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In its newest, flower-filled ad campaign, the Toyota Prius is touted as "harmony between man, nature and machine."

But when it comes to intellectual property, harmony is the last word to describe the Prius. The iconic eco-friendly car, beloved by celebrities such as Leonardo DiCaprio, Cameron Diaz and Julia Roberts, is at the center of a bruising patent fight on multiple fronts.

The latest battle is taking place at the International Trade Commission, where nothing less than Toyota's ability to continue importing the Prius, as well as hybrid versions of the Camry and Lexus, is at stake.

On one side is a tiny company, Paice LLC of Bonita Springs, Fla., that owns a patent related to a key component of the cars' hybrid engine. On the other is the world's largest automaker, which has sold more than 600,000 Prius cars in the United States since the model's introduction in 2000.

Paice doesn't make hybrid cars, nor does it have any plans to do so. Instead, the company's goal is money—getting the maximum royalty fee for every Toyota hybrid sold here using technology that a federal court in Texas already found belongs to Paice.

"It's a death blow for Paice if Toyota is able to take our ideas and not pay for them," said Paice lead counsel Ruffin Cordell, a Washington partner at Fish & Richardson. "These guys have been using Paice's technology for years now."

Toyota, which is represented by George Badenoch of Kenyon & Kenyon in New York, has some serious allies in the fight. Apple Inc., Cisco Systems Inc., Microsoft Corp., Verizon Communications Inc., Volkswagen Group of America Inc., plus trade groups for major automakers have weighed in on a parallel case now pending before the U.S. Court of Appeals for the Federal Circuit.

These companies are all intensely interested in how the court goes about calculating the ongoing royalty rate for Paice's patent—a question that has become more pressing in the wake of a 2006 Supreme Court decision eBay Inc. v. MercExchange.

At the root of the fight is an invention that relates to the drive train of hybrid cars. In gas/electric hybrids like the Prius, the wheels are sometimes driven by an electric motor, sometimes by an internal combustion engine and sometimes by both. The tricky part is combining and controlling power from each source.

In 1994, Dr. Alex Severinsky was issued a patent for a microprocessor that did just that. Severinsky had immigrated to Texas from the Soviet Union, arriving just in time for the gasoline shortage of 1979. "He left Russia, where he waited in line for bread, to come to the U.S., where he waited in line for gas," said Cordell. The experience inspired him to look for an alternative way to power a car, and Paice—which stands for Power Assisted Internal Combustion Engine—was founded in 1992.

Severinsky, who continued to secure related patents, presented his invention to major automakers including Toyota, but a deal remained elusive, said Cordell. Toyota's lawyer, Badenoch, declined to comment for this story.

When Toyota introduced its second-generation Prius in 2004 using technology that looked suspiciously familiar to Severinsky, Paice filed suit in Texas federal court. Paice alleged three counts of patent infringement, naming three Toyota vehicles: the Prius, the Highlander hybrid sport utility vehicle and the Lexus RX400h SUV.

In December 2005, after a 10-day trial, a jury found Toyota had infringed one of Paice's patents. Paice was awarded damages of $4.3 million. (The judge in the case, David Folsom, wrote in a later decision that he "felt the jury's award was low.")

But Paice didn't initially complain. That's because the company was focused on a bigger prize: winning a permanent injunction that would bar Toyota from making, using or selling the cars in the United States for the life of the patent, which expires in 2012.

"When you have a threat of an injunction that would be incredibly disruptive and incredibly costly to Toyota's business, Paice's bargaining position would be that much better to negotiate a higher royalty rate going forward," said Eric Lane, a senior intellectual property associate at San Diego's Luce, Forward, Hamilton & Scripps who has been following the case on his Green Patent Blog.

But in May 2006, less than a month after the hearing on Paice's injunction motion but before Folsom had issued a ruling, the Supreme Court handed down its eBay decision.

Although getting an injunction for patent infringement had been common, the eBay decision now laid out a four-factor test. As a patent owner that doesn't actually make any products, Paice came up short across the board. "We were a little whipsawed by eBay," is how Cordell put it.

Instead of injunctive relief, Folsom awarded Paice an ongoing royalty of $25 per car, and both sides appealed to the Federal Circuit. The appeals court upheld the infringement verdict but remanded the case, asking Folsom to justify the $25 rate. In April, Folsom issued a new decision setting the royalty at $98 per car. Cordell said Paice is satisfied. "You always want a bigger number, but he did a very thorough and rigorous analysis," he said.

Toyota disagreed and appealed the decision. Now pending before the Federal Circuit once again, the case has attracted prominent amicus support for Toyota. The amici stress that further guidance from the court on royalties would be helpful and urge restraint in setting any rates.

"The purpose of an on-going royalty is simply to set the proper ­compensation for use of the patent, not to provide a 'verdict-kicker' or a windfall to the patent owner as some kind of winner's trophy," wrote Edward Reines of Weil, Gotshal & Manges' Redwood Shores, Calif., office on behalf of Apple, Cisco, Microsoft and Verizon.

Winding Roads

As the original case has wound its way through the courts, Paice in 2007 filed a second patent infringement suit in Texas, still pending, involving two Lexus models and the Camry hybrid.

Last month, Paice hit the accelerator when it filed suit at the International Trade Commission. There are no monetary damages at the ITC, but for Paice the forum offers something potentially better: that elusive injunction, here in the form of an exclusion order directing the U.S. Customs Service to turn away all infringing vehicles at the border.

In its ITC complaint, Paice asserts only one patent. It's the same one that the Federal Circuit already determined was valid and that Toyota had infringed. And even Toyota in court papers admits that the cars named in the ITC complaint have hybrid transmissions that are "materially the same" as the ones in the Federal Circuit case. It's extremely unusual to bring a case involving a fully litigated patent to the ITC, and decisions by Article III courts are binding on the agency, said Cordell.

"There's not much here to talk about," he said. "Infringement and validity are already decided, and we think this should be a summary-determination case."

Not so fast, Toyota counters. The purpose of the ITC is to protect domestic industries from unfair foreign competition. To bring an ITC case, a plaintiff must prove the existence of a domestic industry. In a bit of irony, Paice in its ITC complaint said its domestic industry is licensing its patent—to Toyota—as well as its research and development activities.

In Toyota's response filed with the ITC on Oct. 27, Badenoch wrote, "Paice abandoned all of its research and development activities many years ago." Nor, he wrote, is the court-ordered royalty "a 'license' of the type Paice can rely upon to establish a domestic industry."

Still, Michael Murphy, a partner at intellectual property boutique Coats & Bennett in Cary, N.C., who has been following the case, said, "The domestic industry threshold showing at the ITC is modest." Murphy pointed to two cases filed earlier this year at the ITC, one involving handheld electronic devices, another for light-emitting diode chips, which were also brought by patent owners who do not make any products. If either "prevails in satisfying the threshold, that will certainly bode well for Paice," he said.

Murphy noted that time is of the essence, given the patent's 2012 expiration date. "The clock is ticking on all of this," he said. "Getting an exclusion order issued quickly is the paramount objective."

In its reply, Toyota also asserted that it is entitled to use Paice's patented technology in all its vehicles (subject to payment of the royalty), not just the three specific models in the Federal Circuit case. "Since such activities are judicially authorized, they can not constitute infringement."

Toyota also argued that, since Paice already asked for an injunction in the prior case and was denied, it can't try for it again. "Claim preclusion…bars relitigation of all issues relating to the same claim for infringement," Badenoch wrote.

To Williams Mullen partner Greg Stephens, who is based in Durham, N.C., the case offers a chance for the ITC to get in line with Article III courts when it comes to granting injunctive relief. "We now have this difference between the eBay test and the ITC standard for granting injunctive relief," he said. "The question is, will they be harmonized over time?"

Jenna Greene can be contacted at jgreene@alm.com.

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