As regular readers know, we are perplexed by excessive statutory prejudgment rates applied to patent infringement awards. Those rates are historically sourced in a world financially & temporally removed from ours, which presently finds itself staring down negative rates. Antiquated statutory rates are increasingly unreasonable and afford plaintiffs windfall gains. The case below affords another such example.

Defendant Arkwright appealed this matter to the Federal Circuit based, in part, on the jury’s damages award, as well as on the prejudgment interest awarded by Judge Tunheim of the US District Court for the State of Minnesota. We do not address all of the damages-related decisions, but focus here on the determination that 10% per year was the appropriate prejudgment interest rate to apply to the jury’s award.

Here is the story: Initially, plaintiffs sought lost profits damages. Plaintiffs’ damages expert, Donald Gorowsky, provided an opinion relying only on lost profits – he did not provide any reasonable royalty alternative. In pre-trial motions, defense counsel sought to strike Mr. Gorowsky’s opinions, but Judge Tunheim chose to allow Mr. Gorowsky to testify. After plaintiffs presented their affirmative case at trial, however, Judge Tunheim granted defendant’s judgment as a matter of law on lost profits and instructed the jury to disregard the lost profits testimony of Mr. Gorowsky.

The jury then heard testimony from defendant’s expert, Arthur Cobb, who opined to a reasonable royalty of 2%. The jury ultimately returned a damages award of $2.6 million – a figure roughly seven times Mr. Cobb’s proffered damages amount. In his post-trial opinion, Judge Tunheim explained that the jury’s award of $2.6 million amounted to a 15.5% royalty rate on infringing sales from 2010 to 2017, when one averaged competing estimates for accused products at issue.

The court rejected a new trial on damages explaining that defendant’s gross margin supported the double-digit reasonable royalty.

Next, the court awarded prejudgment interest of $1.9 million on the $2.6 million award. This amount was derived using Minnesota’s statutory rate of 10% per annum. As the supporting Exhibit below shows, the 10% statutory rate was applied on the entire $2.6 million award from the date of first infringement through the date of judgment.

The prejudgment interest calculation does not afford consideration that the 15.5% reasonable royalty presumably would have been earned incrementally over the course of the infringement period as individual accused products were sold… and that as of the date of first infringement, only a small portion of total infringement had occurred. Instead, the prejudgment interest approach conceptually presupposes a fully paid-up, lump-sum royalty on the eve of infringement. Defense counsel made these arguments:

Importantly, nowhere in Judge Tunheim’s opinion do we find reference to the 15.5% rate as a “running” royalty; rather, it is described in the excerpt above as “a clean royalty rate.” And the only reference to “lump sum” is excerpted below, which quotes the passage above:

Accordingly, the court accepted Mr. Gorowsky’s PJI calculation.

All of these issues were appealed by defense counsel. In turn, the Federal Circuit ultimately affirmed Judge Tunheim’s judgment, as explained below:

We understand the charge of the trier of fact is to “make the patent owner whole”. Double-digit statutory rates increasingly afford windfall gains in a zero-rate environment by providing far more than the amount adequate to compensate for infringement. In this case, over 42% of the award was an interest payment (i.e., $1,915,328/$4,539,556 = 42.19%). Attorneys representing plaintiffs with a lump-sum royalty prospect stretching back years & years should consider the PJI windfalls evidently on offer from the US District Court for the State of Minnesota.