First published in LES Insights

Abstract

In determining the appropriate measure of patent-infringement damages, the Federal Circuit recently found that a patent owner is not entitled to receive the profits it lost on (1) sales of products co-packaged with its patented products, (2) royalty payments from its licensees, and (3) payments for the patented products received under a transfer-pricing agreement with a related company. First, the co-packaged product was not sufficiently related to the patented product to permit the patent owner to recover lost profits of the lost sales. Second, established law requires lost profits to be based on the patent owner's actual lost sales, not a related company's lost sales. Finally, the transfer-pricing agreement did not indicate what percentage of the payments was attributable to the patented products versus other products and fees. Because none of the revenue streams was eligible as a base for lost profits, the court vacated the lost-profits damages award and remanded the case to the district court to determine a reasonable royalty for the patent- infringement damage.

By statute, damages in a patent-infringement litigation consist of at least a reasonable royalty award, and in some cases, a patent owner can prove that it is entitled to a higher measure of damages, such as the profits lost because of lower sales due to the infringement.

In a recent case, Warsaw Orthopedic, Inc. v. NuVasive, Inc.,1 the U.S. Court of Appeals for the Federal Circuit reversed a district court's award of lost profits, finding that none of the revenue streams on which the patent holder relied was eligible as lost profits. Because, however, the patent holder was entitled to at least a reasonable royalty, the court remanded the action to the district court for a new damages trial to determine a reasonable royalty.

Background

Warsaw Orthopedic sued NuVasive Inc. for patent infringement, asserting one patent directed to spinal implants and a second patent directed to methods and devices for retracting tissue for minimally invasive spinal surgery. Although Warsaw manufactures medical products (fixations) related to the patented products, Warsaw does not practice the patented technologies. Instead, it licenses its patents to its related companies Medtronic Sofamor Danek Deggendorf, GmbH (Deggendorf) and Medtronic Puerto Rico Operations Co. (Puerto Rico), which manufacture and sell the patented products to Medtronic Sofamor Danek USA, Inc. (Medtronic). Medtronic packages the patented products and fixations together into medical kits and sells them to hospitals and surgeons. Warsaw and Medtronic have a transfer-pricing agreement, an arrangement whereby Medtronic remits a portion of its profits to Warsaw, referred to as "true-up payments," ensuring Warsaw receives fair market value for the exchanged property. Warsaw thus argued that the patented products provide three sources of income: (1) revenue from the sales to Medtronic of fixations, (2) royalty payments from Deggendorf and Puerto Rico, and (3) true-up payments from Medtronic arising from the transfer-pricing agreement. A jury awarded Warsaw $101,196,000 in total damages, but it did not clearly indicate what portion was attributable to lost profits versus a reasonable royalty, or what portion of the lost-profits award was attributable to each of the three revenue streams. NuVasive appealed the lost-profits award.

The Decision

First, the court rejected Warsaw's lost-profits claim based on sales of fixations to Medtronic. The court characterized Warsaw's claim as based on a theory of "convoyed sales," which is a sale of a product that is not patented, but is sufficiently related to the patented product such that the patent owner may recover lost profits for the convoyed sales. The court explained that to be entitled to lost profits for convoyed sales, the related products must be functionally related to the patented product and losses must be reasonably foreseeable; selling the products together "merely for 'convenience or business advantage' is not enough." If the convoyed sale has a use separate from the patented product it supports a nonfunctional relationship. The court stated that Warsaw did not present evidence that the fixations had no independent function. Thus, the court concluded that packaging the fixations with the patented products into a kit was merely for convenience or business strategy, not a basis for lost profits.

Next, the court rejected Warsaw's argument that it was entitled to lost profits based on royalty payments from Deggendorf and Puerto Rico. Warsaw acknowledged that the law prevents recovering related companies' lost profits. Warsaw argued, however, that it was not seeking Deggendorf and Puerto Rico's lost profits; rather, it was seeking money that Warsaw would otherwise have received via royalty payments but for NuVasive's infringement. Citing the long-recognized principle that lost profits must come from the lost sales of a product or service the patent owner itself was selling, the court rejected Warsaw's argument because Warsaw itself did not sell the patented product.

Finally, the court found that the true-up payments were not recoverable as lost profits. The court reasoned that Warsaw made no effort to distinguish what percentage of the true-up payments was attributable to the patented technologies as opposed to payments on unrelated transactions. The court also noted that the transfer-pricing policies indicated that the true-ups are established on a company-by-company basis, not a technology-by-technology or even a product-by-product basis.

Although the court found that Warsaw was not entitled to lost profits, by statute, Warsaw is entitled to a reasonable royalty award to compensate it for the value of its patented technologies. Because the jury's verdict did not indicate what evidence the reasonable royalty award was based on or the time period it applied to, the court remanded the action to the district court for a new trial to determine a reasonable royalty award.

Strategy and Conclusion

This decision shows the difficulty in proving a claim for lost profits, and that if a lost-profits claim is based on a payment agreement that includes both patented and unpatented technology, it may be helpful if the agreement indicates which portion is attributable to the patented technology.