I/P Engine, Inc. v. AOL, Inc. et al

Filing 963

MEMORANDUM OPINION & ORDER granting in part and deferring in part 822 Motion for an Award of Post-Judgment Royalties. Within 5 days of completing the aforementioned discovery and briefing schedule, the Court ORDERS the parties to meet and to negotiate an appropriate ongoingroyalty rate, using 20.9% of U.S. AdWords revenues as the appropriate royalty base; if the parties are unable to come to an agreement, the Court Orders the parties to schedule a settlement conference with the United States Magistrate Judge assigned to this case no later than December 1, 2013. Signed by District Judge Raymond A. Jackson on 8/13/2013 and filed on 8/14/2013. (rsim, )

IN THE UNITED STATES DISTRICT COURT

.-.

FOR THE EASTERN DISTRICT OF VIRGINIA

rlLLD

Norfolk Division

AUG 1 4 2013
I/P ENGINE, INC.,
CLERK, U.S. DISTRICT COURT
NORFOLK. VA

Plaintiff,
V.

CIVIL ACTION NO. 2:llcv512

AOL INC., etal.,
Defendants.
MEMORANDUM OPINION & ORDER

Before the Court is Plaintiffs Motion for an Award of Post-Judgment Royalties (ECF

No.822). Having carefully considered the parties' arguments, this matter is ripe for judicial
decision.
I. BACKGROUND

On September 15, 2011, I/P Engine, Inc. ("I/P Engine") filed a complaint against AOL,

Inc., Google, Inc., IAC Search & Media, Inc., Gannett Company, Inc. and Target Corporation
(collectively known as "Google" or "Defendants") in which I/P Engine alleged that the
Defendants had infringed several its patents. On November 6, 2012, the jury reached a verdict

finding that the Defendants had infringed the asserted claims of two of I/P Engine's patents: U.S
Patent Nos. 6,314,420 ("the '420 patent") and 6,775,664 ("the '664 patent") (collectively the

"Patents"). See Verdict Form, Nov. 6, 2012, Dkt. No. 789. Thejury awarded I/P Engine
damages in the amount of $30,496,155, which did not include interest. See id. Thejury also
awarded I/P Engine a running royalty rate of 3.5%. On November 20, 2012, the formal

judgment of the Court was entered into the record. See Judgment of the Court, November20,

2012, Dkt. No. 801. As a result of this favorable verdict, I/P Engine now asks this Court for an
award of an ongoing post-judgment royalty until the expiration of the patents at issue.
II. LEGAL STANDARD

A. The Court's Authority to Grant Ongoing Royalty

In light of the Supreme Court's decision in eBay, Inc. v. MercExchange, LLC, 547 U.S.

388 (2006), it is no longer appropriate for a district court to enter an automatic permanent
injunction to prevent future patent infringement. As the Supreme Court directs in eBay:
According to well-established principles of equity, a plaintiff seeking a permanent
injunction must satisfy a four-factor test before a court may grant such relief. A
plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that
remedies available at law, such as monetary damages, are inadequate to
compensate for that injury; (3) that, considering the balance of hardships between
the plaintiff and defendant, a remedy in equity is warranted; and (4) that the
public interest would not be disserved by a permanent injunction. The decision to
grant or deny permanent injunctive relief is an act of equitable discretion by the
district court, reviewable on appeal for abuse of discretion. These familiar
principles apply with equal force to disputes arising under the Patent Act. As this
Court has long recognized, "a major departure from the long tradition of equity
practice should not be lightly implied. Nothing in the Patent Act indicates that
Congress intended such a departure.
eBay, 547 U.S. at 391-392 (internal citations omitted). When the plaintiff cannot meet the

requirements to garner a permanent injunction, the imposition of an ongoing, post-judgment
royalty may be appropriate. See Paice LLC v. Toyota Motor Corp., 504 F.3d 1293, 1314 (Fed.

Cir. 2007) (hereafter "Paice II"); See also Creative Internet Adver. Corp. v. Yahoo! Inc., 61A F.
Supp. 2d 847, 850 (E.D. Tex. 2009) (hereafter"Creative Internet") (citing Paice LLC v. Toyota
Motor Corp., 609 F. Supp. 2d 620, 624 (E.D. Tex. 2009) (hereafter "PaiceIII")). The United
States Court of Appeals for the Federal Circuit ("Federal Circuit") asserts that a district court's

authority to impose an ongoing royalty is rooted in 35 U.S.C. § 283, the statutory provision that

permits federal courts to grant injunctions "to prevent the violation of any right secured by
patent, on suchterms as the courtdeems reasonable." Further, the Circuitnotes that:
In Shatterproof Glass Corp. v. Libbey-Owens Ford Co., 758 F.2d 613, 628 (Fed.
Cir. 1985), this court upheld a 5% court-ordered royalty, based on sales, "for
continuing operations." Although the parties in that case contested the amount of
the royalty, styled a "compulsory license" by the court, there was no dispute as to
the district court's authority to craft such a remedy. See id. In the context of an
antitrust violation, "mandatory sales and reasonable-royalty licensing" of relevant

patents are "well-established forms of relief when necessary to an effective
remedy, particularly where patents have provided the leverage for or have
contributed to the antitrust violation adjudicated." United States v. Glaxo Group
Ltd., 410 U.S. 52, 59, 93 S. Ct. 861, 35 L. Ed. 2d 104 (1973).

But, awarding an ongoing royalty where "necessary" to effectuate a remedy, be it
for antitrust violations or patent infringement, does not justify the provision of
such relief as a matter of course whenever a permanent injunction is not imposed.
In most cases, where the district court determines that a permanent injunction is
not warranted, the district court may wish to allow the parties to negotiate a
license amongst themselves regarding future use of a patented invention before
imposing an ongoing royalty. Should the parties fail to come to an agreement, the
district court could step in to assess a reasonable royalty in light of the ongoing
infringement.
Paice II, 504 F.3d at 1314-1315. Other district courts have found that their authority to impose
an ongoing royalty is a function of 35 U.S.C. § 284, which directs that "the court shall award the
claimant damages adequate to compensate for the infringement, but in no event less than a

reasonable royalty for the use made of the invention of the infringer, together with interest and

cost as fixed by the court." Creative Internet, 61A F. Supp. 2d at 851 (quoting 35 U.S.C. § 284).
Taken together, there is adequate support for the Court's authority to impose an ongoing royalty
when necessary to effectuate the jury's finding of patent infringement. Further, there is no

support in eBay or the subsequent case law that suggests a prevailing party in a patent
infringement suit must be able to show that the requirements for a permanent injunction have
been met before an ongoing royalty can be awarded to said party. Additionally, the Federal
Circuit urged in Paice II, parties should be given an opportunity by a district court to fashion an

ongoing royalty through direct negotiations before a court imposes one on them. Paice II, 504
F.3d at 1314-1315. Furthermore, the Federal Circuit held that the imposition of an ongoing

royalty rate without a jury finding for prospective damages does not violation a Defendant's
Seventh Amendment rights. Paice II, 504 F.3d at 1316. Finally, "[w]hen injunctive relief is
denied under the traditional four factor test and the Court instead considers whether an infringer

should pay an ongoing royalty, the Court finds that the burden of proving damages remains with
the patentee." Creative Internet, 61A F. Supp. 2d at 855 (citations omitted) (citing Vulcan

Engineering Co., Inc. v. Fata Aluminium, Inc., 278 F.3d 1366, 1376 (Fed. Cir. 2002) ("The

patentee bears the burden of proving its damages by a preponderance of the evidence."). I/P
Engine has not sought a permanent injunction against the use of its patents by the Defendants.
Instead, I/P Engine seeks a reasonable ongoing royalty for the continued use of their
technologies.

B. Means of Assessing a Reasonable Ongoing Royalty Rate

Once a district court determines that a permanent injunction is not warranted and an
ongoing royalty is necessary to compensate a Plaintiff for future infringement, the Court must fix

an appropriate ongoing royalty. Doing so requires the Court to make three determinations. First,
the Court must determine what the appropriate royalty base is. Second, the Court must

determine what the appropriate royalty rate is. Third, the Court must determine the frequency of

the royalty payment. Furthermore, in situations in which a Defendant argues that it is no longer
infringing on the Plaintiffs technology, the Court must determine the duration an ongoing
royalty should be awarded for as well as whether an ongoing royalty is justified at all. A number

of district courts considering the questions before this Court have often applied the GeorgiaPacific Factors as a framework to determine what the proper royalties are as "[m]any of the

factors noted by the Georgia-Pacific Court are also seemingly applicable to an ongoing royalty
rate analysis." Paice III, 609 F. Supp. 2d at 624. However, as the Federal Circuit notes:
There is a fundamental difference, however, between a reasonable royalty for pre-

verdict infringement and damages for post-verdict infringement. Cf. Paice LLC v.
Toyota Motor Corp., 504 F.3d 1293, 1317 (Fed. Cir. 2007) ("[P]re-suit and postjudgment acts of infringement are distinct, and may warrant different royalty
rates given the change in the parties' legal relationship and other factors.") (Rader,
J., concurring). Prior to judgment, liability for infringement, as well as the validity
of the patent, is uncertain, and damages are determined in the context of that
uncertainty. Once a judgment of validity and infringement has been entered,
however, the calculus is markedly different because different economic factors
are involved.

Amado v. Microsoft Corp., 517 F.3d 1353, 1361-1362 (Fed. Cir. 2008) (citation omitted); see
also Paice HI, 609 F. Supp. 2d at 624 ("Many of the factors noted by the Georgia-Pacific Court

are also seemingly applicable to an ongoing royalty rate analysis. A post-judgment, ongoing

royalty negotiation, however, is logically different from the pre-trial hypothetical negotiation
discussed in Georgia-Pacific. In the case of an ongoing royalty, the hypothetical negotiation

occurs post-judgment; therefore, the "willing licensee" in this negotiation is an adjudged

infringer, unlike the situation described in Georgia-Pacific"). Asthe Paice HI Court further
elaborates:

In many ongoing royalty negotiations, the threat of a permanent injunction serves
as a big stick, essentially framing negotiation in terms of how much an adjudged
infringer would pay for a license to continue its infringing conduct. However,
when an injunction is not proper under eBay, the question instead becomes; what
amount ofmoney wouldreasonably compensate a patentee for giving up his right
to exclude yet allow an ongoing willful infringer to make a reasonable profit? See
Georgia-Pacific, 318 F. Supp. at 1120 (factor 15).
Paice III, 609 F. Supp. 2d at 624 (emphasis added). The Court will apply the modified GeorgiaPacific approach to resolve the question of what should be the proper royalty for any ongoing
infringement by the Defendants.

III. DISCUSSION

A. Plaintiff Is Entitled to an Ongoing Royalty for Continued Infringement and the
Appropriate Royalty Base is 20.9%

Despite the Defendants arguments to the contrary, there is no case law to support the

proposition that Plaintiff is not entitled to an ongoing royalty because I/P Engine cannot meet its
burden to receive a permanent injunction. As long as Defendants continue to infringe on I/P

Engine's patents, the Plaintiff must receive monetary relief to compensate for Defendants'

infringement. As a result, the Court FINDS that I/P Engine is entitled to an ongoing royalty to
compensate it for Defendant's continued infringement of I/P Engine's patents.
At trial, the Plaintiff introduced expert testimony that starting in the Fourth Quarter of

2007, the infringing components of the Smart Ads system added 20.9% to Google's U.S.
AdWords revenue and additional evidence is in the record to support this position. The
Defendants continue to contest the use of this base and the matter is on appeal at the Federal

Circuit. The Court will not re-litigate this question and will apply the 20.9% royalty base
introduced at trial to determine the proper ongoing royalty.
B. Frequency of Royalty Payment

In addition to determining the royalty base, the Court must also determine the frequency
of the payments. The Defendants are hereby ORDERED to pay any ongoing royalty to I/P

Engine on a quarterly basis by wire transfer or other certified means of receipt. The Defendants
are FURTHER ORDERED to certify by penalty of perjury the U.S. revenue attributable to

Defendant's use of AdWords in U.S. Dollars and the calculation of the royalty payment. The
Plaintiff shall have the right to request audits of relevant revenue figures and have its designated
auditor review said data. All royalty payments are due within TWENTY (20) DAYS after the

end of each calendar quarter. If payment is not made on a timely basis, the Plaintiff shall petition

the Court for a show case order to determine why payment has not been made and whether a

penalty should be assessed.
C. Additional Discovery and Briefing Is Necessary to Resolve Ongoing Royalty Rate and
Duration

The Defendants argue that as of May 11, 2013, they no longer use the infringing
technologies and that I/P Engine is entitled to no ongoing royalty after that date. In Creative
Internet, 61A F. Supp. 2d 847 at 850, the court assessed a similar claim by Defendant Yahoo!

that it had modified its accused products in a manner that avoided use of the infringed patents.
As a result, Yahoo! argued against an ongoing royalty on the "new" version of its product that no

longer infringed on the Defendant's technology. Id. In CreativeInternet, each party argued the
other side had the burden of showing that the modified product is no more than "colorably
different" from the original, adjudicated product. Id. Resolving the conflict, the Creative

Internet Court determined that given it is the patentee's burden at trial to prove damages, "if a
patentee intends to receive future damages for the continued violation of its right to exclude, the

burden remains with the patentee to demonstrate that the product arising from the infringing
product is no more than a "colorable variation" of the adjudicated product. This can be achieved
by making a comparison between the original product, the modified product, and the claims."
CreativeInternet, 61A F. Supp. 2d at 855 (citing TiVo, 640 F. Supp.2d at 863).

The Creative Internet Court concluded that "in the absence of a permanent injunction, in
order to establish future damages, the burden remains with the patentee to establish (1) that the

products for which the royalty is based, are at least a "colorable variation" of the adjudicated
product, and (2) a reasonable royalty that accounts for changes in the parties' bargaining

positions and economic circumstances" and that a patentee "will not be required to put on a
subsequent infringement case, but rather will have to carry its burden of establishing that the

disputed product is no more thana "colorable variation" of the adjudicated "old" version that a

jury found to infringe[.]" Creative Internet, 61A F. Supp. 2d 847 at 855. The Court finds the
Creative Internet Adver. Corp Court's analysis is highly persuasive and hereby adopts it for this
case.

Google argues that its AdWords products, as of May 11, 2013, no longer infringe on the
Plaintiffs patents. In effect, Google asserts it has created a "new" product ("New AdWords")
that does not infringe and should not be subject to any ongoing royalty. The Plaintiff calls the
Defendants' claim a "red herring" and urges the Court to establish a parallel proceeding for

resolving the question of whether New AdWords is nothing more than a colorable variation of
the adjudicated system and whether an ongoing royalty on New AdWords is appropriate. Since
the ease and availability of non-infringing alternatives has some relevance to the question of an
ongoing royalty as well as to the duration of such a royalty, running a parallel proceeding to
address New AdWords is not in the interests ofjudicial economy. Instead, the Creative Internet

Court's approach is preferred. In that case, the court directed the parties engage in additional
discovery and additional briefing and addressed all royalty matters in a comprehensive fashion.
Therefore, the Court sets forth the following discovery and briefing schedule for this matter:

•

August 25, 2013 - The parties must produce any documents relevant for determining
whether New AdWords is no more than a colorable variation of the adjudicated product.
Any additional discovery is limited to three (3) depositions per side, including expert
witnesses.

•
•

September 25, 2013 - Expert witness reports due.
October 15, 2013 - Expert rebuttal reports due.

•

October 30,2013 - The parties shall serve and file briefs and any supporting evidence,

•

not to exceed fifteen (15) pages, addressing the issues raised in this order.
November 10, 2013 - The parties may file responsive briefs, not to exceed ten (10)
pages.

•

Evidentiary hearing - The Court, if necessary, may schedule an evidentiary hearing in
which the parties may present appropriate evidence and offer arguments in support.

D. The Parties Shall Attempt to Determine an Ongoing Royalty Rate

As the Federal Circuit suggests, parties should be given the opportunity to set their own

royalty rate before the Court imposes one. Paice II, 504 F.3d at 1314-1315. To this end, within
FIVE (5) days of completing the aforementioned discovery and briefing schedule, the Court
ORDERS the parties to meet and to negotiate an appropriate ongoing royalty rate, using 20.9%
of U.S. AdWords revenues as the appropriate royalty base. If the parties are unable to come to

an agreement, the Court FURTHER ORDERS the parties to schedule a settlement conference
with the United States Magistrate Judge assigned to this case no later than December 1, 2013.
IV. CONCLUSION

The Court FINDS that I/P Engine is entitled to an award of a post-judgment royalty.

However, additional discovery and briefing is necessary to determine the precise nature of the
royalty. Accordingly, I/P Engine's motion is GRANTED-IN-PART AND DEFERRED-INPART. The Clerk is DIRECTED to send a copy of this Memorandum Order to counsel and
parties of record.
IT IS SO ORDERED.

Norfolk, Virginia

August/^ ,2013
Raymond A. Jackson

United States District Judge