DUtah Uses Infringer's Profits to Compute Royalty; Comments on Obligation to Award Reasonable Royalty

On December 9, 2013, Judge Stewart of the District of Utah issued an order in Aqua Shield, Inc. v. Interpool Cover Team, Case No. 2:09-CV-13 TS (Doc. No. 178), granting in part and denying in part plaintiff's Rule 59 motion to alter judgment. The court held a bench trial on willfulness and damages and found that plaintiff was entitled to zero damages. Plaintiff moved for relief from that decision, and the court granted the plaintiff's motion to award reasonable royalty damages, which it based on the defendants' net profit margin from the infringing sales.

The plaintiff raised several issues concerning reasonable royalties, but the most interesting, and the one that ended up carrying the day for plaintiff, involved defendants' profits on the infringing product. Evidence of the defendants' profits on infringing sales, of course, happens after the hypothetical negotiation date. This is so-called "book of wisdom" type evidence.

As noted above, the court had held that the plaintiff was entitled to zero damages, and plaintiff argued that the court had a statutory obligation to award reasonable royalties. The court initially observed that, even though the Patent Act seems to require an award of reasonable royalty damages, "'to argue that this requirement exists even in the absence of any evidence from which a court may derive a reasonable royalty goes beyond the possible meaning of the statute.'" Slip op. at 6 (quoting Devex Corp. v. Gen. Motors Corp., 667 F.2d 347, 363 (3d Cir. 1981), aff'd on other

grounds, 461 U.S. 648 (1983)). The court also quoted the Federal Circuit concerning the obligation to award reasonable royalty damages: "that does not mean that a patentee who puts on little or no satisfactory evidence of a reasonable royalty can successfully appeal on the ground that the amount awarded by the court is not reasonable and therefore contravenes section 284." Slip op. at 8 (quoting Dow Chem. Co. v. Mee Indus., Inc., 341 F.3d 1370, 1382 (Fed. Cir. 2003)).

The court then turned to the facts. The court noted that it had awarded zero dollars in damages, but that it had failed to consider the infringer's profits to arrive at that conclusion. The following quote provides the court's observations on the law in this area (slip op. at 9):

In the instant case, the plaintiff contended it had submitted underlying profit and loss statements for each infringing sale. It further contended that defendants' net profits ranged from 12% to 39%. The court rejected these figures, however, because, even though the financial records reflected transaction costs associated with infringing sales, they did not reflect overhead costs across the company. The alleged net margins only reflected transaction expenses related to the sale of each infringing product, and did not reflect company-wide salaries or non-transaction related overhead. Thus, the court found they were not accurate net profit figures.

The court found other information, however, related to defendants' profits. The CEO of one defendant testified on gross revenue and gross profits, and ultimately that the net profit margin was approximately 5%. Another defendant provided testimony that corroborated these figures. The court used this evidence to conclude that defendants' net profits on infringing sales was 5%.

Having found the net profit margin, the court then analyzed what the royalty should be. The court reasoned, in a willing negotiation at the time infringement began, the defendants would have been willing to pay 5% of their net profits as a reasonable royalty to avoid infringement. In so doing ,the court considered the advantages and benefits of the patented invention. However, the court also found that six of the Georgia-Pacific factors favored a higher royalty, and increased the rate to 8%. This resulted in a royalty of $10,800. The court supported its conclusion by observing that the defendants would have designed around the patent, as they had apparently done by the time the court issued the order, if the rate had been higher.

In conclusion:

Slip op. at 13.