Tivo v. Echostar: Shifting Focus on Contempt Charges and Little Tolerance for Injunction Non-Compliance

An en banc panel of the Federal Circuit recently modified contempt examinations in patent infringement injunction cases. In Tivo, Inc. v. Echostar Corp., No. 2009-1374, 2011 U.S. App. WL 1486162, (Fed. Cir. Apr. 20, 2011), the Federal Circuit consolidated the two-part KSM test into a single-step inquiry, focusing on the colorable differences between the infringing product and the new, modified product instead of whether the modified product continues to infringe on the patent. Further, the Court warned parties against acting on ambiguously worded injunctions, noting that parties should seek clarification instead of taking unilateral action and foreclosing themselves of appeal.

Background

Tivo designs and sells digital video recorders (DVRs).  Some of Tivo’s DVRs include the ability to time-shift, or record one channel of television while watching another.  Tivo’s owns a U.S. patent on its time-shift process.

Echostar operates a satellite television service.  This service, which competes with cable, usually requires the subscriber to use a set-top box.  Some of Echostar’s set-top boxes have built-in DVR functionality and include the ability to time-shift.  Echostar did not license Tivo’s patent.

Tivo sued Echostar, alleging that Echostar infringed on Tivo’s patent in several models of Echostar set-top boxes.  The District Court for the Eastern District of Texas agreed with Tivo and held that Echostar willfully infringed on Tivo’s patent in eight models of Echostar set-top boxes.  As a result, the court issued a permanent injunction against Echostar, ordering it to (1) “stop making, using, offering to sell, selling, or importing” the infringing products; and to (2) “disable the DVR functionality” in existing and yet-to-be sold set-top boxes.  The court also awarded Tivo $74 million in lost profits and reasonable royalties, among other damages. Id. at *9-10. 

Echostar appealed and the Federal Circuit upheld the district court’s holdings related to the time-shift patent.  Echostar did not appeal the permanent injunction, and the injunction became effective in 2008.  Id. at *10-11.

Subsequently, Echostar modified its DVR software and updated the infringing set-top boxes with the modified software.  It did not recall or disable the set-top boxes or the DVR functionality after updating the set-top boxes.

Tivo then moved the district court to find Echostar in contempt of the permanent injunction.  First, Echostar argued that its modifications in two specific areas of its DVR software were more than colorably different than the infringing software, and thus was not in contempt of infringing Tivo’s patent.  Second, Echostar argued that by replacing the infringing software in existing set-top boxes with the new, modified DVR software, it complied with the disablement provision of the injunction.  Id. at *11-12.

The court was unconvinced by Echostar’s arguments, and held that (1) Echostar’s modified DVR software was not more than colorably different than the infringing software, and thus Echostar continued to infringe and was violating the infringement provision of the injunction.  The court also held that (2) Echostar had a duty to “disable” the infringing DVRs and not merely replace the infringing software with a workaround as Echostar did.  Thus, the court sided with Tivo and found that Echostar should have asked for clarification before it tried to comply with the injunction, and thus Echostar waived any argument that the injunction was unclear or overbroad.  Echostar appealed these holdings to the Federal Circuit, which eventually heard the issues en banc.  Id.

Court Focuses on Comparing Infringing Product with New Product

The Federal Circuit took up several issues on appeal.  First, the Court rejected Echostar’s initial argument that a good faith effort is a defense to civil contempt.  The Court noted that “lack of intent to violate an injunction alone cannot save an infringer from a finding of contempt.”  However, the Court said that good faith attempts “may be considered in assessing penalties, a matter as to which the district court has considerable discretion.”  Id. at *12-13.

Second, on the issue of finding in contempt of a patent infringement injunction, the court rejected the KSM two-part test.  As explained in KSM Fastening Sys., Inc. v. H.A. Jones Co., 776 F.2d 1522, 1530-32 (Fed. Cir. 1985), the test first examines whether a contempt hearing is the appropriate setting to adjudge infringement.  To do this, a court compares the accused product with the adjudged infringing product to determine if there is “more than a colorable difference” between the accused product and the adjudged infringing product such that “substantial open issues with respect to infringement exist.”  Id. at *13.  If open issues do exist, a court cannot continue with a contempt finding and the court will continue with the second step by holding a new trial.

The Court found this two-step process “unworkable” and “overrule[d] that holding of KSM.” Id. In its place is a single step, combining the initial inquiry into whether contempt proceedings were proper with the merits of the alleged contempt.  To determine whether a patent infringement injunction has been violated, a court will use the “more than colorable differences” standard as modified (see below).  If appealed, a court will determine whether the injunction at issue is enforceable, was violated, and whether the sanctions imposed were proper by examining the “broad discretion” of the trial court. Id.

In application to the instant case, the Court found no need to address the issue of whether the district court improperly held contempt proceedings, as was required under the KSM test.  Under the new test, the Court held that there was no abuse of discretion by the district court in proceeding to contempt.  Id.

Third, the Court rejected the current interpretation of the “more than colorable differences” test, which examines whether there are “substantial open issues with respect to infringement to be tried.”  Id. at *14-15.  The Court thought that language “misled” some courts into focusing solely on whether the new device infringed the patent.  Id. The Court replaced that test with an inquiry into “the differences between the features relied upon to establish infringement and the modified features of the newly accused devices.”  Id. at *14.

More specifically, the Court seeks to answer whether the newly accused product is so different from the product previously found to infringe that it raises “a fair ground of doubt as to the wrongfulness of the defendant’s conduct.”  Id.  Particular focus is given to comparing the elements found to infringe within the infringing product to the modified features of the new product.

If one or more elements previously found to infringe has been modified or removed, the court must make an inquiry into whether that modification is significant.  If the differences are significant, the modified product as a whole shall be deemed more than colorably different from the adjudged infringing one, and the inquiry into whether the newly accused product actually infringes is irrelevant.  Whether a modification is “significant” can be determined from examining prior art and seeking obvious modifications or proffering expert testimony.  The Court noted that a non-obvious modification may result in a finding of more than a colorable difference.  If the differences are not significant, the court must determine whether there is continued infringement to find a violation of injunction.  A district court would be bound by any prior claim construction in comparing infringing and modified products.  Id. at *14-15. 

On application, the Court vacated the district court’s finding of contempt due to the presence of the new test.  Under the new test, a court must now examine whether the changes in Echostar’s modified DVR software are significant enough as compared to the infringing features to warrant continued examination.  If the differences are more than colorable between the infringing boxes and the modified boxes, Echostar is entitled to a new infringement proceeding. Id. at *15.

Court Rejects Vagueness and Overbreadth Arguments Against Injunction

Fourth, on the issue of disablement provision of the injunction, the Court rejected Echostar’s argument that vagueness acts as a defense to a holding of contempt.  The Court noted that a party subject to an injunction “cannot unilaterally decide to proceed in the face of that injunction and make an after-the-fact contention that it is unduly vague.”  Id. at 16.  The Court determined that Echostar should have asked the injunction-granting court to clarify or modify the injunction or to appeal the injunction on a vagueness claim.  Id.

Fifth, the Court also rejected Echostar’s contention that the injunction was overbroad in forcing Echostar to disable all DVR functionality in the infringing set-top boxes.  Echostar argued that disabling all DVR functionality would prohibit the use of a non-infringing workaround.  The Court held that Echostar waived its right to argue overbreadth by failing to raise the issue earlier through an appeal at the time of the injunction.  Id. at *18-19.

Conclusion

The Federal Circuit in Tivo shows that contempt is a serious allegation which requires a focused analysis.  Parties defending themselves against an allegation of contempt must be able to show significant differences between the infringing product and a work-around product to avoid a contempt holding and the significant fines that accompany it.  While the Court in Tivo denied a good faith defense, it was clear that the substantive inquiry no longer focuses exclusively on whether the modified product continues to infringe.  Further, parties already dealing with injunctions have now been warned — ambiguous language in the injunction is no defense to alternative readings or unilateral action.  Companies dealing with injunction compliance issues at any stage of the process should contact an experienced attorney.

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Olivier Taillieu

Sarah Brooks

Also See:

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Arkema v. Honeywell Intl.: Federal Circuit Explains MedImmune Standard for Declaratory Judgment Jurisdiction Involving Indirect Patent Infringement

America Invents Act: First-to-File Priority for Patent Applications Begins March 16

Edwards Lifesciences v. Corevalve: Federal Circuit Sides Strongly with Prevailing Plaintiffs Seeking Injunctions