XY, LLC v. Trans Ova Genetics, LC

Filing 646

ORDER setting ongoing royalties, by Judge William J. Martinez on 03/28/2019. (wjmlc1)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge William J. Martínez
Civil Action No. 13-cv-0876-WJM-NYW
XY, LLC,
Plaintiff / Counterclaim Defendant,
v.
TRANS OVA GENETICS, LC,
Defendant / Counterclaim Plaintiff.

ORDER ON ONGOING ROYALTIES

In February 2016, Plaintiff XY, LLC (“XY”), convinced a jury that Defendant Trans
Ova Genetics, LC (“Trans Ova”), was infringing several of XY’s patents, and that those
patents are valid. (ECF No. 461.) In post-verdict motions, the Court held that XY was
not entitled to a permanent injunction against Trans Ova’s ongoing infringement, but
instead would be awarded a reasonable ongoing royalty. (ECF No. 500 at 21–28.)
Trans Ova appealed the jury’s verdict (among other things) and XY crossappealed the ongoing royalty rates set by the Court (among other things). The Federal
Circuit affirmed the verdict and most of the judgment, but vacated the Court’s ongoing
royalty rates for further consideration. See XY, LLC v. Trans Ova Genetics, 890 F.3d
1282 (Fed. Cir. 2018). As discussed more thoroughly below, the Federal Circuit’s major
concern was that the rates set by this Court were too low, effectively putting Trans Ova
in a better position than it should be as an adjudged infringer.
The Federal Circuit’s vacatur requires the Court to reopen two motions: (1) XY’s

Motion to Set an Ongoing Royalty Rate (ECF No. 471), and (2) XY’s Motion for
Clarification of the Court’s Judgment on Ongoing Royalties (ECF No. 592). The title of
the first motion explains its content. The title of the second motion does not. The
second motion asks the Court to clarify the “royalty base,” or in other words, the
products and services on which Trans Ova must pay royalties, regardless of the royalty
rates. Disputes about the royalty base arose soon after the parties appealed, but the
Court found that it lacked jurisdiction to resolve those disputes while the case remained
with the Federal Circuit, and so denied the motion as premature. (ECF No. 613 at 3–4.)
For the reasons explained below, the Court agrees with XY about the scope of
the royalty base. The Court will also set ongoing royalty rates that somewhat align with
what XY has requested, but in certain ways do not. Finally, the Court will require XY to
submit a form of amended judgment.
I. ROYALTY BASE
The Court finds it appropriate to begin by determining the royalty base.
A.

Background
At trial, XY’s damages expert, Mr. Todd Schoettelkotte, proposed a damages

model that included, among other things, assumptions and opinions about the products
and services on which Trans Ova must pay a royalty. Of note in that regard was the
following:
1.

By “the parties’ long-standing practice,” Trans Ova’s minimum per-straw
royalty of $5 had been prorated based on the number of cells in the straw,
with 2 million cells considered the baseline. Thus, the minimum royalty on
a 2-million-cell straw would be $5, but would increase to $7.50 for a

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3-million-cell straw, and so forth. (See ECF No. 592 at 5.)
2.

The royalty base includes “making the sexed embryos [Trans Ova] uses
for its embryo transfer services.” (Id. at 4.)

3.

The royalty base includes “revenues Trans Ova receives for each and
every step of the IVF process,” including “payments it receives for the
necessary oocyte retrieval services and IVF fertilization drugs.” (Id.)

4.

The increased royalty for reverse sorting applies to all revenues generated
when reverse-sorted semen is used, not simply when it is sorted. (Id. at
8–9; ECF No. 609 at 8.)

Mr. Schoettelkotte included each of these revenue components as part of the royalty
base when formulating his damages model (ECF No. 592 at 3–6)—although, for
reasons explained below (Part II.D), he assigned no value to the third item. Regardless,
added together with all other aspects of his damages model, he proposed damages for
pre-verdict infringement of $4,584,555. (See ECF No. 470 ¶ 4.)
The jury awarded $4,585,000 (see ECF No. 461 at 9), which is manifestly a
rounded-up version of Mr. Schoettelkotte’s proposal. The Court therefore previously
held “that the jury adopted Mr. Schoettelkotte’s damages analysis.” (ECF No. 500
at 23.) No party has since challenged this assertion, either in this Court or on appeal.
B.

Scope of the Royalty Base
Although the jury’s adoption of Mr. Schoettelkotte’s damages analysis is

unchallenged, Trans Ova nonetheless argues that his view of the royalty base does not
control.

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1.

Prorating the Minimum Royalty for Larger Straws

Concerning the prorating of the minimum royalty for straws of more than 2 million
cells, Trans Ova does not deny that this was its “course of dealing.” (ECF No. 600 at 6.)
Trans Ova instead argues that this Court previously rejected Mr. Schoettelkotte’s
proposal to increase the $5 minimum to $7.50, and so foreclosed prorating. (Id. at 7–9.)
Trans Ova is conflating two separate issues. The Court indeed rejected
Mr. Schoettelkotte’s proposal (and therefore XY’s request) that the minimum royalty for
the 2-million-cell straw be increased to $7.50. (ECF No. 470 ¶ 17; ECF No. 500 at 27–
28.) That is a separate issue from whether the minimum royalty should be prorated for
straws containing more than 2 million cells. Mr. Schoettelkotte and XY both argued that
it should (ECF No. 470 ¶ 17; ECF No. 471 at 10 n.2), but the Court simply did not
address the matter—likely because it was presented in connection with a proposal to
increase the minimum royalty, which the Court rejected. It is clear now, however, that
whatever the minimum royalty, the jury accepted Mr. Schoettelkotte’s claim that
prorating straws larger than 2 million cells is part of Trans Ova’s obligation to XY. The
Court accordingly agrees with XY that this obligation must carry forward as part of the
ongoing royalty. Otherwise, Trans Ova ends up with a better deal than it had before
being adjudged an infringer—an incongruity with which the Federal Circuit was
specifically concerned. See XY, 890 F.3d at 1298. (See also Part II.A, below.)
2.

Other Items of the Royalty Base

As for the other three disputed items of the royalty base, Trans Ova has no
persuasive argument that the jury did not accept these as part of Trans Ova’s obligation
when it accepted Mr. Schoettelkotte’s damages model. Trans Ova instead argues that

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paying royalties on such components of its processes would be economically infeasible,
or it attempts to relitigate the scope of the relevant patents. (ECF No. 600 at 4–6, 11–
12.)
Trans Ova cannot relitigate the patents post-verdict. As for economic
infeasibility—a theme that runs through all of Trans Ova’s arguments, both as to the
royalty base and the royalty rate—the Federal Circuit has already foreclosed that
consideration. First, in the appeal from this case, the Federal Circuit established that
the ongoing royalty could be no less than the pre-verdict royalty awarded by the jury.
XY, 890 F.3d at 1298. The Federal Circuit’s decision made no qualification for whether
that rate is economically feasible for Trans Ova. By extension, any claim that
expanding the royalty base would likewise create economic infeasibility is similarly
foreclosed. Second, the Federal Circuit’s decision in ActiveVideo Networks, Inc. v.
Verizon Communications, Inc., evaluates an ongoing royalty established by the district
court that “seem[ed] high” and to which the infringer “likely . . . would not have agreed
. . . prior to the litigation.” 694 F.3d 1312, 1342. The Federal Circuit held the judgment
of validity and infringement created “a substantial shift in the bargaining position of the
parties,” justifying a royalty rate to which a licensee would never have agreed under
normal business conditions. See also State Indus., Inc. v. Mor-Flo Indus., Inc., 883
F.2d 1573, 1580 (Fed. Cir. 1989) (“There is no rule that a royalty be no higher than the
infringer’s net profit margin.”). Thus, Trans Ova’s arguments have no relevance here.
Because the jury agreed with XY as to the scope of pre-verdict royalty base, the
Court, again, must assess a post-verdict royalty on the same base to avoid granting
Trans Ova a windfall. See XY, 890 F.3d at 1298.

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C.

Starting Date
XY additionally requests that the Court’s order specify that Trans Ova’s royalty

obligation “shall be considered to have commenced on February 12, 2016, the last day
of trial, such that Trans Ova shall owe XY ongoing royalties for all covered sales made
since then.” (ECF No. 593-9 at 2.) The Court agrees that the judgment should so
specify. This request is therefore granted.
II. ROYALTY RATE
A.

Background
The major thrust of XY’s motion for an ongoing royalty (ECF No. 471) is that the

ongoing royalty rate for past infringement should be no lower than the royalty rate
assessed for pre-verdict infringement, i.e., no lower than 15% of gross sales plus 4% for
reverse sorting services. (Id. at 3–5.) Originally, however, the Court assessed a postverdict royalty “of 12.5% of gross sales, with an additional royalty of 2% for reverse
sorting services.” (Id. at 28.) As to minimum royalties, the Court ruled that “[t]he perstraw or per-service minimum royalty shall remain unchanged at $5, as the jury did not
modify that portion of the [parties’ License] Agreement in awarding infringement
damages.” (Id.)
On appeal, the Federal Circuit agreed with XY that this Court erred in its decision
to set a royalty rate of 12.5% + 2%, because those rates are lower than the 15% + 4%
awarded by the jury for pre-verdict infringement:
Although district courts may award a lower ongoing royalty
rate if economic factors have changed in the infringer’s favor
post-verdict—for example, if a newly-developed noninfringing alternative takes market share from the patented
products—the district court identified no economic factors
that would justify the imposition of rates that were lower than

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the jury’s.
XY, 890 F.3d at 1298. Thus, this Court must decide anew an appropriate reasonable
royalty, no lower than 15% of gross sales, plus 4% for reverse sorting services, and in
any event no lower $5 per straw or per service (prorated per the parties’ prior course of
dealing, as applicable).
B.

The “When” of the Reasonable Royalty Analysis
After the Federal Circuit’s remand, the Court called for a status report from the

parties on whether they intended to file any additional motions with respect to the
matters the Court must decide anew. (ECF No. 616.) In response, XY announced that
“re-briefing of the ongoing royalty issue would be unnecessary and inefficient,” and so it
“intend[ed] to file a motion to recalculate the ongoing royalty rates”—a recalculation
presumably on the record as already submitted (otherwise the statement about
“unnecessary and inefficient” re-briefing makes no sense). (ECF No. 621 at 1.) By
contrast, Trans Ova announced an intent to reopen the record and submit numerous
additional materials developed since the original judgment. (Id. at 2–3.)
The Court then called for further briefing from Trans Ova:
It appears to the Court that Trans Ova is interpreting the
Federal Circuit’s references to “post-verdict” circumstances
as a direction to consider any post-verdict circumstances, up
through the present time. The Court, by contrast, interpreted
“post-verdict” to refer to circumstances as they existed
immediately after the verdict. However, the Court will not
foreclose Trans Ova’s interpretation without further briefing.
(ECF No. 622.) Trans Ova responded with authority that it interpreted as authorizing
this Court to assess an ongoing royalty based on current, post-appeal, circumstances
(ECF No. 623 at 3–8), although none of this authority addressed a circumstance in
which a Court was recalculating a reasonable royalty because the appeals court
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deemed the original royalty, imposed soon after the verdict, to be too low. XY replied
that this Court, in its discretion, could consider evidence developed since the original
judgment but that it would be inequitable under the circumstances of this case, because
additional discovery would delay royalty payments even longer, and most of the new
material and arguments Trans Ova sought to inject into the record were available to it
the first time around. (See ECF No. 628.)
The Court resolved the dispute as follows:
The Court construes the Federal Circuit's repeated focus on
circumstances “between the date of first infringement and
the date of the jury’s verdict,” [XY, 890 F.3d at 1297, 1298],
as foreclosing the sort of re-opening of the record Trans Ova
proposes. Moreover, under the circumstances of this case,
the Court finds that re-opening of the record is inappropriate
in any event. Accordingly, no new motion practice is needed
from either party. The Court will decide anew XY’s Motion to
Set an Ongoing Royalty Rate on the record as it existed as
of XY’s reply in support of that motion and under the
principles set forth in the Federal Circuit’s appeal decision.
(ECF No. 634 (record citations omitted).)
The Court’s statement “that re-opening of the record is inappropriate in any
event” deserves some elaboration. In the Court’s view, it would be inequitable to
calculate a reasonable royalty based on circumstances as they currently exist, although
not because of the delay inherent in the additional discovery Trans Ova proposed. The
Court’s task is to establish the royalty rate that it should have imposed shortly after the
verdict—the rate that Trans Ova should have begun paying as of February 12, 2016.
To permit Trans Ova to argue from current (post-remand) circumstances would
potentially permit it to profit from what turned out to be this Court’s error and the delay
inherent in correcting that error on appeal. In other words, if this Court had originally

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imposed royalty of, say, 18.75% + 5% (XY’s lowest pre-judgment proposal, see ECF
No. 471 at 6), and the Federal Circuit had affirmed in the face of a challenge from Trans
Ova, then Trans Ova’s royalty obligation would have been and would continue to be
18.75% + 5%. But if Trans Ova may now try to persuade this Court to impose a royalty
lower than these figures based on circumstances since the Court first imposed a royalty,
Trans Ova would be gaining an advantage it never would have otherwise received but
for the Court’s error. Whether changed circumstances might justify a lower rate today
(a matter on which the Court expresses no opinion) is not relevant to what Trans Ova
should have been paying as of as of February 12, 2016.
Accordingly, as the Court previously announced, the following analysis will be
confined to “the record as it existed as of XY’s reply in support of that motion and under
the principles set forth in the Federal Circuit’s appeal decision.” (ECF No. 634 (record
citations omitted).)
C.

Reasonable Royalty Standards
The Federal Circuit stated that this Court’s “focus [when calculating a reasonable

royalty] should have been on XY’s improved bargaining position [in light of the verdict]
and any other changed economic factors (as articulated in Amado, ActiveVideo, and
Paice).” XY, 890 F.3d at 1298. The three referenced decisions are Amado v. Microsoft
Corp., 517 F.3d 1353 (Fed. Cir. 2008); ActiveVideo, supra; and Paice LLC v. Toyota
Motor Corp., 504 F.3d 1293 (Fed. Cir. 2007). The basic thrust of each of these cases is
that a jury verdict declaring a patent infringed and not invalid significantly changes the
parties’ bargaining positions in favor of the patentee, see ActiveVideo, 694 F.3d at
1342–43; Amado, 517 F.3d at 1361–62; Paice, 504 F.3d at 1314–15, absent intervening

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factors not present here, XY, 890 F.3d at 1298.
D.

Reasonable Royalty Under the Circumstances
XY relies on a post-verdict declaration from Mr. Schoettelkotte to argue that its

strengthened bargaining position entitles it to an increase of between 25% and 50% on
the basic 15% royalty rate assessed by the jury for gender-selected straws and
embryos, or in other words, an ongoing basic royalty rate of between 18.75% and
22.5% on gender-selected straws and embryos. (ECF No. 470 ¶ 20.) As for the
enhanced royalty for reverse sorting and fertilization, Mr. Schoettelkotte again proposes
an increase of between 25% and 50% on the 4% royalty rate assessed by the jury, or in
other words, an ongoing enhanced royalty rate of between 5% and 6%. (Id.) As for the
minimum, Mr. Schoettelkotte proposes $7.50 per 2-million-cell straw, which is a 50%
increase over the $5 minimum royalty for a 2-million-cell straw. (Id. ¶ 17.)
As mentioned above (Part I.A), Mr. Schoettelkotte’s damages model at trial
included oocyte retrieval services and IVF fertilization drugs, which are covered by XY’s
053 Patent, as part of the royalty base, but he assigned no royalty rate to the 053
Patent because of his understanding of its added value, or lack thereof. (ECF No. 470
¶ 14.) In his current declaration, Mr. Schoettelkotte draws on other witnesses’ trial
testimony to change course and opine that the 053 Patent has much more value to
Trans Ova than he originally understood, particularly to the processes noted (i.e.,
oocyte retrieval and IVF drug delivery). (Id. ¶ 15.) He accordingly opines in light of
what trial testimony revealed that an ongoing royalty for the 053 Patent would be
appropriate. (Id.) He proposes between 3% and 4%. (Id. ¶ 20.)
Finally, Mr. Schoettelkotte notes that Trans Ova “generally does not invoice its

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customers for each segment of the IVF cycle,” and therefore it may be simpler “to set an
on-going royalty rate to be applied to all of Trans Ova’s IVF service cycle revenue as
opposed to different rates for different components.” (Id. ¶ 19.) Under this model, the
enhanced royalty for reverse sorting and fertilization in the newly assessed royalty on
the 053 Patent would not be separate, but would be subsumed in a single “weight[ed]
. . . on-going royalty” on the entire IVF cycle. (Id.) That weighted royalty again
represents a 25% to 50% increase over the jury’s findings, and so ranges from 12.63%
to 15.38%. (Id. ¶ 20.)
Trans Ova criticizes Mr. Schoettelkotte’s opinion as “purely speculative” because
he supposedly “invents a percentage-based additur without any real, economic-based
rationale.” (ECF No. 485 at 8.) But Trans Ova presents no argument about what any
reasonable ongoing rate should be other than to repeatedly emphasize that XY’s
highest royalty rate amongst its licensors is 10%. (ECF No. 485 at 6–8.)
The authority cited in the Federal Circuit’s decision on appeal forecloses anything
less than the 15% basic rate assessed by the jury. Moreover, even awarding 15% (the
same as the jury) would likely be error because the jury was considering a reasonable
rate for pre-verdict infringement and the Federal Circuit has emphasized that the verdict
itself is a changed circumstance that strengthens the patentee’s bargaining position.
See XY, 890 F.3d at 1297.
In this light, the Court finds Mr. Schoettelkotte’s post-verdict royalties largely,
although not completely, persuasive. Concerning the basic rate (what the Court
previously awarded at 12.5%), the Court will award 18.75%. The Court finds that this
figure, on the low end of XY’s proposed range, is most appropriate considering that the

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highest negotiated rate XY imposed on any licensee was 10%. Given that, a rate
substantially higher than the 15% floor that constrains this Court is not justified on this
record. The Court finds that an increase of 25% over the 15% floor, to 18.75%, is
sufficient and reasonable.
Concerning the minimum royalty on a 2-million-cell straw, Mr. Schoettelkotte
proposes $7.50, a figure he arrived at as follows: “the jury found that the royalty rate for
sexed straws should be affixed at 15%, which is a 50% increase over the contractual
royalty rate of 10%. Applying the 50% increase to the $5 per straw minimum would
suggest a new minimum price of $7.50 per straw.” (ECF No. 470 ¶ 17.) However, XY
has offered no evidence that the 10% royalty rate and the $5 minimum were directly
economically correlated, such that an increase to one implies a need to increase to the
other. If anything, a higher royalty rate suggests that the per-straw minimum is less
important because it would come into play less often. But the Court agrees to the
limited extent that XY’s changed bargaining power in these circumstances would permit
it to extract a higher per-straw minimum, regardless of economic correlation to the
royalty rate. The Court finds that, similar to the 25% increase over the 15% floor, a 25%
increase to the per-straw minimum is appropriate, or in other words, a minimum of
$6.25 per 2-million-cell straw, prorated as appropriate.
As for the enhanced royalty, the Court agrees with XY that the 053 Patent has
value to Trans Ova that merits a royalty. The Court further agrees with Mr.
Schoettelkotte’s opinion that a weighted, blended rate for the entire IVF cycle is a better
course of action than separate royalties for different components of the cycle. The
Court again finds that a 25% increase is appropriate, which Mr. Schoettelkotte

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calculated at 12.63%—lower than 15%, but a rate XY has itself endorsed as appropriate
under the weighted, blended approach. (ECF No. 471 at 6 & n.1.)
E.

Quarterly Reports
Finally, XY requests that “the Court order Trans Ova to provide XY with quarterly

royalty reports sufficient to allow XY to evaluate Trans Ova’s compliance with the
ongoing royalty set by the Court.” (ECF No. 471 at 12.) This request is reasonable and
will be granted.
III. CONCLUSION
For the reasons set forth above, the Court ORDERS as follows:
1.

XY’s Motion to Set an Ongoing Royalty Rate (ECF No. 471) is GRANTED IN
PART and DENIED IN PART as stated above;

2.

XY’s Motion for Clarification of the Court’s Judgment on Ongoing Royalties (ECF
No. 592) is GRANTED;

3.

No later than April 8, 2019, XY shall file a proposed form of amended judgment
embodying the Court’s rulings regarding the royalty rates, royalty base, the date
on which these rates took effect, and reporting requirements. On that same day,
XY shall also e-mail an editable copy of the document to martinez_chambers
@cod.uscourts.gov.
Dated this 28th day of March, 2019.
BY THE COURT:

______________________
William J. Martinez
United States District Judge

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