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Infringer's Actual Profits Should Not Cap Reasonable Royalty: Federal Circuit
Practical Law Legal Update 9-593-8466 (Approx. 3 pages)
Infringer's Actual Profits Should Not Cap Reasonable Royalty: Federal Circuit
by Practical Law Intellectual Property & Technology
| Published on 23 Dec 2014 • USA (National/Federal) |
In Aqua Shield v. Inter Pool Cover Team, the US Court of Appeals for the Federal Circuit vacated a $10,800 reasonable royalty award against Inter Pool Cover (IPC), holding that the district court erred in its use of IPC's actual profits during the infringing period to calculate a reasonable royalty. The Federal Circuit also vacated the district court's non-willful infringement finding and affirmed a narrow infringement determination.
On December 22, 2014, the US Court of Appeals for the Federal Circuit vacated-in-part, affirmed-in-part and remanded the US District Court for the District of Utah's decision in Aqua Shield v. Inter Pool Cover Team (No. 2014-1263, (Fed. Cir. Dec. 22, 2014)).
The case involved Aqua Shield's U.S. Patent No. 6,637,160 ('160 patent), which claims enclosures designed to cover pools or create sun rooms. The district court denied Aqua Shield's request for a preliminary injunction against Inter Pool Cover's (IPC's) infringement because of questions about personal jurisdiction over IPC. The district court subsequently:
- Granted summary judgment in favor of Aqua Shield regarding infringement and validity.
- Conducted a bench trial on relief and:
- granted Aqua Shield a permanent injunction against IPC's infringement;
- rejected Aqua Shield's lost-profits and reasonable royalty damages claims, awarding no damages; and
- found no willful infringement.
Upon Aqua Shield's motion to alter the judgment, the district court reassessed its conclusions but changed only its no royalty determination, awarding Aqua Shield $10,800 in reasonable royalty damages. The district court based this award on IPC's net profits of $135,000 during the infringing period, concluding that IPC would have been willing to pay an 8% royalty.
The Federal Circuit held that the district court erred in its reasonable royalty calculation because it incorrectly used evidence of IPC's actual profits. The Federal Circuit explained that the key question in a hypothetical pre-infringement negotiation is the profit the infringer would have anticipated by using the patented technology compared to using non-infringing alternatives. It also noted that a particular infringer's inefficiency does not entitle it to an especially low royalty rate.
The Federal Circuit also explained that:
- Anticipated incremental profits under the hypothetical conditions are central to constraining the royalty negotiations.
- Evidence of an infringer's actual profits is generally admissible to prove the anticipated profits.
However, in this case the district court erred because it treated IPC's profits earned during the infringement period as a cap for calculating a reasonable royalty. This was error because such an analysis replaces the hypothetical inquiry into the parties' anticipated profits if a royalty were to be paid with an inquiry into what profits were earned when the infringer was charging prices without accounting for any royalty. While parties' expectations of anticipated profits would have constrained the hypothetical royalty negotiation, the actual profits should not.
Here, IPC could have raised the sale price to account for the royalty payment since the district court did not find that IPC was selling into a perfectly competitive market forcing it to act as a pure price-taker.
The Federal Circuit also:
- Vacated the district court's willful infringement decision because the district court's reliance on the denial of the preliminary injunction motion was not sufficient for it to conclude that IPC did not willfully infringe.
- Affirmed the district court's holding on a narrow infringement issue.