On December 22, 2014, the Federal Circuit vacated a district court’s decision on damages and willfulness, reasoning that the court (1) placed too much weight on an infringer’s actual profits in calculating a reasonable royalty, and (2) improperly relied on the denial of a preliminary injunction to find no willful infringement. The Federal Circuit’s opinion reflects a nuanced, fact-specific approach to these two issues.

Aqua Shield’s patent claims “enclosures designed to cover pools or create sun rooms.” Aqua Shield sued Inter Pool Cover Team (IPC) for infringement, and the district court granted summary judgment that IPC infringed and that Aqua Shield’s patent was not invalid. The district court then conducted a bench trial to decide the appropriate remedy for IPC’s infringement. The court ultimately awarded Aqua Shield $10,800 in damages and found that IPC’s infringement was not willful.

To calculate a reasonable royalty, the district court multiplied IPC’s net profits on infringing sales—$135,000—by a rate of 8 percent, in what the district court viewed as a proper “hypothetical negotiation.” The Federal Circuit, however, found reversible error in the district court’s methodology. Specifically, while an “infringer’s actual profits earned during the period of infringement can be relevant to the [hypothetical negotiation] inquiry,” the district court erred in treating IPC’s actual profits “as a royalty cap.” The Federal Circuit stressed that a proper hypothetical negotiation should be forward-looking, inquiring into what the infringer “would have anticipated the profit-making potential of use of the patented technology to be, compared to using non-infringing alternatives.” The district court, on the other hand, looked at only “what turned out to have happened.” The Federal Circuit noted, for example, that IPC might have increased prices to account for a royalty payment in the hypothetical negotiation context, thus implying that IPC’s anticipated profits (and a proper reasonable royalty) may have been larger than its actual profits. The Federal Circuit remanded for the district court to re-determine damages, considering “the advantages of the patented product, the ease and cost of designing around the claimed invention, and the relevance of IPC’s actual profits to what IPC’s expectations would have been in a hypothetical negotiation.”

The Federal Circuit also vacated the district court’s decision that IPC’s infringement was not willful. The district court found no willfulness in large part because Aqua Shield’s request for a preliminary injunction had been denied. The Federal Circuit recognized that the denial of a preliminary injunction may weigh against a later determination of willfulness, but there is “no rigid rule;” the relationship between the two depends on the circumstances. Here, the preliminary injunction was denied “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”—not because of the actual merits of Aqua Shield’s infringement claims or IPC’s invalidity defenses. Therefore, the denial of a preliminary injunction in this case was “a legally insufficient reason for determining that IPC did not willfully infringe.” The Federal Circuit also noted that the evidence failed to demonstrate conclusively that IPC actually designed around Aqua Shield’s patent (even if IPC intended to), which is also relevant to willfulness.

The fact-intensive approach to damages and willfulness taken by the Federal Circuit in this case serves as a reminder of the importance of making and preserving a good record at the trial court. The Federal Circuit’s opinion also reminds that legal authority cannot be read in a vacuum; the factual context of each case matters.

Aqua Shield v. Inter Pool Cover Team, 2014-1263 (Fed. Cir. Dec. 22, 2014) (Taranto (author), Wallach, and Chen).