04/07/15

Aqua Shield v Inter Pool(IPC): Royalty Damages Rely on Hypotheticals and Attorney's Fees Rely on Proper Seagate Willful Infringement Analysis


Category: Infringement 

  

By: Abby Lin, Contributor  

TitleAqua Shield v. Inter Pool Cover Team, No. 2014-1263 (Fed. Cir. Dec. 22, 2014).
Issues
[1] We deal here only with a challenge to the soundness of the district court’s particular use of IPC’s profits in its rationale.
Aqua, at *10.
[2] Aqua Shield appeals … the finding of no willfulness that led to the denial of enhanced damages and attorney's fees.
Id. at *2.
Holding
[1] Contrary to Aqua Shield’s broader contention, therefore, the district court did not err in considering IPC’s profits. But it did err in treating the profits IPC actually earned during the period of infringement as a royalty cap. That treatment incorrectly replaces the hypothetical inquiry into what the parties would have anticipated, looking forward when negotiating, with a backwardlooking inquiry into what turned out to have happened. See Interactive Pictures, 274 F.3d at 1385 (expectations govern, not actual results).
Id. at *10.
[2] [The district court improperly applied Seagate's two part terms for willfulness analysis by relying on EDNY's denial of Aqua Shield's motion for preliminary injunction based on personal jurisdiction and incomplete analysis on if IPC's design around was implemented. ] We therefore vacate the court’s decision that IPC did not willfully infringe and remand for an analysis that conforms to Seagate’s standard. 497 F.3d at 1371. We do not reach an ultimate conclusion ourselves. We observe, however, that Seagate’s first requirement focuses on whether the infringer’s defenses, as ultimately presented to the court, were reasonable. Bard, 682 F.3d at 1008. [...] we note that the objective baselessness of an infringer’s defenses, assessed on the litigation record, may have a strong bearing on whether the “objectively defined risk” of infringement “was either known or so obvious that it should have been known to the accused infringer.” Seagate, 497 F.3d at 1371 [...]
Id. at *14-15 (text added).

 

 

 

Procedural HistoryAqua Shield sued Inter Pool Cover Team, Alukov Hz spol. s.r.o., Alukov spol. s.r.o., and Pool & Spa Enclosures (collectively, IPC) for infringement of U.S. Patent No. 6,637,160 [in the U.S. District Court for the Eastern District of New York before the case was transferred to the District of Utah]. Aqua Shield won summary judgment that IPC infringed and that no claim was invalid. A bench trial led eventually to determinations that Aqua Shield was entitled to damages in the form of a royalty of $10,800 and that IPC had not been willful in its infringement. Aqua Shield appeals the amount of the royalty award and the finding of no willfulness that led to the denial of enhanced damages and attorney’s fees.
Aqua, at *2 (text added).

 

Legal Reasoning (TARANTO, Wallach ,Chen)
Analysis
[1]In hypothetical analysis of damages, the profits hypothetically earned should be used instead of actual profits earned by the infringer.
For purposes of Aqua Shield’s challenge, two points are key. First, anticipated incremental profits under the hypothesized conditions are conceptually central to constraining the royalty negotiation, as recognized in Trans-World Mfg., 750 F.2d at 1568. Second, “[e]evidence of the infringer’s actual profits generally is admissible as probative of his anticipated profits.” Id.; see Interactive Pictures Corp. v. Infinite Pictures, Inc., 274 F.3d 1371, 1385 (Fed. Cir. 2001); see also Sinclair Ref. Co. v. Jenkins Petrol. Process Co., 289 U.S. 689, 698 (1933) (post-infringement evidence can be a relevant “book of wisdom”); Lucent, 580 F.3d at 1333.
Aqua, at *10.
Contrary to Aqua Shield’s broader contention, therefore, the district court did not err in considering IPC’s profits. But it did err in treating the profits IPC actually earned during the period of infringement as a royalty cap. That treatment incorrectly replaces the hypothetical inquiry into what the parties would have anticipated, looking forward when negotiating, with a backwardlooking inquiry into what turned out to have happened. See Interactive Pictures, 274 F.3d at 1385 (expectations govern, not actual results).
Id. at *10.
The district court’s analysis also incorrectly replaces the inquiry into the parties’ anticipation of what profits would be earned if a royalty (of amounts being negotiated) were to be paid with an inquiry into what profits were earned when IPC was charging prices without accounting for any royalty. Thus, the district court seems to have simply assumed that any royalty paid by IPC would have directly reduced its profits, dollar for dollar. But that would not be true, in general, if IPC could have raised it prices (over what it actually charged for infringing sales) to account (fully or partly) for a royalty payment. The district court did not find, and IPC has not argued here, that IPC was selling in a perfectly competitive market in which it was forced to act as a pure price-taker. We have not been shown proof that this case is different from the typical one in which pricing might be adjusted to account for a royalty based on sales price. Indeed, IPC has not pointed to any evidence supporting the district court’s conclusion that a royalty should be a percentage of profits rather than sales revenues. In Douglas Dynamics, LLC v. Buyers Prod. Co., 717 F.3d 1336, 1346 (Fed. Cir. 2013), this court explained: “The infringer’s selling price can be raised if necessary to accommodate a higher royalty rate, and indeed, requiring the infringer to do so may be the only way to adequately compensate the patentee for the use of its technology.” The court held, for that reason, that “the district court clearly erred by ensuring the ongoing royalty rate it awarded would ‘leave some room for profit’ by [the infringer] at its current prices.” Id. On the record before us, we conclude that the district court committed the same error in the present case. We vacate the district court’s royalty calculation and remand for redetermination in a manner consistent with this opinion.
Id. at *10-11.
Willfulness Analysis Incomplete without Seagate's Steps
The district court did not lay out its willfulness analysis in Seagate’s two-part terms. See Initial Damages Op. at 10–11, 29–30; Aqua Shield, 2013 WL 6410975, at *1–2. And with regard to infringement that occurred before the court’s decision granting Aqua Shield summary judgment of infringement, the court gave only one reason for concluding that “Defendants[] reasonably believed that their products did not infringe the ’160 Patent”—namely, that “the Eastern District of New York denied Aqua Shield’s motion for preliminary injunction.” Initial Damages Op. at 10. The court gave no additional reasons when, in ruling on Aqua Shield’s post-judgment motion, it reiterated that IPC “prudently conducted [itself] with confidence that a court might hold the patent invalid or not infringed.” Aqua Shield, 2013 WL 6410975, at *2.
Id. at *12-13.
Our opinion in Seagate expressly connects findings of willfulness to preliminary-injunction rulings. Seagate, 497 F.3d at 1374 (“A substantial question about invalidity or infringement is likely sufficient not only to avoid a preliminary injunction, but also a charge of willfulness based on post-filing conduct.”). But it states no rigid rule, and it notes that preliminary injunctions can be denied even when a defendant has not raised “substantial question[s] about invalidity or infringement.” See id. In a later willfulness determination, the significance of a preliminary-injunction denial depends on why the preliminary injunction was denied. In this case, the Eastern District of New York’s decision to deny Aqua Shield’s motion for a preliminary injunction cannot reasonably be read to support a conclusion that any substantial basis existed for doubting infringement or validity. The New York court denied Aqua Shield’s motion because of personal- jurisdiction questions and because Aqua Shield lacked sufficient knowledge of IPC’s product to make the required showing of a likelihood of success on the merits. Personal jurisdiction does not speak to infringement or validity at all...The denial of Aqua Shield’s motion for a preliminary injunction is thus a legally insufficient reason for determining that IPC did not willfully infringe.
Id. at *13-14.
With respect to the willfulness of any infringement that occurred after summary judgment of infringement, the evidence cited by the district court stops short of demonstrating that IPC did in fact design around the ’160 patent and, if so, when. The court pointed to evidence that IPC instructed its factory to fix the end panels of its pool enclosures in place, in a manner it believed to avoid the patent’s claims. Initial Damages Op. at 11; Aqua Shield, 2013 WL 6410975, at *2. Questions remain about whether that change was actually implemented or whether the resulting products avoided infringement. Both inquiries are relevant to the issue of willfulness. They may also bear on the royalty issue, because they may be relevant to the ease and cost of designing around the patented technology.
Id. at *14.
We therefore vacate the court’s decision that IPC did not willfully infringe and remand for an analysis that conforms to Seagate’s standard. 497 F.3d at 1371….If the court determines on remand that IPC willfully infringed Aqua Shield’s patent, it should reconsider its decision to deny enhanced damages and attorney’s fees.
Id. at *14-15.
Conclusion
For the foregoing reasons, we vacate the district court’s royalty award, non-willfulness finding, and denial of enhanced damages and attorney’s fees. We remand the case for further proceedings consistent with this opinion. Costs are awarded to Aqua Shield. VACATED IN PART AND REMANDED
Aqua, at *16.

 

 

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