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TiVo Case Affects Difficulty of Designing Around Patents

There are hundreds of millions of dollars at stake, but that's not why the lawsuit is so important. Businesses throughout the country, in all industries, are waiting for the Federal Circuit's decision in TiVo Inc. v. EchoStar Corp. because the en banc ruling could significantly shift the balance of power between patent owners and infringers--in patentees' favor. Designing around patents could become far more difficult, and the penalties for failure could be far more severe.

At issue is how courts should handle allegations of repeat infringement--claims that an adjudged infringer is infringing the same patent again. Should that infringer be treated like any other defendant? Or can that company face an abbreviated legal process which provides fewer legal defenses and harsher penalties? In other words, can the accused simply be tried for contempt?

On March 4, a bitterly divided Federal Circuit panel granted district court judges wide latitude to use contempt proceedings to handle allegations of repeat infringement. That decision, however, didn't stand for long. On May 14, the Federal Circuit vacated the ruling and decided to rehear the case en banc. It will be argued this fall.

If the full court gives the green light to contempt proceedings, it will provide patentees with a powerful weapon against infringers. "The threat of contempt proceedings is a substantial sword for plaintiffs," says Jeffrey Lewis, a partner at Patterson Belknap Webb & Tyler.

Such a ruling, however, would hamper the ability of many companies to legitimately design around existing patents. "It increases the risk for adjudged infringers," says Elizabeth Roesel, of counsel at Paul, Hastings, Janofsky & Walker.

EchoStar's Contempt

The TiVo case was routine, at first. A federal district court found in 2006 that EchoStar's satellite TV receivers infringed TiVo's patent on software for digital video recorders (DVRs). The court ordered EchoStar to pay a $100 million and issued an injunction against the company. EchoStar responded with a year-long effort to design around the patent, then began using the redesigned software. When TiVo found out, it asked the district court to hold EchoStar in contempt for violating the 2006 injunction. That's when the legal controversy really heated up.

TiVo had plenty of good reasons to seek contempt proceedings instead of filing a new infringement suit. For starters, contempt proceedings are much faster and cheaper.

"Defendants don't get to have the same presumptions and defenses. There's no jury trial. There's no Markman hearing. It's a shortcut proceeding. You have one streamlined hearing, then an issuance," says Charles Macedo, a partner at Amster, Rothstein & Ebenstein and author of "The Corporate Insider's Guide to U.S. Patent Practice."

A finding of contempt, moreover, is particularly stinging. "No one wants to be found in contempt of court," Macedo says. "It's a pretty harsh sounding remedy, even if the damages aren't any bigger [than for infringement]."

Yet the costs to the defendant can be much bigger. In addition to paying damages, the defendant can be hit with significant monetary sanctions or even jail time. In this case, the district court in 2009 slapped EchoStar with $110 million in additional infringement damages plus $90 million in sanctions.

EchoStar appealed the district court's action. A Federal Circuit panel responded in March with a controversial decision.

Differing Opinions

It's well settled that contempt proceedings cannot always be used against repeat infringers. Contempt is available only if a defendant's redesigned item is not "colorably different" from the item that previously had been found infringing, so the redesigned item has no "substantial open issues with respect to infringement."

This is an amorphous standard, according to many experts. "Nobody knows what 'colorable difference' means," Lewis says.

The Federal Circuit panel in TiVo, however, interpreted this standard broadly. Judge Alan D. Lourie, writing for the two judge majority, ruled that contempt proceedings can be brought even if a redesigned item does not infringe "in the exact same manner" as the prior version of the item. Moreover, he added, "the presence of a new issue does not necessarily preclude the ... use of a contempt proceeding to determine continued infringement." In this case, Lourie concluded, the district court "did not abuse its discretion in finding that the ... [defendant's] software had not been altered significantly enough to raise substantial open issues of infringement."

Judge Randall R. Rader, who became the circuit's chief judge in June, dissented vehemently. There is, he wrote, "little similarity between the former infringement proceedings and the issues now before this court. The accused structures are different. The theories of infringement are different. The pertinent claim constructions apply in ways that are different. ... Indeed, the only thing that is not different is the identity of the parties themselves. These differences deserve a trial, not a summary contempt proceeding."

Rader raised an important issue, according to many patent experts. The majority "effectively broadened the [original] injunction from 'you can't do the same thing' to 'you can't do something different,'" Macedo says.

Guidance Needed

In addition to making contempt proceedings more widely available, the panel majority also made it easier to hold a repeat infringer in contempt. The panel declared, for instance, that a defendant's good faith redesign efforts are not a defense to contempt (see "Not Enough").

The panel also declared that a defendant can be held in contempt even if its redesign is noninfringing. So long as the defendant violates a court injunction, that's enough to impose sanctions.

In this case, the district court's injunction against EchoStar was unusually broad. It not only forbade EchoStar from making or selling infringing satellite TV receivers, it required EchoStar to disable DVR functionality in its receivers.

The panel interpreted this literally. It wasn't enough for EchoStar to disable infringing DVR functionality in its receivers; the company had to disable all DVR functionality.

EchoStar argued that this part of the injunction was ambiguous, but the panel disagreed. The majority declared that "EchoStar had ample notice of what it had been ordered to do" and ruled EchoStar could be held in contempt for violating this injunction.

In its May 14 order vacating the panel ruling, the Federal Circuit indicated that it wanted to take a fresh look at the standards for using contempt proceedings against repeat infringers. Many observers expect the en banc court will try to bring some clarity to this area of the law and limit district courts' ability to hold repeat infringers in contempt.

"My expectation is they will give some guidance regarding a more bright line standard for when contempt citations are appropriate," says Steven Spears, a partner at McDermott Will & Emery.

TiVo's General Counsel Matt Zinn comments on this article in a Letter to the Editor.

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Steven Seidenberg

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