In a recent ruling in the Centripetal Networks, Inc. v. Cisco Systems, Inc. matter, the United States District Court for the Eastern District of Virginia awarded the plaintiff an ongoing royalty for Cisco’s future use of the asserted patents—in addition to past damages—of no less than $750 million. These ongoing royalties constitute a substantial portion of the total compensation that Centripetal Networks will receive under the award and draw attention to an area of patent litigation that frequently receives less notice than damages for past infringement.
Since the Supreme Court’s 2006 ruling in eBay, Inc. v. MercExchange, LLC, ongoing royalties are one of four ways in which a court can address future infringement: “(1) it can grant an injunction; (2) it can order the parties to attempt to negotiate terms for future use of the invention; (3) it can grant an ongoing royalty; or (4) it can exercise its discretion to conclude that no forward-looking relief is appropriate in the circumstances” (Whitserve, LLC v. Comput Packages, Inc., 694 F.3d 10, 35 (Fed. Cir. 2012)). As the award of ongoing royalties is a fairly recent development, the law and guidance around them continue to develop.
Generally, ongoing royalties are informed by the award for past damages, but courts have noted differences between the two. In Centripetal, the court noted that ongoing royalties can be distinguished from reasonable royalties for past damages due to the determination that the patents at issue are valid and infringed. However, the extent to which the determination of validity and infringement should distinguish the past damages rate from the ongoing royalty rate is unclear. Generally, royalties awarded for past damages assume a finding of validity and infringement (Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1325 (Fed. Cir. 2009)).
Furthermore, the royalties payable for future infringement have generally been tied directly to sales of the products found to be infringing, thereby permitting the infringer to either remove the infringing technology from its products, or exit the market entirely, if it wished to stop paying the royalty. However, in Centripetal, the court awarded annual royalty minimums of approximately $168 million for the first three years and approximately $84 million for the following three years. As such, Cisco does not appear to be able to avoid making approximately $750 million in royalty payments. This appears to be the first ongoing royalty award structured in this way.
From a practical perspective, Cisco may have been locked into the royalties even without the royalty minimums, as it presented no evidence concerning a non-infringing alternative as part of its damages case. However, this is not necessarily the case. The lack of a non-infringing alternative as of the date of the hypothetical negotiation does not mean that one has not become available subsequently or that one could not become available over the next six years. A more conventional ongoing royalty structure would allow the infringer to develop and adopt such a non-infringing alternative and thereby mitigate its royalty obligations.
It appears that Cisco will appeal the ruling in Centripetal, and it will be informative to see how the Federal Circuit addresses the ongoing royalty award.
Philip Kline is a managing director with Ankura Consulting Group in Ann Arbor, Michigan.
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