CAFC Finds Proof of Damages Inadequate

Scott Daniels | March 31, 2015

Warsaw Orthopedic v. NuVasive

March 2, 2015

Before Dyk, Lourie & Renya.  Opinion by Dyk.

Procedural History

After a trial, the jury issued a verdict finding the patents valid and infringed, and awarded damages to the patentee Warsaw ($101,196,000 identified as total damages) to be paid by the infringer NuVasive.  The trial judge sustained the verdict and issued a judgment in favor of the patentee.  On appeal, the CAFC affirmed the judgment in favor the patentee, with respect to the validity and infringement issues.  On the question of damages, however, the CAFC vacated the judgment and sent the case back to the trial judge for a new trial on reasonable royalty.

Legal Principles

The purpose of 35 U.S.C. § 284 is to ensure that a patentee receives full compensation for any damages caused by any acts of infringement. The term “damages” refers to the amount of loss to the patentee. A patentee may seek to recover “actual damages” which is usually the amounts of profits actually lost.  If the patentee cannot prove actual damages, the patentee is entitled to a reasonable royalty.

For any specific act of infringement, the patentee is entitled to either a reasonable royalty or lost profits, but not to both.  Lost profits “makes the patentee whole” — it is to compensate the patentee holder for the profits it lost because of the infringement. A reasonable royalty compensates the patentee for the value of the patented technology that was taken from it.

A patentee is not entitled to recover damages based on the lost sales of a related company.

A “convoyed sale” is the sale of an unpatented product that is sufficiently related to the patented product so that the patentee may, nonetheless, recover lost profits for lost sales of that unpatented product.

Warsaw’s Problems

Warsaw owns two patents, but it does not practice the claimed inventions. Instead, Warsaw

1.  licenses the technologies to related companies Medtronic Sofamor Danek Deggendorf, GmBH (“Deggendorf”) and Medtronic Puerto Rico Operations Co. (“M Proc”), which manufacture and sell the patented products to Medtronic Sofamor Danek (“MSD”) and pay royalties to Warsaw on those sales; and

2.  makes “fixations” which it sells to MSD at a profit; MSD packages the fixations, which are not patented, and the patented products together as medical kits, and then sells them to hospitals and surgeons.

Warsaw alleged at trial that it derived three types of income related to its claimed inventions, referring to each type as “lost profits” for which it was entitled to damages:

1.  it receives income from the sale of fixations to MSD, which Warsaw argues should be treated as “convoyed sales”;

2.  it receives royalties from M Proc and Deggendorf; and

3.  it receives transfer payments from MSD resulting from an inter-company transfer pricing agreement, which Warsaw calls “true-up payments.”

Warsaw requested a reasonable royalty in addition to damages.  According to the CAFC, the jury verdict did not indicate which portion of the $101,196,000 award was for damages and which portion for reasonable royalty.  After the verdict issued, Warsaw asked the trial judge to grant it supplemental damages and an ongoing royalty for future acts of infringement.  The trial judge denied the request for supplemental damages, but granted a low ongoing royalty.

On appeal to the CAFC, NuVasive attacked the award of damages, and Warsaw attacked the trial judge’s denial of supplemental damages and grant of an ongoing royalty as being too low.

The jury verdict included an award to Warsaw for its decrease in sales of the unpatented fixations (i.e., “convoy sales”), caused by NuVasive’s infringing sales.  The CAFC disagreed.  It explained that to be the basis for a damages award, convoyed sales (here, the sales of fixations) “must be functionally related to the patented product and losses must be reasonably foreseeable.”  Combination of an unpatented product and a patented product in a kit is merely “a convention or business strategy.”  Moreover, there was no proof at trial that the kit components had a functional relationship or that the unpatented fixations had no function independent of the patented kit component.  The CAFC therefore vacated the portion of the damages award based on convoyed sales.

The CAFC also vacated the verdict award of damages to Warsaw based on the royalties it would have received from M Proc and Deggendorf, but for NuVasive’s acts of infringement.  The Court explained that a patentee is not entitled to lost profits based on lost sales of another company.

Warsaw presented testimony at trial that the prices paid by MSD to Warsaw were adjusted by various accounting and taxation considerations.  To offset these adjustments, MSD made “true-up payments” to Warsaw, so that Warsaw’s receipts would reflect the fair market value of the technology obtained by MSD from Warsaw.  The CAFC vacated the portion of the damages award based on such true-up payments, finding that Warsaw’s description of the payments was unclear.  In particular, Warsaw failed to distinguish between the amount attributable to royalty payments based on MSD’s sales to surgeons and hospitals, and unrelated transactions.

The CAFC added that even if Warsaw were not entitled damages for lost profits, it might still recover a reasonable royalty.  Unfortunately, the jury verdict was not clear which portion of its award was based on lost profits and which portion, reasonable royalty. The CAFC therefore remanded the case to the trial court for a new trial on reasonable royalties.  The CAFC offered guidance to the trial judge, stating that existing royalty agreements entered into after an arms-length negotiation would be good evidence of what was a reasonable as a royalty.  The CAFC expressed doubt, however, regarding the evidentiary value of the royalty payments from the related companies Deggendorf and M Proc.

The CAFC did not decide the issue of supplemental damages – i.e., damages for acts of infringement occurring during the “gap period” between the close of discovery and the jury verdict – because it was remanding the case to the trial judge for a new trial on the reasonable royalty issue.

Finally, regarding the award of an ongoing royalty, the CAFC vacated the award because it was impermissibly based, at least in part, on lost profits.

Takeaways

Damages should not be considered as an afterthought to the patent issues.

Allocation of ownership of patent rights among related companies should take into account possible damages awards in infringement actions.

Naming or not naming certain companies as plaintiffs may affect the damages possible in an infringement action.

Jury verdicts need to specific to permit review by the appellate court.

Full Opinion

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