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EMC Corp. v. Zerto, Inc.

United States District Court, D. Delaware

August 10, 2017

EMC CORPORATION and EMC ISRAEL DEVELOPMENT CENTER, LTD., Plaintiffs,
v.
ZERTO, INC., Defendant.

          MEMORANDUM

         I. INTRODUCTION

         In July of 2012, Plaintiffs, EMC Corporation and EMC Israel Development Center, Ltd., (collectively, "EMC") filed suit against Defendant, Zerto, Inc. ("Zerto"), alleging patent infringement of a total of seven patents. (D.I. 315 at 1). On May 8, 2015, a jury found Zerto liable for infringement of claims in four of the patents: U.S. Patent Nos. 7, 577, 867 ("the '867 Patent"), 7, 603, 395 ("the '395 Patent"), 7, 971, 091 ("the 091 Patent"), and 7, 647, 460 ("the '460 Patent"). Id. at 2.

         Without specifying the amount it allotted for each patent, the jury awarded EMC $585, 783.00 in damages. Id. The award amounts to 72.6% of the total amount that EMC's damages expert identified as minimally adequate to compensate EMC for infringement. Id.

         On March 31, 2016, the court partially granted EMC judgment as a matter of law, finding Zerto liable for infringement of an additional claim in the '091 patent. (D.I. 299 at 23). Although the court rejected EMC's request for a permanent injunction, it found EMC was entitled to an ongoing royalty covering all infringing sales made after the jury's verdict. (D.I. 299 at 28). The court directed mediation regarding an appropriate royalty and permitted EMC to file a renewed motion for an ongoing royalty rate of post-judgment sales if the parties could not reach an agreement. Id. at 3. The parties were unable to reach an agreement. Id. Presently before the court is EMC's renewed motion for ongoing royalty rate covering post-judgment sales. While EMC's motion was pending, the United States Court of Appeals for the Federal Circuit affirmed the judgment in favor of EMC, as well as the court's March 31, 2016 order (D.I. 299). (D.I. 337).

         II. STANDARD OF REVIEW

         Upon a finding of infringement for a patentee, courts have jurisdiction to "grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable." 35 U.S.C. § 283. The Federal Circuit has clarified that in some cases, where an injunction is inappropriate, a court may decide to award future royalties to be paid in light of post-judgment infringement. Paice LLC v. Toyota Motor Corp., 504 F.3d 1293, 1314 (Fed. Cir. 2007) (hereafter "Paice II”); see Creative Internet Adver. Corp. v. Yahoo! Inc., 674 F.Supp.2d 847, 850 (E.D. Tex. 2009). The Federal Circuit has also given the district court "broad discretion" in matters concerning an ongoing royalty rate. See Telcordia Techs., Inc. v. Cisco Sys., Inc., 612 F.3d 1365, 1378 (Fed. Cir. 2010). A patentee bears the burden of proving its damages by a preponderance of the evidence. Vulcan Engineering Co., Inc. v. Fata Aluminum, Inc., 278 F.3d 1366, 1376 (Fed. Cir. 2002).

         III. DISCUSSION

         EMC argues that it is entitled to ongoing royalty rates for Zerto's post-verdict infringement that are triple the rates it requested at trial. (D.I. 315 at 3). In support of its request, EMC argues that: (1) EMC prevailed at trial, enhancing its bargaining position; (2) several other changes in the parties' relationship have occurred since the stipulated hypothetical negotiation in 2011 that support EMC's requested royalty rates; and (3) Zerto's post-verdict infringing sales are willful acts, and therefore the ongoing royalty rates should be enhanced so as to reflect post-verdict willfulness. Mat 10-11, 16.

         Courts assessing prospective damages for ongoing infringement "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 Commc'ns, Inc., 694 F.3d 1312, 1343 (Fed. Cir. 2012). A district court may also consider "additional evidence of changes in the parties' bargaining positions and other economic circumstances that may be of value in determining an appropriate ongoing royalty." Id.

         While the law in the area of ongoing royalty rates has not been definitively settled by the Federal Circuit, it seems clear from the Federal Circuit's opinion in Amado v. Microsoft Corp., 517F.3d 1353 (Fed. Cir. 2008) that the reasonable royalty rate for post-verdict infringement is not limited to the reasonable royalty rate that the jury found for pre-verdict infringement. 517 F.3d at 1361. What remains unclear, however, is where the court should begin its analysis. Some courts have turned to the factors outlined in Georgia-Pacific Corp. v. United States Plywood Corp. , 318 F.Supp. 1116 (S.D.N.Y. 1970). Because the parties did not discuss those factors in the briefing, however, the court will look mainly to the purported changes in bargaining position and economic circumstances to guide its analysis of the proper ongoing royalty rate. The court will then consider whether the ongoing infringement was willful, and whether enhancement is appropriate in light of any willful infringement.

         A. Ongoing Infringement

         As a preliminary matter, Zerto argues that the court should not increase the jury's effective royalty rates because Zerto no longer infringes the '460 or the '867 patents, and any infringement of the '395 and '091 patents is de minimus. (D.I. 322 at 6-11). Specifically, Zerto claims that: (1) it implemented two separate design changes that avoid the '460 patent; (2) it no longer directly infringes the '867 patent; and (3) any royalty on the '395 and '091 patents should only apply to Zerto's customers' use of the Zerto virtual replication product with the VSS agent. Id. EMC argues, however, that Zerto still infringes the '460 patent because Zerto's redesign attempts fails to design-around the '460 patent claims. (D.I. 333 at 2-4). EMC also claims that Zerto still infringes the '867 Patent because Zerto still maintains and controls the computer-readable storage code. Id. at 4-5. As for the '395 and '091 patents, EMC contends that Zerto still infringes because the court found infringement of those patents at trial and Zerto has not ceased selling the infringing products post-trial. (D.I. 322 at 6); (D.I. 333 at 1).

         The court declines to consider whether Zerto's re-designs avoid EMC's patents. The court will not award royalties on the '460 patent for any sales that occurred after December 2015. Questions regarding the redesigns are best resolved in a separate hearing with limited, expedited discovery. See (D.I. 315 at 9 n.6).

         Zerto alleges that in order to directly infringe claim 45 of the '867 patent, "both Zerto Virtual Replication and the Zerto VSS Agent must be installed by Zerto Inc. (not a Zerto customer) on a computer in the United States." (D.I. 322 at 9). Zerto asserts that it has not installed any copies of Zerto Virtual Replication and the VSS Agent software on a computer since the trial. Thus, Zerto claims, "a royalty cannot be imposed on the sale of a product by Zerto where the use of that product by the Zerto customer to whom it is sold is not an act of infringement." Id. Zerto's argument is similar to the one it made in its Renewed Motion for Judgment as a Matter of Law: "Zerto disputes that it ever had a copy of the VSS Agent Software, which is required to satisfy [claim 45 of the '867 patent]...." (D.I. 299 at 24). The court found that there was evidence from which a jury could conclude that Zerto maintains the server from which the software is downloaded. Id. In its order denying Zerto's motion-and finding that substantial evidence supported the jury's finding that Zerto directly infringes claim 45 of the '867 patent-the court explained that: (1) EMC produced evidence that Zerto's customers download the VSS Agent software from Zerto's website; (2) the Zerto Virtual Manager Administration Guide instructs users to access the "Zerto Support Portal downloads page"; and (3) installation of ...


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