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IP Alert UPDATE: Federal Circuit Addresses Reasonable Royalty Damages and Third-Party Injunctions in Asetek Danmark v. CMI

April 7, 2017

UPDATE: On April 3, 2017, the Federal Circuit issued a modified opinion in Asetek Danmark A/S v. CMI USA Inc., FKA Cooler Master USA, Inc., Cooler Master Co., Ltd., granting in part CMI USA and Cooler Master’s petition for rehearing. In the modified opinion, the panel partially vacated the injunction against CMI USA and Cooler Master to the extent “the injunction reaches conduct by Cooler Master that does not abet new violations by CMI." In view of this modification, Chief Judge Sharon Prost's partial dissent was deleted. The panel's opinion otherwise remains unchanged.

Our previous IP Alert on this case from December 2016 follows, revised to reflect the newly modified opinion:

The Federal Circuit’s recent decision in Asetek Danmark A/S v. CMI USA Inc. provides guidance on whether an injunction may be imposed against a party not found liable for patent infringement, such as when an exclusive U.S. distributor is found liable for selling infringing products made by a non-party foreign supplier. Asetek also holds that a damages expert’s non-exclusive reliance on per-unit lost profits in determining a reasonable royalty is permissible.

Patent owner Asetek Danmark sued two parties for patent infringement, CMI USA (formerly Cooler Master USA) and Cooler Master Co., a Taiwanese company. CMI was the exclusive U.S. Distributor of Cooler Master’s CPU cooling systems that were accused of infringing Asetek’s patents.

At trial CMI was found to infringe one of two asserted patents. The jury found that Asetek was entitled to a 14.5% reasonable royalty and approximately $405,000 in damages. The district court also granted a permanent injunction against both CMI and Cooler Master, even though Cooler Master had been dismissed from the litigation by stipulation prior to trial.

Cooler Master then intervened and appealed the injunction to the extent that the injunction imposed obligations on Cooler Master. CMI and Cooler Master also appealed rulings on infringement and obviousness, and CMI appealed the district court’s rulings on damages.

With regard to damages, the panel held that it was not improper for Asetek’s expert to rely on Asetek’s per-unit profit margin under its licensing agreement with a customer in calculating a reasonable royalty. CMI argued that such an approach circumvents the lost profits requirement that the patent owner show that it would have made the infringer’s sales “but for” the infringement. The court rejected this contention, holding that this requirement is not applicable to determining reasonable royalty damages.

CMI also argued that the calculated rate of 14.5% was improper because the license relied upon by CMI’s expert, which was a license to CMI’s customer, included a maximum royalty of only 7%. The panel reasoned that when using the hypothetical negotiation approach to determining a reasonable royalty, it is “appropriate” and “logical” to consider per-unit lost profits that would result from granting a license to the infringer. The panel also held that CMI’s expert did not rely on lost profits to an impermissible extent in calculating a reasonable royalty, because CMI’s expert took into account additional evidence relevant to a hypothetical negotiation, including “‘the nature and the scope of the license’ at issue, . . . Asetek’s ‘established policy and marketing program,’” the relationship between the parties, and the extent that “CMI’s profits under the license would ‘be attributable to the patented invention.’” The panel further approved of the 14.5% rate despite the maximum royalty rate of 7% in the relied-upon license, because the license actually included a higher effective royalty rate of between 10% and 19%, and Asetek would have sought a higher rate from competitor CMI compared with a customer licensee.

After considering the damages issues, the panel reviewed the injunction against CMI and Cooler Master. The injunction prohibited Cooler Master from independently making, using, selling, or importing the infringing products, and required both CMI and Cooler Master to provide certain third-party notices.

Appellants made two arguments: First, Cooler Master argued it could not be enjoined because it was previously dismissed from the lawsuit, which constitutes an adjudication with claim-preclusive effect. The panel held that claim preclusion did not bar relief as to future conduct, but only as to pre-dismissal conduct. Therefore, a dismissal from suit does not bar a former party from being subject to an injunction relating to post-dismissal conduct.

Appellants’ second argument was that the scope of the injunction was overbroad to the extent it reached conduct by Cooler Master other than conduct that abets a new violation by CMI. Cooler Master was alleged to be selling infringing products in the U.S. through its websites and via a partnership with another company. The parties disputed whether the injunction could reach such other commercial activities of Cooler Master.

The panel noted that despite the rule that an injunction may not bind non-parties who act independently, Fed. R. Civ. P. 65(d) provides that an injunction may bind non-parties who are “in active concert or participation with” parties to the action, or the parties’ officers, agents servants, employees, and attorneys, who receive actual notice of the injunctive order. Rule 65(d) has been interpreted to cover two classes of non-parties: aiders and abettors, and those in privity with an enjoined party.

Based on this reasoning, the panel vacated the injunction as to Cooler Master to the extent it “reaches conduct by Cooler Master that does not abet new violations by CMI” and remanded the case to the district court to determine the relationship of Cooler Master and CMI “both in their businesses and in this litigation,” i.e., whether Cooler Master is in privity with CMI for purposes of the injunction. The panel included a nonexhaustive list of potentially pertinent facts and questions for determination on remand:

the nature of the exclusivity relationship between the firms (e.g., its scope, its terminability); trademarks and other aspects of the two companies’ relations at relevant times; the origins of CMI and its relationship to Cooler Master; the details of and intent behind changes in the companies’ relations, particularly since liability was found in this case; and the companies’ relationship in the conduct of this litigation, in which products made by Cooler Master and carrying its brand name are at stake, both before and after Cooler Master was dismissed. . . . If Cooler Master needs CMI’s permission to itself engage in the U.S.-focused acts at issue, would such acts be properly viewed as taken in active concert or participation with CMI? Is CMI’s interest in such Cooler Master acts suggested by the fact that CMI itself has joined in Cooler Master’s challenges to the injunction’s scope on appeal, challenges whose success would free Cooler Master to transfer business away from CMI? Whether or not Cooler Master has plenary freedom to transfer its business away from CMI, was Cooler Master, after leaving this case, still exercising control over CMI’s conduct of this litigation, which concerned the future of Cooler Master’s products, or did Cooler Master simply leave its products’ fate in this litigation in CMI’s hands?

The panel concluded that the additional proceedings on remand to answer such questions might be avoided if Asetek chose to file a new infringement action against Cooler Master and request a preliminary injunction, relying on the judgment reached in this case.

Asetek provides helpful guidance to litigants regarding the application of injunctive relief with respect to non-parties, particularly in factually similar situations involving a U.S. distributor of infringing products provided by a non-party foreign supplier, and the type of record that should be developed in anticipation of requesting or asserting an injunction against such a non-party. Asetek also approves of using evidence of per-unit lost profits as a non-exclusive factor in the determination of a reasonable royalty.

For more information, please contact Fitch Even partner Paul B. Henkelmann, author of this alert.

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