Technology-licensing company Soverain Software sued a number of online retailers in an infringement case involving two of Soverain's online-shopping-cart patents. The suit named eighteen defendants, although only two remained for trial. The jury trial resulted in an infringement verdict and $17.9 million in damages. Following the jury verdict, the defendants moved for a new trial on several grounds, and Soverain moved for the imposition of an ongoing royalty against the defendants' continued infringement. The court refused, however, to overturn the jury's verdict and set an ongoing royalty at a rate two-and-a-half times that found by the jury, reasoning that post-judgment infringement would be willful.
In their post-trial motions, the defendants moved for judgment as a matter of law on several different grounds related to the testimony of the Soverain's damages expert. In his model for a reasonable royalty, Soverain's expert used the costs of implementing Soverain's software, called Transact, as a starting point for a hypothetical negotiation. The parties agreed that Transact embodied the patents-in-suit and was available at the time of infringement. Soverain's expert used the software as an alternative available to infringers rather than developing their own software. Using Transact involved initial licensing fees, implementation costs, and maintenance/support costs, starting with the 1998 damages period. Because Soverain's model assumed that using Transact meant forgoing the development of a defendant's own system, the model included fees for perpetual use of Transact, extending beyond the life of the patent. The defendants argued that this model was improper because: (1) it sought a reasonable royalty extending beyond the life of the patents, which is a form of patent misuse; and (2) that it relied on the cost of Soverain's own commercial software and the entire market value.
The court acknowledged that seeking post-expiration royalties through a licensing agreement could constitute patent misuse. But it held that Soverain did not try to extract post-expiration royalties but rather "considered the entire cost of implementing an alternative system for the purpose of determining what reasonable royalty rate would have been agreed to as part of the hypothetical negotiation." The court was persuaded by testimony of Soverain's expert that parties to a hypothetical negotiation would have considered the entire cost of the alternative system in determining a reasonable royalty rate. The court also noted that the defendants emphasized this aspect of the royalty model during cross-examination; thus, the jury was able to consider whether the maintenance costs, which went beyond the 2015 expiration date of the patents-in-suit, should form the basis of a reasonable royalty. Further, the court pointed to the expert's testimony concluding that the discounted maintenance and support costs would become virtually nothing beyond 20 years.
Next, the court rejected the defendants' arguments that Soverain violated the entire-market-value rule. Specifically, the royalty base was the value of products sold on the infringing websites. The court held that the entire-market-value rule would be implicated only if Soverain had used the cost of implementing a defendant's entire website. According to the court, it was proper to base the royalty on the value of online sales enabled by the patented technology. The court also briefly endorsed the methodology of using the cost of Transact as the starting point for a reasonable-royalty model and deferred to the jury's findings on which expert's analysis should prevail.
The court also addressed an odd twist in the damages award. Specifically, one of the defendants had sold 95 percent of its goods through one website and the rest through a second website. The jury, however, apportioned 95 percent of the damages to the second website. The court relied on its power to correct clerical errors, switching the verdict so the damages against the defendant represented the actual sales apportionment. It reasoned that defendant's counsel had transposed the two amounts in its own demonstrative—showing that it was easy to confuse the two—and that the evidence only supported the corrected verdict.
Rather than seeking an injunction, Soverain asked the court to impose an ongoing royalty on any use by the defendants. It asked for a royalty rate quadruple that used by the jury, arguing that the royalty rate should be doubled, based on changed circumstances, and then doubled again, based on willful infringement.
The court declined to impose a higher post-judgment royalty rate due to changed circumstances. The jury, according to the court, considered evidence regarding changed circumstances in arriving at its royalty rate. Specifically, the court noted that Soverain's expert considered post-1998 evidence in arriving at his damages model, which included the costs of implementing Transact through the life of the patents-in-suit and also pointed to trial testimony on how the patented technology was used to improve the profitability of the defendants' businesses and the success of e-commerce sales in 2004 and 2009.
The court did agree with Soverain, however, that continued infringement after judgment warranted a higher royalty rate and imposed a post-judgment royalty of two-and-a-half times that found by the jury. In its analysis, the court found four factors weighing in favor of enhancement of the post-verdict royalty. The first two—whether defendants had a good-faith belief that the patents are invalid or not infringed and the closeness of the case—both strongly favored enhancement. Because the defendants were now adjudged infringers and the patents were deemed not invalid, the court reasoned that the defendants could not assert a good-faith belief of noninfringement or validity. Further, it found that the defendants' statuses as "large, profitable" companies favored enhancement. Finally, it found that consideration of remedial action "favors enhancement because there is no evidence that Defendants have taken any steps to stop infringement." Accordingly, the court found that an ongoing royalty of two-and-a-half times the jury's royalty was appropriate under the circumstances.
Strategy and Conclusion
This case shows an example of how patent owners may be able to base a damages model in part on a time after expiration of the patents. The court seemingly approved of the damages model because it did not directly assess royalties for the post-expiration time, but rather considered an alternate course of action that would have implications beyond the life of the patent. This case also demonstrates one way courts may exercise equitable power to set royalties for the post-judgment period, in lieu of an injunction. In that role, the court is not bound by the reasonable-royalty rate found by the jury and may, as here, increase the royalty significantly.