On-Going Royalty Should Consider the Fact that Patentee Won

In XY, LLC v. Trans Ova Genetics, L.C., [2016-2054, 2016-2136] (May 23, 2018), the Federal Circuit affirmed the district court on all issues except the ongoing royalty rate, which the court vacated and remanded for recalculation in accordance with its opinion.

XY’s patents relate to the sorting of X- and Y- chromosome-
bearing sperm cells for selective breeding purposes.  XY licensed Trans Ova under these patents, but purported to terminate the licenses for breach.  XY then sued Trans Ova for patent infringement, later adding counts for breach of contract  and unjust enrichment.  Trans Ova counter claimed for invalidity, monopolization, and breach of contract.

The Federal Circuit affirmed summary judgment on Trans Ova’s antitrust counterclaims, and the denial of post trial motions on the breach of contract issues. The Federal Circuit found no abuse of discretion in the in
denying Trans Ova’s motion for a new trial on the issue of patent invalidity,finding the issue as to one patent mooted by its concurrent affirmance of a PTAB decision invalidating the patent.  Because XY did not appeal the failure to award damages, the Federal Circuit dismissed as moot, Trans Ova’s appeal of the finding of willfulness.

The district court calculated an ongoing royalty rate for gross sales by averaging the jury’s 15% rate with the 10% rate in XY’s prior licenses to
arrive at a rate of 12.5%. For reverse sorting services, the district court awarded an ongoing royalty rate of 2%, half of the jury’s rate for those services.  A district court’s methodology for calculating an ongoing royalty  is reviewed under the abuse of discretion standard. See ActiveVideo Networks, Inc. v. Verizon Commc’ns, Inc., 694 F.3d 1312, 1332 (Fed. Cir. 2012).

In Amado v. Microsoft Corp., the Federal Circuit held that there is a “fundamental difference” between “a reasonable royalty for pre-verdict infringement and damages for post-verdict infringement.” When calculating an ongoing royalty rate, the district court should consider the change in the parties’ bargaining positions, and the resulting change in economic circumstances, resulting from the determination of liability.  When patent claims are held to be not invalid and infringed, this amounts to a “substantial shift in the bargaining position of the parties.  District courts to consider changed economic circumstances, such as changes related to the market for the patented products.

The Federal Circuit found that the district court focused on pre-verdict factors that were either irrelevant or less relevant than post-verdict  factors. In particular, the district court awarded an ongoing royalty based on an average between the jury’s reasonable royalty for past infringement (15%) and the rate established in the parties’ pre-suit license Agreement (10%).  The Federal Circuited noted that the jury considered and rejected the 10% pre-suit license rate.  The Federal Circuit said that the district court’s focus should have been on XY’s improved bargaining position and any other changed economic factors, rather than XY’s behavior in the past.  Instead, the district court identified
no economic factors that would justify the imposition of rates that were lower than the jury’s.