Green Patents: setting royalties for clean technology
Co-authored with Cyrus Frelinghuysen.
On April 17th, Judge David J. Folsom of the US District Court for the Eastern District of Texas issued an order in Paice LLC v. Toyota Motor Corp., increasing the royalty rate that the Toyota Motor Company must pay Paice LLC for sales of Prius, Highlander, and the Lexus RX400h vehicles found to infringe a Paice patent involving hybrid vehicle technology. Judge Folsom had previously ordered Toyota to pay $25 per infringing vehicle but on remand raised the rate to roughly $98 per vehicle.
The decision stems from a series of lawsuits Paice brought against Toyota alleging infringement of its patents related to hybrid electric vehicles. Paice filed its complaint in this particular case in June 2004. A jury later found that Toyota had infringed two claims of US Patent No. 5,343,970 for drive trains for hybrid electric vehicles. Paice was awarded $4,269,950 for past infringement, but Judge Folsom denied Paice’s request for injunctive relief in light of the Supreme Court’s decision in eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). Instead, Judge Folsom ordered Toyota to pay Paice an “ongoing royalty” of $25 per infringing vehicle until the expiration of the patent.
On appeal, Paice argued that the district court did not have the authority to impose an ongoing royalty and, even if it did, that the jury should have determined the amount of the royalty. The Federal Circuit affirmed the infringement verdict as well as the district court’s imposition of an ongoing royalty without a jury determination on the issue: “In most cases, where the district court determines that a permanent injunction is not warranted, the district court may wish to allow the parties to negotiate a license amongst themselves regarding future use of a patented invention before imposing an ongoing royalty. Should the parties fail to come to an agreement, the district court could step in to assess a reasonable royalty in light of the ongoing infringement.” The Federal Circuit then remanded the case to the district court because Judge Folsom provided no reasoning to support his selection of $25 per infringing vehicle as the appropriate rate.
On remand, Toyota argued that the rate should be lowered from $25 to $16, largely “because Toyota has experienced increased costs and is no longer making as much profit on the infringing vehicles that is attributable to ‘hybridness.’” In contrast, Paice argued for a higher rate based on the high price of gas and modifications to federal fuel efficiency laws, which it argued have increased demand for hybrid vehicles. Judge Folsom ultimately set the rate at less than 0.5% of the wholesale price for each of the vehicles, remarking that, “These royalty rates continue to allow Toyota to make a reasonable profit.”
As litigation on “clean” energy patents increases, we expect to see similar arguments over the value of such technology compared to conventional fuel sources in determining reasonable royalty damages.
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