An eye opening opinion was recently issued in the case of ECIMOS, LLC v. Carrier Corp., Case Nos. 19-5436; 19-5519 (US 6th Cir. August 21, 2020). The case involved various breach of contract, copyright infringement and trade secret misappropriation claims related to heating, ventilation and cooling systems. After trial, the jury found in favor of the plaintiff. In particular, the jury found that the defendant had breached various contract provisions, that the plaintiff possessed both copyrights and trade secrets related to database computer sources codes, that the defendant had infringed the plaintiff’s copyright and misappropriated trade secrets related thereto. The jury awarded $7.5 million in money damages.

The plaintiff had also sought injunctive relief from the court such as an order barring the defendant from future disclosure and/or use of the plaintiff’s source code. Normally, such injunctive relief would issue as a matter of course.

However, in the ECIMOS case, the court did NOT issue the typical injunctive relief. Yes, the court DID order the defendant to cease and desist from disclosing or using the database source code, BUT then the court stayed its order with respect to use of the source code. Astonishingly, the court allowed the defendant to continue using the plaintiff’s trade secrets and copyright-protected source code until the defendant could create and implement its own new, non-infringing database as long as the defendant paid court-approved licensing fees. The court appointed a special court officer to oversee the temporary use of the plaintiff’s IP, to determine the adequacy of the licensing fee and to ensure payment by the defendant. The defendant has now been using the plaintiff’s IP under this compulsory licensing arrangement for nearly two years.

The trial court justified this unusual decision by noting that the jury had found that the misappropriation of trade secrets had caused no detriment to the plaintiff. In legal terms, the trade secret misappropriation did not result in recoverable compensable damages. Because of this, the trial court concluded that preventing use of the trade secrets would not help the plaintiff since it would not prevent any additional harm. Somehow, the court then concluded that it could, therefore, order a compulsory licensing arrangement between the parties (with, of course, as licensing fees — as set by the court — being paid)? One wonders if employment relationships could be created in this manner.

Unfortunately for the plaintiff, on appeal, the Sixth Circuit Court of Appeals agreed with the trial court. Without citing legal authority or logic, the court affirmed the US federal courts have the power to order parties into compulsory IP licensing arrangements.

This and other legal trends raise the question of whether we are entering an age of compulsory licensing fees. For example, in the music industry, the Mechanical Licensing Collective (“MLC”) will begin making royalty payments in mid-2021. The MLC was authorized by the Music Modernization Act passed by Congress in 2018. The MLC is a compulsory licensing arrangement between song-writers, musicians, producers and other artists in the music industry with online streaming and downloading services. There is no “opt-out” for the artists and other owners of copyrighted music and compositions. The streaming and download services will have access to and the ability to sell and perform all compositions and will pay royalties over to the MLC. The MLC will then issue royalty payments to artists.

Royalties may sound great, but the compulsory nature of the MLC licensing arrangement — and cases like ECIMOS — should raise weighty concerns about liberty and property rights. Issues with respect to takings and involuntary servitudes come to mind. Could other types of compulsory licensing relationships be ordered under the court’s “no [economic] harm” theory (as long, of course, as licensing fees are paid)?

For more information and/or if you have questions about protecting your copyrights and other intellectual property, contact the business and copyright lawyers at Revision Legal at 231-714-0100.

The Legal Foundation for Compulsory Licensing

Compulsory licensing in the United States has traditionally been disfavored except in narrowly defined statutory contexts. The most well-known compulsory license regime in intellectual property law is the mechanical license for musical compositions under 17 U.S.C. § 115, which allows any person to reproduce and distribute a musical composition in a phonorecord upon payment of the statutory rate set by the Copyright Royalty Board. The ECIMOS case represents a different and more troubling category: a court-imposed compulsory license as a substitute for injunctive relief in an IP infringement case where the plaintiff has prevailed at trial. The legal authority for such orders is contested. Courts in equity have broad discretion to fashion remedies, but the use of compulsory licensing as an alternative to injunctive relief in trade secret and copyright cases has no statutory basis.

eBay’s Four-Factor Test and Its Application to IP Licensing

In eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), the Supreme Court held that courts must apply a four-factor test before granting a permanent injunction in patent infringement cases: (1) the plaintiff has suffered an irreparable injury; (2) remedies at law are inadequate; (3) the balance of hardships favors an injunction; and (4) the public interest is not disserved by permanent injunctive relief. Post-eBay, some courts extended this four-factor test to copyright and trade secret cases, giving defendants an opportunity to argue that money damages are an adequate remedy. In ECIMOS, the Sixth Circuit’s application of eBay-style balancing to impose a compulsory licensing arrangement took the doctrine to a logical extreme: if a trade secret misappropriator can continue using stolen IP in exchange for court-set fees, the deterrent effect of trade secret law is substantially undermined.

Trends in Compulsory Licensing: Pharmaceuticals and Technology

The policy debate over compulsory licensing has expanded into legislative and regulatory arenas. In the pharmaceutical context, Section 1498 of Title 28 permits the US government to use patented inventions without a license in exchange for reasonable compensation. The Bayh-Dole Act, 35 U.S.C. §§ 200–212, gives the government “march-in” rights to require licensing of federally funded inventions if the patent holder has not taken adequate steps to commercialize the invention or satisfy health or safety needs. In the technology sector, antitrust regulators in both the United States and the European Union have used compulsory licensing as a remedy in cases involving standard-essential patents (SEPs), requiring owners to license on FRAND (fair, reasonable, and non-discriminatory) terms.

Protecting Your IP Portfolio Against Compulsory Licensing Risk

IP rights holders who are contemplating or engaged in litigation should build the record needed to support full injunctive relief from the outset. This means documenting the irreparable harm caused by the infringement—harm that cannot be adequately compensated in money—before filing suit. Evidence of reputational harm, loss of competitive advantage, and the erosion of trade secret protection over time all support the irreparable harm prong of the eBay test. Courts are more likely to grant injunctive relief when the plaintiff has documented concrete, non-compensable harm rather than relying on abstract assertions.

Contact an IP Litigation Attorney

Whether you are enforcing an intellectual property right or defending against an infringement claim, the strategic decisions made early in litigation will determine the remedies available at the end. The intellectual property attorneys at Revision Legal advise clients on litigation strategy, injunctive relief, and licensing negotiations. Contact us at 231-714-0100.