March 01, 2013

An opinion made public on Tuesday (May 21, 2013) may make it slightly easier for patent holders to succeed in securing a permanent injunction in patent infringement matters. Chief Judge Rader authored the opinion for the majority in the matter of Douglas Dynamics, Inc. v. Buyers Products Company. In the opinion, the Federal Circuit reversed the district court’s ruling and found that a permanent injunction was warranted. The reversal was, in large part, the result of the majorities’ reasoning (which appeared to be significantly based on theoretical assumptions as opposed to actual evidence on the record) regarding the irreparable harm the plaintiff would suffer by way of loss of distinctiveness and market lure, as well as damage to its reputation and perception in the marketplace. Further, the opinion may be at least somewhat counter to previous judicial opinions, a point made by Judge Mayer in his dissenting opinion. In all, the Douglas Dynamics opinion may provide guidance and a stronger basis for patent holders to argue the issue of irreparable harm and find greater success in securing permanent injunctions.

Background

The matter generally involved patented technology related to snow plow mounting assemblies. A jury found that Buyers Products Company (“Buyers”) infringed two patents, U.S. Patent No. 5,353,530 (“the ‘530 patent”) and U.S. Patent No. 6,944,978 (“the ‘978 patent”) owned by Douglas Dynamics, Inc. (“Douglas”). The district court, however, denied Douglas’s motion for a permanent injunction and instead assigned an ongoing royalty. While the ‘530 patent has since expired, the ‘978 patent remains in force. The appeal was heard by Chief Judge Rader, Judge Newman and Judge Mayer.

The general prerequisites for injunctive relief, emphasized in eBay Inc. v. MercExchange, LLC., indicate that to be entitled to a permanent injunction, a patentee must show:

  1. it has suffered an irreparable injury;
  2. remedies available at law are inadequate to compensate for that injury;
  3. considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and
  4. the public interest would not be disserved by a permanent injunction.

Irreparable Injury

The majority opinion states that “[i]rreparable injury encompasses different types of losses that are often difficult to quantify, including lost sales and erosion in reputation and brand distinction.”1

Lost Sales/Market Share

The district court previously concluded that “Douglas has failed to make even a threshold showing of irreparable harm.”2 The district court apparently reached this conclusion because: 1) Douglas could not identify any sales lost to Buyers (the parties were apparently selling to different market segments) and 2) Douglas’s market share increased by about 1% in the year following Buyers’ introduction of its infringing snowplows.

The majority, however, contended that “if [an infringer] made its place in the market by infringing on the intellectual property of the [patent holder] and capitalized on its similarity to the better product, then the harm to the [patent holder] might go beyond a simple counting of lost sales—some of which would occur anyway if the [infringer] marketed itself effectively….The [patent holder] would lose some of its distinctiveness and market lure because competitors could contend that they had ‘similar features’ without noting that those features infringe the [patent holder’s] proprietary technologies”3 (emphasis added).

Additionally, the majority found the 1% annual market share increase to be immaterial, at least in this case. The opinion notes that market share could be maintained or increased for a variety of reasons despite the additional competition from an infringer. In particular, the opinion points to the fact that Douglas dedicated significant time and money towards marketing and sales, engineering and research and development.

Reputation and Brand Distinction

The majority disagreed with the district court’s conclusion that because there was no evidence that interested consumers confused the two companies, Douglas sustained no harm to its reputation as an innovator. Rather, the Federal Circuit maintained that “[e]ven absent consumer confusion…there can still be harm to a company’s reputation, particularly with its perception in the marketplace by customers, dealers, and distributors”4 (emphasis added).

Moreover, the evidence presented to the jury apparently indicated that Douglas had never licensed out the infringed patents and that Douglas intentionally made this decision in order to maintain its market exclusivity. The majority stated, “[e]xclusivity is closely related to the fundamental nature of patents as property rights. It is an intangible asset that is part of a company’s reputation, and here, Douglas’s exclusive right to make, use, and sell the patented inventions is under attack by Buyers’ infringement”5 (emphasis added).

Adequacy of Remedies Available at Law

The majority found the remedies at law “inadequate to compensate Douglas for at least the reputation loss Douglas suffered from Buyers’ infringement.”6

Additionally, the opinion points to the fact that Buyers went from zero to approximately 5% market share in three years. The majority indicated that “[t]his record evidence underscores the profitability of infringement and suggests that mere damages will not compensate for a competitor’s increasing share of the market, a market which Douglas competes in, and a market that Douglas has in part created with its investment in patented technology.”7

Balancing the Hardships between the Parties

Noting that Buyers had represented to the district court that it had a new design around which was ready for implementation, and upon already concluding that Douglas had suffered irreparable harm, the majority concluded that “the balance of the hardships would suggest that Buyers should halt infringement and pursue a lawful course of market conduct.”8 This was in contrast to the district court’s conclusion that this factor was “at best a wash for Douglas.”9

Public Interest

In its ruling, the district court apparently reasoned that “the public may well be better served by having a new competitor, selling cheaper snowplow assemblies in what appears may be an untapped market segment.”10

Although the majority agreed that competition serves the public interest, the opinion notes that Buyers is competing by using a competitor’s patented technology. As such, it has avoided the costs and risks of research and development and therefore can undercut prices and enter the ‘untapped market segment’ of cheap snowplows. The majority noted that “cheap copies of patented inventions have the effect of inhibiting innovation and incentive” and concluded that this inhibition of innovation and incentive “coupled with the public’s general interest in the judicial protection of property rights in inventive technology, outweighs any interest the public has in purchasing cheaper products.”11

Dissenting Opinion Regarding the Permanent Injunction

Judge Mayer authored a dissenting opinion stating that “[t]he majority errs in reversing the denial of injunctive relief based on its assumption that ‘[w]here two companies are in competition against one another, the patentee suffers the harm—often irreparable—of being forced to compete against product that incorporate and infringe its own patented inventions.’”12

After a detailed explanation of the bases for his dissent, Judge Mayer appears to summarize his position, as mentioned above, by stating that “[t]he majority’s analysis fails to recognize ‘that eBay jettisoned the presumption of irreparable harm as it applies to determining the appropriateness of injunctive relief,’ and that ‘a successful patent infringement claim can no longer rely on presumptions or other short-cuts to support a request for a permanent injunction.’”13

Additionally, Related to Damages…

The opinion also vacated the district court’s ongoing royalty rate and remanded to establish a new pre-injunction ongoing royalty rate. Two reasons were cited for vacating the ongoing royalty rate. First, the district court apparently applied the 25% rule of thumb that was found to be fundamentally flawed in Uniloc USA, Inc. v. Microsoft Corp. Second, the district court apparently limited the ongoing royalty rate based on Buyers’s profit margins “ensuring the ongoing royalty rate it awarded would ‘leave some room for profit’ by Buyers at its current prices.”14 The Federal Circuit previously held in Golight, Inc. v. Wal-Mart Stores, Inc. that an infringer’s net profit margin does not represent a ceiling or cap on reasonable royalty damages.

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1 Majority opinion at 10-11.
2 Douglas Dynamics, Inc. v. Buyers Products Company, (Denial of Permanent Injunction Order), No. 09-CV-261 (W.D. Wis. Feb. 25, 2011).
3 Id. at 11.
4 Id.
5 Id. at 12.
6 Id.
7 Id. at 12-13.
8 Id. at 13.
9 Id.
10 Id.
11 Id. at 14.
12 Dissenting opinion at 2.
13 Id. at 5-6
14 Majority opinion at 14.