Economic Considerations in Granting Injunctive Relief: Federal Circuit Partially Reverses Injunctive Relief in a Case of Willful Infringement

Overview

On August 3, 2020, the United States Court of Appeals for the Federal Circuit partially reversed a District Court’s decision for a permanent injunction against 10X Genomics. Bio-Rad Laboratories had sued 10X Genomics (“10X”) for infringing three patents directed to a microfluidic system that enables researchers to encapsulate biological materials in oil partitions, or plugs, for high-throughput biochemical reactions and genomics. During trial in the District Court for the District of Delaware, a jury found the patents-in-suit to be valid and willfully infringed and awarded Bio-Rad $24 million in damages based on 10X’s sale of five product lines. After denying 10X’s motion for judgment as a matter of law to overturn the verdict, the district court granted Bio-Rad’s motion for a permanent injunction prohibiting 10X from selling the five infringing product lines. 10X appealed these decisions.

On appeal, the Federal Circuit partially reversed the district court’s ruling after evaluating the court’s application of the four-factor eBay test (see eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006)) for injunctive relief. Persuaded by 10X Genomics’ argument that it had not been able to develop non-infringing versions for two of the five enjoined products, the Federal Circuit reversed the injunction as to these two products. Although 10X had enjoyed a first mover advantage in the single-cell genomics market, 10X was a much smaller company than Bio-Rad, and 10X’s revenue was dependent in part on the sale of these two enjoined products.

This decision illustrates how the “balance of hardships” eBay factor can sometimes be dispositive and preclude or at least limit a patent owner’s ability to obtain an injunction in situations where defendants would face significant economic harm if unable to continue selling the infringing products.

Infringement under the Doctrine of Equivalents

The University of Chicago and RainDance Technologies obtained three patents (including U.S. Patent No. 8,889,083, “the ‘083 Patent”) directed to a microfluidic system that enables researchers to encapsulate biological materials in oil plugs (partitions of oil within water conduits) for high-throughput biochemical reactions and genomics. In February 2015, these parties filed suit against 10X alleging literal infringement and infringement under the doctrine of equivalents (“DOE”) by 10X’s production and sale of five product lines: Single Cell 3’ Gene Expression, Linked-Reads, Single Cell V(D)J, Single Cell ATAC-seq, and Single Cell CNV. Bio-Rad subsequently purchased RainDance Technologies and assumed its position in the pending litigation. 

The ‘083 patent is directed to a system comprising a non-fluorinated microchannel, a fluorinated oil, and a plug comprising an “aqueous plug fluid” and biological materials. The purpose is to flow biological materials and biochemical reagents through the non-fluorinated microchannel via the fluorinated carrier fluid, such that biological materials and biochemical reagents become encapsulated in the fluorinated oil, thus facilitating biochemical reactions within individual oil plugs.

Claim 1 of the ‘083 patent is as follows: 

1. A microfluidic system comprising: 

a non-fluorinated microchannel;

a carrier fluid comprising a fluorinated oil and a fluorinated surfactant comprising a hydrophilic head group in the microchannel; and

at least one plug comprising an aqueous plug-fluid in the microchannel and substantially encased by the carrier fluid, wherein the fluorinated surfactant is present at a concentration such that surface tension at the plug-fluid/microchannel wall interface is higher than surface tension at the plug-fluid/carrier fluid interface. 

Bio-Rad’s infringement positions as to the ‘083 patent relied on the use of a “non-fluorinated” microchannel in 10X’s technology. After the suit was filed, 10X attempted to remedy the infringement by adding 0.02% Kynar, a non-reactive amount of fluorine-containing resin, to the microchannels of its accused products. 10X argued that microchannels lined with Kynar were fluorinated and therefore non-infringing.

Although Bio-Rad could not prove literal infringement, it asserted that these products infringed under the DOE because the products performed substantially the same function in substantially the same way to obtain the same result as the claimed invention. In rebuttal, 10X asserted a prosecution history estoppel defense: Bio-Rad had surrendered the “fluorinated microchannels” feature from the scope of their claims when they had narrowed their claims during prosecution to recite “a non-fluorinated microchannel.” As a result, 10X argued, microchannels with 0.02% Kynar could not infringe the ‘083 patent under the DOE as a matter of law. However, Bio-Rad successfully rebuted this argument by asserting the “tangential relation” exception to prosecution history estoppel. Evidence presented during trial—including an admission by 10X of the non-reactivity of Kynar within the microfluidic system—demonstrated that this de minimis concentration of Kynar did not impart any functional or chemical changes to the product, and hence the accused equivalent feature bore no more than a tangential relation to the narrowing amendment. The jury found infringement of the ‘083 patent under the DOE, and the Federal Circuit declined to set aside the verdict. 

Four-Factor eBay Test for Injunctive Relief

Injunctive relief is an equitable remedy that patent owners can seek following a determination of infringement when monetary damages would be insufficient to remedy the harm caused by the infringement. In its most basic form, an injunction is a judicial tool that allows a court to order an adjudged infringing party to desist from continuing to produce or sell an infringing product.

In the 2006 eBay decision, the Supreme Court re-affirmed the traditional four-factor test for determining whether permanent injunctive relief is appropriate. This test requires patent owners to establish that (1) it has suffered an irreparable injury; (2) remedies available at law are inadequate to compensate for that injury; (3) considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) the public interest would not be disserved by a permanent injunction. Following eBay, courts must assess each part of this test, and it is impermissible to presume that the patent owner has suffered an irreparable injury simply as a result of a defendant’s infringement.

Federal Circuit’s Application of the eBay Test

At trial, the district court determined that Bio-Rad satisfied all four factors of the eBay test, enjoining all five of the accused products. In evaluating the four-factor eBay test, the court found (1) that Bio-Rad would “suffer irreparable harm” because Bio-Rad and 10X are direct competitors, (2) that the balance of hardships likely weighed in favor of injunctive relief because Bio-Rad “had significantly invested in its [microfluidic] business while 10X had non-infringing alternatives for three of the five accused products,” and (3) that the public would not be harmed because an injunction would allow 10X to continue to provide customer support to those who had purchased a product prior to the injunction date. Based on these findings, the district court ordered a permanent injunction on all five accused products. On appeal, 10X argued that Bio-Rad failed to justify its request for a permanent injunction through the eBay test and that the district court abused its discretion in enjoining all five accused products. The Federal Circuit analyzed the court’s application of these three factors (irreparable harm, balance of hardships, and public interest) in turn. 

1. Irreparable Harm

   On appeal, 10X argued that Bio-Rad would not suffer irreparable harm absent an injunction because the two companies are not direct competitors. 10X alleged that only one of the five accused products is in direct competition with a Bio-Rad product, and furthermore that Bio-Rad’s product is inferior to the competing 10X product. Bio-Rad responded that, even if this allegation is true, this product, Single Cell 3’ Gene Expression, accounts for 80% of 10X’s revenue and 10X was able to produce a non-infringing alternative to this product. Bio-Rad added that the reason their product is allegedly inferior is because several employees left Bio-Rad to create 10X and began willfully infringing the patents-in-suit. Bio-rad alleged that 10X’s willful infringement helped it gain a “first mover” advantage and forced Bio-Rad to rush production of their competing product. The district court had agreed, finding that 10X’s first mover advantage allowed it to establish a “strong market lead” over Bio-Rad. On this prong, the Federal Circuit agreed with the district court. 

2. Balance of Hardships

   The balance of hardships prong allows the court to weigh how an injunction will affect a company’s economics, including whether an injunction may leave a company insolvent. The district court noted that Bio-Rad had invested nearly half a billion dollars in its microfluidic products and also reasoned that 10X’s hardship was mitigated because 10X had developed and sold non-infringing alternatives for the accused products. On appeal, 10X argued that the district court had erred, as 10X does not sell and has not designed non-infringing substitutes for two of the five accused products, Linked-Reads and Single Cell CNV, and their revenue is limited to the enjoined products. In response, Bio-Rad contended that the Linked-Reads and Single Cell CNV products do not account for any significant portion of 10X’s revenue, and 10X had sufficient time to design non-infringing alternatives. After analyzing these arguments, the Federal Circuit acknowledged the significant hardship that Bio-Rad would suffer absent an injunction. However, the court noted that 10X’s survival as a company depended on selling the enjoined products, and absent non-infringing alternatives for Linked Reads and Single Cell CNV, the hardships to 10X resulting from an injunction outweighed the hardships to Bio-Rad without one. The Federal Circuit held that the district court had abused its discretion in enjoining all five accused products and reversed the injunction as to the Linked-Reads and Single Cell CNV products.

3. Public Interest 

   Injunctions must “strike a workable balance between protecting the patentee’s rights and protecting the public from the injunction’s adverse effects.” In deciding to enjoin the five accused products, the district court determined that, even with an injunction, 10X could continue to sell its inventoried enjoined products and provide support for existing customers, provided that 10X pays a 15% royalty on all revenue flowing from sale of these products. On appeal, 10X argued that this injunction would result in the loss of years of academic and private investment in single-cell genomics research. The Federal Circuit, however, was not convinced. Analysis of the injunction crafted by the district court revealed that academic and private researchers 1) would not have to surrender their existing products, and 2) may be unaware that 10X has non-infringing alternatives for three of the five enjoined products. As such, the Federal Circuit determined that the district court did not err in their analysis of the “public interest” prong. 

Accordingly, the Federal Circuit affirmed the injunction on three of the five accused products and reversed the injunction as to the two accused products for which 10X lacked non-infringing alternatives. 

Takeaways

The four-factor eBay test requires balancing patentees’ rights with the infringing party’s economic interests. The Federal Circuit held that the district court had abused its discretion by enjoining 10X from selling products for which it had been unable to develop non-infringing alternatives. Alleged infringers confronted with arguments for injunctive relief should consider the “absence of non-infringing alternatives” element of the balance of hardships prong, which often is overlooked in favor of other aspects of the test. That said, admitting a lack of non-infringing alternatives can sometimes have undesirable consequences, including when calculating damages. Indeed, Bio-Rad’s award of 15% royalty on any future sales related to the accused products was upheld, along with a partial injunction as to the products for which 10X did have design-arounds.

While many previous Federal Circuit decisions scrutinizing injunctions have focused on the “irreparable injury” and “public interest” prongs of the eBay test, this panel instead relied on the “balance of hardships” prong. While this particular aspect of the decision may be unusual, the Bio-Rad decision suggests that the economic and market forces underpinning awards of permanent injunction remain important and may be exploited in challenging such awards.

(Co-authored by Eric Greenwald)