An appeals court has mostly extinguished Verizon Communications Inc.'s hopes of turning around what may be the most disastrous patent fight in the company's history.
The U.S. Court of Appeals for the Federal Circuit on Friday affirmed a $140 million infringement verdict won last year by ActiveVideo Networks Inc. and its lawyers at Morgan Lewis & Bockius. The court also upheld an order that required Verizon to make an additional $115 million in "sunset royalty" payments to ActiveVideo while it tries to design around the infringed patents. Here's the decision.
ActiveVideo sued Verizon in May 2010, alleging that its FiOS-TV video-on-demand service infringes five of its patents. Filed in the "rocket docket" Eastern District of Virginia, the case sped to trial in fifteen months. A jury in August 2011 found Verizon liable for infringing four patents, and socked the cable company with $115 million in damages. The jury also found that ActiveVideo infringed two Verizon patents, but pegged Verizon's damages at just $16,000.
After trial, the news just got worse for Verizon and its lawyers at Kellogg Huber Hansen Todd Evans & Figel and Simpson Thatcher & Bartlett. U.S. District Judge Raymond Jackson, who sits in Alexandria, Va., tacked on $25 million in supplemental damages and interest. What's more, last October Jackson issued a rare injunction forcing Verizon to stop infringing the four patents. Although he stayed the injunction for eight months to give Verizon time to design around the patents, during that time Verizon had to pay ActiveVideo $2.74 per FiOS-TV subscriber per month. That represents a staggering 40 percent of Verizon's profits from Fios-TV. These "sunset royalties" brought Verizon's total liability to more than $250 million. (As we previously reported, ActiveVideo has asserted that Verizon's design-around continues to infringe.)
Verizon tapped Kellogg Huber's Michael Kellogg for the Federal Circuit appeal. At oral arguments in May, he maintained that the jury erred in finding infringement and asserted that the sunset royalty payments were too high. He pointed to the royalties paid by Verizon's competitor, Cablevision, which licenses ActiveVideo's patents for just 17 cents per subscriber per month. Finally, Kellogg argued that Jackson erred on summary judgment when he invalidated a patent Verizon had hoped to assert against ActiveVideo.
Kellogg's efforts came up short. The Federal Circuit reversed the finding of infringement as to one patent, but affirmed as to the other three. The court left the jury's verdict intact and ruled that the royalty payments were not clear error. The court did agree, however, that Jackson shouldn't have tossed the Verizon patent on summary judgment.
Morgan Lewis partner Daniel Johnson Jr., who served as co-lead counsel for ActiveVideo at trial, told us that Verizon could have settled for much less. "They refused. They were as aggressive as could be at every stage," he said. "That gave us no choice other than to go to trial." Johnson also told us that he's not concerned about any exposure on the patent that the Federal Circuit revived for Verizon.
Jeff Miller, president and CEO of ActiveVideo Networks, said in a statement that the company is "gratified" by verdict. " We're glad to have this part of the case behind us so that we can put all of our energies into doing what ActiveVideo Networks does best: enabling our customers to deliver the best TV Navigation, Guides and content experiences to all of their subscribers."
Kellogg was not available for comment. We also reached out to Verizon, but did not hear back.