TiVo Case More Closely Aligns US With Europe On Patent Infringement Contempt Cases

The United States recently changed one important aspect of enforcing patent rights. Patent owners who wish to use contempt proceedings to stop adjudged infringers from committing additional infringements must comply with the new standards laid down in TiVo Inc. v. EchoStar Corp. The decision, which brings US law closer to that of European countries, makes it easier for patentees to bring contempt actions, but may sometimes make it harder to win these actions.

The TiVo Inc. v. EchoStar Corp. decision is available here [pdf].

Patentees like contempt proceedings for a variety of reasons. These actions are far faster and cheaper than bringing new infringement suits. They prevent defendants from asserting many defences and counterclaims that could be raised in ordinary infringement suits. They put defendants at risk for steep, punitive damages. And they place defendants at a psychological disadvantage.

“A defendant wants to go into a case on equal footing with the plaintiff, but as an adjudged infringer, the defendant [in a contempt proceeding] is wearing a very black hat,” said Meredith M. Addy, a partner in Brinks, Hofer, Gilson & Lione.

The defendant in this contempt proceeding, EchoStar, argued that contempt was inappropriate, and the company’s argument met with some success. It caused the US Federal Circuit Court of Appeals (sometimes called the country’s “patent court”) to rewrite the country’s rules for contempt proceedings in patent cases.

Overall, however, the 20 April ruling by the Federal Circuit was bad news for EchoStar, which had been trying to design around TiVo’s US Patent 6,233,389. That patent covers certain technology which enables a digital video recorder (DVR) to simultaneously record one programme while playing back another.

EchoStar thought in 2004 that it had incorporated this DVR functionality into its satellite TV receivers without violating TiVo’s patent. TiVo thought otherwise and sued for infringement.

In 2006, EchoStar was found guilty of wilful infringement and ordered to pay $104 million in damages. In addition, EchoStar was slapped with a very broad injunction. The injunction not only forbade the company from making or selling any receivers that infringed the TiVo patent, it also forbade EchoStar from making or selling any receivers that had DVR functionality.

EchoStar then spent a year redesigning its receivers. Fifteen engineers spent over 8,000 hours on the project and came up with a technology that EchoStar patented. The redesigned receivers hit the market in 2007.

When TiVo learned about this in 2008, it brought contempt proceedings against EchoStar for violating the injunctions. The district court held for TiVo in 2009, hitting EchoStar with $90 million in sanctions and an additional $110 million in damages.

EchoStar appealed. A three-judge panel of the Federal Circuit upheld the contempt decision in a controversial 2010 ruling [pdf]. Last month, the full Federal Circuit changed the law on contempt and reached a slightly different conclusion. The court threw out the $110 million infringement award and sent the case back to the district court to determine if the redesigned receiver infringed TiVo’s patent. The court upheld the $90 million contempt sanction, however, ruling that EchoStar had violated the broad injunction against DVR functionality. The decision thus holds that a defendant can be held in contempt for violating an injunction even if the defendant’s new workaround does not infringe.

TiVo had argued that the injunction covered only infringing DVR functionality, but the court rejected this. The court held, on a 7-5 vote, that the injunction covered precisely what it said – any DVR functionality. The majority held that if EchoStar had found the injunction vague or overbroad, it had to challenge the injunction at the time it was issued. The company could not wait until a subsequent contempt proceeding in order to collaterally challenge the scope of the injunction. Such a challenge was simply too late.

Many experts are troubled by this aspect of the court’s ruling, because it can be difficult or impossible to know in advance whether parts of an injunction are vague or overbroad. “You may not know what parts of an injunction are unclear until you make changes to the device [in order to design around the patent]. It puts the infringer in a tough spot to require it to object to the terms of injunction when the injunction issues,” said Prof. Timothy R. Holbrook of Emory Law School. “The majority’s approach is rather harsh.”

The ruling also reaffirmed that a defendant’s good faith is no defence to contempt. Expensive efforts to design around the patent, accompanied by attorney opinions that a design-around is non-infringing, do not immunise a defendant against a finding of contempt. Such good faith efforts, however, may reduce the penalty imposed by the court.

The TiVo decision threw out the old test for determining when contempt proceedings are appropriate for (alleged) repeat infringements. Instead, the Federal Circuit held that if a patentee provides “a detailed accusation … setting forth the alleged facts constituting the contempt,” the district court has “broad discretion” over whether to begin contempt proceedings.

This change will make it easier for patentees to bring contempt proceedings, according to many experts. “They’ve lowered the bar to get to a contempt proceeding,” says Eric Shih, a partner in Novak Druce + Quigg. “You no longer need to go through a whole rigamarole to get to a contempt hearing.”

But while the Federal Circuit made it easier for a patentee to start contempt proceedings, the court also made it more difficult for the patentee to win such proceedings against an alleged repeat infringer. “Before, the focus was on whether the new thing infringes the patent in any way. Now the focus is on whether the new thing infringes in the same way the original thing infringed,” says Carlos Perez-Albuerne, a partner in Choate, Hall & Stewart.

In order for a defendant to be held in contempt for continued infringement, the patentee must prove, by clear and convincing evidence, that the infringing elements in the original product are still present in the redesigned product. If one or more of those elements is significantly modified in the redesigned product, “contempt is then inappropriate,” the court held. A patentee would need to bring a new infringement suit in order to obtain relief.

This standard seems to bring the US into line with most European countries. (Procedures for contempt proceedings are not harmonised in Europe; each EU state has its own rules.)

“TiVo is consistent with the UK view,” says Harold C. Wegner, a partner in Foley & Lardner.

In Germany, too, a patentee can win a contempt proceeding only if a redesigned product is substantially the same as the original infringing product. “If the redesign is substantially different from the previously accused embodiment, then even if the redesign is infringing, the patentee must start new proceedings,” says Dr. Richard Schlötter, a partner in Reed Smith.

In this case, we may never know whether EchoStar’s redesigned receivers were substantially different from its original infringing receivers. Because less than two weeks after the Federal Circuit issued its ruling, EchoStar gave up the fight. The company reached a settlement with TiVo – and agreed to pay the patentee $500 million over the next six years.

Other adjudged infringers may ponder that high price before they attempt to design around a patent.