: • Then, Commercial cases would be tried to a “special jury” of merchants • Then, Certain other cases would be tried to special juries, e.g., Matron’s jury to determine pregnancy. • Then, civil juries in U.K. and U.S. were white men: • No women, no blacks See generally Trial By Jury, James Oldham, NYU Press 2006 (Mr. Oldham is a Professor at Georgetown Univ. Law School)

8. 1819-1870 Law v. Equity • 1870 Patent Act, patentee could elect to proceed in equity and recover infringer's profits and an injunction, or to proceed in law and recover “as damages, compensation for pecuniary injury he suffered by the infringement.” Birdsall v. Coolidge, 93 U.S. (3 Otto) 64, 68-69, 23 L.Ed. 802 (1876). • However, patentee was required to choose between these paths of recovery. • See, Nike v. Wal-Mart Stores, 138 F.3d 1437 (Fed. Cir. 1997) for a history of patent act amendments and their impact on law and equity. 

9. Damages at Law • Prior to merger of law and equity, recovery in law was limited to patentee’s actual loss, such as lost profits or a mathematical formula for damages or loss of an established royalty where patentee had licensees.  • In an action at law, if no actual loss could be proven according to legal standards, then jury had to be instructed to find nominal damages. Coupe v. Royer, 155 U.S.565, 583 (1895).

10. Reasonable Royalty • Equity statute in 1870 permitted concept of what became reasonable royalty, R.S. 4921. • The U.S. S.Ct. endorsed “reasonable royalty” where no damages could be shown. • The Court explicitly relied on principles in equity in adopting this remedy. Dowagiac Mfg. Co. v. Minnesota Moline Plow, Co., 235 U.S. 641 (1915).

11. Reasonable Royalty is Equity • In Dowagiac Mfg. Co., the Court relied on equitable principles to endorse reasonable royalty damages: “As was said in Tilghman v. Proctor, 125 U.S. 136, 145, 31 L. Ed. 664, 667, 8 S. Ct. 894: ‘It is inconsistent with the ordinary principles and practice of courts of chancery, either, on the one hand, to permit the wrongdoer to profit by his own wrong, or, on the other hand, to make no allowance for the cost and expense of conducting his business, or to undertake to punish him by obliging him to pay more than a fair compensation to the person wronged.’”

12. Reasonable Royalty is Equity • U.S. S.Ct. cases that endorsed a reasonable royalty concept were brought under Equity Statute, R.S. 4921 and its predecessors: • Dowagiac Mfg. Co. was an equity case under R.S. 4921 • Garretson v Clark, 111 U.S. 120 (1884) (cited in Lucent) • Westinghouse Co. v. Wagner Mfg. Co., 225 US 604, 615 (1912) (cited in Lucent)

13. Hypothetical & Speculative Damages Not Permitted At Law • “The actual damages which will sustain a judgment must be established …. by facts from which their existence is logically and legally inferable. The speculations, guesses, estimates of witnesses, from no better basis of recovery than the speculations of the jury themselves. Facts must be proved, data must be given which form a rational basis for a reasonably correct estimate of the nature of the legal injury….” Central Coal & Coke Co. v. Hartman, 111 F. 96, 98 (8th Cir. 1901).

14. Merger of Law and Equity Turns Reasonable Royalty on its Head • After the 1938 merger of law and equity in the Federal Courts, • If any damages at law could be proven, even if minimal, then equitable remedy of a reasonable sum was not available: • No equitable damages could be awarded in the unified system when there was a legal damages remedy. • This was so even if damages at law were less than what could have been sought in equity. UCLA Journal of Law & Technology, Vol. 13, Issue 2, Erick S. Lee, at page 7.

15. 1952 Act Consolidated Law and Equity Remedies from 1870 Act January 10, 1950, House Judiciary Committee Report to what is now 28 U.S.C. Section 284

16. 1952 Act Combined Damages Statutes from Law and Equity Former Equity Damages Statute R.S. 4921 (Excerpted in relevant part):

17. 1952 Act Combined Law and Equity Damages into One Statute Former Damages Statute for Action at Law

18. 1952 Act Combined Statutes May 12, 1953 House Report, p. 29, H. 82-2.7

19. 35 U.S.C. 284 Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty (4921) for the use made of the invention by the infringer, together with interest and costs as fixed by the court. When the damages are not found by a jury (4919), the court shall assess them (4921). In either event the court may increase the damages up to three times the amount found or assessed. The court may receive expert testimony (4921)….[Jury would not receive expert testimony on damages at law]

20. Georgia-Pacific • The Second Circuit opinion in Georgia-Pacific cited the 1952 legislative history and also described “reasonable royalty” in classic equity terms: • “The whole notion of a reasonable royalty is a device in aid of justice, by which that which is really incalculable shall be approximated, rather than that the patentee, who has suffered an indubitable wrong, shall be dismissed with empty hands.” Georgia-Pacific Corp. v. US Plywood-Champion Papers Inc., 446 F. 2d 295, at fn. 5 (2d Cir. 1971)

21. Apportionment Derives from Equity • Lucent, 580 F.3d 1301, at 1332, for example: • “Factor 13 is “[t]he portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.”

22. Reasonable Royalty: 284 Today v. 4921 Then • [T]he objective of the Court’s concern has been two-fold: determining the correct (or at least approximately correct) value of the patented invention, when it is but one part or feature among many, and ascertaining what the parties would have agreed to in the context of a patent license negotiation. • Lucent, 580 F.3d 1301, 1337, citingRS 4921 caselaw: • Garretson v Clark, 111 U.S. 120 (1884); • Westinghouse Co. v. Wagner Mfg. Co., 225 US 604, 615 (1912)(Under 4921) • When a patent is for an improvement…He must separate its results distinctly from those of the other parts, so that the benefits derived from it may be distinctly seen and appreciated. … "The patentee," …"must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features, and such evidence must be reliable …. Garretson v Clark, 111 U.S. at 120

23. Trend to Award Future Damages is Equity • In Innogenetics v. Abbott Labs, 512 F.3d 1363, 1380 (Fed Cir. 2008), the court vacated an injunction because the damages included at least partial payment for future use. • IP Innovation v Red Hat (E.D. Tex. 2010), Judge Radar allowed jury to award fully paid up, lump sum royalty for past and future use. • Paice teaches that the future portion at least is equitable.

24. Why hasn’t this come up before? • 2010 PriceWaterhouseCoopers study: • Prior to 2000, few patent trials had juries • Less than 100 trials per year in patent cases • Less than 15% to jury prior to 1990 • Less than 25% to jury from 1990-2000 • After 2000, most patent trials have juries • After May 2006, eBay eliminates injunction: Damages are only remedy in most cases. • Since 2000, median jury award has increased 10X

25. Conclusion • The civil jury as it existed in 1790 does not exist today • The1952 Patent Acts’ “reasonable royalty” in section 284 derives from equity: R.S. 4921 • Paice shows future royalties are equitable and no right to a jury trial under Seventh Amendment. • Innogenetics, IP Innovation, allowed damages for future use • Lucent’s rule on apportionment and EMV is from Equitable Cases under R.S. 4921 • Common law definition of “damages” would not allow for hypothetical negotiation model.