IP Law Daily, PATENT—E.D. Va.: Google ordered to pay ongoing royalty of 1.4% of AdWords revenue to I/P Engine for continued infringement, (Jan 29, 2014)

By Cheryl Beise, J.D.

Because Google, Inc.’s revised AdWords program continued to infringe two patents held by I/P Engine following a jury’s infringement verdict, an appropriate ongoing royalty rate for the search engine’s continued willful infringement was 6.5%, the federal district court in Norfolk has ruled (I/P Engine, Inc. v. AOL Inc., January 28, 2014, Jackson, R.). The court previously held that the appropriate ongoing royalty base (the value I/P Engine’s patents added to AdWords) was 20.9%.

Last week, the court ruled that Google’s modified version of its AdWords product (“new AdWords”) was nothing more than a colorable variation of the infringing product (“old AdWords”).

Background. In September 2011, I/P Engine, Inc. filed a complaint against Google, Inc., and its customers, AOL, Inc., IAC Search & Media, Inc., Gannett Company, Inc., and Target Corporation, accusing them of infringing several of patents through Google’s AdWords system.

On November 6, 2012, a jury found that the defendants had infringed the asserted claims of two of I/P Engine’s patents. The jury awarded I/P Engine damages in the amount of $30,496,155, which did not include interest. The jury also awarded I/P Engine a running royalty rate of 3.5 percent. Final judgment was entered on November 20, 2012.

In December 2012, I/P Engine asked the court for an award of post-judgment royalties from November 20, 2012 until the defendants ceased infringing or until April 4, 2016, the expiration date of both patents. I/P Engine contended that an appropriate royalty rate was 7%.

The defendants argued that I/P Engine was not entitled to post-judgment royalties because they had modified the AdWords program to cease infringement. They contended that if royalties were warranted, a lump sum award was appropriate.

On August 14, 2013, the court held that I/P Engine was entitled to an ongoing royalty with a royalty base of 20.9 percent, and that royalty payments should be made on a quarterly basis. The court ordered further discovery and briefing as to the defendants’ contention that they had ceased infringement as of May 11, 2013. The court also ordered the parties to meet and negotiate an appropriate ongoing royalty rate, but they were unable reach agreement.

The instant order resolved the ongoing royalty rate issue.

Reasonable ongoing royalty rate. Ascertaining the appropriate rate after a verdict of infringement requires the consideration of additional factors and changed circumstances, the court noted. The key question was what amount of money would reasonably compensate I/P Engine for giving up its right to exclude, yet allow an ongoing willful infringer to make a reasonable profit.

The court adopted as a starting point for its analysis the 3.5% “running royalty rate” the jury indicated on the verdict form. I/P Engine’s damages expert, Dr. Stephen Becker, specifically testified in favor of this rate at trial and the court found his testimony to be persuasive.

The court explained that post-verdict ongoing royalty rates are often higher than the rates found at trial because an infringement verdict reduces the bargaining power of the infringer in a hypothetical negotiation vis-a-vis the patentee. I/P Engine argued that the changed circumstances justified increasing the post-verdict royalty rate from 3.5% to 5%, a nearly 43% increase.

The court applied a modified Georgia-Pacific analysis, focusing on the changed circumstances that would most affect a hypothetical negotiation between the parties between the years 2004 and 2012.

Dr. Becker pointed to four changed circumstances to justify I/P Engine’s requested increase: (1) the defendants have been adjudged infringers, (2) the patents-in-suit were now owned by a financially sound party, (3) AdWords’ revenue impact was better known, and (4) certain comparable licenses would no longer be subject to discounted rates and would range between 3.75% and 5%.

The court accepted the first three factors cited by Dr. Becker. The most significant changed circumstance was that the defendants had been adjudged infringers, a fact that put I/P Engine in a much stronger bargaining position than it would have been in 2004, according to the court.

As for Dr. Becker’s fourth factor, it was based on pre-verdict settlements, which the court found to be of little relevance to its post-judgment analysis. While the defendants pointed to a license I/P Engine entered into with one of the defendants’ competitors after judgment, that license was not probative, according to the court, because it was for an unspecified amount of money and the details regarding the competitor’s use of I/P Engine’s patent were unclear.

The court concluded that it was appropriate to increase the royalty rate under the modified Georgia-Pacific approach to 4.6%, rather than to the 5% requested by I/P Engine. The reduction took into account the substantial investment Google made to improve its AdWords program, the court noted.

Willfulness enhancement. I/P Engine also argued that the royalty rate should be increased by an additional 40% to account for the fact that the defendants were judged to be willful infringers.

The defendants contended that they should not receive a willfulness enhancement because they were already subject to a court-ordered ongoing royalty, and because they had reasonable arguments for invalidity and non-infringement in their pending appeal before the Federal Circuit. Neither argument was availing.

The defendants pointed to no support for the proposition that continued infringement following a jury verdict of infringement should not be considered willful because of a court-ordered ongoing royalty, the court said.

As for merits of the defendants’ case on appeal, the federal district court in the Eastern District of Texas “thoughtfully explained” why it rejected a similar argument in Mondis Tech. Ltd. v. Chimei InnoLux Corp., 822 F. Supp. 2d 639 (E.D. Tex. 2011). Among other reasons, the Mondis court said that the Federal Circuit and not the district court was in the proper position to evaluate the merits of the appeal, and that continued infringement before appeal would nonetheless usually be considered willful.

In Read Corp. v. Portec, Inc., 970 F.2d 816, 826-27 (Fed. Cir. 1992), the Federal Circuit delineated the factors relevant to a willfulness enhancement : (1) the defendant’s deliberate copying, (2) the defendant’s good faith belief of invalidity or non-infringement, (3) the defendant’s behavior as a party in the litigation, (4) the defendant’s size and financial condition, (5) the closeness of the case, (6) the duration of the defendant’s misconduct, (7) any remedial action taken by the defendant, (8) the defendant’s motivation for harm, and (9) the defendant attempts to conceal its misconduct.

The relevant factors weighed in I/P Engine’s favor, according to the court. Although I/P Engine did not dispute that there was no evidence of copying, improper motive, or concealment on the defendants’ part, the defendants’ misconduct continued presently and the defendants had taken no remedial action. Instead, the defendants’ clearly replicated the infringing element of their old AdWords system into the new AdWords system.

Under the circumstances of the case, and in light of the treble damages normally awarded for willful infringement, the court found that I/P Engine’s 40% requested increase was reasonable. The court therefore enhanced the 4.6% rate by just over 40%, for an ongoing royalty rate of 6.5%.

The case is No. 2:1l-cv-512-RAJ-TEM.

Attorneys: Donald Charles Schultz (Crenshaw Ware & Martin PLC) and Jeffrey Kirk Sherwood (Dickstein Shapiro LLP) for I/P Engine, Inc. Robert Leo Burns, II (Finnegan Henderson Farabow Garrett & Dunner LLP) and Stephen Edward Noona (Kaufman & Canoles, PC) for AOL Inc., IAC Search & Media, Inc., Gannett Company, Inc., Target Corp., and Google Inc.

Companies: I/P Engine, Inc.; AOL Inc.; IAC Search & Media, Inc.; Gannett Company, Inc.; Target Corp.; Google Inc.

Cases: Patent VirginiaNews