In Aqua Shield v. Inter Pool Cover Team, No. 14-1263 (Fed. Cir. Dec. 22, 2014), the Federal Circuit vacated the district court's grant of royalty damages to Aqua Shield and its finding that the infringement by Inter Pool Cover Team, Alukoz Hz spol. s.r.o., Alukov spol. s.r.o., and Pool & Spa Enclosures (collectively "IPC") of Aqua Shield's U.S. Patent No. 6,637,160 ("the '160 patent") was not willful. The Federal Circuit affirmed the district court's omission of one specific model from its royalty calculation and remanded the case for further proceedings.
The '160 patent claims enclosures that are designed to cover swimming pools or create sunrooms. Aqua Shield sued IPC in the Eastern District of New York for infringement of the '160 patent based on IPC's importation and sale of pool enclosures, and sought a preliminary injunction. The New York court denied the preliminary injunction, and the case was subsequently transferred to the District of Utah. The Utah court granted SJ to Aqua Shield regarding validity and infringement, awarding Aqua Shield $10,800 in royalty damages and finding that IPC's infringement was not willful. Aqua Shield appealed, principally challenging the district court's royalty award methodology and the rejection of willfulness.
"[T]he district court did not err in considering IPC's profits. But it did err in treating the profits IPC actually earned during the period of infringement as a royalty cap. That treatment incorrectly replaces the hypothetical inquiry into what the parties would have anticipated, looking forward when negotiating, with a backward-looking inquiry into what turned out to have happened." Slip op. at 10.
On appeal, the Federal Circuit concluded that the district court's application of the hypothetical negotiation approach for royalties was flawed. The Court agreed with the district court that an infringer's actual profits may be relevant in a hypothetical negotiation, but only in an indirect and limited way. The Court reasoned that "[t]he hypothetical negotiation is hypothetical not only because, in the typical case, no successful pre-infringement negotiation ever occurred, but also because the negotiation is constructed on hypothetical assumptions," such as "infringement . . . of the patents and willingness of the parties to negotiate an agreement." Slip op. at 7-8. The Court stated that for purposes of Aqua Shield's challenge, two points were key: (1) anticipated incremental profits under the hypothesized conditions are conceptually central to constraining the royalty negotiation, and (2) evidence of the infringer's actual profits generally is admissible as probative of his anticipated profits. The Court thus held that while "the district court did not err in considering IPC's profits," "it did err in treating the profits IPC actually earnedduring the period of infringement as a royalty cap." Id. at 10. The Court stated, "That treatment incorrectly replaces the hypothetical inquiry into what the parties would have anticipated, looking forward when negotiating, with a backward-looking inquiry into what turned out to have happened." Id.
The Court also held that the district court's analysis incorrectly looked at what profits were earned when IPC was charging prices without accounting for any royalty. The Court disagreed with the district court's apparent assumption that any royalty paid by IPC would have directly reduced its profits dollar for dollar, and noted that IPC had not pointed to any evidence supporting the district court's conclusion that a royalty should be a percentage of profits rather than sales revenues. The Court concluded that the district court erred by ensuring that the ongoing royalty rate it awarded would leave some room for profit by IPC at its current prices.
The Federal Circuit thus vacated the district court's royalty calculation and remanded for a redetermination, noting that the court on remand should consider all relevant record evidence, including the advantages of the patented product, the ease and cost of designing around the claimed invention, and the relevance of IPC's actual profits to what IPC's expectations would have been in a hypothetical negotiation.
The Federal Circuit also vacated the district court's decision that IPC did not willfully infringe the '160 patent. The Court noted that the district court's only one reason for finding no willfulness before the grant of SJ was that the New York court had denied Aqua Shield's motion for preliminary injunction. The Court stated that while preliminary injunction denials are connected to willfulness determinations, their significance depends on why the injunction was denied. The Court held that the New York court's decision, which was based on personal jurisdiction questions and Aqua Shield's lack of knowledge about IPC's product, "cannot reasonably be read to support a conclusion that any substantial basis existed for doubting infringement or validity." Id. at 13. The Court thus held that the denial of Aqua Shield's motion for preliminary injunction was a legally insufficient reason for determining that IPC did not willfully infringe.
With regard to infringement occurring after SJ, the Court held that questions remained about whether IPC's design-around was actually implemented and whether the resulting products avoided infringement, both of which would be relevant to willfulness. The Federal Circuit thus vacated the district court's finding of no willfulness and remanded, noting that the court on remand should focus on IPC's defenses as articulated during the infringement and validity proceedings. The Court also stated that if the district court determines on remand that IPC willfully infringed the '160 patent, it should reconsider its decision to deny enhanced damages and attorneys' fees.
Thirdly, the Federal Circuit rejected Aqua Shield's argument that the district court erred in omitting one of IPC's pool enclosure models from the calculation of IPC's infringing sales, reasoning that Aqua Shield never obtained a finding of infringement by that model. The Court thus affirmed the district court's decision on this issue.
Judges: Wallach, Taranto (author), Chen
[Appealed from D. Utah, Chief Judge Stewart]
This article previously appeared in Last Month at the Federal Circuit - January 2015
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