In a recent en banc decision of the Federal Circuit, TiVo Inc. v. EchoStar Corp., U.S. Court of Appeals for the Federal Circuit, 2009-1374, decided April 20, 2011, the Court unanimously overruled its previous two-step test, the KSM test, regarding patent infringement in a contempt hearing, which first requires a threshold inquiry of the appropriateness of a contempt hearing before a district court can adjudge whether a redesigned product continues to infringe. The court held that the KSM inquiry “confuses the merits of contempt with the propriety of initiating contempt proceedings,” and replaced that test by allowing broad discretion to the district court to determine the propriety of a contempt proceeding based on the facts presented. While the court held that the district court did not abuse its discretion in holding the contempt proceedings, it vacated the finding of contempt and remanded to the district court to make factual findings under the new guidance. Seven judges joined the majority opinion, written by Judge Lourie, while five judges joined Judge Dyk’s dissenting-in-part opinion.

This case’s somewhat convoluted procedural history started when TiVo initially filed a patent infringement suit in the Eastern District of Texas alleging that EchoStar’s television receivers infringe claims of its U.S. Patent No. 6,233,389 (the ‘389 patent). After a $74 million jury verdict finding EchoStar liable for willful infringement, the district court issued a permanent injunction against EchoStar.  Without appealing the permanent injunction, EchoStar spent time and effort redesigning its receivers and obtaining opinions of counsel that the redesigned devices no longer infringed the ‘389 patent. After the district court found EchoStar in contempt of its permanent injunction order despite these efforts, EchoStar appealed the decision. A panel of the Federal Circuit affirmed the district court’s decision, and EchoStar petitioned for a rehearing en banc.

The Federal Circuit held that the KSM two-step inquiry was unsound, clarified the standards governing contempt proceedings in patent infringement cases, and vacated the district court’s finding of contempt of the infringement provision of the permanent injunction and remanded to make a determination of colorable differences under the newly articulated standard. Preliminarily, the court dismissed EchoStar’s good faith defense. Pointing to Supreme Court precedent, the court stated that “a lack of intent to violate an injunction alone cannot save an infringer from a finding of contempt.” The court did indicate that, though not a defense to civil contempt, good faith efforts may be considered in assessing penalties. After discussing the replacement of the unworkable KSM inquiry, the court held that, given the district court’s familiarity with all the facts, there was no abuse of discretion in the decision to hold the contempt proceedings.

The court also clarified the colorable differences test:  instead of focusing solely on infringement by the newly accused devices, the initial focus should be on the “differences between the features relied upon to establish infringement and the modified features in the newly accused products.” When modifications to those features are “significant,” the newly accused product will be deemed “colorably different” from the adjudged infringing one. If the court determines that the modifications are not colorably different, then the court must find that the newly accused product continues to infringe the relevant claims, making the evaluation on a limitation by limitation basis. The patentee is bound by any prior claim constructions and must prove violation of the injunction by clear and convincing evidence. In the present case, since the district court did not make its contempt determination based on this clarified test, the Federal Circuit vacated the contempt finding and remanded to make the assessment under the new guidance.

The majority and minority divided on the issue of whether provisions of an injunction order can be directly challenged within a contempt proceeding, and, thus, the minority disagreed with the decision to uphold the finding of contempt. The dissent, led by Judge Dyk, stated that an accused party cannot be held in contempt for violating an injunction that does not clearly reach the accused conduct. Judge Dyk noted that policy dictated that accused infringers design around patents and that the permanent injunction at issue did not address design-arounds. The majority, on the other hand, held that lack of clarity of the injunction was not a defense; challenges to clarity are appropriately made as direct appeals or motions to modify the injunction.

The decision therefore suggests that any ambiguities in an injunctive order are best challenged at the time of granting to clarify the scope of the order. The decision also lowers the threshold for initiating a contempt proceeding, but focuses the “colorable differences” inquiry on features that were relied upon in the initial infringement finding. Thus, in cases where there may be significant modifications in these features, the patentee may be better off initiating a new infringement suit against the redesigned products rather than a contempt proceeding, despite the fact that the contempt proceeding is now easier to initiate.