In WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC., Appeal Nos. 2013-1576, -1577, the Federal Circuit held that a company was not entitled to lost profits based on the activities of related companies.

Warsaw sued NuVasive for patent infringement.  Warsaw argued that, while it did not itself practice the patented technologies, it should recover for three sources of income related to those technologies, including (1) revenue from the sale of certain products to a sister company, which the sister company packaged with patented products into kits; (2) royalties from the sales of other sister companies; and (3) inter-company “true-up” payments (post hoc transfers to ensure that Warsaw receives fair-market value).  Warsaw characterized the three sources of incomes as lost profits.  The district court sustained the jury’s findings of infringement and damages for past infringement.  After trial, Warsaw filed a motion seeking supplemental damages.  The district court denied the motion and set ongoing royalty rates for each patent.

The Federal Circuit affirmed the district court on the issues of invalidity and infringement.  With respect to damages, the Federal Circuit concluded that, for any particular sale, a patentee is entitled to either a reasonable royalty or lost profits, but not both.  Noting that Warsaw failed to prove either a functional relationship between its products and the patented technology, or a lack of an independent function of Warsaw’s products, the Federal Circuit held that the sales of Warsaw’s products were not convoyed sales and that that Warsaw could not recover on such sales as lost profits.  The Federal Circuit also held that Warsaw was not entitled to lost profits based on the sales of its sister companies (which remitted money to Warsaw).  The Federal Circuit confirmed that lost profits may only come from the lost sale that would have been made by the patentee itself.  Similarly, the Federal Circuit held that the “true-up” payments were not recoverable as lost profits because they were derived from sales not made by the patentee.

The Federal Circuit noted Warsaw was still entitled to a reasonable royalty.  Nevertheless, because the foundation for the jury’s reasonable royalty rate was unclear and included a lost profits component, the Federal Circuit remanded for a new trial on damages.