Opinion ID: 807368
Heading Depth: 2
Heading Rank: 4

Heading: Permanent Injunction and Sunset Royalty

Text: After trial, ActiveVideo moved the district court to permanently enjoin Verizon from future infringement of the ’578 and ’582 patents. 5 The district court granted ActiveVideo’s motion and stayed the injunction for a sixmonth sunset royalty period. Verizon challenges the injunction and sunset royalty amount. We granted Verizon’s motion to stay the injunction pending appeal. The permanent injunction entered by the district court reads: IT IS ORDERED that effective May 23, 2012, Defendants are enjoined from (1) further in- fringement of the U.S. Patent 5,550,578 (“the ‘578 patent”), including by use of SeaChange and NextGen VOD services and others not colorably different, until expiration of the ‘578 patent and from (2) further infringement of U.S. Patent 6,205,582 (“the ‘582 patent”), including by providing VOD via SeaChange, NextGen, and others systems not colorably different, offered in conjunction with (a) widgets or (b) on-demand VOD cata- logs, including post view navigation or others not colorably different, until expiration of the ‘582 patent. J.A. 5. We review the grant of a permanent injunction for abuse of discretion. Broadcom Corp. v. Qualcomm, Inc., 543 F.3d 683, 702 (Fed. Cir. 2008). For a permanent injunction to issue, the party requesting an injunction must demonstrate that: (1) it has suffered an irreparable injury; (2) legal remedies, such as money damages are inadequate compensation; (3) the balance of hardships 5 The ’883 and ’678 patents expired and are thus not part of the injunction. 43 ACTIVEVIDEO v. VERIZON COMMUNICATION warrants an injunction; and (4) the public interest would not be disserved by an injunction. eBay Inc. v. MercExchange, LLC, 547 U.S. 388, 391 (2006). “We may find an abuse of discretion on a showing that the court made a clear error of judgment in weighing relevant factors or exercised its discretion based upon an error of law or clearly erroneous factual findings.” Innogenetics, 512 F.3d at 1379 (internal quotation marks omitted).
In this case, the district court found that all four factors favored the granting of a permanent injunction. Verizon challenges the grant of the injunction on both legal and factual grounds. As the district court correctly observed, the issues of irreparable harm and adequacy of remedies at law are inextricably intertwined. The parties briefing to this court has similarly intertwined the discussion of these two factors. The district court found that ActiveVideo suffered irreparable harm because “Verizon’s unlawful infringement unquestionably impedes upon the portion of the market share which Cablevision could have, and it thus impedes on ActiveVideo’s ability to introduce its patented technology to the portion of the market that Verizon controls. There is no doubt that ActiveVideo suffers indirect losses when Cablevision suffers direct losses from Verizon’s infringement.” J.A. 11-12. “Without Verizon’s added competition, Cablevision would have more subscribers and need an expanded CloudTV platform which would, in turn, generate more revenue and broader recognition for ActiveVideo. The presence of Verizon’s infringing product leads to a loss of market share for ActiveVideo and Cablevision.” J.A. 15. The district court also found that the litigation costs, which caused the patentee to divert resources from developing technology and improving its ACTIVEVIDEO v. VERIZON COMMUNICATION 44 business, “are the type of past harm which a court can consider in determining whether to issue injunctive relief.” J.A. 16. The district court rejected Verizon’s arguments regarding delay in bringing suit and ActiveVideo’s licensing campaign. As an initial matter, it was legal error for the district court to determine that ActiveVideo’s litigation costs supported irreparable harm and favored granting an injunction. Litigation costs are undoubtedly undesirable and may take funds away from other endeavors, but they are not an irreparable harm in the injunction calculus. See Innogenetics, 512 F.3d at 1381 n.8 (“If litigation costs were a factor, injunctive relief would be warranted in every litigated patent case.”). Reliance on litigation costs to support a determination of irreparable harm was therefore legal error. The district court also clearly erred in its reliance on the loss of market share Cablevision suffers due to Verizon’s infringement as a predicate for its irreparable harm finding. Verizon and ActiveVideo do not compete; this is not disputed. ActiveVideo sells VoD hardware and software to providers of video services; Verizon markets and sells video services to end users. ActiveVideo has a customer, Cablevision, who licenses ActiveVideo’s Cloud TV platform. Cablevision markets and sells video services to end users under its brand name, “Optimum” and “iO.” Cablevision has a license from ActiveVideo wherein it pays ActiveVideo a licensing fee for each subscriber Cablevision has. Hence, if Verizon takes a customer away from Cablevision, ActiveVideo loses that fee. As Verizon argues, such a loss is certainly not irreparable. Straightforward monetary harm of this type is not irreparable 45 ACTIVEVIDEO v. VERIZON COMMUNICATION harm. 6 Whether ActiveVideo receives this subscriber fee from Verizon or from Cablevision, it will be adequately compensated. Nor is this harm “incalculable” as ActiveVideo argues. The inquiry is whether ActiveVideo is irreparably harmed by Verizon’s infringement. ActiveVideo does not lose market share when Cablevision loses a subscriber to Verizon, it loses the Cablevision licensing fee. Cablevision, not ActiveVideo, has lost market share. Determining how many additional subscribers Cablevision would have absent Verizon’s infringing activity might be difficult to calculate. But, the question is not how many subscribers Cablevision would have absent Verizon’s infringement. Cablevision does not have an exclusive license to the patents at issue. The question is how much was ActiveVideo harmed by Verizon’s infringement. ActiveVideo, as the patent holder, is harmed, not just when its licensee loses sales, but rather every time the infringing service is sold. The harm to ActiveVideo due to Verizon’s infringement is readily quantifiable. When Verizon pays ActiveVideo a per month royalty for each FiOS-TV subscriber, then ActiveVideo is adequately 6 ActiveVideo argues that this case is like Robert Bosch LLC v. Pylon Manufacturing Corp., 659 F.3d 1142, 1153-54 (Fed. Cir. 2011), where we held it was an abuse of discretion for the court to decline to award injunctive relief. We do not see the parallel between this case and Bosch. In Bosch, the finding of irreparable harm was based upon three facts: (1) the parties were direct competitors; (2) there was a loss of market share and potential customers; and (3) due to financial problems, the infringer might not be able to satisfy a monetary judgment. 659 F.3d at 1152-55. In this case, ActiveVideo and Verizon are not direct competitors and there is no suggestion that Verizon would be unable to pay whatever royalty or judgment is ultimately assessed. Every injunctive case must be considered according to its unique facts. ACTIVEVIDEO v. VERIZON COMMUNICATION 46 compensated. Cablevision’s loss of market share does not make ActiveVideo’s harm irreparable. Given that the district court’s fact finding regarding irreparable harm was based in large part on the loss of market share to Cablevision, this fact finding is clearly erroneous. To be clear, we are not suggesting that loss of market share cannot be a basis for irreparable harm or that there can be no irreparable harm absent direct competition. We conclude only that in light of the evidence presented and the relationships of the relevant parties, no such basis is present in this case. Finally, in support of its irreparable harm finding, the district court found that “[w]ith every customer Verizon has unlawfully acquired, they have taken away ActiveVideo’s ability to spread its brand name, to obtain references from potential customers, and to expand its goodwill throughout the areas in which Verizon and Cablevision are fierce competitors.” J.A. 15-16. There is no evidence, however, indicating that FiOS-TV damages ActiveVideo’s “CloudTV” brand name. Indeed, the record shows that Cablevision does not even use the ActiveVideo “CloudTV” brand and instead uses its own brands, “Optimum” and “iO.” J.A. 91469, 92427, 93132. As for customers, the district court mixes apples and oranges. ActiveVideo does not share a customer base with Verizon. Verizon competes for customers with Cablevision, not ActiveVideo. The focus of the irreparable harm analysis should be on harm to ActiveVideo, not Cablevision. As discussed above, the number of subscribers to whom Verizon offers the infringing service is quantifiable and compensable by an ongoing royalty. See Paice LLC v. Toyota Motor Corp., 504 F.3d 1293, 1314-15 (Fed. Cir. 2007). The district court only briefly mentions harm to ActiveVideo (as distinct from Cablevision’s lost market share 47 ACTIVEVIDEO v. VERIZON COMMUNICATION and potential loss of brand recognition). The district court found that “Verizon’s actions stripped ActiveVideo of the opportunity to get a nationwide deployment which would have bolstered ActiveVideo’s reputation in the cable industry. This lost opportunity, which is also difficult to quantify, favors granting an injunction.” J.A. 17. The district court does not cite any record evidence in support of this claimed harm, and we can find none in the record. The evidence of record including evidence from ActiveVideo’s own witnesses indicates that Verizon’s use of VoD stimulates an increased demand for such services. See, e.g., J.A. 47164 n.9 (listing testimony); J.A. 4081 (“Q: Okay. Mr. Wagner, it is your opinion that ActiveVideo would not lose any sales by licensing to Verizon, correct? A: I have not calculated any lost profits here, so that is correct.”); J.A. 47264-65 (“Q: So you conclude that Verizon’s entry into the television business with its FiOS TV service in 2005 influenced the other MSOs to introduce more robust VoD offerings; is that correct? A: Yes. . . . Q: So that would have created an increased demand for interactive TV services, such as . . . VoD . . . from the MSOs; is that correct? A: In theory, yes, that’s cause and effect.”). 7 7 The district court does not find that there has been any price erosion, nor does ActiveVideo argue price erosion. ActiveVideo, in one general sentence, claims: “Moreover, a compulsory license would have myriad and complex negative effects on ActiveVideo’s bargaining position vis-à-vis other potential customers or licensees.” Cross-Appellant’s Br. 64-65. The evidence supporting this assertion, a declaration by ActiveVideo’s CEO, claims Verizon’s infringement erodes prices for the CloudTV platform. This declaration cites no evidence of price reduction that has occurred. It only speculates that but for Verizon’s infringement, ActiveVideo would be able to lock in a more profitable deal with Comcast in the future. The facts of this case call that speculation into question: ACTIVEVIDEO v. VERIZON COMMUNICATION 48 We conclude that the district court clearly erred when it found that this record supported a finding of irreparable harm. This factor weighs against granting an injunction. The losses to ActiveVideo due to Verizon’s infringement are clearly quantifiable. Moreover, ActiveVideo sought to broadly and extensively license this technology (Cablevision, Grande, and TV Guide) including a campaign to secure a license from Verizon itself, which started in 2004. In light of the record evidence including ActiveVideo’s past licensing of this technology and its pursuit of Verizon as a licensee, no fact finder could reasonably conclude that ActiveVideo would be irreparably harmed by the payment of a royalty (a licensing fee). As ActiveVideo’s CEO testified, ActiveVideo had been trying to get Verizon as a customer since 2004. J.A. 3356 (“we really wanted a U.S. customer like Verizon”); J.A. 3373 (“ActiveVideo had been trying to get Verizon as a customer since late 2004; isn’t that right? A. Yeah”); J.A. 6058 (“Q. Now ActiveVideo’s been willing to license its patents in the past, right? A. We have always been willing to for the right price. Q. I believe you’ve also been willing to sell them, correct? A. Everything’s for sale except my children.”). In fact, during this litigation Verizon sought an eight-month sunset royalty (Verizon would have a compulsory license for eight months) to give it an opportunity to design around. ActiveVideo asked for a sunset royalty of a “minimum of a ActiveVideo’s license to Cablevision is $0.17 per subscriber. It seems unlikely that an ongoing royalty to Verizon at $2.74 could drive the price down in the future. Indeed, ActiveVideo’s expert stated that “because the verdict of infringement increases the value of ActiveVideo’s patents and . . . places ActiveVideo in a stronger position in its negotiations with [potential customers], ActiveVideo would be able to demand more from cable operators to keep Verizon at a competitive disadvantage.” J.A. 49369-70. 49 ACTIVEVIDEO v. VERIZON COMMUNICATION one-year period,” four months longer than Verizon requested and six months longer than the court eventually ordered. The fact that ActiveVideo actually sought to extend the sunset royalty period longer than Verizon wanted is further evidence that ActiveVideo is not being irreparably harmed and that money damages can adequately compensate ActiveVideo for any Verizon infringement. To be clear, we are not holding that any time a patentee offers a license to the defendant, it will be unable to secure an injunction. We conclude only that in light of the record in this case, which shows extensive licensing, licensing efforts, solicitation of the defendant over a long period of time preceding and during litigation, and no direct competition between Verizon and ActiveVideo, it was clearly erroneous for the district court to conclude that money damages would not adequately compensate ActiveVideo for Verizon’s infringement. Analyzing the adequacy of remedies at law, the court again referenced ActiveVideo’s lost business opportunities: “The Court cannot predict how large a share of the television market ActiveVideo would have been able to control, and it cannot speculate as to how much ActiveVideo’s brand name and recognition would have grown absent Verizon’s infringement.” J.A. 18-19. The district court, however, cited no evidence in the record to support these assertions. Loss of business opportunity or damage to brand recognition could provide a basis for concluding that monetary relief would be inadequate. There simply is not record evidence which establishes these losses. ActiveVideo can be adequately compensated for Verizon’s infringement through an on-going royalty payment. There are no concerns about Verizon’s inability to pay. Cf. Bosch, 659 F.3d at 1154-55. ActiveVideo’s loss of revenue due to Verizon’s infringement can be adequately remedied by an ongoing royalty from Verizon for each of ACTIVEVIDEO v. VERIZON COMMUNICATION 50 its subscribers. This is what ActiveVideo has sought from Verizon since 2004, and based on the infringement determinations ActiveVideo is certainly entitled to it. There is no record evidence that ActiveVideo has lost any market share or any customers at all due to Verizon’s infringement. In fact, ActiveVideo’s own expert testified that ActiveVideo has not lost any sales by licensing to Verizon. Finally, there is no evidence that ActiveVideo’s brand would be harmed as Cablevision sells its product under its own brand name. The district court’s fact finding that ActiveVideo has proven that no adequate remedy at law exists is clearly erroneous. This record cannot support such a finding. Therefore, this factor also weighs against granting an injunction. Verizon also argues that the district court improperly weighed the balance of hardships in favor of ActiveVideo because (1) an injunction would have potentially disastrous consequences for Verizon while the payment of ongoing royalties in lieu of an injunction would give ActiveVideo unprecedented profits, and (2) there is no evidence that ActiveVideo’s small company size would render it more susceptible to harm from Verizon’s continued infringement, especially since they are not competitors. Balancing the hardships the district court found that “both parties will suffer hardship in this case, but the greater hardships lie with ActiveVideo.” J.A. 20. It concluded that “[b]ecause it is such a small corporation (with less than 150 employees), ActiveVideo will suffer serious hardship if an injunction is not granted.” Id. The district court failed, however, to identify any reason why this is the case. It is certainly true that ActiveVideo would suffer substantial hardship if it was not compensated for Verizon’s infringement. But there is no evidence that an injunction is necessary to avoid hardship to 51 ACTIVEVIDEO v. VERIZON COMMUNICATION ActiveVideo. The fact that ActiveVideo is a smaller company or that it is more reliant on these patents than Verizon does not mean that there is hardship absent an injunction, especially here where ActiveVideo and Verizon do not compete in the same market. In fact, ActiveVideo does not dispute Verizon’s contention that under the sunset royalty rate established by the district court, ActiveVideo would receive from Verizon, in one month, 70% of the total revenue ActiveVideo has generated during its entire 23 year history. The district court clearly erred in its determination that the balance of the hardships favors granting an injunction. There is no evidence in this record upon which the district court could conclude that the hardship favored ActiveVideo receiving an injunction. The final factor asks whether “the public interest would not be disserved by a permanent injunction.” eBay, 547 U.S. at 391. The heart of the patent grant is the right to exclude. See 35 U.S.C. § 154(a)(1) (“Every patent shall contain . . . a grant to the patentee . . . of the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States.”). Although enforcing the right to exclude serves the public interest, the public interest factor requires consideration of other aspects of the public interest. See 7 Donald A. Chisum, Chisum on Patents § 20.04[2][c][vii] (2009) (“The proper question on the public interest should be: will an injunction harm a specific public interest that outweighs the public’s interest in a robust patent system?” (internal citations and quotation marks omitted)). Here, the district court found that Verizon’s customers will suffer some harm with the removal of their VoD services, but it was satisfied that ActiveVideo showed that the customers’ interests in entertainment did not outweigh the public interest in allowing patentees to enforce their right to ACTIVEVIDEO v. VERIZON COMMUNICATION 52 exclude. The district court finding that the public interest supports the grant of an injunction here is not clearly erroneous. Given the record in this case, it was an abuse of discretion for the district court to grant a permanent injunction. The district court fact findings that there was irreparable harm, inadequate remedies at law, and hardship which favored granting an injunction to ActiveVideo are clearly erroneous. Given that these findings cannot be supported by the record evidence, no injunction can issue. If the general public interest in upholding patent rights alone was sufficient to mandate injunctive relief when none of the other three factors support injunctive relief, then we would be back to the general rule that a patentee should always receive an injunction against infringement. But the Supreme Court rejected the idea that there is a general rule that courts should issue permanent injunctions against patent infringement. eBay, 547 U.S. at 393-94. We vacate the grant of a permanent injunction in this case and remand for the district court to consider an appropriate ongoing royalty rate for future infringement by Verizon. See Paice, 504 F.3d at 1315, 1317; Amado v. Microsoft Corp., 517 F.3d 1353, 1361-62 (Fed. Cir. 2008).
Following trial, Verizon asked the district court to stay the injunction during an eight month “sunset” period during which a design around to the ActiveVideo patents could be completed. The district court stayed the permanent injunction for a six month sunset royalty period during which Verizon was ordered to pay a sunset royalty for its continued infringement. The court held that granting this sunset royalty would mitigate harm to the public and provide Verizon considerable time to implement non53 ACTIVEVIDEO v. VERIZON COMMUNICATION infringing alternatives. Verizon moved this court for a further stay of the injunction pending appeal, which we granted. On appeal, Verizon argues that the sunset royalty amount should be vacated because it was based on the “flawed damages methodologies” of ActiveVideo’s expert. Appellants’ Br. 42. ActiveVideo sought a sunset royalty amount of $3.40 per subscriber per month. Verizon argues that the royalty rate should be $0.17 per FiOS-TV subscriber per month. Verizon argues that ActiveVideo receives $0.17 before costs in its agreement with Cablevision. In a thorough and well-reasoned opinion, the district court concluded that the sunset royalty rate should be $2.74 per FiOS-TV subscriber per month. The district court accepted ActiveVideo’s expert testimony that Verizon received an incremental profit of $6.86 per FiOS-TV subscriber per month. The court analyzed the respective bargaining positions of the parties post-verdict, and concluded that “it would have been reasonable for the parties to make an agreement whereby Verizon would receive 60% of the profits and ActiveVideo would receive 40% of the profits.” J.A. 31. This results in the $2.74 per subscriber per month royalty. The district court rejected Verizon’s suggestion that it should pay the same rate as Cablevision. The district court found that after the patent is held not invalid and infringed by Verizon, ActiveVideo is in a much better bargaining position with Verizon than it was with Cablevision in 2009. Based on the fact that Verizon may be able to design around, but does not know precisely how effective such a design around might be, the court discounted the profit split from the 50/50 to 60/40 (in favor of Verizon). This may seem high, and while it is likely true that Verizon would not have agreed to that amount prior to litigation, Verizon has been adjudicated to infringe and ACTIVEVIDEO v. VERIZON COMMUNICATION 54 the patent has been held not invalid after a substantial challenge by Verizon. See Paice, 504 F.3d at 1317 (Rader, J., concurring) (“[P]re-suit and post-judgment acts of infringement are distinct, and may warrant different royalty rates given the change in the parties’ legal relationship and other factors.”); Amado, 517 F.3d at 1362 (“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.”). The district court is correct; there has been a substantial shift in the bargaining position of the parties. See Amado, 517 F.3d at 1362 (“There is a fundamental difference, however, between a reasonable royalty for pre-verdict infringement and damages for post-verdict infringement.”). We reject Verizon’s argument that the district court erred in concluding that the jury verdict placed ActiveVideo in a stronger bargaining position. Verizon also argues that the royalty amount adopted by the district court was erroneous because the jury rejected ActiveVideo’s profit calculation when it failed to adopt ActiveVideo’s bottom-line damages number. And Verizon contends that the district court erred in failing to explain why the royalty number proposed by ActiveVideo was correct. We discern no error in the district court’s analysis. Verizon’s “flawed methodology” argument is merely a continuation of the argument we previously dismissed. See supra Part III.B. There are a number of reasons why the jury may have rejected ActiveVideo’s “bottom-line” damages number. There is no way to know whether the jury rejected ActiveVideo’s profit figure or whether it discounted the damages model based on other factors. ActiveVideo’s expert reconciled his profit figure 55 ACTIVEVIDEO v. VERIZON COMMUNICATION with the jury verdict, and the district court did not clearly err in crediting that testimony to determine an appropriate sunset royalty rate. See Honeywell Int’l, Inc. v. Hamilton Sundstrand Corp., 523 F.3d 1304, 1314 (Fed. Cir. 2008) (concluding that it can virtually never be clear error for a judge to credit the testimony of one witness over another when the witness has told a consistent, coherent, and facially plausible story). We held in Amado that an assessment of prospective damages for ongoing infringement should “take into account the change in the parties’ bargaining positions, and the resulting change in economic circumstances, resulting from the determination of liability.” Amado, 517 F.3d at 1362. And, although Amado dealt with the imposition of royalty damages while an injunction was stayed during appeal, this holding applies with equal force in the ongoing royalty context. 8 Though we vacate the district court’s injunction, we see no error in its postverdict royalty calculation. The district court, on remand, should determine an appropriate ongoing royalty, an inquiry that is much the same as its sunset royalty analysis. The district court may wish to consider on remand additional evidence of changes in the parties’ bargaining positions and other economic circumstances that may be of value in determining an appropriate ongoing royalty. See Paice, 504 F.3d at 1315 (“Upon remand, the court may take additional evidence if necessary to account for any additional economic factors arising out of the imposition 8 However, some of the Amado factors considered by the district court in its sunset royalty analysis may not directly apply in an ongoing royalty situation. For example, the district court considered the defendant’s likelihood of success on appeal, the ability of the defendant to immediately comply with the injunction, and the evidence and arguments found material to granting the permanent injunction. J.A. 28-29; see Amado, 517 F.3d at 1362. ACTIVEVIDEO v. VERIZON COMMUNICATION 56 of an ongoing royalty.”). Indeed, ActiveVideo’s bargaining position is even stronger after this appeal. We leave the procedural aspects of how to proceed on the issue of prospective damages to the discretion of the district court.