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Contempt and Competition

Despite the title, this is not an undiscovered antitrust law column by Jane Austen - not that pride and prejudice don't have roles to play in the case I'm writing about (although sense and sensibility may take a back seat). And to be sure, there's an epic battle of wits going on; the parties have produced wonderfully well-written briefs, with more to come. But the setting is more Silicon Valley than the bucolic English countryside, the subject is not romance and the social order but innovation competition, and your clients have something real at stake in this story's outcome.

To oversimplify: TiVo (the maker of what former FCC chairman Michael Powell once described as "God's machine") successfully sued EchoStar for patent infringement and won an injunction against EchoStar's infringing digital video recorders. EchoStar then redesigned its DVR software to eliminate the two features that were evidently the basis of the jury's infringement verdict. Contending that the design-around still infringed its patent (based on an infringement theory that it seemingly had disavowed at trial) and violated the injunction, TiVo sought contempt sanctions. EchoStar argued that the summary contempt process was the wrong way to go; instead, TiVo should file a new infringement action against the modified product. But the district court agreed with TiVo, employed the contempt process, held EchoStar in contempt and imposed about $200 million in contempt sanctions. Only a little over half of that amount was meant to compensate TiVo for the continued infringement: About $90 million of the sanctions was meant "to promote EchoStar's compliance with this Court's orders." Mind you, though, this is not the typical coercive civil contempt penalty that you can avoid by just complying with the court's order - as where a recalcitrant witness is jailed until he or she agrees to testify, or a defendant is fined for each day that it remains in non-compliance with an order. This extra $90 million was due regardless of what EchoStar did going forward. Ouch. And this is even though the district court pointedly refused to hold that EchoStar had acted willfully.

A Federal Circuit panel affirmed the contempt sanctions, over a caustic dissent by now-Chief Judge Rader. The Circuit, however, vacated the panel decision and granted EchoStar's petition for en banc rehearing. We'll hear from TiVo before long, in what's bound to be a fine brief arguing that patent owners and courts need to be able to resort to contempt proceedings to enforce injunctions against infringement.

There's a lot riding on this case. The law is clear that design-arounds are a good thing, and that the patent laws specifically mean to encourage them. One of the main reasons the patent laws require patent applicants to fully describe their claimed inventions, and then publish the patents, is to enable innovators to figure out other ways to accomplish the same thing. And like it or not, the people best positioned to do this are those who have been held to infringe a patent - and who probably are subject to an injunction not to do the same thing any more. They're the people who have taken a shot at it, and been told by a court not only that they've failed, but why - what the infringed patent means and how their product infringed it. But if your efforts to take what you've learned in order to develop non-infringing competition are likely to throw you into contempt proceedings (which by design are not exactly a level playing field), why take the chance? And for that matter, if you know at the outset that the rules are one strike and you're out, would you even play the game? In raising the costs and risks of design-arounds, the district court's decision seriously discourages this important source of competition. The impact of the district court's decision is magnified by the rise of patent trolls, or non-practicing entities. Whether you think they're good or bad, whether the patents they're wielding are valid or not, they only increase the competitive importance of design-arounds.

So if your clients compete through innovation, and part of that innovation involves design-arounds, you'll want to watch this important en banc argument closely. The outcome could have a lot of impact on the costs and benefits of your clients' innovation investments. At the extreme, if the Federal Circuit affirms the liberal use of contempt proceedings against design-around efforts, each patent could become more of an end point of technological progress, rather than just a stop along the way. And the resulting loss in innovation competition, the kind of competition that drives our economy today, could be enormous. Especially with these two parties, my signoff has to be: Stay tuned.

Christopher Kelly is an antitrust litigator and partner in the Washington, D.C., office of Mayer Brown.

Chris Kelly

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