Addressing the issue of lost-profit damages, the U.S. Court of Appeals for the Federal Circuit upheld the functional relationship test for convoyed sales and clarified what is an acceptable substitute under Grain Processing. American Seating Co. v. USSC Group, Inc., Case Nos. 07-1112, -1135 (Fed. Cir. Jan. 29, 2008) (Mayer J.).

American Seating owns U.S. Patent No. 5,888,038, directed at a wheelchair restraint system for securing wheelchairs to a mass transit vehicle that can be unobtrusively stored when no wheelchairs are present. American Seating filed suit in the Western District of Michigan against USSC for patent infringement. The two USSC’s devices at issue were the VPRo I and the VPRo II. The district court held that the VPRo I infringed, but the VPRo II did not. The jury awarded lost-profit damages totaling approximately $2.3 million. The lost-profit damages included diverted collateral sales of accompanying passenger seats sold with the infringing restraint system, as well as lost sales from bait-and-switch offers to sell the VPRo I, but delivering the VPRo II. The trial court set aside damages awarded for the portion of the verdict relating to convoyed sales, thereby reducing the overall award to $676,850.

On appeal, the Federal Circuit upheld the trial court’s ruling on convoyed sales and determined that the jury properly awarded damages for lost profits for USSC’s bait-and-switch sales of the non-infringing VPRo II. A “convoyed sale” refers to the relationship between the sale of a patented product and a functionally associated non-patented product. The Federal Circuit found that a patentee may recover lost profits on convoyed sales in cases where unpatented components are sold with a patented item if both the patented and unpatented products “together were considered to be components of a single assembly or parts of a complete machine, or they together constituted a functional unit.” The Court emphasized that an inherently functional relationship between the patented and unpatented components is required. According to the panel, American Seating failed to establish a functional relationship; the restraint system operated independently of the passenger seats, and customers purchased the two together for convenience only. Thus, it was proper to set aside damages for convoyed sales of the seats.

The Court also found that American Seating was entitled only to receive lost-profit damages from sales in which USSC employed a bait-and-switch tactic by first offering to sell the VPRo I and then substituting the non-infringing VPRo II. The court held that presence of a non-infringing replacement product does not preclude lost-profit damages in all circumstances. Rather, the infringer must show all purchasers viewed the replacement product as equivalent to the patented device for it to be considered an acceptable substitute under Grain Processing. Here, the evidence presented was sufficient to support the jury’s conclusion that the VPRo II was not an acceptable substitute to all purchasers. Therefore, including in the lost profits the sales from USSC’s infringing offers to sell the VPRo I was appropriate.