The U.S. Court of Appeals for the Federal Circuit held that a company that owns a patent, but does not itself manufacture a product covered by that patent, is not entitled to claim lost profit damages, even if its sister company manufactures a product that is covered by the patent. Spine Solutions v. Medtronic Sofamor, Case No. 09-1539 (Fed. Cir., Sept. 9, 2010) (Moore, J.).

The patents in suit related to intervertebral implants, or total disc replacement devices. Spine Solutions (SSI) sued Medtronic, alleging infringement of its patent. After a jury trial, SSI was awarded $5.7 million in lost profits, an 18 percent reasonable royalty on the remaining $9.1 million in revenue (which the district court doubled pursuant to 35 U.S.C. §284), attorneys’ fees and a permanent injunction. Medtronic appealed.

The Federal Circuit first discussed the invalidity and infringement issues raised. It was undisputed that, except for a "single anchor" limitation, a prior art reference disclosed every element of the independent claim. However, the Federal Circuit disagreed that it would have been obvious to one of ordinary skill in the art to combine the "single anchor" limitation from a secondary reference with the primary prior art reference because the record failed to show that a person of skill in the art would have viewed a "single anchor" as being stable enough for a disc replacement device.

Turning to the infringement issues, Medtronic argued that one of the allegedly infringing products lacked the "single anchor" limitation because it had two anchors. The Federal Circuit agreed based on a "simple observation" of the product and, because the applicant had disclaimed use of two anchors during prosecution, reversed as to that product.

Medtronic also appealed the district court’s decision to allow SSI to add two sister companies that manufacture the patented devices as co-plaintiffs in order to claim lost profit damages. The Federal Circuit agreed with Medtronic that there was insufficient evidence that the sister companies were exclusive licensees with standing to sue for infringement. Instead, the only evidence was an implicit "understanding" between the related companies as to licensing, an understanding that was not documented by an oral or written agreement. As the Court noted there was nothing to stop SSI from licensing to a third party, the Federal Circuit concluded that "[i]f we were to find standing on these facts, this would mean that any company related to a patent owner could be treated as an exclusive licensee, so long as the patent owner allows only that company to practice the patent, regardless of any actual agreement as to exclusivity. This is plainly contrary to our case law, which specifies that a bare license … even if it is the only license granted by the patentee, does not provide standing without the grant of a right to exclude others." Thus, the Federal Circuit reversed the award of lost profit damages.

Finally, on the issue of willfulness, the Federal Circuit concluded that Medtronic was not "objectively reckless" so as to trigger an award of attorneys’ fees because Medtronic "raised a substantial question as to the obviousness" of the patent in suit.

Practice Note: In order to be in a position to claim lost profits as a measure of damage, a patent holding company that licenses its sister company to manufacture products covered by the patent should ensure that the sister company is exclusively licensed pursuant to a written agreement that will support independent standing.