04.22.2011

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Updates

On April 20, the Federal Circuit issued its long-awaited en banc decision in TiVo Inc. v. EchoStar Corp.,1 vacating one ground for a contempt citation but affirming the other and upholding a $90 million sanction.  Along the way, the court significantly revised its approach to contempt proceedings in ways that may both help and hurt patentees in future cases.

The case involved TiVo’s allegations that EchoStar violated a permanent injunction issued by Judge Folsom of the Eastern District of Texas after a jury found that certain models of EchoStar’s satellite television receivers infringed TiVo’s patent on a method for simultaneous digital video recording ("DVR") and playback.  The injunction included a fairly standard provision prohibiting EchoStar from making, using, selling or offering to sell the “Infringing Products” and products only “colorably different therefrom.”  In addition, however, the district court required EchoStar to “disable the DVR functionality . . . in all but 192,708 units of the Infringing Products that have been placed with an end user or subscriber” and not to enable the DVR functionality in new placements of “Infringing Products.”  On appeal, a Federal Circuit panel reversed the infringement judgment as to one set of claims, but affirmed as to another.  EchoStar did not challenge the scope of the injunction in the original appeal, and the panel did not reach it.

In the meantime, EchoStar undertook to design around the patent by removing features that TiVo had accused of infringement at trial.  In some cases, EchoStar downloaded the new software into receivers that had been found to infringe.  TiVo moved for contempt, and the district court found EchoStar in contempt for violating two provisions of the injunction.  First, the district court found that EchoStar violated the injunction against further infringement because EchoStar’s redesigned software was not colorably different from the original, infringing software and continued to infringe TiVo’s patent.  Second, the district court found that EchoStar violated the injunction by failing to disable all DVR functionality (even noninfringing functionality) in receiver boxes that had been found to infringe.

A divided panel of the Federal Circuit affirmed both rulings, but the full court voted to rehear the case en banc.  Although only nine active judges heard the oral argument last fall, two later-appointed judges (Judges O’Malley and Reyna) and a senior judge who sat on the original panel (Judge Mayer) also participated in the en banc decision.  The result was a split decision.

All 12 sitting judges agreed to clarify the substantive law and change the procedures for determining contempt.  On the procedural side, the court rejected earlier precedent calling for a two-stage inquiry, including a preliminary evaluation of whether contempt proceedings are appropriate.  On the substantive side, the court reaffirmed that the party claiming contempt must show by clear and convincing evidence that the new products are insignificantly different from the products previously found to infringe and that the new products themselves infringe.  The court clarified, however, that the analysis should focus on the differences involving features relied upon to prove infringement in the original case.

Based on that analysis, the seven-judge majority, led by Judge Lourie, voted to vacate the district court’s finding of contempt of the noninfringement provision and to remand for further consideration under the proper test.  Five dissenting judges, led by Judge Dyk, would have reversed outright on grounds that there were significant differences between EchoStar’s new and old products.

On the second issue, the same seven-judge majority affirmed the district court’s finding of contempt based upon EchoStar’s failure to disable all DVR functionality (not just infringing DVR functionality) in certain receivers.  The majority held that the district court’s order was sufficiently clear and specific to be enforced and that EchoStar had waived its right to complain of ambiguity or overbreadth by failing to challenge the terms of the injunction in its first appeal.  The same five judges dissented, believing that EchoStar reasonably read the disablement provision to apply only to the infringing software, and that EchoStar was entitled to argue the ambiguity of the provision in the contempt proceeding.

Although the Supreme Court may yet have the last word, the decision is very significant for both prevailing patentees and adjudicated infringers.  Most importantly, contempt sanctions will be proper only if there are no significant differences between the newly designed product and the features of the original product upon which the patentee relied to establish infringement in the first place.  Where that is not the case, the patentee will have to file a new infringement action and prove up its case from scratch.  On the other hand, the Federal Circuit has put the burden on adjudged infringers to appeal or request clarification or modification of injunctions that appear overbroad or ambiguous.  In most circumstances, raising the ambiguity or overbreadth in the injunction proceeding will be too late.

Uncertainty in the Framework for Assessing Injunctions Prohibiting Further Infringement

Under 35 U.S.C. § 283, a district court may grant an injunction “in accordance with the principles of equity to prevent the violation of any right secured by [a] patent.”  Based on this authority, federal courts may enjoin further infringement of a patent by a party that has been found liable for infringing the patent.  Typical language prohibits making, using or selling the products found to infringe or “colorable imitations” thereof.  Patentees often prefer to accuse adjudged infringers of contempt of such injunctions rather than filing a new infringement action.  Among other reasons, contempt proceedings are simpler and less expensive, the accused infringer is stuck with the rulings made in the original case, and the decider is not a jury but instead a judge who has already ruled against the infringer and issued an injunction for the patentee.

In California Artificial Stone Paving Co. v. Molitor, 113 U.S. 609 (1885), the Supreme Court first commented on when a party may be found in contempt for violating an injunction prohibiting further infringement.  The Court recognized that contempt is a “severe remedy” and that it should not be imposed where there is a “fair ground of doubt as to the wrongfulness of the defendant’s conduct.”  Id. at 618.

A hundred years later, the Federal Circuit issued its first opinion addressing an effort to design around a patent after an injunction forbidding further infringement has issued.  In MAC Corp. of America v. Williams Patent Crusher & Pulverizer Co., 767 F.2d 882, 885-86 (Fed. Cir. 1985), a panel held that the decision to proceed with contempt proceedings rests in the discretion of the district court and that the district court there had not abused its discretion in denying the patentee’s motion for contempt because the differences between the enjoined product and the redesigned product created a “fair ground of doubt” as to whether defendant’s products violated the injunction.

Just months later, another Federal Circuit panel issued KSM Fastening Systems, Inc. v. H.A. Jones Co., 776 F.2d 1522 (Fed. Cir. 1985).  In KSM, the court outlined a two-step framework for assessing whether contempt is proper when an adjudged infringer creates a redesigned product after being enjoined from further infringement of a patent.  First, the district court had to determine whether there were “colorable difference[s]” between the adjudged products and the newly created, redesigned products.  Id. at 1530.  “Colorable difference[s]” existed, according to the panel, if “substantial issues [of infringement concerning the redesigned product] need to be litigated, particularly if expert and other testimony subject to cross-examination would be helpful or necessary.”  Id. at 1531.  Second, if the district court found no colorable differences, it was to determine if the redesigned product infringed the patent, either as construed or admitted.  If so, contempt was proper.  Id. at 1532.

After KSM, Federal Circuit opinions used varying language in discussing whether contempt proceedings were appropriate.  See Abbott Labs. v. TorPharm, Inc., 503 F.3d 1372, 1379 (Fed. Cir. 2007) (holding that the district did not abuse its discretion to hold contempt proceedings because the adjudged infringer’s new product “was a subterfuge”); Arbek Mfg., Inc. v. Moazzam, 55 F.3d 1567, 1570 (Fed. Cir. 1995) (“Contempt, however, is not a sword for wounding a former infringer who has made a good-faith effort to modify a previously adjudged or admitted infringing device to remain in the marketplace. . . . Rather, the modifying party generally deserves the opportunity to litigate the infringement question at a new trial, ‘particularly if expert and other testimony subject to cross-examination would be helpful or necessary.’” (quoting KSM, 776 F.2d at 1531)). 

This varying language led to doubts about the circumstances under which a district court could properly hold contempt proceedings and about the proper test for imposing contempt.

Uncertainty in the Framework for Assessing Ambiguous Injunctions

In Granny Goose Foods, Inc. v. Brotherhood of Teamsters Local 70, 415 U.S. 423 (1974), the Supreme Court considered whether an injunction prohibiting labor strikes could be enforced against a party that reasonably believed that the injunction had expired prior to conducting a labor strike.  In holding that the injunction was unenforceable, the Supreme Court noted that “those against whom an injunction is issued should receive fair and precisely drawn notice of what the injunction actually prohibits.” Id. at 444.  The Supreme Court further stressed that judicial contempt is a “potent weapon” and that when it is based upon an injunction that is “‘too vague to be understood, it can be a deadly one.’”  Id. (quoting Int’l Longshoremen’s Ass’n Local 1291 v. Philadelphia Marine Trade Ass’n, 389 U.S. 64, 76 (1967)).

Subsequent decisions, including Federal Circuit cases, have variously upheld and struck down contempt findings based on injunctions containing varying levels of ambiguity.  Some courts required that the enjoined party try to clarify any ambiguity in the injunction before taking actions that could lead to contempt; otherwise, the party acted at its own risk and waived any argument as to enforceability of the injunction based upon ambiguity.  See, e.g., Star Fin. Serv., Inc. v. AASTAR Mortg., 89 F.3d 5, 14 (1st Cir. 1996) (“As the district court correctly admonished, if AASTAR was confused about the scope of the order or felt that it was unable to comply, it should have sought relief from the court. . . . Instead of seeking help or information from either the court or its attorney, AASTAR’s employees ‘undertook to make their own determination of what the decree meant’ and thereby ‘acted at their peril.’” (quoting McComb v. Jacksonville Paper Co., 336 U.S. 187, 192 (1949)); Szabo v. United States Marine Corp., 819 F.2d 714, 718 (7th Cir. 1987) (“Not having appealed from the grant of the injunction, U.S. Marine cannot argue that it is too vague to be enforced . . . or that it violated Rule 65(d) of the Federal Rules of Civil Procedure . . . .”).  Such courts typically relied upon a rationale enunciated in an older Supreme Court decision, McComb v. Jacksonville Paper Co., 336 U.S. 187, 192 (1949), which upheld a finding of contempt when the defendants argued that their conduct was not specifically enjoined because the defendants “undertook to make their own determination of what the decree meant” and a contrary holding “would give tremendous impetus to the program of experimentation with disobedience of the law.” 

Other courts, however, reversed contempt findings in such cases, holding that ambiguity in injunctions did not give the enjoined party “fair and precisely drawn notice of what the injunction actually prohibits.”  See, e.g., Abbott Labs., 503 F.3d at 1382-83 (reversing finding of contempt because the injunction at issue did not “give adequate notice that” the filing of an application for FDA approval to manufacture and sell a generic version of a particular drug was prohibited; instead, the injunction prohibited “commercially manufacturing, using, selling, or offering to sell [a generic version of a particular drug] or from importing such product into the United States.”).

TiVo v. EchoStar

In 2001, TiVo was issued U.S. Patent No. 6,233,389, entitled “Multimedia Time Warping System,” which claims methods and apparatuses for simultaneously recording and playing back live television.  In 2004, TiVo sued EchoStar in the United StatesU.S. District Court for the Eastern District of Texas, alleging that EchoStar had infringed various claims of the patent by selling and making satellite television receivers that contained DVR functionality.  After trial in 2006, a jury found that certain models of EchoStar’s receivers infringed TiVo’s patent.  One set of receivers used a processing chip called a “50X” chip; the other set of receivers contained a chip made by Broadcom.

After the jury returned its verdict, district judge David Folsom imposed a permanent injunction against EchoStar that contained two pertinent provisions.  Under the “Noninfringement” provision, EchoStar was prohibited “from making, using, offering to sell, or selling in the Un[it]ed States, the Infringing Products, either alone or in combination with any other product and all other products that are only colorably different therefrom in the context of the Infringed Claims.”  Under the “Disablement” provision, EchoStar was required to “disable the DVR functionality (i.e., disable all storage to and playback from a hard disk drive of television data) in all but 192,708 units of the Infringing Products that have been placed with an end user or subscriber.”  In the preamble to the final judgment and injunction, Judge Folsom defined the Infringing Products as certain models of EchoStar satellite receivers containing either the 50X chip or the Broadcom chip.

EchoStar appealed the judgment.  Although the Federal Circuit initially granted a stay, a merits panel ended up affirming the infringement judgment as to two software claims even though it reversed the judgment as to TiVo’s hardware claims.  The court lifted its stay of the injunction and remanded the case to the district court for further proceedings.  EchoStar did not challenge the scope of the permanent injunction on the first appeal.

After the stay was lifted, EchoStar revealed that it had downloaded redesigned software into the receivers that had been found to infringe.  EchoStar claimed that its receivers did not infringe the two software claims and that the injunction no longer applied to those receivers.  TiVo disagreed and moved to have the district court hold EchoStar in contempt of the injunction.  TiVo argued both that EchoStar’s redesigned software still infringed and that EchoStar had failed to disable all DVR functionality in the receivers that had been found to infringe. 

Judge Folsom then held a series of hearings.  During the hearings, EchoStar made three primary arguments in defense. 

First, EchoStar argued that its redesigned software was substantially different from the software that had been found to infringe because it had removed a “start-code detection” device and a “copy buffer.”  EchoStar argued that removal of the “start-code detection” device removed a feature that TiVo had claimed met the “parsing” limitation of the software claims.  EchoStar further argued that the use of statistical estimation as a replacement for the “start-code detection” device was very different, indeed something that TiVo had thought impossible.  TiVo countered by contending that EchoStar’s software still contained a “PID filter” that “parsed” audio and video data according to the district court’s construction of the term “parse.”  EchoStar also argued that removal of the “copy buffer” from its Broadcom receivers removed a feature that TiVo had claimed met the “automatically flow controlled” limitation of the claims.  TiVo countered by contending that the removal of the “copy buffer” removed only one of 11 buffers used in EchoStar’s receivers to transport data and that EchoStar still used an infringing flow control method.

Second, EchoStar argued that its redesigned efforts were Herculean and showed good faith casting “a fair ground of doubt” about the wrongfulness of its conduct.  TiVo countered that intent is irrelevant in determining whether an enjoined party has violated an injunction.

Third, EchoStar argued that the Disablement provision merely required it to disable infringing DVR functionality and that EchoStar had disabled that functionality when it downloaded the redesigned software into the receivers that had been found to infringe.

Judge Folsom agreed with TiVo as to both disputed provisions.  In his view, EchoStar violated the Noninfringement provision because EchoStar’s redesigned software was not colorably different from the software found to infringe at trial and because the redesigned software still infringed the software claims of TiVo’s patent.  In addition, he stated that even if EchoStar had successfully redesigned its software, he would have found EchoStar in violation of the Disablement provision, which he read to require EchoStar to disable all “DVR functionality” in the “Infringing Products” (i.e., the models of receivers defined in the injunction).

EchoStar appealed the final judgment of contempt, and in 2010, a divided panel affirmed.  The majority (Circuit Judges Lourie and Mayer) held that the district court did not err in finding that EchoStar had violated the Noninfringement provision.  In its view, the district court properly determined that substantial open issues of infringement did not exist because “EchoStar had itself conceded [that other components] met the [parsing] limitation” and because the district court properly found that the redesigned software still met the “automatically flow controlled” limitation based upon EchoStar’s new flow control device, a “circular transport structure with ten buffers.”  The majority also affirmed the district court’s finding of contempt based upon the Disablement provision because “the district court’s injunction was sufficiently clear to bar EchoStar from challenging it now.”

A vigorous dissent by Chief Judge Rader opined that the Disablement provision was overly broad and should have been interpreted to require EchoStar to disable only the DVR software that had been found to infringe at trial.  Under this interpretation, EchoStar would have been allowed to download redesigned software to its receivers in an attempt to design around TiVo’s patent.  The dissent further opined that the district court erred in finding that EchoStar violated the Noninfringement provision.  First, EchoStar had eliminated the video frame start-code detection in its entirety.  Second, the redesign involved a major effort that had been vetted by leading patent lawyers.  Third, the district court improperly determined that a separate “PID filter” met the “parsing” limitation, even though TiVo had not alleged that theory at trial.  The dissent thus concluded that substantial open issues of infringement remained and that a finding of contempt was improper.

EchoStar petitioned for rehearing en banc, and the full court granted the petition and heard further argument in November 2010.

The Federal Circuit’s En Banc Decision

In the April 20 decision, all 12 sitting judges voted to overrule KSM’s two-stage approach to contempt proceedings.  As a threshold matter, district courts will have wide discretion to decide whether to initiate contempt proceedings.  “What is required for a district court to hold a contempt proceeding is a detailed accusation from the injured party setting forth the alleged facts constituting the contempt.”  On the merits, however, the court retained KSM’s requirement that the patentee prove by clear and convincing evidence both that there are no “colorable differences” between the newly accused products and the infringing products and that the new products infringe under the claim construction used previously.  Moreover, the court unanimously instructed that the existence of “colorable differences” turns on whether there have been substantial changes to features previously relied upon by the patentee to prove infringement in the original case.   In making this analysis, the district court “must look to the relevant prior art . . . to determine if the modification merely employs or combines elements already known in the prior art” in an obvious manner.  The district court may also consider expert testimony and “take account of the policy that legitimate design-around efforts should always be encouraged as a path to spur further innovation.”  The court adhered to its previous view that “good faith” is not a defense to contempt, but may be considered when imposing sanctions for contempt.

The court split on applying this law to the facts of the case.  The seven-judge majority (Judge Lourie joined by Judges Newman, Mayer, Bryson, Moore, O’Malley and Reyna) decided to remand the case to the district court for further analysis under the new legal rubric.  The five dissenters (Judge Dyk joined by Chief Judge Rader and Judges Gajarsa, Linn and Prost) would have ruled outright that EchoStar’s redesigned products were more than colorably different from the originally accused products, precluding a finding of contempt.  In their view, it was undisputed that the start-code-detection feature found to satisfy the “parsing” limitation had been removed, and EchoStar’s statistical estimation feature was neither present in the original software nor earlier viewed by TiVo as capable of performing the required function.  The dissent therefore determined that the redesigned products were necessarily more than colorably different.

The court split along the same lines regarding the Disablement provision, voting 7-5 to affirm the district court’s finding of contempt and award of sanctions.  The majority thought that the plain language of the Disablement provision required EchoStar to disable all DVR functionality in all the specifically named models of satellite receivers, regardless of whether any redesigned DVR functionality infringed.  And, citing the McComb line of cases, it held as a matter of law that EchoStar had waived its right to challenge the vagueness or overbreadth of that provision by neither appealing it nor moving to clarify or modify it before violating it.  The majority therefore affirmed $90 million of the sanctions awarded by the district court.

The dissenters disagreed on each point.  They thought the majority’s reading of the injunction was strained and cited the Granny Goose line of cases in arguing that EchoStar could not be held in contempt where its narrower reading of the injunction was reasonable.  They also rejected the majority’s argument that EchoStar had waived its position by not appealing and not seeking a ruling from the district court in advance.  Finally, the dissenters thought that the $90 million award was based in large part on violation of the Infringement provision, so that award should have been vacated regardless of the result on the Disablement provision.

Significance

Contempt is an important weapon in the arsenal of patentees that prevail in patent infringement cases.  The Federal Circuit’s decision should make it easier for patentees to initiate contempt proceedings but more difficult to prevail in the end.  To establish a lack of “colorable differences,” the patentee will need to show (by clear and convincing evidence) that redesigned products do not contain significant changes to the features of the originally accused products on which the patentee relied to establish infringement in the first place.  Redesign efforts that significantly change particular features found to infringe will not violate standard noninfringement provisions of permanent injunctions.  Instead, the patentee will have to file a new lawsuit and prove infringement anew.

On the other hand, the decision should benefit patentees by forcing adjudged infringers to challenge ambiguities and overbreadth in injunctions on appeal or at least seek modification or clarification from the district court before implementing a design-around.  It is not always easy to challenge injunctions on appeal.  Traditional appellate wisdom is to focus on just a few issues, and most patent appeals focus on the merits of infringement, invalidity and enforceability, and, in some cases, damages.  Moreover, ambiguities are often latent; the infringer may not know what its design-around will look like when it files its opening brief on appeal.  And the prospect of playing “mother may I” with a district judge who has already found infringement and imposed an injunction is not terribly attractive either.

The Supreme Court may have the last word.  EchoStar has already announced plans to seek review of the ruling on the Disablement provision, and it will presumably argue that the Supreme Court precedents on waiver are hard to reconcile and that the Federal Circuit’s view on this issue (which is not unique to patent law) conflicts with decisions of other circuits. 


1 No. 2009-1374, 2011 WL 1486162 (Fed. Cir. Apr. 20, 2011). 

 

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