Ongoing Royalty

Legal Context

• eBay Inc. v. MercExchange (S.Ct. 2006) held that permanent injunctions in patent cases are not automatic — courts must apply the traditional four-factor equity test
• After eBay, courts more frequently deny injunctions, particularly against NPEs (who suffer no competitive harm from infringement) and in cases where the infringing product is a small feature of a large product and an injunction would be disproportionately disruptive

When Injunction is Denied

• The patent owner still has a property right in the patent
• The defendant continues infringing
• The court must determine what compensation is appropriate for this future infringement
• Paice LLC v. Toyota Motor Corp. (Fed. Cir. 2007): the Federal Circuit held that when an injunction is denied, the court has authority to award an ongoing royalty to compensate the patent holder for ongoing infringement

Equity Power

• Ongoing royalties are granted under the court's equitable powers (not as statutory damages under § 284 for past infringement)
• They are forward-looking, addressing future use of the patented technology.

Timing Difference

• Pre-verdict reasonable royalties are calculated as of the hypothetical negotiation date (the date infringement began — typically the day before infringement started)
• Ongoing royalties are calculated as of a HYPOTHETICAL NEGOTIATION BETWEEN A WILLING LICENSOR AND WILLING LICENSEE AT THE TIME THE INJUNCTION IS DENIED

New Bargaining Positions

• By the time of the injunction denial, the parties' positions have changed: (1) the defendant's infringement is NOW ADJUDICATED — it is no longer merely alleged
• The defendant is a proven infringer
• (2) the defendant has already embedded the patented technology in its product/service — switching costs are high
• (3) the patent owner knows the infringement is ongoing and adjudicated
• (4) the parties are no longer 'willing' — they are in an adversarial post-judgment posture

Generally Higher

• Because the defendant is in a weaker bargaining position (proven infringer, switching costs, prior course of infringement), courts typically set ongoing royalty rates HIGHER than the pre-verdict reasonable royalty
• The defendant cannot realistically walk away from the technology without enormous disruption
• Amado v. Microsoft Corp. (Fed. Cir. 2008): held that the defendant's changed circumstances (proven infringement) justify a higher ongoing royalty rate than the pre-verdict rate
• XY, LLC v. Trans Ova Genetics (Fed. Cir. 2018): further confirmed that ongoing royalties are set in a post-verdict posture that may support higher rates.

Factors Considered for Ongoing Royalty

• (1) the jury's pre-verdict reasonable royalty verdict as a starting point
• (2) the defendant's adjudicated infringement — a proven infringer has less negotiating power
• (3) the commercial success of the infringing product since the verdict
• (4) the amount of the defendant's investment in the infringing technology (sunk costs)
• (5) whether the patent owner has licensed the patent at higher rates to other parties since the verdict
• (6) the time remaining on the patent (if patent expires soon, ongoing royalty period is short)
• (7) the likelihood that the defendant would have designed around the patent instead of taking a license (available alternatives)

Process

• Courts typically invite the parties to negotiate an ongoing royalty after the injunction denial
• If they cannot agree, the court sets the rate
• Some courts allow supplemental damages proceedings with expert testimony on ongoing royalty

Fee Structure

• Ongoing royalties can be per-unit (per infringing product sold), percentage of revenue, or lump sum
• Courts prefer per-unit or percentage to reflect actual future usage.

Ongoing Royalty

• A compulsory license is a statutorily authorized forced license (like § 203 march-in rights for Bayh-Dole inventions)
• The US has NO general statutory compulsory license for patents
• Ongoing royalties are EQUITY-BASED court orders set under the court's inherent power, not under a statutory compulsory license scheme

Opponents' Argument

• Patent owners argue that ongoing royalties (especially when lower than market rates) amount to a forced license that undermines patent exclusivity
• Patent owners would prefer an injunction that stops infringement

Courts' View

• Ongoing royalties do not destroy the patent — the patent owner IS being compensated
• The compensation is calibrated to reflect the post-verdict changed positions
• If the royalty is set too low (less than what a willing licensor would accept), courts should adjust upward

Policy Tension

• Ongoing royalties make most sense for cases where an injunction would cause disproportionate harm to the public or third parties (e.g., a component patent in a medical device widely used by hospitals; a patent covering a feature of critical infrastructure)
• eBay encouraged courts to think about these equitable factors

Design Patent Ongoing Royalty

• For design patents, ongoing royalties are more complex — the § 289 total profit remedy is backward-looking (past sales)
• Ongoing royalties for future design patent infringement are calculated similarly to utility patent ongoing royalties under § 284.

Contempt of Court

• If the court enters a specific order requiring the infringer to pay ongoing royalties and the infringer continues to infringe without paying, the court can hold the infringer in contempt
• Contempt sanctions can include fines, coercive daily penalties, or (in extreme cases) imprisonment

Compliance Monitoring

• Ongoing royalty orders typically require the infringer to provide periodic reports of sales (quarterly or annually) and remit royalty payments
• The patent owner can audit the infringer's records

Modification

• Either party can return to court to modify the ongoing royalty if circumstances change
• (1) if the patent is subsequently found invalid by PTAB or another court, the infringer may seek to terminate ongoing royalty obligations
• (2) if the market changes significantly (new competing technology, price changes), parties may seek modification
• (3) patent expiration automatically terminates the ongoing royalty obligation

Design Around

• An infringer that designs around the patent to avoid infringement can eliminate the ongoing royalty obligation
• The design-around must actually design out all infringed patent claims (not create an equivalent that still infringes)