C.A.G. Insights

Is a Compulsory License the New Remedy for Successful Patent Litigation?

A patent provides its owner with the right to exclude others from making, using or selling a patented product. These rights may be enforced by filing an infringement lawsuit. In such a lawsuit, the Patent Act empowers the court to issue an injunction against an infringer “in accordance with the principles of equity.”  So how is it possible to acknowledge and honor the right to exclude the making of an infringing product without always granting an injunction against the infringer of those rights? One Texas court is trying carefully to balance these principles of equity to determine when a permanent injunction is appropriate.

In Finisar v. DirecTV, the Eastern District of Texas decided to allow DirecTV to continue infringing a Finisar patent.  According to appeal briefs filed by both parties, the court imposed a compulsory license obligating DirecTV to pay a court determined royalty to Finisar of $1.60 per set top box for the duration of the patent. The court also awarded past damages of $78 million, but denied Finisar’s request for a permanent injunction against DirecTV.

To understand why the permanent injunction was denied, one need look no further than the 2006 decision in eBay v. MercExchange by the Supreme Court. In eBay, the Court held that patent cases are no different than other cases, in that a plaintiff seeking a permanent injunction must still satisfy the traditional four-factor test before a court may grant such relief. A plaintiff must demonstrate that: (1) it has suffered an irreparable injury; (2) remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) considering the balance of hardships between the plaintiff and the defendant, a remedy in equity is warranted; and (4) the public interest would not be disserved by a permanent injunction.

In Finisar, the court applied the four factor test as eBay instructs.  Regarding whether Finisar would be irreparably harmed, the court focused on the fact that money was an adequate remedy alone, because Finisar had not attempted to commercialize its technology.  As a “non-practicing entity” or NPE, Finisar did not make any product like the one described in its patent.  An amount of money could be determined to make Finisar whole for past infringement and future infringement.  On the balance of hardship, the court compared DirecTV’s loss or revenue from 15 million viewers against the relative lack of hardship on Finisar and found the balance leaned against an injunction. Finally, on the public interest factor, the court found there to be no public interest in limiting satellite television to millions of viewers and that the patent system itself had a public interest in the technology being used.

The Finisar decision is perhaps a bellwether, indicating a trend against permanent injunctions, particularly when the patent owner is not practicing his own invention.  Even the popular press has discussed the growing number of lawsuits brought by NPEs, sometimes referring to these parties as patent trolls.  Finisar is a leader in the field of high-speed data communications and does not fit the traditional image of a patent troll.  Still, this decision raises two concerns.  First, can a non-practicing entity ever suffer irreparable harm from a continuing infringement?  Second, how is any court empowered to grant a compulsory license?

Regarding irreparable harm, the Eastern District of Texas has again taken the lead in addressing the issue.  In Commonwealth Scientific and Industrial Research Org. v. Buffalo Technology et al., 492 F. Supp. 600 (E.D. Tex 2007), Judge Leonard Davis held that an NPE can establish irreparable harm by showing that existing infringement precludes its ability to license its patents.  Other harms could include the disregard of the patent by other potential infringers.  Indeed, a rational choice might be to ignore any private negotiations and simply gamble that a judge will provide more favorable terms in a compulsory license. Further, if a compulsory license is granted to one infringer, the patent owner loses the additional value it might have derived from granting an exclusive license.

Another concern raised by Finisar is the very concept of a compulsory license.  In general, a compulsory license is an involuntary contract between a willing buyer and an unwilling seller imposed and enforced by the state.  A compulsory license is more common outside the U.S. and is typically coupled to a requirement that the patent owner “work” his invention in a particular jurisdiction.  For example, Australian law allows a person to apply for a compulsory license if the patent owner has not practiced his invention in Australia to the extent required to satisfy the Australian public.  In contrast, the U.S. does not have a working requirement.  The Finisar court has essentially created a “working” requirement — a task that should be handled by Congress if it sees fit to do so.

On its surface, the Finisar decision appears to be expedient. From the court’s point of view, the dispute is resolved.  A value has been placed on past and future infringement. The public can keep watching its DirecTV programming. But, in reaching these results, the court has indicated to all future infringers that a patent owner’s right to exclude may not mean much at the negotiation table.

David Carstens, co-founder of Carstens, Allen & Gourley, LLP, brings a highly skilled background in patent law and engineering to develop winning strategies for clients. He is knowledgeable in all aspects of intellectual property, including patents, trademarks, copyrights, and trade secrets. 

This blog is maintained by Carstens, Allen & Gourley, LLP to inform readers of recent developments in intellectual property. Solely informational in nature, this blog is not intended to create an attorney-client relationship or to be used as a substitute for legal advice or opinions.