Ongoing Royalty

An ongoing royalty (also called a post-verdict royalty or forward-looking royalty) is a court-ordered payment for continued patent infringement that occurs AFTER a judgment of infringement — typically when the court denies a permanent injunction that would stop the infringement. 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.

Ongoing royalties and pre-verdict reasonable royalties are both royalty-based compensation, but they are calculated differently: 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.

Courts calculate ongoing royalties using modified versions of the Georgia-Pacific reasonable royalty framework, adjusted to reflect the post-verdict context: TELCORDIA TECHNOLOGIES v. CISCO SYSTEMS (Fed. Cir. 2012): established that courts have discretion in determining the ongoing royalty rate; courts need not simply adopt the jury's pre-verdict reasonable royalty rate; courts should consider changed circumstances that alter the hypothetical negotiation; 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 royalties have sometimes been characterized as a form of judicial 'compulsory license' — but this characterization is legally inexact and has been criticized: COMPULSORY LICENSE vs. 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.

An ongoing royalty order creates an ongoing obligation that the court can enforce: 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; NEGOTIATED SETTLEMENT: frequently, after a court denies injunction and orders ongoing royalties, the parties negotiate a settlement license — the court's rate serves as a floor/benchmark for negotiation; 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); WILLFULNESS: because the infringer is a proven, adjudicated infringer who continues to infringe under an ongoing royalty, any continuation of infringement outside the scope of the order is likely to be considered willful — supporting enhanced damages under § 284.