Citations
- 691 F. Supp. 2d 946
Full opinion text
MEMORANDUM OPINION AND ORDER ON MOTIONS RELATING TO TRANSAMERICA’S COMPLIANCE WITH PERMANENT INJUNCTION
MARK W. BENNETT, District Judge.
TABLE OF CONTENTS
I. INTRODUCTION..........................................................949
A. Background...........................................................949
1. The lawsuit.......................................................949
2. The patent and the constructions of pertinent terms...................949
3. The jury verdict, post-trial motions, and permanent injunction.........954
B. Motions Now Before The Court .........................................956
C. The Evidentiary Hearing ..............................................957
D. The Tentative Ruling..................................................957
E. The Closing Arguments And Final Comments............................958
II. ANALYSIS................................................................958
A. Standards And Burdens Of Proof.......................................958
1. Arguments of the parties ...........................................958
2. Tentative Analysis.................................................960
a. The status quo.................................................960
b. Transamerica’s burden.........................................960
c. The nature of Lincoln’s motion and Lincoln’s burden..............961
d. The interplay between the motions ..............................963
3. The parties’ closing arguments......................................963
4. Final analysis.....................................................964
B. Ti'ansamerica’s Motion ................................................966
1. The March 2009 “design around ”...................................966
a. Nature of the “design around ”..................................966
b. Arguments of the parties........................................968
c. Tentative analysis.............................................969
d. The parties’closing arguments..................................972
e. Final analysis.................................................972
2. The July 6 and September 12, 2009, “design arounds ”.................972
a. Nature of the “design arounds ”.................................973
i. The July 6, 2009, “design around ”..........................973
ii. The September 12,2009, “design around ”....................974
iii. Expert analyses...........................................978
b. Arguments of the parties........................................985
c. Tentative analysis.............................................987
d. The parties’ closing arguments..................................994
i. Transamerica’s closing argument...........................994
ii. Lincoln’s closing argument.................................995
iii. Transamerica’s rebuttal ...................................995
iv. The e-mail exchanges......................................996
e. The final analysis..............................................996
i. Dr. Kelly’s participation in the September 12, 2009, “design around ”........................................996
ii. Credibility determinations.................................997
iii. Reconsideration of the September 12, 2009, “design around”................................................999
3. Summary ........................................................1001
C. Lincoln’s Motion.....................................................1002
1. Arguments of the parties ..........................................1003
2. Tentative analysis................................................1003
3. The parties’ closing arguments and the court’s final analysis.........1006
4. Summary ........................................................1007
III. CONCLUSION..................... .....................................1007
After a jury verdict finding patent infringement and awarding damages based on a reasonable royalty rate, and after the court’s entry of a permanent injunction against further infringement, the parties in this litigation have filed post-trial motions concerning the infringer’s compliance with the permanent injunction. The infringer asserts that changed circumstances, consisting of its implementation of various “design arounds,” make prospective application of the permanent injunction inequitable and, indeed, that one of its “design arounds” warrants refund of the royalties that it has paid since implementing that “design around.” The patent holder asserts that the infringer’s “design arounds” still infringe, so that, pursuant to the terms of the permanent injunction, the patent holder is now entitled to a further royalty, at a further enhanced rate, for continued infringement.
I. INTRODUCTION
A. Background
1. The lawsuit
On August 8, 2006, Transamerica Life Insurance Company, Western Reserve Life Assurance Co. of Ohio, and Transamerica Financial Life Insurance Company, collectively “Transamerica,” filed a Complaint For Declaratory Judgment (docket no. 1) initiating this action. In its Complaint, Transamerica asserted, in essence, that it is not infringing a patent held by Lincoln National Life Insurance Company (Lincoln) by selling various annuity product contracts. Transamerica also alleged that the patent-in-suit is invalid on “anticipation” and “obviousness” grounds, pursuant to 35 U.S.C. §§ 102 and 103, respectively, and subsequently clarified in amended pleadings that it was also asserting invalidity of the patent for an “inadequate specification,” pursuant to 35 U.S.C. § 112. See Amended And Substituted Complaint (docket no. 52). In contrast, in an Answer To Plaintiffs’ Complaint And Patent Infringement Counterclaim (docket no. 14), filed December 29, 2006, Lincoln sought declarations that the patent-in-suit is not invalid and that Transamerica is infringing the patent, as well as damages for infringement, injunctive relief from such infringement, and reasonable attorney fees for litigating this matter.
2. The patent and the constructions of pertinent terms
This litigation involves United States Patent No. 7,089,201 B1 (the '201 patent), entitled “METHOD AND APPARATUS FOR PROVIDING RETIREMENT INCOME BENEFITS,” which is assigned to Lincoln. In pertinent part, the '201 patent is a “business method” patent. See State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368, 1375 (Fed.Cir.1998) (taking the opportunity “to lay [to rest] this ill-conceived notion” that a method of doing business was not “within the statutory classes” of patentable inventions); accord In re Comiskey, 499 F.3d 1365, 1374 (Fed.Cir.2007) (explaining that State Street Bank held that patentability of a business method “does ‘not turn on whether the claimed subject matter does “business” instead of something else’ ” (quoting State Street Bank, 149 F.3d at 1377)). The business methods claimed in the '201 patent are “[cjomputerized methods for administering variable annuity plans.” The '201 patent, Abstract.
Independent Claim 35 of the '201 patent, the claim at issue for present purposes, claims a five-step computerized method for administering a variable annuity plan having, inter alia, a guaranteed minimum payment feature associated with a systematic withdrawal program. Claim 35 is quoted below, with bold text indicating claim terms for which the parties had agreed on a construction and italicized text indicating claim terms for which the parties disputed the proper construction.
35. A computerized method for administering a variable annuity plan having a guaranteed minimum payment feature associated with a systematic withdrawal program, and for periodically determining an amount of a scheduled payment to be made to the owner under the plan, comprising the steps of:
a) storing data relating to a variable annuity account, including data relating to at least one of an account value, a withdrawal rate, a scheduled payment, a payout term and a period of benefit payments;
b) determining an initial scheduled payment;
c) periodically determining the account value associated with the plan and making the scheduled payment by withdrawing that amount from the account value;
d) monitoring for an unscheduled withdrawal made under the plan and adjusting the amount of the scheduled payment in response to said unscheduled withdrawal; and
e) periodically paying the scheduled payment to the owner for the period of benefit payments, even if the account value is exhausted before all payments have been made.
In a Memorandum Opinion And Order Regarding Construction Of Disputed Patent Claim Terms (the Markman Ruling) (docket no. 64), entered March 10, 2008, the court adopted the parties’ agreed constructions of certain terms and construed the disputed claim terms. See Transamerica Life Ins. Co. v. Lincoln Nat’l Life Ins. Co., 550 F.Supp.2d 865 (N.D.Iowa 2008). As to the language of Claim 35 at issue here, the parties agreed that “comprising the steps of’ is open-ended language meaning that the method includes the steps listed in the claim, but is not limited to those steps or the order in which the steps are recited in the claim. They also agreed that “storing data relating to a variable annuity account” means “storing information relating to a variable annuity account.” The disputed claim terms of Claim 35, the parties’ proffered constructions of those terms, and the court’s determination of the appropriate constructions are set forth in the following table:
3. The jury verdict, post-trial motions, and permanent injunction
On February 13, 2009, a jury found infringement by Transamerica of all pertinent claims the '201 patent beginning August 8, 2006; awarded damages, for a reasonable royalty from the infringement date to the time of trial in the amount of $13,098,349, at a royalty rate of 11 basis points, with a base of $11,907,589,871; and rejected all of Transamerica’s invalidity claims. See Verdict Form (docket no. 276). By Memorandum Opinion And Order (docket no. 313), dated June 8, 2009, the court denied Transamerica’s post-trial motions, granted Lincoln’s post-trial motion for a' Permanent Injunction, and granted Lincoln’s motion for prejudgment interest. See Transamerica Life Ins. Co. v. Lincoln Nat’l Life Ins. Co., 625 F.Supp.2d 702 (N.D.Iowa 2009).
Somewhat more specifically, the Permanent Injunction entered by the court on June 8, 2009, (1) enjoined Transamerica from using and continuing to use a claimed computerized method or one that was not “colorably distinct” to administer variable annuity riders, including riders with eertain specified annuities; (2) required an accounting and payment by Transamerica of a royalty at the rate of 11 basis points, as determined by the jury for pre-trial infringement, for the time from trial to commencement of the injunction (five months); (3) gave Transamerica ten days from the date of the Permanent Injunction to implement non-infringing alternatives and provided that, ninety days after the implementation period, Transamerica had to provide an accounting and pay a royalty at the rate of 22 basis points for using the claimed method or a method that was not “colorably distinct” for any riders during that ninety-day period; and (4) provided that, if, at the end of the ninety-day period (i.e., one hundred days after entry of the Permanent Injunction), Transamerica had failed to show to Lincoln’s “reasonable satisfaction” that Transamerica had ceased using a claimed method or a method that is not “colorably distinct” from a claimed method, Lincoln “may” move the court for an accounting and a further royalty payment at a further enhanced rate of 44 basis points.. See Permanent Injunction (docket no. 313).
' The Permanent Injunction was entered after soliciting a proposed permanent injunction from Lincoln, see Order (docket no. 309); Lincoln’s Proposed Permanent Injunction Order (docket no. 310), and objections to the proposed language by Transamerica, see Transamerica’s Comments On Proposed Permanent Injunction Order (docket no. 312). The court modified some proposed language for the final version of the Permanent Injunction in light of Transamerica’s objections. See Memorandum Opinion And Order (docket no. 313).
B. Motions Now Before The Court
Two motions are now before the court. The first is Transamerica’s October 18, 2009, Motion For Relief From And Modification Of Permanent Injunction And Refund Of Royalty Payments Made Under Protest (docket no. 345) (Transamerica’s Motion). The second is Lincoln’s November 4, 2009, Motion For A Further Accounting And Ongoing Royalty Payments (docket no. 349) (Lincoln’s Motion).
In its motion, Transamerica seeks modification of the Permanent Injunction to allow Transamerica to use three “design arounds,” implemented on March 30, 2009, July 6, 2009, and September 12, 2009, respectively, to administer specified riders on the ground that Transamerica’s “design arounds” are more than “colorably distinct” from Lincoln’s claimed method (ie., the “design arounds” are not infringing). The March 30, 2009, “design around” purportedly instituted a “manual” method to pay guaranteed benefits when account values were low or exhausted, thereby avoiding infringement of Step (e) of Claim 35 of the '201 patent. The July 6, 2009, “design around,” described by Transamerica as an “interim” solution, purportedly “off-shored” to a Transamerica affiliate in Canada calculations of initial maximum annual withdrawal amounts (MAWAs) for policies with new or upgraded guaranteed minimum withdrawal benefit (GMWB) riders, thereby avoiding infringement of Step (b) of Claim 35 for those new or upgraded riders. The September 12, 2009, “design around” purportedly “off-shored” various calculations to an unrelated third party in Canada, described herein as Citi Canada, so that Transamerica now “determin[es]” the initial scheduled payment under all pertinent riders and makes all “adjust[ments]” to the amount of the scheduled payment under those riders in Canada, thereby avoiding infringement of Steps (b) and (d) of Claim 35. Transamerica also seeks a refund of royalties paid under protest since the March 30, 2009, “design around,” because Transamerica contends that it was not infringing Claim 35 after that “design around.” Lincoln contends that no modification of the Permanent Injunction is appropriate, because Transamerica’s “design arounds” still infringe.
In its motion, Lincoln seeks a further royalty at a further enhanced rate of 44 basis points, pursuant to paragraph 4 of the Permanent Injunction, for continued infringement after one hundred days from entry of the Permanent Injunction, because Lincoln is not “reasonably satisfied” that Transamerica is no longer infringing. Transamerica asserts that such an enhanced royalty rate is a “contempt” penalty, which is not appropriate here, either because Transamerica is no longer infringing or because Transamerica has made good faith efforts to create a non-infringing method.
C. The Evidentiary Hearing
The court held an evidentiary hearing on the motions concerning Transamerica’s compliance with the Permanent Injunction on February 8 and 9, 2010. The parties offered thousands of pages of exhibits, all of which were admitted without objections. See Witness And Exhibit List (docket no. 392). However, because the court did not receive those exhibits until the last business day before the hearing, even though the hearing had been set more than two months in advance, the court was unable to review all of the exhibits before the hearing. Under the circumstances, the court did its best to identify and review the most important exhibits prior to the hearing.
Transamerica also presented the testimony of Tracy Martin, its director of post-issue operations and the “lead” from an operational side of planning for the March 30, 2009, and July 6, 2009, “design arounds”; Keith Neill, Transamerica’s implementation lead for product development, who was responsible, with his staff, for effecting the July 6, 2009, and September 12, 2009, “design arounds” in the Transamerica policy administration system; and Dr. John Patrick Joseph Kelly, a computer scientist and Transamerica’s expert witness concerning the “design arounds” in the Transamerica policy administration system. Lincoln presented the testimony of its expert witness, Richard Romano, the regional practice director for a consulting company that provides professional consultancy services to financial services companies related to program management, business analysis, technical analysis, and quality assurance. Lincoln also submitted deposition designations from depositions on October 14, 2009, of Ms. Martin, Mr. Neill, and Lynn Blankenship, Transamerica’s director of business applications; a deposition on November 4, 2009, of Robert Frederick, senior vice president of Transamerica Life Insurance Company and chief operating officer of Transamerica Capital Management; and a deposition on November 5, 2009, of David Hopewell, chief financial officer for the retail annuity business unit within Transamerica.
The briefing by the parties was very thorough, perhaps even to the point of over-briefing, and counsel were obviously well-prepared for the hearing. Thus, the opening statements were very illuminating, and the examination of witnesses was well-conducted.
D. The Tentative Ruling
At the conclusion of the evidentiary hearing, the court promised the parties that it would, before the end of the following week, provide them with, a “tentative draft ruling” on thé pending motions for their comment in final closing arguments, to be held telephonically at a later date. The court has followed a similar procedure of providing the parties with tentative draft rulings before final arguments for claim construction rulings in this and two prior patent cases. See Transamerica Life Ins. Co., 550 F.Supp.2d at 872; Ideal Instruments, Inc. v. Rivard Instruments, Inc., 498 F.Supp.2d 1131, 1136 (N.D.Iowa 2007); Maytag Corp. v. Electrolux Home Prods, Inc., 411 F.Supp.2d 1008, 1015-16 (N.D.Iowa 2006). The court has found that such a procedure is very effective in focusing the parties’ arguments on true disputes. The court fulfilled its promise in this case on February 22, 2010, by providing the parties with a “tentative draft ruling” some eighty-two pages in length. That same day, the court entered an Order (docket no. 396, as amended docket no. 397) setting telephonic closing arguments for February 26, 2010.
E. The Closing Arguments And Final Comments
The closing arguments took place, as scheduled, on February 26, 2010. As anticipated, the closing arguments focused on the key disputes in light of the court’s “tentative draft ruling,” albeit without waiving any prior arguments. The closing arguments were also quite illuminating.
However, apparently not content with the closing arguments on the record, on February 27, 2010, Transamerica’s counsel included in an e-mail to the court, intended primarily to convey citations for certain cases referenced in its closing argument, additional argument concerning whether or not facts were in dispute and whether or not expert testimony was appropriate. Lincoln’s counsel responded to Transamerica’s additional comments in an e-mail of his own on February 28, 2010. With leave of the court, Transamerica then replied by e-mail dated March 1, 2010.
II. ANALYSIS
A. Standards And Burdens Of Proof
Prior to the evidentiary hearing, the parties disputed the order of presentation of arguments and evidence at the hearing, the standards and burdens of proof applicable to the motions now pending before the court, and, indeed, the nature of Lincoln’s motion. Transamerica filed a Motion For Determination Of The Burdens Of Proof (docket no. 380), on January 19, 2010, seeking expedited pre-hearing determination of these questions. The court summarily denied that motion on January 21, 2010, because Transamerica had had ample opportunity to request such a prehearing ruling in the months between filing of the present motions and the evidentiary hearing, but had not done so. The court stated however, that Transamerica, as the first movant, would proceed first at the hearing, unless the parties reached some other agreement. See Order (docket no. 381). At the hearing, the parties continued to dispute the applicable standards and burdens of proof, as well as the nature of Lincoln’s motion. The court must now resolve those disputes.
1. Arguments of the parties
When Transamerica’s Motion was the only motion before the court, Transamerica acknowledged that it bore the burden to prove that modification of the Permanent Injunction is appropriate. Transamerica asserted that it was entitled to modification of the Permanent Injunction according to each of three standards. First, Transamerica asserted that it was entitled to modification of the Permanent Injunction pursuant to the first clause of Rule 60(b)(5) of the Federal Rules of Civil Procedure, on the ground that the “judgment has been satisfied, released, or discharged,” because it had implemented “design arounds” that were no longer infringing, citing Newhouse v. McCormick & Co., 157 F.3d 582, 584 (8th Cir.1998). Second, Transamerica asserted that it was entitled to modification of the Permanent Injunction pursuant to the last clause of Rule 60(b)(5), on the ground that “applying [the judgment] prospectively is no longer equitable,” citing Horne v. Flores, - U.S. -, 129 S.Ct. 2579, 2593, 174 L.Ed.2d 406 (2009) (proof that prospective application of a judgment is no longer equitable may include a change in factual conditions or law that renders continued enforcement of the judgment detrimental to the public interest); Kaler v. Bala, 571 F.3d 729, 734 (8th Cir.2009) (modification pursuant to Rule 60(b)(5) (last clause) is appropriate if a critical element of the original ruling no longer exists). Finally, Transamerica asserted that it is entitled to modification of the Permanent Injunction pursuant to what appears to be a “free-standing” equitable standard, based on the court’s equitable power to modify a permanent injunction owing to changed circumstances, citing Pro Edge L.P. v. Gue, 411 F.Supp.2d 1080, 1086-87 (N.D.Iowa 2006) (indicating that this is, in fact, a Rule 60(b)(5) (last clause) standard); International Rectifier Corp. v. Samsung Elec. Co., 361 F.3d 1355, 1359 (Fed.Cir.2004) (stating that modification of a patent-based injunction should be made after applying Federal Circuit law, and “District courts have broad discretion in determining the scope of injunctive relief, and this court reviews a district court’s decision granting, denying, or modifying an injunction, in a patent case, for abuse of discretion, applying Federal Circuit law,” in turn citing Carborundum Co. v. Molten Metal Equip. Innovations, Inc., 72 F.3d 872, 881 (Fed.Cir.1995), without reference to Rule 60(b)(5)).
In Lincoln’s Combined Brief (docket no. 349), in resistance to Transamerica’s Motion and in support of its own, Lincoln asserted that, at least as to its own motion, the court has the power to grant the relief necessary to effect compliance with its decree, citing Hartman v. Lyng, 884 F.2d 1103, 1106 (8th Cir.1989). Lincoln then relied on its reading of paragraph 4 of the Permanent Injunction as requiring Transamerica to show that it has made more than colorable changes to its infringing method and that Lincoln’s dissatisfaction with the changes was not “reasonable.” Lincoln conceded that “reasonable satisfaction” under paragraph 4 is determined objectively, citing Advantage Consulting Group, Ltd. v. ADT Security Sys., Inc., 306 F.3d 582, 589 (8th Cir.2002), although the “reasonable satisfaction” language at issue in that case pertained to performance of a contract, not to a permanent injunction. Thus, Lincoln contended that the applicable standard, as dictated by paragraph 4 of the Permanent Injunction, was whether or not Lincoln was “reasonably satisfied” that Transamerica was no longer infringing, but Lincoln argued that paragraph 4 places the burden on Transamerica to show to the court’s reasonable satisfaction, just as Transamerica had tried to show to Lincoln’s reasonable satisfaction, that Transamerica is not infringing.
In Transamerica’s Resistance and Reply (docket no. 364), that is, its resistance to Lincoln’s Motion and its Reply in support of its own Motion, Transamerica asserted that Lincoln’s Motion is for “contempt,” so that Lincoln must prove by clear and convincing evidence that Transamerica is in violation of the Permanent Injunction, citing Pro Edge L.P. v. Gue, 377 F.Supp.2d 694, 698 (N.D.Iowa 2005) (stating that substance, not nomenclature, controls the nature of a motion, although this was not a “contempt” ruling); Hartman, 884 F.2d at 1106 (stating that the power to effect necessary relief is the power to craft a remedy for “contempt”); KSM Fastening Sys., Inc. v. H.A. Jones Co., 776 F.2d 1522, 1524 (Fed.Cir.1985) (the patent holder “bears the heavy burden of proving violation [of an injunction] by clear and convincing evidence” to obtain contempt sanctions); id. at 1532 (using “violation of an injunction” and “in contempt of an injunction” interchangeably). Transamerica also argued that contempt is not appropriate when a former infringer has made a good faith effort to modify its infringing conduct, citing Arbek Mfg. v. Moazzam, 55 F.3d 1567, 1570 (Fed.Cir.1995). Transamerica also argued that the following cases explain what is meant by “colorably distinct”: Acumed LLC v. Stryker Corp., 525 F.3d 1319, 1324 (Fed.Cir.2008); KSM Fastening Sys., Inc. v. H.A. Jones Co., 776 F.2d 1522, 1531-32 (Fed.Cir.1985). Transamerica argued that, because Lincoln’s motion is for “contempt,” if Lincoln fails to carry its “heavy burden,” then whether the modified method infringes must be determined in a separate action, not a summary contempt proceeding, citing MAC Corp. of Am. v. Williams Patent Crusher & Pulverizer Co., 767 F.2d 882, 885 (Fed.Cir.1985); KSM, 776 F.2d at 1531 (“If substantial issues need to be litigated, particularly if expert and other testimony subject to cross-examination would be helpful or necessary, the court may properly require a supplemental or new complaint.”). In Transamerica’s subsequent motion for prehearing determination of burdens (docket no. 380), which the court summarily denied, Transamerica added a citation to Additive Controls & Measurement Sys. v. Flowdata, Inc., 154 F.3d 1345, 1349 (Fed.Cir.1998) (if there are “substantial open issues” of infringement, then contempt proceedings are inappropriate, and the issue of infringement must be determined in a separate action).
In Lincoln’s Reply (docket no. 369), in support of its Motion, Lincoln asserted that its Motion is not a motion for “contempt,” but a motion pursuant to paragraph 4 of the Permanent Injunction, so that, as the party seeking modification of the Permanent Injunction, and the party on whom paragraph 4 places the burden, Transamerica bears the burden of proving that its “design arounds” are “colorably distinct” and non-infringing, so that Lincoln should have been “reasonably satisfied.”
2. Tentative Analysis
The court tentatively found that the happenstance of the filing of motions by both parties concerning substantially the same issue — Transamerica’s compliance with the Permanent Injunction — does not shift the entire burden to one party or the other. Rather, the court tentatively found that each party continues to bear the appropriate burden of proof otherwise applicable to its motion.
a. The status quo
Specifically, the court tentatively found that the status quo, in the absence of relief to either party, is that Transamerica remains subject to the enhanced royalty rate of 22 basis points provided in paragraph 3 of the Permanent Injunction for failure to implement non-infringing alternatives within the ten-day implementation period. Transamerica can obtain relief from a royalty at that rate only by showing that it is no longer infringing. Similarly, Lincoln can only obtain a higher royalty rate, if Lincoln shows that it is entitled to a further enhancement of the royalty rate. The court did not read the Permanent Injunction to impose a royalty rate of 22 basis points only for the 90 days after the ten-day implementation period. Rather, the court read it to impose a royalty rate of 22 basis points after the ten-day implementation period, unless further enhancement or other modification is appropriate. Thus, the court tentatively concluded that both parties are attempting to upset the “status quo” of continued royalty payments for continued infringement at the rate of 22 basis points.
b. Transamerica’s burden
The court also tentatively concluded that, to obtain a modification of the Permanent Injunction, Transamerica has the burden to prove that circumstances have changed, so that it is no longer equitable to apply the injunction prospectively. Fed.R.Civ.P. 60(b)(5) (last clause). Under Rule 65(b), the party seeking relief from the judgment (or injunction), here Transamerica, bears the burden of establishing that changed circumstances warrant relief. Horne, 129 S.Ct. at 2593. Although International Rectifier Corp. v. Samsung Elec. Co., 361 F.3d 1355, 1359 (Fed.Cir.2004), and the cases cited therein, state that modification of a patent-based injunction should be made after applying Federal Circuit law, and “District courts have broad discretion in determining the scope of injunctive relief,” with no explicit citation to Rule 60(b)(5), the “discretion” to “modify” an injunction in a patent case is nowhere excluded from Rule 60(b)(5), and the Rule 60(b)(5) (last clause) standard appeared to this court to be an appropriate guide to the court’s exercise of the “discretion” it has under International Rectifier. Moreover, the court tentatively found that it may disregard Transamerica’s argument based on Rule 60(b)(5) (first clause) — that Transamerica is entitled to relief because it has “satisfied” the judgment by full compliance with the Permanent Injunction— because the court tentatively found that the disposition of Transamerica’s motion would be the same whether the court uses a “satisfied the judgment” or a “no longer equitable to enforce the injunction” standard.
In its “tentative draft ruling,” in the introduction to its analysis of Transamerica’s Motion, the court added, further, that a showing that any one (or more) of Transamerica’s “design arounds” does not infringe — that is, is more than “colorably distinct” from the infringing method— would plainly be a “significant change in factual conditions” sufficient to render continued enforcement of the Permanent Injunction inappropriate as “detrimental to the public interest.” Id.; Fed.R.Civ.P. 65(b)(5) (last clause). The court rejected, at least tentatively, any contention that some lesser showing — for example, that Transamerica has made a significant effort to create a non-infringing “design around” — is sufficient basis to find that it is no longer equitable to apply the injunction prospectively. The court explained that, in light of the public interest in protecting patent rights, evident from the patent laws themselves, however hard an infringer may have tried to create a non-infringing method, if the resulting “new” method still infringes, it is still subject to an injunction against infringement, and applying the injunction prospectively remains equitable.
c. The nature of Lincoln’s motion and Lincoln’s burden
Transamerica contends that Lincoln’s motion is necessarily one for “contempt,” on which Lincoln bears the burden of proof by “clear and convincing evidence” that Transamerica is still infringing, and Transamerica can escape a finding of “contempt” by a showing that it has made “good faith” efforts to avoid infringement. The court tentatively concluded that, if the Permanent Injunction consisted of just paragraph 1 — the prohibition oh using and continuing to use the claimed method or a method that is not colorably distinct from the claimed method to administer certain specified riders — then the court would probably agree with Transamerica that Lincoln’s motion for a further accounting and payment of a further royalty based on continued infringement by Transamerica’s “design arounds” is a motion for “contempt.” See, e.g., Hartman v. Lyng, 884 F.2d 1103, 1106 (8th Cir.1989) (the purposes of contempt power are to effectuate compliance with the court’s order or process and to compensate individuals from harm incurred by noncompliance); KSM Fastening Sys., Inc. v. H.A. Jones Co., Inc., 776 F.2d 1522, 1524 (Fed.Cir.1985) (explaining when a patent holder’s action is properly considered a “contempt” action and when it should be a separate action).
Here, however, the court tentatively agreed with Lincoln that Lincoln’s motion is for a specific remedy provided in paragraph 4 of the Permanent Injunction. Paragraph 4 provides that, if, at the end of the 100-day period following entry of the Permanent Injunction, Transamerica has failed to show to Lincoln’s “reasonable satisfaction” that Transamerica has ceased using a claimed method or a method that is not “colorably distinct” from a claimed method, Lincoln “may” move the court for an accounting and a further royalty payment at the further enhanced rate of 44 basis points. Thus, the court tentatively concluded that the Permanent Injunction itself provides for the motion that Lincoln has filed and, at least arguably, states the applicable procedure, standards, and burden of proof for resolving that motion.
Lincoln contends that paragraph 4 places the burden on Transamerica to show to the court’s reasonable satisfaction, just as Transamerica had to try to show to Lincoln’s reasonable satisfaction, that Transamerica is not infringing. The court disagreed, in its tentative ruling. The court tentatively concluded, instead, that whatever burden Transamerica may have had before Lincoln filed its motion, Lincoln now has the burden as the movant pursuant to paragraph 4 to prove whatever is required to obtain a further royalty at a further enhanced rate. This conclusion was again based on the language of the Permanent Injunction, which provides that once Transamerica has attempted to make the showing that it is no longer infringing to Lincoln’s “reasonable satisfaction,” Lincoln “may” move the court for an accounting and further royalty payment. By authorizing Lincoln to make such a motion, the court tentatively reasoned, paragraph 4’ of the Permanent Injunction at least implicitly places the burden on Lincoln to show that it is entitled to the further relief provided in paragraph 4.
As to what Lincoln must prove, under the plain language of the Permanent Injunction, the court tentatively concluded that, to seek a further enhancement of the royalty rate to 44 basis points, Lincoln must prove that it was not “reasonably satisfied” that Transamerica’s “design arounds” are “colorably distinct” from Transamerica’s infringing method. Permanent Injunction, ¶ 4. Lincoln concedes that the “reasonable satisfaction” standard is an “objective” one, but Lincoln assumes that, if it shows that it was not “reasonably satisfied,” then it is entitled to a further royalty at a further enhanced rate. In its tentative analysis, the court read paragraph 4 to provide that Lincoln’s “reasonable” dissatisfaction just opens the door to the court’s consideration, in its discretion, of whether or not to require an accounting and payment of a further royalty at a further enhanced rate. The Permanent Injunction says nothing about the court being required to raise the royalty rate, if Lincoln so moves or if Lincoln was not “reasonably satisfied.” Rather, the Permanent Injunction expressly gives Lincoln the discretion to decide whether or not to move for a further enhancement of the royalty rate, if Lincoln is not “reasonably satisfied.” Permanent Injunction, ¶ 4 (“Lincoln may move the court....”). The court tentatively concluded that paragraph 4 of the Permanent Injunction then leaves the court with the discretion to decide whether or not to require an accounting and payment of a further royalty at a further enhanced rate under the circumstances presented.
In its tentative ruling, the court found the differences between paragraphs 3 and 4 of the Permanent Injunction were instructive. While paragraph 3 provides that Transamerica must do an accounting and pay a royalty at an enhanced rate of 22 basis points for infringement during the 90-day period after the implementation period, without any “trigger” or motion by Lincoln, paragraph 4 provides for a further accounting and further royalty payment at a further enhanced rate of 44 basis points only if Lincoln is not “reasonably satisfied” and moves the court. The court tentatively reasoned that court action is required by paragraph 4, but not by paragraph 3, specifically because the court retains the discretion under paragraph 4 to decide whether or not to grant the relief provided in that paragraph.
Thus, pursuant to what the court found was the plain language of paragraph 4 of the Permanent Injunction, the court tentatively concluded that Lincoln must prove the following: (1) that it was not “reasonably satisfied” with Transamerica’s “design arounds,” to “open the door” to the court’s consideration of whether or not to grant further relief, and if Lincoln makes that showing, (2) that a further accounting and payment of a further royalty at a further enhanced rate are appropriate (and for what period of further infringement).
d. The interplay between the motions
The question still remaining after these tentative conclusions was whether resolution of one of the motions before the court has a determinative or preclusive effect on the other motion now before the court. The court’s tentative answer was not necessarily. There is plainly some relationship between whether Transamerica’s “design arounds” are more than “colorably distinct” from a claimed method and whether Lincoln’s dissatisfaction with those “design arounds” is “reasonable,” but the court tentatively concluded hat does not mean that those questions are two sides to the same coin.
Specifically, the court reasoned in its tentative draft ruling that, to satisfy its first burden, Lincoln does not have to be right that Transamerica’s “design arounds” still infringe or are not “colorably distinct” to open the door to the court’s consideration of whether Transamerica must pay a further royalty at a further enhanced rate, Lincoln’s belief that the “design arounds” still infringe just has to be objectively reasonable. Thus, a finding that Lincoln’s dissatisfaction was “reasonable” does not foreclose a finding that Transamerica’s “design arounds” are, in fact, “colorably distinct,” and, hence, does not foreclose a finding that it is no longer equitable to apply the injunction prospectively, so that modification of the Permanent Injunction might be appropriate. Similarly, a finding that it is not appropriate to enhance the royalty rate further, for equitable reasons that have nothing to do with whether or not the “design arounds” can be found definitively to infringe, even if Lincoln’s dissatisfaction with the “design arounds” was “reasonable,” would not necessarily mean that Transamerica is entitled to modification of the Permanent Injunction. One example of an equitable reason not to enhance the royalty rate, the court suggested in its tentative ruling, might be that Transamerica has made good faith attempts to design around infringement.
On the other hand, if Transamerica proves that its “design arounds” are “colorably distinct,” then the court tentatively reasoned that, not only would Transamerica be entitled to modification of the Permanent Injunction, but there would be no question that Lincoln is not entitled to a further enhancement of the royalty rate, because it would be inequitable to require payment of a further royalty, at a further enhanced rate, for using a method that is “colorably distinct.” If Transamerica fails to show that modification of the Permanent Injunction is appropriate, then it would be necessary to reach Lincoln’s contention that a further royalty should be paid at a further enhanced rate for continued infringement. Transamerica’s request for a refund of royalties paid under protest likewise depends upon Transamerica making an adequate showing that the March 30, 2009, “design around” was “colorably distinct,” so the issue of whether Transamerica is entitled to a refund of royalties based on that “design around” is subsumed in the question of whether that “design around” avoids infringement.
3. The parties’ closing arguments
At the end of its closing argument, Transamerica reiterated its contention that imposing ongoing royalties must be based on a finding of a violation of the permanent injunction under the two-prong test stated in KSM. Transamerica argued that it is inappropriate to modify the permanent injunction to impose an ongoing royalty and to force Transamerica to pay until Transamerica proves to this court that its method no longer infringes. Rather, Transamerica asserted that, instead of the present summary proceedings — -which Transamerica still asserted are “contempt” proceedings, in light of the size of the ongoing royalties, which makes them “punitive” — the question of whether Transameriea’s “design arounds” still infringe should be decided in a new action, tried to a jury. Transamerica argued that such a course was all the more appropriate, because expert testimony is necessary, and Transamerica (the former infringer) has made a good faith effort to modify its procedures to avoid infringement. Transamerica cited in support of these contentions Abbott Laboratories v. TorPharm, Inc., 503 F.3d 1372 (Fed.Cir.2007); Arbek Mfg., Inc. 55 F.3d at 1570; and KSM, 776 F.2d at 1531.
Although Lincoln did not address most of these preliminary points specifically in its closing argument, beyond suggesting that the court had analyzed them properly, Lincoln did devote a significant portion of its closing argument to supporting the court’s rejection of the argument that Transamerica’s “effort” matters, citing Transamerica’s concession at the evidentiary hearing that “effort” does not matter on the purely legal question of whether or not the “design arounds” are colorably different, and TiVo, Inc. v. Dish Network Corporation, 640 F.Supp.2d 853 (E.D.Tex.2009), as finding “effort” irrelevant to whether or not an infringer was in contempt of a permanent injunction. Lincoln’s counsel also did point out in its post-closings e-mail that, even if the proceedings were for “contempt,” whether or not expert testimony was required was not dispositive of whether or not summary proceedings or new proceedings were appropriate, citing Additive Controls, 154 F.3d at 1349.
4. Final analysis
Transamerica’s closing argument has done nothing to convince the court that its tentative analysis of the various preliminary points is erroneous. First and foremost,' as explained above, in the court’s tentative analysis, which the court now expressly adopts and reaffirms, Lincoln’s motion is not a motion for “contempt,” but a motion authorized by paragraph 4 of the Permanent Injunction. Second, the court has not herein “modified” the Permanent Injunction to provide for an ongoing royalty, the. Permanent Injunction so provided from its filing, because, as the court explained above, the Permanent Injunction established a “status quo” pursuant to which Transamerica must pay an ongoing royalty, at 22 basis points, for ongoing infringement after the ten-day implementation period. Third, Transamerica is the party that sought modification of the Permanent Injunction on the ground that it was purportedly no longer infringing. It makes no sense to assert that modification proceedings would have been appropriate for Transamerica to try to show that it is no longer infringing, because of its “design arounds,” but. that separate proceedings are now necessary to determine whether or not Transamerica’s “design arounds” still infringe. Fourth, as the Abbott Laboratories case now cited by Transamerica makes clear, the need for expert testimony is not dispositive of whether or not separate proceedings are required, even if the present action were one for “contempt.” See Abbott Labs., 503 F.3d at 1379 (citing Additive Controls, 154 F.3d at 1349). Consequently, the court now adopts all of the factual findings in Section II.A. of its tentative ruling and, for all of the reasons stated in the tentative ruling and those stated here, expressly reiterates as final its tentative conclusion that the parties’ motions must be adjudicated according to the standards applicable to each, that is, with Transamerica bearing the burden on its motion for modification of the Permanent Injunction to show that its “design arounds” do not infringe, and Lincoln bearing the burden on its motion pursuant to paragraph 4 of the Permanent Injunction to show that it was not reasonably satisfied with Transamerica’s “design arounds” and, further, that it is appropriate for the court to impose an ongoing royalty at a further enhanced rate of 44 basis points.
Turning to the question of the import of any evidence of Transamerica’s “effort” to design around the patent, it is true that the court tentatively rejected the argument that Transamerica’s “effort” matters to the question of whether or not it is equitable to modify the Permanent Injunction pursuant to Rule 65(b) on Transamerica’s Motion, but the court also tentatively concluded that, in the context of Lincoln’s Motion, one example of an equitable reason not to enhance the royalty rate might be that Transamerica has made good faith attempts to design around infringement, i.e., that “effort” does matter in that context. In the TiVo decision, on which Lincoln relied to support its closing argument that “effort” does not matter, the infringer had devoted thousands of hours and hundreds of thousands of dollars in attempting to “design around” the patent — indeed, the infringer had “invested 8,000 man-hours of work and over $700,000 in its redesign efforts,” comparable to, if not more than, the time and expense that Transamerica has invested here. TiVo, 640 F.Supp.2d at 869. Nevertheless, in the context of determining whether the infringer’s redesigned products were color-ably different from its original products, the court noted that it would not consider evidence of the amount of money that the infringer spent on advertising, the number of hours that it spent redesigning its modifications, or the fact that it obtained opinions of counsel, but would, instead, “limit[ ] itself to a comparison between the infringing and modified products in light of the claim language and the Court’s construction thereof.” Id.
Similarly, here, for the reasons stated in the tentative ruling, the court reiterates its tentative conclusion that “effort” does not matter to the determination, on Transamerica’s Motion, of whether or not Transamerica has modified its method sufficiently that enforcing the Permanent Injunction is no longer equitable. Specifically, in light of the public interest in protecting patent rights, evident from the patent laws themselves, however hard an infringer may have tried to create a non-infringing method, if the resulting “new” method still infringes, it is still subject to an injunction against infringement, and applying the injunction prospectively remains equitable. However, for the reasons stated in the tentative ruling, the court now reiterates that, where the question is whether or not the court should, in its discretion, impose a further enhanced royalty for further infringement, a question raised by Lincoln’s Motion, the court may properly consider the infringer’s “effort” and “good faith” in attempting to avoid further infringement. It is not clear that Lincoln argues otherwise.
The court adopts and reaffirms all other findings of fact in Section II.A. and adopts and reaffirms as final its tentative conclusions on all other preliminary matters addressed in Section II.A.
With these preliminary questions resolved, the court turns to consideration of the parties’ motions in turn.
B. Transamerica’s Motion
In Transamerica’s Motion, Transamerica asserts that it made three separate modifications or “design arounds” to its method for administering the riders in question, each of which avoids infringement of one or more steps of the claimed method in Claim 35. Transamerica contends that, because one or more of these “design arounds” avoid infringement, it is no longer equitable to impose the Permanent Injunction prospectively, pursuant to the last clause of Rule 60(b)(5). Transamerica also asserts that it is entitled to a refund of royalty payments that it has made since the implementation of the first “design around.”
As explained and reaffirmed above, to obtain relief from the Permanent Injunction, Transamerica has the burden to prove that circumstances have changed, so that it is no longer equitable to apply the injunction prospectively. Fed.R.Civ.P. 60(b)(5) (last clause); Horne, 129 S.Ct. at 2593 (under Rule 65(b), the party seeking relief from the judgment (or injunction) bears the burden of establishing that changed circumstances warrant relief). The Supreme Court has explained that modification is appropriate under this clause when “a significant change either in factual conditions or in law renders continued enforcement detrimental to the public interest.” Horne, 129 S.Ct. at 2593 (internal quotation marks and citations omitted).
Although Transamerica discusses its “design arounds” in reverse chronological order, the court will consider them in chronological order.
1. The March 2009 “design around ”
Transamerica contends that, on March 30, 2009, it implemented a procedure whereby it would manually calculate and process all scheduled payments for all riders more than one year before their account values would equal one maximum annual withdrawal amount (one MAWA). Transamerica contends that this modification avoids infringement of Step (e) of Claim 35, which requires use of a computerized method to periodically pay the scheduled payment, even if the account value is exhausted before all payments have been made. Lincoln disputes whether this “design around” is truly “manual” and whether it would avoid infringement, even if it is “manual.”
a. Nature of the “design around ”
In its brief, Transamerica explains its March 30, 2009, “design around” as follows:
The March 30, 2009 modification utilizes an existing procedure whereby Transamerica’s policy administration system runs a scan — called the “Low Value Report” — at the end of each month to identify policies with riders which have account values less than two times MAWA. See Martin Decl. ¶¶ 36-37. After March 30, 2009, if any policy ever appears on the “Low Value Report,” it would be immediately removed from the policy administration system and thereafter administered manually. All future calculations and scheduled payments would be performed by an individual using paper, pen or pencil, and a calculator. Id. ¶¶ 39-49.
Transamerica’s Brief (docket no. 345-1) at 12-13. This description is consistent with the testimony at the evidentiary hearing of Tracy Martin, Transamerica’s director of post-issue operations and the “lead” from an operational side of planning for the March 30, 2009, and July 6, 2009, “design arounds,” although Ms. Martin provided further detail in her testimony.
Ms. Martin explained at the hearing that, prior to implementation of the new procedure in March 2009, Transamerica had, at best, a “vague procedure” concerning manual payment of benefits for policies at or near exhaustion. Her group invested some 400 hours in developing a procedure that- was adequate from an operations standpoint. The majority of that time was spent “putting together the documentation as far as fine detail from a processing standpoint on how to handle a policy of this nature as well as the process flow and design.” Hearing Transcript, Yol. 1, 100:19-21. The result was the “Manual Rider Administration at Exhaustion” step-by-step procedure documented in Exhibit No. 718 and summarized graphically in Exhibit No. 720. Ms. Martin distilled an explanation of the March 30, 2009, procedure further in a demonstrative graphic, reproduced below.
As Ms. Martin explained in her testimony, the process takes a few days, because the administrative system has to cycle between steps to make sure that there are no errors before proceeding to the next step. She explained that, both before and after March 30, 2009, the Vantage policy administration system would generate a “low value report” when a policy’s value falls below two times MAWA, that is, more than one year before the policy value is exhausted. As a result, a spreadsheet is now created under the March 30, 2009, procedure with the policy holder information to hold the final values and information from Vantage, and an operator would manually deactivate the policy from the Vantage administration system, so that the Vantage system could no longer value it, send a statement, print any values, cut a check, or anything else. The policy would be left in place on the Vantage system, however, for an audit trail and trace back 'to last policy values, if there were any problems. The operator would also notify the various units affected by the change to March 30, 2009, procedures for a manual process. On the second day, the actuarial unit does any calculation that needs to be done, using a calculator, paper, and pencil. An operator stores the resulting policy information or transactions on the spreadsheet, which is in electronic form on a computer, but only stores information and does not do any calculations. See Exhibit No. 707 (example of a spreadsheet). On the third day, operators would build a “shell policy” on the repetitive payment system (RPS), but the “shell policy” contains only name, address, and any notification requirements to serve as a “tickler” to an operator to perform a manual process to send out information or a payment. The RPS, which is ordinarily used to automate payments for individuals with immediate annuities, not variable annuities, does not make any further payments for the variable annuities under the manual process. Instead, when a payment is due, the accounting unit would verify the check information and payment due, then use check stock and typewriter to create a check, obtain a real signature, and mail the check to the beneficiary. Ms. Martin testified that, since implementation of this policy, it would not be possible to process a payment on a policy at or near exhaustion any other way. Hearing Transcript, Vol. 1, at 106-116. Ms. Martin testified that no policies have ever been exhausted and, at least since the March 30, 2009, procedure was implemented, only two policies have ever appeared on the “low value report,” but both were “false positives,” owing to high policy loan amounts. Hearing Transcript, Vol. 1, at 171:1-9.
On questioning by Lincoln, Ms. Martin conceded that the prior “vague procedure” — as described at trial and in a “functional specification” submitted as Exhibit No. 1146 — was, in “broad strokes,” essentially the same as the March 30, 2009, procedure, in that it also required stopping automated payments, closing the Vantage account, and sending a manually-created check to the policy holder. Ms. Martin pointed out, however, that the March 30, 2009, procedure has the procedural detail necessary for actual implementation of a manual payment procedure from an operations standpoint, while the prior “vague procedure” did not. Ms. Martin also conceded that various computer or automated systems are still used in relation to the “manual” payment system, but she pointed out that none of those systems does more than hold information; the calculations are done by a person using paper and pencil and the checks are created, signed, and mailed by a person. She also testified that the system would no longer be able to make electronic payment transfers, if a policy holder had previously received scheduled payments in that way.
Transamerica’s expert, Dr. Kelly, confirmed that no software changes were made to implement the March 30, 2009, procedure, although subsequently, a change was made at the time of the September 12, 2009, “design around” to restrict policies identified in a low value report to prevent further operations on that account and to require manual payment. Hearing Transcript, Vol. 2, 331:2-17. Therefore, he opined that no “computerized method” was used to perform Step (e) after March 30, 2009. Id. at 331:21-334:2.
b. Arguments of the parties
Transamerica argues that, after the March 30, 2009, “design around,” Transamerica would not use any computerized method to make any scheduled payments to its customers “even if’ their account values ever become “exhausted,” that is, would be less than one MAWA. Lincoln responds that Transamerica merely recasts the argument it raised and lost at trial and on a motion for judgment as a matter of law, and as a result, cannot meet its burden to establish that it is no longer using a claimed computerized method to administer variable annuities. Lincoln also argues that the evidence presented by Transamerica post-trial shows that Transamerica continues to use a computerized method to perform the step of periodically paying the scheduled payment even if account value is exhausted, because Transamerica’s “redesign” uses multiple computer systems, including the same Vantage, RPS, automated work distribution system (AWD), and General Ledger computer systems and software programs previously identified for account administration “even if’ account value is exhausted. Lincoln contends that, as Transamerica admits here, even the “manual” writing of checks requires the use of multiple computer systems to balance Transamerica’s accounts and to withdraw funds from those accounts to be paid to Transamerica’s policyholders. In its reply, Transamerica argues, in essence, that using computers for functions other than paying scheduled payments to rider owners does not constitute performance of Step (e).
At the evidentiary hearing, the court asked the parties why the March 30, 2009, “design around” matters, if it only applies to a situation, account value exhaustion, that has never happened. In response, Lincoln asserted that the court had held, in its claim construction and ruling on a motion in limine that account value exhaustion is not required for Step (e) to be performed, so that Step (e) is being performed with respect to every policy for which payments are made. For this reason, Lincoln described the March 30, 2009, “design around” as a “non-starter.” Transamerica responded that, at trial, in order to try to prove infringement in a circumstance where the event had never happened, Lincoln argued that it is not just that Transamerica performed the method, but that Transamerica necessarily will perform the method based on contract obligations and computer systems that are in place or going to be in place, citing Jury Instruction No. 7. Transamerica asserted that Step (e) means that, in order to infringe, the infringer has to have a “computerized method” in place to periodically pay scheduled payments. Consequently, Transamerica argued, if Transamerica has in place a manual procedure to handle the circumstance of payments when the account value is exhausted, it does not infringe Step (e), because there is no “computerized method” that will necessarily perform that step.
c. Tentative analysis
Step (e) of the computerized method, which Transamerica argues is avoided by its March 30, 2009, “manual” procedure, involves a computerized method for “periodically paying the scheduled payment to