When a court rules that your company has infringed a competitor’s patent, that’s bad enough. But when the court later finds your company infringed the same patent a second time and then holds your company in contempt—that’s a whole lot worse.
Contempt sanctions can be brutal, so few adjudged infringers would dare try to design around an already infringed patent. However, when the patent covers crucial technology, a company may have little choice.
That’s why, when a business faces contempt proceedings for repeat infringement, the stakes are typically huge. “These cases are likely to involve lots of money and/or fabulous breakthroughs in technology,” says Meredith Martin Addy, a partner at Brinks Hofer Gilson & Lione.
Consider, for instance, the contempt battle between TiVo Inc. and EchoStar Corp. The case involved a technological breakthrough and produced a settlement under which EchoStar agreed to pay $500 million.
“This is one of the top 10 patent awards,” says Matthew Zinn, TiVo’s general counsel. “It was a very important case to TiVo.”
The Federal Circuit’s recent en banc ruling in TiVo Inc. v. EchoStar Corp. discarded the old standards for finding contempt as a result of repeat infringement and created new guidelines that benefit patentees in some ways but benefit alleged infringers in other ways. “The ruling seems to make it easier to initiate contempt proceedings but harder to prove contempt [for continued infringement],” says Carlos Perez-Albuerne, a partner at Choate Hall & Stewart.
TiVo makes it easier to prove contempt on other grounds, however. This is how the Federal Circuit upheld a contempt ruling against EchoStar, even though EchoStar’s redesigned products may not have infringed.
In 2006, a federal district court in Texas found EchoStar had violated TiVo’s patent for “time warp” technology in digital video recorders (DVRs). This technology allows consumers to record one TV show while watching a different show.
The jury ordered EchoStar to pay $104 million in damages. In addition, Chief Judge David Folsom hit EchoStar with an injunction that, inter alia, forbade it from putting any DVR functionality into its satellite TV receivers.
EchoStar, however, was determined to provide this time warp functionality to its satellite TV customers. After a year of effort, the company came up with a new way to provide this functionality. It patented this invention and obtained an opinion from counsel that this design-around did not infringe. Then the company downloaded this new software into its customers’ satellite TV receivers.
TiVo responded in 2008 by bringing contempt proceedings against EchoStar. TiVo could have filed a new infringement suit, but that would have been far more time-consuming and expensive. A contempt proceeding, unlike an ordinary lawsuit, has no discovery or jury and prevents a defendant from raising a variety of defenses and counterclaims—such as alleging a plaintiff’s patent is invalid.
In 2009, Judge Folsom held EchoStar in contempt for violating his injunction. He slammed EchoStar with $90 million in sanctions and an additional $110 million in infringement damages.
EchoStar appealed and won a partial victory before the en banc Federal Circuit in April. The court unanimously threw out the $110 million infringement award and imposed a new test for determining when an adjudged infringer can be held in contempt for continued infringement.
The old test, which the Federal Circuit established in its 1985 decision in KSM Fastening Systems v. H.A. Jones Co., had substantive and procedural components. To determine that, procedurally, a contempt proceeding was appropriate, a court had to find no “colorable difference” between the redesigned product and the originally infringing product. If this threshold was met, the court proceeded to a substantive analysis: A defendant was in contempt if the redesigned product infringed the patent.
The Federal Circuit in TiVo held this test was “unworkable” because trial court judges often conflated the two components of the test. The appellate court lowered the bar for obtaining a contempt proceeding: If a patentee provides “a detailed accusation … setting forth the alleged facts constituting the contempt,” a judge has discretion to hold a contempt proceeding.
But TiVo raised the bar for proving that a defendant committed contempt. First, a patentee must show that the elements found infringing in the original product remain without significant change in the redesigned product. (KSM’s procedural test, by contrast, required a patentee to show only that the original and redesigned products were generally similar.) Second, a patentee must show that the defendant’s redesigned product infringes the same patent claims as the original product.
This new substantive test “is tougher than the old test,” says Professor Timothy Holbrook of Emory Law. As a result, it helps defendants. But the final part of the TiVo decision gives a big boost to plaintiffs.
On a narrow 7-5 vote, the Federal Circuit ruled that a defendant accused of violating an injunction cannot attack the injunction as vague or overbroad.
In this case, Judge Folsom had enjoined EchoStar from putting any DVR functionality into its satellite TV receivers. EchoStar argued this applied only to infringing DVR functionality, since it made no sense to prohibit legitimate design-arounds. But the Federal Circuit majority ruled that EchoStar had waived its vagueness and overbreadth claims by not raising them on a direct appeal of the injunction. The majority then held EchoStar in contempt for violating this injunction.
Soon after the Federal Circuit’s ruling, EchoStar agreed to pay half a billion dollars to settle its dispute with TiVo. The majority’s approach to injunctions is “rather harsh” to adjudged infringers who wish to design around patents, Holbrook says. “You may not know what parts of an injunction are unclear until you make changes to the device [in order to design around the patent]. It puts the infringer in a tough spot to require it to object to the terms of injunction when the injunction issues.”
TiVo will cause litigants to spend more time and effort crafting injunctions, according to experts. It also will provoke more appeals of injunctions and post- verdict motions to clarify injunctions.
“If a defendant has a workaround and really wants to be safe, it must precipitate an interpretation of the injunction,” says Perez-Albuerne. “Even if the court doesn’t change the injunction, it should expressly indicate whether the workaround is covered by the injunction.”