Last week's article (see here) looked at a recent district-court opinion in which the court determined that a permanent injunction was appropriate based, in part, on the competition between the parties, the patent owner's general licensing practices, and the nature of the infringing product. This week's article looks at a recent Federal Circuit opinion addressing the requirements for lost-profits damages, and-like last week's case-addressing a permanent injunction. Here, the court vacated and remanded the district court's denial of a permanent injunction, reasoning that direct competition showed irreparable harm. Like last week, this decision highlights that, while the Supreme Court's eBay v. MercExchange decision did make permanent injunctions more difficult to obtain against patent infringement, it did not eliminate them altogether.

The Presidio Decision

In its decision addressing, among other things, lost profits and a permanent injunction, the Federal Circuit in Presidio Components, Inc. v. American Technical Ceramics Corp.,1 held that lost profits remain available when the asserted patent does not cover the patent owner's own products, as long as the patent owner's products directly compete with the infringing products in the market.

Both Presidio and ATC manufacture electrical components, including capacitors. Presidio owns a patent on a one-piece design for a capacitor-an improvement over the previous, and less reliable, two-piece designs. During prosecution of Presidio's patent, ATC also applied for a patent on its one-piece capacitors; however, the USPTO rejected ATC's patent application, citing Presidio's patent as prior art. Nevertheless, ACT started selling its one-piece capacitor-the 545L capacitor-and eventually overcame the USPTO's rejection by arguing that Presidio's patent did not disclose "orientation sensitivity."

Presidio sued ACT for infringement based on the sale of ACT's 545L capacitors. While Presidio's inventors believed their patent covered Presidio's one-piece capacitor-the BB capacitor-Presidio conceded during litigation that its patent did not cover the BB capacitors. Yet, Presidio still argued it was entitled to lost profits based on sales of the BB capacitor that it allegedly lost to ACT's 545L capacitors. After the jury awarded Presidio over $1 million in lost profits, which the district court left untouched, ATC challenged the lost-profits award on appeal, claiming that because Presidio's BB capacitors were neither covered by Presidio's patent nor in competition with ATC's allegedly infringing 545L capacitors, the award of lost profits was in error.

On appeal, ATC challenged two of the four factors required to show entitlement to lost profits: (1) demand for the patented product; and (2) absence of acceptable noninfringing substitutes. Regarding the first factor, the Federal Circuit initially found that demand need not be limited to a "patented" product; rather, demand for the patent owner's product can arise merely from a product that directly competes with a product that does, in fact, infringe. Thus, the Federal Circuit explained, Presidio could recover lost profits if its BB capacitors directly competed with ATC's 545L capacitors.

ATC argued that any market demand for the BB capacitors was not linked to one of the patent's claim limitations. The Federal Circuit rejected this argument, explaining that demand did not need to be established for one claim limitation over another; instead, establishing demand alone suffices.

Next, ATC argued that Presidio's BB capacitors and ATC's 545L capacitors were not sufficiently similar to support competition in the market because ATC's capacitors were designed for a higher-performance market. The Federal Circuit again disagreed, pointing out a number of similarities between the designs, and statements by Presidio's expert that the products competed "head-to-head" in the one-piece-capacitor market, vying for the same customers in the same applications. And the evidence showed that customer demand had begun moving from a two-piece design to a one-piece design (like the BB and 545L) due to increased reliability. Finally, ATC admitted that some of its 545L customers also purchased BB capacitors. The Federal Circuit viewed these factors as showing that demand existed for Presidio's BB capacitors in direct competition with the ATC's 545L capacitors.

The second lost-profits factor required Presidio to prove that no acceptable noninfringing substitutes for the accused capacitors were available on the market during the relevant period. The requirement is not absolute, however: Presidio needed only prove a reasonable probability that customers would have purchased its capacitors if ATA's infringing product had not entered the market.

ATC sought to show noninfringing substitutes with two other products available at that time-ATC's prior-generation 540L capacitors and non-party DLI's capacitors. As the court explained, however, the mere existence of a competitor's product does not establish the adequacy of that substitute, as some products lack the competitive advantages of the patented invention. The Federal Circuit thus found that neither of these products were adequate substitutes in the same market because both were two-piece designs (and therefore less reliable) and the evidence showed that customers did not in fact treat either as an acceptable substitute for the accused product. Accordingly, the Federal Circuit found that Presidio was entitled to recover lost profits.

Presidio separately appealed the district court's denial of a permanent injunction against ATC's 545L capacitors. Despite agreeing that demand existed for the BB capacitors, and that they do compete with the 545L capacitors, the district court found that ATC was not a direct competitor for purposes of granting a permanent injunction. The Federal Circuit highlighted the tension that would result from acknowledging competition for one purpose (damages) but not another (injunction). And as a result, the court held that, in light of the evidence establishing direct competition, the district court placed too much weight on the failure of Presidio's BB capacitors to actually practice Presidio's patent. In the court's words, "[e]ven without practicing the claimed invention, the patent owner can suffer irreparable injury." Such injury cuts in favor of a permanent injunction.

Here, the direct competition suggested that Presidio would suffer from irreparable harm without an injunction. In addition, Presidio presented evidence that ATC considered and analyzed Presidio's patent while developing its 545L capacitor and before filing its own patent application. And the USPTO's use of Presidio's patent as prior art against ATC's application indicated that the BB and 545L capacitors embody similar technology. Consequently, the Federal Circuit found that the district court abused its discretion in denying Presidio a permanent injunction and therefore remanded the case to the district court to reweigh the permanent-injunction factors in light of the Federal Circuit's opinion.

As a final note, the Federal circuit addressed ATA's claim based on alleged false marking by Presidio. The district court had granted summary judgment of liability for false marking for the period after Presidio admitted that its patent did not cover its BB capacitors. The Federal Circuit noted that Congress had changed the false-marking statute during the pendency of the appeal, and that the modified statute has retroactive application-contrary to the default statutory interpretation-because the statute stated that it "shall apply to all cases, without exception." The court therefore remanded the issue for the district court to determine if ATA had a claim under the amended statute.

Strategy and Conclusion

The Presidio case illustrates that a company can recover lost profits-and possibly a permanent injunction-even if its products do not embody every element of the claimed invention. The required demand for the patent owner's product may be established by showing direct competition with the accused products. Here, that was achieved through evidence of an increase in profits, consumer preference, and better performance over the technology previously available on the market.

The direct competition necessary for lost profits also supports the issuance of a permanent injunction. Additionally, when a successful patent owner seeks an injunction, the infringer's knowledge and assessment of the asserted patent in developing its own technology may tip the scales towards a finding of irreparable harm, further favoring a permanent injunction.