Douglas Dynamics, LLC v. Buyers Product Co., Case Nos. 2011-1291, 2012-1046, -1057, -1087, -1088 (Fed. Cir. May 21, 2013)

A split panel of the Federal Circuit reversed the trial court’s denial of a permanent injunction based on possible damage to the patentee’s reputation, despite there being no evidence of lost sales or lost market share. The dissent opined that this decision effectively revives the presumption of irreparable harm, despite the Supreme Court’s eBay decision.

Both of the parties to the case, patentee Douglas Dynamics (“Douglas”) and defendant Buyers Products (“Buyers”), make and sell snowplows, but the evidence showed Douglas makes higher quality, more expensive plows and Buyers makes lower quality, less expensive plows. The trial court compared them to Mercedes Benz and Ford Taurus automobiles. (The dissent cited a survey that distributors viewed Douglas’s equipment as high quality and Buyers’ as low quality.)

Douglas sued Buyers for infringing its patent on assemblies for mounting snowplows on trucks. The evidence showed Douglas had roughly 60% of the market and that Buyers entered the market in 2007 and by 2010 had 5% of the market. But the evidence showed the two were not direct competitors because Douglas served the high end of the market and Buyers the lower end, so that it was unlikely that a buyer from Douglas would consider buying one of Buyers’s assemblies instead. In fact, Douglas’s market share had increased roughly 1% per year during Buyers’s infringement.

The jury found two of the patents valid and infringed. The trial court imposed a reasonable royalty but denied Douglas’s request for a permanent injunction, finding there was no evidence that Douglas had lost any sale to Buyers or any market share, and that Douglas had failed to make a threshold showing of irreparable harm.

In a decision by Judge Rader, the CAFC reversed and instructed the trial court to enter a permanent injunction. The court held that irreparable harm may include “erosion in reputation and brand distinction.” Picking up on the Mercedes vs. Ford analogy, Judge Rader opined that Mercedes would lose some of its allure and distinctiveness if others could tout similar features at a lower cost, without mentioning they are offering the features via infringement.

Also, the court found potential damage to Douglas’s reputation as an innovator, opining that Douglas’s reputation would suffer if customers found the same features in the products of competitors deemed less innovative, and that “as Buyers’s expert agreed, Douglas’s reputation would be damaged if its dealers and distributors believed it did not enforce its intellectual property rights.” Also, the court noted, Douglas had never licensed the patents, intending to maintain market exclusivity.

“Exclusivity is closely related to the fundamental nature of patents as property rights. It is an intangible asset that is part of a company’s reputation, and here, Douglas’s exclusive right to make, use, and sell the patented inventions is under attack by Buyers’s infringement.

Where two companies are in competition against one another, the patentee suffers the harm - often irreparable - of being forced to compete against products that incorporate and infringe its own patented inventions.”

The court found that the evidence showed irreparable harm and that the other factors weighed in favor of an injunction. Regarding the fact that Douglas had maintained its market share, the court opined that Douglas should not “suffer some penalty for managing through great effort to maintain market share in the face of infringing competition.” More relevant, the court found “is the rise in Buyers’s market share from zero to about 5% in three years while infringing Douglas’s patents. This record evidence underscores the profitability of infringement and suggests that mere damages will not compensate for a competitor’s increasing share of the market.” The court disagreed with the trial court’s characterization of the patented inventions as minor, noting Buyers had tried and failed to design around the patents.

Finally, the court disagreed with the trial court’s balancing of the interests and evaluation of the public interest. On the latter point, the court agreed with the general principle that increased competition serves the public interest but not where the competition is from infringement. The court deemed this would allow the infringer to undercut prices and enter the previously untapped market of lower-priced plows.

In his dissenting opinion, Judge Mayer opined that the majority effectively resuscitates the presumption of irreparable harm, contrary to the Supreme Court’s decision in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006). The dissent found the trial court’s ruling that Douglas failed to meet the eBay prerequisites for injunctive relief to be ‘thorough and well-reasoned”, noting that Douglas was unable to point to a single snowplow sale that had been lost to Buyers, and that Douglas and Buyers occupy different market segments. Because they are not direct competitors, the dissent deemed it unlikely that future sales by Buyers’ would irreparably harm Douglas.

The dissent stated there was no reliable evidence that money damages were inadequate and that Douglas’s argument about permanent reputational damage was belied by the record, citing (a) the trial court’s finding that Douglas offered no evidence that Buyers’s use of the patented technology ever caused a customer to believe that Buyers’s snowplows were somehow connected with, or a version of, Douglas’s snowplows and (b) the survey evidence that distributors viewed the quality of Douglas’s and Buyers’s plows differently. The possibility that distributors and others would view Douglas negatively if they felt it was not enforcing its IP rights is, in the dissent’s view, too speculative. Douglas’s investment in the technology could be recouped by a royalty.

Where infringing sales do not come from a direct competitor and there is no evidence of lost profits or market share, the dissent stated, the harm generally will not be irreparable. “Instead, where the damages caused by infringement are “quantifiable and compensable by an ongoing royalty,” … there is no irreparable injury and therefore no need for injunctive relief.” (Citations omitted.)

In an interesting damages ruling, the court vacated and remanded the royalty award, for two reasons. First, the trial court had applied the ‘infamous’ 25% rule of thumb, which the court had found to be fundamentally flawed in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1317 (Fed. Cir. 2011). Second, the trial court erred by capping the rate at the infringer’s profit margin, as it is not a ceiling on the royalty. The infringer can raise its prices to pay a higher royalty, the court noted, and may need to do so to compensate the patentee for using its technology. The dissent did not take issue with these rulings.