Commercial Litigation and Arbitration

Monies Paid under License to Stay Injunction Pending Appeal Are Recoverable upon Reversal of Injunction Even Though Payor Had Choice Not to Pay

In Broadcom Corp. v. Qualcomm Inc., 2008 U.S. Dist. LEXIS 91378 (C.D. Cal. Oct. 29, 2008), the trial court entered a preliminary injunction ordering Qualcomm to stop infringing a patent of Broadcom’s but staying the injunction pending appeal if Qualcomm royalties to Broadcom. While the case was on appeal, Qualcomm paid $11 million in royalties to Broadcom. The Federal Circuit then reversed the injunction. Qualcomm sought its $11 million back:

This case appears to be a matter of first impression. The issue is whether Qualcomm may recover royalties paid pursuant to a court order that was subsequently reversed. The parties cite no authority adjudicating this precise issue, and the Court has found of none. Instead, the parties proceed by analogy. Qualcomm contends that the return of the '686 sunset royalties is warranted under the law of restitution, as well as the law of contempt. Broadcom counters that Qualcomm has already received the precise benefits for which it paid: the stay of an otherwise immediate injunction, and an implied license for claim 3 of the '686 patent through the date of the Federal Circuit's decision. ***

[Restitution.] It is black letter law that when money is paid pursuant to a court order that is subsequently reversed, the disadvantaged party has a right to restitution. In Baltimore & Ohio R.R. v. United States, 279 U.S. 781, 785-86, 49 S. Ct. 492, 73 L. Ed. 954 (1929), the Supreme Court found that railroads benefitting from an invalid order of the Interstate Commerce Commission were under an obligation to make restitution after the reversal of the decree sustaining that order. In relevant part, the Court held:

The right to recover what one has lost by the enforcement of a judgment subsequently reversed is well established. And, while the subject of the controversy and the parties are before the court, it has jurisdiction to enforce restitution and so far as possible to correct what has been wrongfully done.

Id. at 786. This holding was reaffirmed by the Supreme Court in United States v. Morgan, 307 U.S. 183, 197, 59 S. Ct. 795, 83 L. Ed. 1211 (1939)***.

Qualcomm contends that restitution is necessary to avoid Broadcom's unjust enrichment. Morgan appears to control this issue. But Broadcom asserts that Morgan is inapposite, because Qualcomm was under no obligation to pay royalties. Instead, Broadcom asserts, Qualcomm faced a choice: either immediately cease to infringe the then-valid patent '686, or purchase a stay of that injunction. This interpretation accords with the terms of the injunction, which would be "stayed until January 31, 2009, so long as . . . Qualcomm pays Broadcom an ongoing royalty." ***

According to Broadcom, Morgan only applies in cases of "compulsion." The Court agrees that Morgan cannot be applied literally on these facts, as there was no compulsion, per se. But the Court disagrees that the reasoning of Morgan — and the equitable principles of restitution — should be so limited to cases of compulsion. First, the meaning of "compulsion" in Morgan is far from clear. Even before Morgan, "the concept of compulsion ha[d] been extended to cases where the error of the decree was one of inaction rather than action . . . ." Atlantic Coast Line R. Co. v. State of Florida, 295 U.S. 301, 309, 55 S. Ct. 713, 79 L. Ed. 1451 (1935) (citing Baltimore, 279 U.S. 781, 49 S. Ct. 492, 73 L. Ed. 954). It likewise may be possible to extend the concept to this case as well, where Qualcomm's choice between an immediate injunction and a partial stay may well have been illusory. On appeal, Qualcomm argued that "the injunction [would] disrupt Qualcomm's ongoing business model with CDMA carriers and [that] the sunset provisions [would] not allow sufficient time to develop design-around technology." ***Thus, the absence of compulsion, at least in some form, is not a foregone conclusion in this case.

The law of restitution also has broad application in cases where money is transferred pursuant to a court order that is subsequently reversed. The Eighth Circuit, for example, has cited Morgan and related precedents for the proposition that "courts have frequently held that, when a benefit has been conferred in compliance with a judgment subsequently reversed, restitution may be required." Iowa Elec. Light and Power Co. v. Atlas Corp., 654 F.2d 704, 706 (8th Cir. 1981) (denying restitution because a "consent order" merely embodied the terms of a voluntary agreement between the parties) (emphasis supplied). The difference between "compulsion" and "compliance" is more than mere semantics. The emerging Restatement of Restitution, now in draft, provides that "[a] transfer . . . of property, in compliance with or otherwise in consequence of a judgment that is subsequently reversed or avoided, gives the disadvantaged party a claim in restitution to the extent necessary to avoid unjust enrichment." Restatement (Third) of Restitution & Unjust Enrichment § 18 (T.D. No. 1, 2001) (emphasis supplied). The essential factor appears to be that the transfer occurred as a consequence of the court order. ***

[T]he draft Restatement specifically anticipates and addresses Broadcom's contention on this issue: "[p]arties resisting restitution sometimes assert that the judgment debtor has made a 'voluntary payment' (for instance, in electing to pay a judgment rather than post a bond), but the contention is uniformly rejected." Id. cmt. C.

Held, “under the law of restitution, Qualcomm is entitled to restitution of the '686 sunset royalties, plus interest.”

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