Paice LLC, a small Florida-based hybrid car technology company that won a patent infringement case against Toyota in 2005, has now brought a related case to the International Trade Commission, which has the power to ban all Toyota hybrids from the United States. What’s at stake for Toyota if its hybrids were banned from the US?

“It doesn’t matter that Toyota might eventually have that decision overturned…Toyota would lose millions of dollars,” Michael Murphy, a N.C.-based intellectual property lawyer and former electrical engineer, told HybridCars.com. Murphy has a deep understanding of both patent law and hybrid electrical systems.

The case won’t be decided for another year and a half, but even the slight prospect of losing the case represents another pothole for Toyota, just one year after overtaking General Motors as the world’s largest car company. In recent months, the Japanese company reported its first corporate losses (to the tune of billions), a growing problem with quality, its biggest recall in history, and the decision to close its first factory in the United States.

Murphy explained that Paice’s intellectual property holdings consist primarily of patents originated by inventor Dr. Alex Severinsky, a Russian immigrant who is an electrical engineer by training. Severinsky began work on hybrid drivetrain concepts, by his statements, as early as the 1980s. When the US district court in Marshall, Tex.—well-known as a favorable environment for patent holders—ruled that Toyota did indeed infringe upon Paice’s hybrid patent, the court forced the company to pay a “compulsory license” to Paice of about $100 per hybrid car.

HybridCars.com spoke with Murphy to learn more about the twists and turns in the story of Toyota’s hybrid patent saga.

Court Definition of Terms

HybridCars.com: What specifically is the innovation that Paice owns?

Michael Murphy: At its heart, it’s the cooperative dual management of the internal combustion and the electric motor. Either one is a candidate at any time for providing some of the torque or all of the torque needed to spin the drive wheels. What Paice says is its real innovation is in the fusing of the two, the seamless management of torque from either or both drive inputs.

It sounds like Paice made claim to the special sauce that makes a hybrid what it is—the key ability to switch back and forth from electric to internal combustion.

If all you were doing was switching from an electric mode to a gas mode, you wouldn’t have infringement. In other words, you wouldn’t have infringement if you made a crude hybrid system that said we’re either running on batteries or we’re running on the gas engine, but never both.

Michael Murphy

Michael Murphy

The real point of [Paice’s claimed] sophistication is where you get torque. It may be, under certain conditions, it’s more efficient to get torque from the electric motor. Under other conditions, it’s more efficient to get that from the gas engine. And under other conditions, you want to seamlessly blend torque from both sources.

So, it’s in the reading of what’s required based on the needs of the driver and other conditions, and the delivery of torque to satisfy that requirement.

Paice would probably describe it a little different. They say their microprocessor-based controller looks at engine speed, motor speed, battery voltage, battery charge, ambient temperature, acceleration, direction, deceleration—all of those things—to make a decision about how much of the torque should be supplied by the engine versus the electric motor. That’s the heart of it. If it was an either-or system, Toyota wouldn’t be in court. Also, it wouldn’t be a very efficient hybrid system.

Injunction, Fee or Exclusion

Does the ruling in Paice’s favor hold true for all of Toyota’s future hybrid models?

That’s exactly what the International Trade Commission proceeding hinges on.

But first, you have to go back to the first case in the eastern district of Texas, where it was found that the hybrid drivetrain in the Prius II, the then existing Toyota Highlander Hybrid, and the Lexus RX 400h all infringed claims 11 and 39 of U.S. Patent No. 5,343,970.

What Paice wanted out of that first lawsuit was a permanent injunction, banning Toyota from selling or importing these infringing drivetrains. The injunction would have given Paice strong leverage to negotiate a lucrative licensing deal with Toyota. Paice didn’t get the injunction, because the court had to balance the harm—the cost to the patent owner—versus the interests of the public and whether money damages are going to be adequate remedies. The district court denied Paice’s motion for a permanent injunction. Instead, they said Toyota has to pay license fees. That’s called a compulsory license.

Now, several years down the road, here comes Toyota with new vehicles, the Prius III, the new Lexus HS 250h, that were not part of the original court settlement, and they’re coming into the country.

Paice is saying to Toyota, you don’t have a license for the new vehicles, but you need to get one.

They don’t want to give Toyota a license. Paice never wanted to grant a license to Toyota, at least not under the court terms. Paice always felt that their technology was worth a lot more than that to Toyota. And by the court denying the permanent injunction, Paice lost a huge point of leverage against Toyota. Toyota is allowed to build and sell these vehicles. And all Toyota has to do is pay the licensing fee.

So as new vehicles are coming to the market, Paice is viewing it as their opportunity to open up a new case and get better terms.

Paice didn’t get the decision they wanted in the first case. Now, there’s a second lawsuit, also filed in Texas, by Paice against Toyota. And it is alleging infringement of these new vehicles—the third-generation Prius, the Camry Hybrid, the Lexus HS 250h, and the Lexus RX 450h.

Paice sees these new vehicles as new acts of infringement. So they see an opportunity to go to the International Trade Commission and have the ITC do its own infringement hearings as essentially a parallel process to the ongoing court proceedings. But what the ITC can do—and what would be a huge setback for Toyota—the ITC can exclude or stop importation of these new vehicles if they determine that they are infringing Paice’s patent.

Low Chance of a Ban

Has the ITC decided the issue?

Paice just submitted their complaint to the ITC in the last month.

Is there any chance that Toyota hybrids will get banned?

If you ask the question like that, the answer has to be yes. Is there ANY chance? Is there a strong chance? No.

But banning those hybrids is not good for Paice…

That’s not right. Paice wants them banned—and really the term here is excluded. As soon as Paice wins an exclusion order from the ITC, Toyota’s in trouble. It doesn’t matter that Toyota can appeal that decision. And it doesn’t matter that Toyota might eventually have that decision overturned. For some indeterminate period of time, perhaps months, Toyota is stuck without any ability to bring these new vehicles into the United States and sell them. Think of the cost. Toyota would lose millions of dollars.

I can’t imagine Toyota letting that happen.

If it does happen, Toyota will run to Paice and negotiate a license. And it won’t be on favorable terms to Toyota. So Paice does want the exclusion order, because that will be Paice’s point of leverage to secure a much more lucrative licensing agreement with Toyota than it got out of the 2005 court proceedings.

Applying Pressure Through International Trade Commission

Do you know when the ITC case will be decided?

It may take about 15 months or so, but it could be sooner. The ITC will likely rule more quickly than the district court. And that’s the whole point of the strategy. If you can get an ITC ruling favorable to you, the patent owner, you just ratcheted up the pressure enormously.

Does the ITC subscribe to the same set of laws that were used in the previous case decided in Paice’s favor over Toyota?

Yes, subject to a few exceptions that probably are not important to this ITC proceeding. More importantly, Paice will say they got a fully adjudicated final decision by the district court in 2005 that Toyota infringed two patent claims. They will say, “We are in a related second court proceeding where the admissions made by Toyota of record include that the drivetrains in these new vehicles are not materially different that were at issue in the 2005 court case. Therefore, Toyota has effectively admitted that its new cars infringe the same two patent claims.”

Paice is turning to the ITC and saying, you guys don’t have to do anything except look at the record. Infringement is there. Stop importation of these new models which are not covered by the compulsory license ordered in the 2005 infringement decision.

In principle, is the prior ruling of infringement one that would hold weight at the ITC?

Absolutely.

So, it’s not looking good for Toyota?

That’s probably a fair assessment, but keep in mind that I’m talking about Paice’s characterization that Toyota has made those admissions. I don’t know that Toyota has actually made those admissions or conceded that point.

Secondarily, you also have to look at how the ITC works. When the ITC grants these exclusion orders, it does a similar balancing act as the court would do when it’s granting an injunction. It will look at the effective exclusion on the public health and welfare, and the competitive conditions in the US economy, and the production of like or directly competitive articles in the US. It’s not a light switch. You don’t just flip it on and off.

So even if the ITC buys into Paice’s arguments, there’s still no guarantee the ITC will grant an exclusion order. They might look at the same thing the district court did. For example, Paice doesn’t sell hybrid drivetrains. Instead, Paice’s focus is on licensing their hybrid drivetrain technology. In some sense, one might argue that Paice essentially is a licensing company. Here, I think Paice’s arguments are not very strong.

And that’s a mitigating factor for the ITC? That Paice did come up with an innovation, but they don’t make or sell hybrid cars.

That’s right. If the ITC is considering the effect of exclusion on public health and welfare, and you have what might be regarded as a licensing company that doesn’t make the infringing product, and there’s no other party in the United States that’s been identified as providing a substitute product or an alternative to it, and these hybrid vehicles are perceive as being desirable, they’re selling well, there’s growing interest in them in terms of economy and reduced pollution, well how do you balance that out? Maybe it’s better to let the importation continue.

Could the ITC enforce a certain level of royalty like the district court did?

No. The remedy from the ITC is limited to exclusion.

Harm and Fairness

But the ITC could just let it fall back to the court, and say Paice is already getting their royalties. For the future vehicles, there’s a decent likelihood that they’ll get similar royalties. And let it stand there.

That could happen. The district court in Texas said back in 2005 to Paice: “You were seeking a license from Toyota on this technology, which demonstrates that money damages are an adequate remedy here. Here’s your license.” And it could be in the second proceeding [regarding Toyota’s more recent crop of hybrids] that the district court turns around and does what it did in 2005. Here are compulsory licenses on these new vehicles. The real point here is, unless and until Paice can prevent Toyota from bringing those vehicles into the country, they don’t have as strong a position for licensing the technology as they want. If they can get the ITC to put a ban in place, then all the sudden the balance of negotiating strength goes to Paice.

It sounds like Paice is willing to spend the money to bring it to the ITC because it could give them a chance at stronger leverage, but they’re probably aware that it’s a long shot. They also probably feel wronged, and sense a lot of money at stake, and they’ll do what they can to bring the case as far as they can.

I don’t doubt that Paice believes it has a strong case for exclusion. If you read the complaint with a friendly eye toward Paice, it sounds like they’ve made a pretty good argument for exclusion. On the other hand, if you view Paice primarily as a licensing company, you have to wonder if they’re really suffering irreparable harm, or some kind of fundamental unfairness, if they’re not granted an injunction.

So you have a manufacturer out there making leading edge hybrid car products that everyone wants. Consumers are clamoring for it. Apparently, hybrid cars have benefits for the environment, reduced pollution, higher fuel efficiency, all of that great stuff. Then you have a company saying we don’t actually make any product, but we don’t want anybody else to be able to make it either, unless they pay a potentially high license fee to us. A lot of people who want Toyota’s hybrid cars are going to say that’s not fair.

On the other hand, you have the whole world of patent owners who say, “What is my patent worth if the only thing it gets me is a ticket for some court to impose a compulsory license at a royalty I wasn’t free to negotiate? Shouldn’t I be able to go out and negotiate that in the free market?” These are the top-level philosophical issues.