IP Law Daily License’s post-judgment royalties reduced after one group of animal insemination patents expired
Thursday, May 7, 2020

License’s post-judgment royalties reduced after one group of animal insemination patents expired

By John W. Scanlan, J.D.

There was no authority holding that the principle barring relief from judgment for changed circumstances when the change is anticipated extends to patent expiration.

The owner of several patents for the artificial insemination of cattle and other animals was not entitled to post-judgment royalties for several later-expired patents because the royalties for those patents were separable for the royalties for other patents still in effect, the U.S. District Court for the District of Colorado ruled in a decision on remand from the Federal Circuit (XY, LLC v. Trans Ova Genetics, LC, May 5, 2020, Martínez, W.).

Trans Ova provides various types of animal artificial insemination services to cattle farmers. XY had 10 U.S. patents related to the sorting of bull semen into X cells and Y cells: seven "Sorting" patents involving conventional fresh sorting, two "Reverse Sorting" patents related to semen that is first frozen and then sorted after it is thawed, and one "IVF with Reverse Sorting" patent related to reverse sorting along with the administration of oocyte stimulation drugs and the collection of oocytes as part of the "IVF service cycle". In 2004, Trans Ova and XY entered into a five-year agreement allowing Trans Ova to use XY’s technology in animal breeding in exchange for a 10 percent royalty of gross receipts from the services involved regardless of the number of XY patents practiced for a given service, with an automatic renewal of the agreement unless Trans Ova was in material breach. XY sent a letter to Trans Ova in 2007 stating that it was terminating the agreement due to Trans Ova breaches. Trans Ova asserted that the agreement was still in effect because it had not breached it and continued to make royalty payments to XY, which XY largely refused to accept.

In 2012, XY brought patent infringement and other claims against Trans Ova, which filed patent invalidity and other counterclaims. After a trial, the jury found that the license agreement had expired in 2009. It determined that Trans Ova had willfully infringed all 10 patents and that all of the patents were valid and awarded $4.585 million in damages, an amount virtually identical to that proposed by XY’s damages expert. It found both parties liable for breach of contract; it also found that XY had "unclean hands," limiting its ability to recover on certain other claims. Because the court could not grant a permanent injunction against ongoing infringement by Trans Ova, the court instead ordered it to pay an ongoing royalty to XY. XY had argued that the post-verdict royalty rates could not be lower than the 15 percent on services incorporating the Sorting patents and 4 percent rate services incorporating the Reverse Sorting patents proposed by XY’s damages expert and adopted by the jury, and Trans Ova had argued that the rates should be the 10 percent rate provided by the license agreement because that was the standard rate XY charged to licensees and, therefore, there was no need for an expert to discuss hypothetical negotiations between the parties. The court compromised on 12.5 percent of all gross receipts for the licensed products plus 2 percent for reverse sorting services.

Trans Ova appealed the verdict, and XY cross-appealed the decision to set the royalty rate below the rate adopted by the jury. The Federal Circuit agreed with XY, stating that without changed circumstances between the first infringement date and the jury’s verdict, lowering the rate would create the "absurd" result that XY would be better off repeatedly suing Trans Ova rather than accepting the 12.5 rate. It remanded the matter to the district court, which issued an order in April 2019 agreeing with XY’s expert that the Sorting patents should have an 18.75 percent royalty rate and the other two categories should carry a 25 percent premium over the Sorting patent rate assessed by the jury, resulting in 23.75 percent for the Reverse Sorting patents. Application of the expert’s formula resulted in a 12.63 percent weighted, blended royalty rate for the IVF service cycle.

One of the Sorting patents was invalidated by the USPTO, and the other six expired by their own terms by December 3, 2019. One week later, Trans Ova moved for partial relief from the final judgment, arguing that the royalty rates should be reduced given the expiration of the seven Sorting patents.

Waiver/timeliness. Trans Ova did not forfeit its right to bring its motion for a reduction in the patent royalties by failing to account for the expiration of the patents in the judgment, the district court said. XY asserted that Trans Ova could not move under Rule 60(b)(5) for a reduction in the royalties now because it had failed to argue before entry of the judgment that the judgment must explicitly account for the expiration of the patents. However, XY did not cite any authority that the principle barring relief from judgment for changed circumstances when the change is anticipated extends to patent expiration. The expiration of patents has self-executing effects regardless of the intent of the parties, including that a patent holder cannot charge royalties on a patent after the patent expires. The fact that all benefits from a patent expire with the patent was an established background legal principle when the original and amended final judgments were entered. Therefore, Trans Ova had no duty to address the expiration of patents prior to entry of the final judgment, the court said.

Furthermore, Trans Ova had not waived its opportunity to ask for relief by waiting to bring its motion until after the last of the Sorting patents had expired. Although it was not necessary for it to wait until then, the court observed that the expiration date was a logical point to bring its motion, and one week after their expiration was a "reasonable time."

Royalty rate. Trans Ova was no longer required to pay the royalty on the Sorting patents because the rate for the Sorting patents in the judgment was separable from the rates on the Reverse Sorting and IVF-related patents. The court agreed with Trans Ova’s argument that the 12.63 percent blended rate was the result of the combination of the 18.75 percent rate for conventional sorting, another 5 percent for reverse sorting, and another 3 percent for IVF-related services. Application of XY’s expert’s formula after the 18.75 percent rate is removed leaves a 3.93 percent blended rate. Although XY argued that the reverse sorting rate was a free-standing 23.75 percent that did not change even after the expiration of the Sorting patents, the court examined the testimony of XY’s expert and concluded that he viewed the Sorting and Reverse Sorting rates as separable and that both the "base rate" for the Sorting patents and the "premium" for the Reverse Sorting patents should be collected only on products that used both sets of patents.

The court said that XY did not contest that the IVF with Reverse Sorting patent expires on January 14, 2022, and that after that date Trans Ova owes only a 5 percent royalty for the Reverse Sorting Patents; this final royalty rate ends altogether with the expiration of the last Reverse Sorting Patent on May 21, 2022.

Contrary to XY’s argument, the court said, its decision does not put Trans Ova, as an infringer, into a better position than XY licensees, who are paying 10 percent royalties until the last patent expires; the licensees are entitled to practice XY’s entire patent portfolio but the amended judgment gave Trans Ova the right to practice only up to 10 patents. The court observed that XY had drafted the amended judgment and could have proposed language providing for a non-diminishing royalty until the expiration of the last patent at issue in the case, although it expressed uncertainty as to whether it could have approved such an arrangement in light of existing precedent.

This case is No. 1:13-cv-00876-WJM-NYW.

Attorneys: Daniel Lynn Moffett (Akin Gump Strauss Hauer & Feld LLP) for XY, LLC. Donald E. Lake, III (Lewis Brisbois Bisgaard & Smith LLP) for Trans Ova Genetics LC.

Companies: XY, LLC; Trans Ova Genetics LC

MainStory: TopStory Patent GCNNews ColoradoNews

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