United States District Court, D. Delaware
TELCORDIA TECHNOLOGIES, INC., Plaintiff/Counterclaim Defendant,
CISCO SYSTEMS, INC., Defendant/Counterclaim Plaintiff.
GREGORY M. SLEET, Chief District Judge.
On May 10, 2007, a jury returned a unanimous verdict in favor of the plaintiff Telcordia Technologies, Inc. ("Telcordia"), finding that U.S. Patent Nos. RE 36, 633 (the "'633 patent") and 4, 835, 763 (the '"763 patent") (collectively, "the patents-in-suit") were valid, and that Cisco Systems, Inc., ("Cisco") willfully infringed the asserted claims of the '633 and '763 patents. (D.I. 346.) On May 16, 2007, the court entered judgment on the verdict. (D.I. 348.) In its post-trial motions, Telcordia sought a permanent injunction or, in the alternative, an order requiring Cisco to pay an ongoing market-rate royalty. (D.I. 366.) The court declined Telcordia's requests, ordered the parties to negotiate the terms of a reasonable royalty rate going forward, and directed the parties to submit competing proposals if they failed to reach an agreement on their own. (D.I. 420 at 27.) On appeal, Cisco challenged, inter alia, the court's holding that the asserted claims of the '763 are valid, and the court's order requiring the parties to negotiate an ongoing royalty. Telcordia Techs., Inc. v. Cisco Sys., Inc., 612 F.3d 1365, 1367 (Fed. Cir. 2010). The Federal Circuit affirmed the court's findings on those issues and remanded to allow the parties to negotiate the terms of the royalty. Id. at 1379. Unfortunately, the parties' negotiations were unsuccessful. Presently before the court are Telcordia's and Cisco's cross-proposals for an ongoing royalty rate on post-verdict sales of products that infringe the patents-in-suit. (D.I.s 434; 435.)
The patents-in-suit relate to telecommunications networks. In particular, the '633 patent discloses a residual time stamp technique method and apparatus for timing recovery in a broadband network. The '763 patent is directed to a survivable or self-healing fiber optic ring network that can withstand a cut line or failed node.
Prior to trial, the court granted Cisco's motion in limine to limit Telcordia's '633 patent damages theory to only "boxes" that were sold with a specific card capable of infringing the '633 patent, not the total number of "boxes" Cisco sold. (D.I. 335 at 5.) That reduced Telcordia's asserted damages from nearly $200 million to $77 million. (D.I. 434 at 1.) At the conclusion of trial, the jury found the asserted claims of the two patents valid, and awarded Telcordia $6.5 million as compensation for Cisco's willful infringement. (D.I. 346.) The court granted Telcordia's post-trial motion for prejudgment interest, but denied its motions for enhanced damages and attorney fees. (D.I. 420 at 2.) After remand from the Federal Circuit, Telcordia calculated an effective royalty rate of 0.64% for past infringement based on the ratio of the jury's $6.5 million damages award over Cisco's $1.1 billion total sales of accused products through trial. (D.I. 434 at 2; D.I. 435 at 1.) In order to narrow the dispute and cut-off additional interest on the judgment, Cisco paid Telcordia $11, 667, 028. That sum represents the $6.5 million jury award for past infringement, pre- and post-judgment interest, and an amount for post-verdict sales of the accused products at the 0.64% effective royalty rate. (D.I. 434 at 2; D.I. 435 at 1.) Accordingly, the dispute before the court is the narrow question of whether the jury's effective royalty rate for past infringement is the appropriate measure of damages to compensate Telcordia for Cisco's post-verdict infringement.
III. STANDARD OF REVIEW
If a permanent injunction is not warranted, courts have the power to assess a reasonable ongoing royalty in light of continued infringement when the parties are unable to negotiate a license regarding the future use of a patented invention. See Paice LLC v. Toyota Motor Corp. (Paice II), 504 F.3d 1293, 1315 (Fed. Cir. 2007). "[A]n assessment of prospective damages for ongoing infringement should take into account the change in the parties' bargaining positions, and the resulting change in economic circumstances, resulting from the determination of liability.'" ActiveVideo Networks, Inc. v. Verizon Communs., Inc. (ActiveVideo II), 694 F.3d 1312, 1343 (Fed. Cir. 2012) (quoting Amado v. Microsoft Corp. (Amado II), 517 F.3d 1353, 1362 (Fed. Cir. 2008)). In ActiveVideo II, the Federal Circuit clarified that a liability determination affects the prospective damages assessment in the ongoing royalty context, as well as when royalty damages are imposed for an injunction that was stayed during appeal. Id. Indeed, the Federal Circuit has emphasized that damages for post-verdict infringement are fundamentally different from a reasonable royalty for pre-verdict infringement. Amado II, 517 F.3d at 1361.
Prior to judgment, liability for infringement, as well as the validity of the patent, is uncertain, and damages are determined in the context of that uncertainty. Once a judgment of validity and infringement has been entered, however, the calculus is markedly different because different economic factors are involved.
Id. at 1362. Although the Federal Circuit has not delineated specific economic factors for courts to assess in an ongoing royalty context,  it has noted that a party's position is stronger after prevailing on appeal. Active Video II, 649 F.3d at 1343. Accordingly, the court must exercise its discretion in considering all relevant economic factors presented by the parties and provide a clear explanation of its reasons for the imposed ongoing royalty rate. See Paice II, 504 F.3d at 1315.
Although the court strongly encouraged the parties to be reasonable in their negotiations, (D.I. 420 at 27 n.12), they have provided vastly dissimilar proposals for the appropriate ongoing royalty rate. Cisco argues that the 0.64% effective royalty rate that it has already paid for post-verdict sales is more than what Telcordia is reasonably entitled to. (D.I. 434 at 2 n.2.) In contrast, Telcordia proposes an ongoing royalty based on its market rates of 3.5% for both patents until February 4, 2008 - the expiration of the '763 patent - and 2% thereafter until October 30, 2012 - the expiration of the '633 patent. (D.I. 435 at 2.) As such, Telcordia seeks $20, 592, 108 for total damages and interest. The difference in the parties' positions amounts to roughly $8.9 million. (D.I. 434 at 2; D.I. 435 at 2 n.2, Exs. B, C.)
Telcordia focuses exclusively on Cisco's optical networking system ("ONS") products found to infringe Telcordia's '763 patent. It argues that the '763 patent ongoing royalty period - - between the May 2007 Judgment and the expiration of the '763 patent - represented a key strategic timeframe for Cisco's ONS products from a revenue and product-positioning perspective. (D.I. 435 at 3.) During that timeframe, Telcordia contends that the market for Cisco's ONS products had matured and Cisco enjoyed an upward revenue trend - more than doubling the sales volumes it experienced three to four years earlier. ( Id. at 6.) Telcordia further asserts that Cisco would not have been willing or able to pull the ONS products from the market just when demand was rapidly increasing, because that would have disrupted Cisco' s relationships with strategically important customers, such as, Time Warner, Comcast, and Amazon.com, who relied on the ONS products. ( Id. at 7.) Finally, Telcordia argues that Cisco's decision to continue willfully infringing despite the specter of an ongoing royalty illustrates that it did not have a redesign, or any other practical strategy, to capitalize on the ONS product line without using Telcordia's '763 patent. ( Id. ) Therefore, Telcordia argues its market rates are the appropriate rate for the ongoing royalty because its bargaining position is strengthened by victory at trial, and market conditions evolved in a way that greatly enhanced the value of a license to the '763 patent. ( Id. at 6-7.)
In contrast, Cisco argues that the post-verdict landscape provides little bargaining power for Telcordia to negotiate a rate exceeding the jury's effective royalty rate. At the time of the verdict, the '763 patent, which represents the vast majority of post-verdict sales,  had less than nine months before expiration. (D.I. 434 at 4.) Rather than paying the "exorbitant 3.5% royalty, " Cisco contends it could have deferred sales of the accused product, advised its customers not to deploy the systems until after the patent expired, or disabled the accused functionality during the short period until the '763 patent expired. ( Id. ) Cisco argues those options were possible because Telcordia only asserted method claims that required the products to be deployed in a very particular way in a customer's network,  ( id.), and the accused functionality is only one of many types of available network protection schemes, ( id. at 5). Cisco similarly argues it could have designed around or avoided infringement of the '633 patent at minimal cost because it already provided noninfringing alternatives and had begun ...