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October 19, 2008

Damaged Damages

A judge in the panhandle state pandered to his prejudice by capriciously denying Floyd Minks $1.3 million in jury-awarded patent damages against Polaris, instead parceling Minks a measly $55,000, but granting attorneys fees, albeit half the amount requested without offering a new trial. In vacating and remanding, the CAFC gives a lesson in reasonable royalty while putting a lid on judicial juggling of fact and law.

Floyd M. Minks v. Polaris Industries (CAFC 2007-1490,  1491)

Asserted 4,664,080 "is directed to an electronic governor system for internal combustion engines."

Minks had been a component supplier to Polaris. A four-day jury trial found willful infringement.

The court... reduced the damages award as a matter of law under Federal Rule of Civil Procedure 50 without offering Minks a new trial on damages.

The judge cut damages to $27,904.80, but doubled it for willfulness.

Court Caprice - Fact versus Legal Error

The center-ring issue in this case was Constitutional, the 7th Amendment, a check on the courts, intending to inhibit judicial vagary without the prospect of rectification by a new trial.

The court noted that although "[t]he Seventh Amendment [ordinarily] requires that a plaintiff be given the option of a new trial in lieu of remitting a portion of the jury award[,] . . . this mandate does not apply when the reduction in a damages award is necessitated by legal error." Damages Reduction Order at 24 (citing Johansen v. Combustion Eng'g, Inc., 170 F.3d 1320, 1329-30 (11th Cir. 1999))... The issue before us on appeal is whether the Seventh Amendment required the district court to offer Minks the option of a new trial in lieu of accepting the reduced damages award.

The Reexamination Clause of the Seventh Amendment states that "no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of common law." U.S. Const. amend. VII. "[T]he Reexamination Clause does not inhibit the authority of a trial judge to grant new trials 'for any of the reasons for which new trials have heretofore been granted in actions at law in the courts of the United States.'" Gasperini v. Ctr. for Humanities, Inc. , 518 U.S. 415, 433 (1996). This authority extends to "overturning verdicts for excessiveness and ordering a new trial without qualification, or conditioned on the verdict winner's refusal to agree to a reduction (remittitur)." Id. (citing Dimick v. Schiedt, 293 U.S. 474, 486-87 (1935)). Nevertheless, the Supreme Court has long interpreted the Seventh Amendment as requiring that the exercise of a district court's discretion to set aside an excessive jury award be accompanied by an offer of a new trial. For example, in Kennon v. Gilmer the Court stated:

[I]n a case in which damages for a tort have been assessed by a jury at an entire sum, no court of law, upon a motion for a new trial for excessive damages and for insufficiency of the evidence to support the verdict, is authorized, according to its own estimate of the amount of damages which the plaintiff ought to have recovered, to enter an absolute judgment for any other sum than that assessed by the jury.

131 U.S. 22, 29 (1889). The Court reaffirmed this principle in Hetzel v. Prince William County, holding that the entry of judgment for a lesser amount than that awarded by the jury, without the offer of a new trial, "cannot be squared with the Seventh Amendment" when the reduction is premised on a finding that the evidence does not support the award. 523 U.S. 208, 211 (1998).

The large print giveth and the small print taketh away. The small print is "legal error."

Despite its recognition of this rule, the Eleventh Circuit held in Johansen that when a jury's award is premised on "legal error," a court may reduce the award and enter an absolute judgment in an amount sufficient to correct the legal error without offering the plaintiff the option of a new trial. Compare Johansen, 170 F.3d at 1328, 1331 (stating that "the Seventh Amendment prohibits reexamination of a jury's determination of the facts, which includes its assessment of the extent of plaintiff's injury," and analyzing Hetzel), with id. at 1330-31 ("The Seventh Amendment is not offended by this reduction because the issue is one of law and not fact."). Johansen considered whether a federal court may reduce a punitive damages award by an amount required by the Due Process Clause of the Fourteenth Amendment without offering the plaintiff a new trial. In its analysis, the court identified two types of legal error that permit the reduction of a jury award without the offer of a new trial. First, "where a portion of a verdict is for an identifiable amount that is not permitted by law, the court may simply modify the jury's verdict to that extent and enter judgment for the correct amount." Id. at 1330 (citing N.Y., L.E. & W.R. Co. v. Estill, 147 U.S. 591 (1893)). Second, a court may reduce a jury's punitive damages award when the award "enter[s] that 'zone of arbitrariness that violates the Due Process Clause of the Fourteenth Amendment.'" Id. at 1331, 1334 (quoting BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 568 (1996)). Importantly, both types of error derive from the operation of legal principles without regard to the evidence presented by the plaintiff. That is, legal errors permitting the reduction of a jury award without the offer of a new trial arise without regard to whether the jury's award is or is not supportable as an evidentiary matter.

The judge's stunt didn't wash. "The amount of damages based on a reasonable royalty is an issue of fact."

Despite its effort to cast this decision as one of law rather than fact, the court necessarily engaged in an independent review of the evidence and substituted its conclusion for that of the jury on the factual issue of compensatory damages. Cf. Cooper Indus., Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424, 437 (2001) ("'Unlike the measure of actual damages suffered, which presents a question of historical or predictive fact, the level of punitive damages is not really a "fact" "tried" by the jury.'" (quoting Gasperini, 518 U.S. at 448, 459 (1996) (Scalia, J., dissenting))); see also Micro Chem., Inc. v. Lextron, Inc., 317 F.3d 1387, 1394 (Fed. Cir. 2003) ("The amount of damages based on a reasonable royalty is an issue of fact.").

Reasonable Royalty

Under 35 U.S.C. § 284, Minks is entitled to a compensatory award no less than a reasonable royalty. Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554 (Fed. Cir. 1995) ("A patentee is entitled to no less than a reasonable royalty on an infringer's sales for which the patentee has not established entitlement to lost profits." (citing 35 U.S.C. § 284 (1988))). A reasonable royalty "may be based upon an established royalty, if there is one, or if not, upon the supposed result of hypothetical negotiations between the plaintiff and defendant." Id. (citing Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1078 (Fed. Cir. 1983)). "The hypothetical negotiation requires the court to envision the terms of a licensing agreement reached as the result of a supposed meeting between the patentee and the infringer at the time infringement began." Id. A determination of the royalty stemming from a hypothetical negotiation is often made by assessing factors such as those set forth in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). See Maxwell v. J. Baker, Inc., 86 F.3d 1098, 1109-10 (Fed. Cir. 1996); Rite-Hite, 56 F.3d at 1554-55. A comparison of the Georgia-Pacific factors and the standard of a hypothetical negotiation to the evidence of record in this case makes clear that the district court's reduction of compensatory damages necessarily amounted to an assessment of the sufficiency of the evidence, and as such, the option of a new trial was required.

The first Georgia-Pacific factor looks to "[t]he royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty." 318 F. Supp. at 1120.

Similarly, the sixth Georgia-Pacific factor looks to "[t]he effect of selling the patented specialty in promoting sales of other products of the licensee; that existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales."6

6 In Rite-Hite, this court clarified that "the relevance of anticipated collateral sales to the determination of a reasonable royalty rate" is not to be confused with the application of the entire market value rule to a determination of the royalty base. 56 F.3d at 1549 n.9 (citing Deere & Co. v. Int'l Harvester Co., 710 F.2d 1551, 1559 (Fed. Cir. 1983)) (emphasis added).

Finally, the hypothetical negotiation is deemed to be an arm's length transaction. Rite-Hite, 56 F.3d at 1576. Courts should not, therefore, accept "as conclusive the royalty arrangement between the patent owner and the single licensee, a close corporation owned by the inventor's family . . . ." Cheramie v. Orgeron, 434 F.2d 721, 727 (5th Cir. 1970). Indeed, the district court in Rite-Hite employed this exact reasoning in its determination of the royalty rate that was affirmed by this court. See Rite-Hite Corp. v. Kelley Co., 774 F. Supp. 1514, 1535 (E.D. Wis. 1991), aff'd in part, rev'd in part, 56 F.3d 1538 (Fed. Cir. 1995)

Minks had gotten 4% for non-patented items from Minks Engineering.

Under a previous agreement, for example, Minks had received a ten percent royalty based solely on the sale of patented items. As the reasonable royalty award to which Minks is entitled in this case is based solely on patented reverse speed limiters, the district court was required to assess the sufficiency of Minks' testimony to support an established royalty of four percent, ten percent, or some other rate.

But Minks and Minks Engineering is a rather cloistered deal. Minks turned down Polaris on its patent licensing offer.

What is a reasonable royalty rate between an inventor and his own company is clearly not a reasonable royalty rate between two competitors in the same line of business."). Although the record is not wholly clear on the relationship between Minks and Minks Engineering, they are not competitors. As such, the district court must have considered whether the evidence in this case warranted a departure from the royalty rate established between Minks and Minks Engineering.

The court should have at least offered a new trial.

We need not consider the exact reasonable royalty supported by this evidence. Gasperini, 518 U.S. at 433. However, the district court's exercise of discretion to assess the evidence and overturn the jury's verdict upon a determination that it is excessive may only result in the order of a new trial, either unqualified or conditioned on Minks' refusal to accept a reduction. Id.; see also Hetzel, 523 U.S. at 211 (stating that entry of "judgment for a lesser amount than that determined by the jury without allowing petitioner the option of a new trial, cannot be squared with the Seventh Amendment").

In citing Hertzel as proper precedent, the CAFC stumbled around Tronzo, a similar/dissimilar case where tort was in the mix.

Minks caught a break, because he clearly didn't have his act together, as demonstrated by the attorneys fees issue.

Although we herein vacate the district court's judgment reducing the compensatory damages award without offering Minks a new trial, we detect no abuse of discretion in the award of attorney fees. Even on appeal, Minks remains unable or unwilling to articulate a coherent damages theory. We therefore affirm the award of attorney fees, but we note that the trial judge may exercise his discretion to modify the award if it warrants further consideration on remand.

Notice

Minks hadn't marked his patent product. When the damages clock started ticking was thus germane.

Section 287(a) requires actual notice to the accused "to assure that the recipient knew of the adverse patent during the period in which liability accrues, when constructive notice by marking is absent." SRI Int'l, Inc. v. Adv. Tech. Labs., Inc., 127 F.3d 1462, 1470 (Fed. Cir. 1997). "[I]n SRI we explained that as long as the communication from the patentee provides sufficient specificity regarding its belief that the recipient may be an infringer, the statutory requirement of actual notice is met. Thus, the requirement of 'a specific charge of infringement' set forth in Amsted does not mean the patentee must make an 'unqualified charge of infringement.'" Gart v. Logitech, Inc., 254 F.3d 1334, 1345-46 (Fed. Cir. 2001) (internal citation omitted). Under this standard, general letters referring to the patent and including an admonishment not to infringe do not constitute actual notice. See Amsted Indus. Inc. v. Buckeye Steel Casting Co., 24 F.3d 178, 187 (Fed. Cir. 1994). Conversely, letters that specifically identify a product and offer a license for that product do constitute actual notice. See Gart, 254 F.3d at 1346.

Willfulness

Polaris tried to wiggle from willfulness under the "objective recklessness" standard of In re Seagate Technology, LLC, 174 F.3d 1360 (Fed. Cir. 2007) (en banc). The CAFC granted no wiggle room, as Polaris couldn't muster a match to start a fire on this kindling.

Remanded for a new trial.

Posted by Patent Hawk at October 19, 2008 11:18 PM | Damages

Comments

Like your blog. New to it and find it a great read. Can you expand on the ruling on willfulness a bit more in the above case? Thanks

Posted by: patpor at October 22, 2008 7:35 AM

Hi patpor:

Thanks for reading the Patent Prospector.

Polaris willfully infringed Minks patent because the two had explicit discussions regarding the ‘080 patent prior to infringement.

Posted by: Patent Hawk at October 23, 2008 2:31 PM