Warsaw Orthopedic, Inc. et al. v. NuVasive, Inc.

Addressing the issue of convoyed and related sales, the U.S. Court of Appeals for the Federal Circuit, even while affirming the district court with respect to its invalidity and infringement findings, remanded the case for a new trial on damages, concluding that the district court had improperly allowed damages on non-convoyed sales.  Warsaw Orthopedic, Inc. et al. v. NuVasive, Inc., Case Nos. 13-1576; -1577 (Fed. Cir., Mar. 2, 2015) (Dyk, J.).

Warsaw Orthopedic brought suit against NuVasive asserting infringement of two patents:  one directed to oversize spinal implants and the other to retracting tissue for minimally invasive spinal surgery.  NuVasive counterclaimed against Warsaw and its related company Medtronic Sofamor Danek USA (MSD) asserting a patent related to neuromonitoring during surgery.  After a jury found liability on all three asserted patents, it awarded Warsaw over $100 million in total damages, indicating on the verdict form that was for “lost profits damages (with royalty remainder).”  The district court denied Warsaw’s post trial motion for supplemental damages and a permanent injunction.  The district court set an ongoing royalty rate at 13.75 percent for one of the Warsaw patents and 8.25 percent for the other.

Warsaw appealed, arguing that the district court erred in denying supplemental damages to compensate for NuVasive’s infringement between the close of discovery and trial and in declining to award a higher royalty rate.  Warsaw also appealed the determination that it infringed NuVasive’s patent.  NuVasive cross appealed challenging the validity determination, the infringement determination against it and the damages calculation for the patents it was found to infringe.

The Federal Circuit affirmed the district court’s liability determinations.  However, the more interesting aspect of the opinion relates to Federal Circuit’s remand of the damages issues.  While Warsaw owns the asserted patents, it does not practice them.  Rather it licenses them to related companies that manufacture and sell patented products to MSD and pay royalties to Warsaw on those sales and manufactures fixations (medical products such as screws and surgical rods), which it sells to MSD for a profit.  MSD packages the fixations and the patented products together into medical kits.

Warsaw claimed that NuVasive’s infringement of the patented technologies resulted in Warsaw’s making fewer sales of fixations to MSD because MSD lost sales of the patented medical kits that included the fixations.  Warsaw’s claim was based on a convoyed sales theory.  The Federal Circuit explained that to be entitled to lost profits for convoyed sales, the related products must be functionally related to the patented product and the losses must be reasonably foreseeable.  The Court found the fixation sales to MSD were not convoyed sales as Warsaw had failed to prove a functional relationship between the two sufficient to support a jury verdict for convoyed sales.  The Court also found that Warsaw’s marketing of the fixations as part of a comprehensive kit of instruments and implants was “the precise sort of convenience or business strategy” that was excluded from the convoyed sales analysis.

NuVasive also challenged the inclusion of lost royalty payments from related companies in the lost profits award.  Warsaw had claimed that NuVasive’s infringement detrimentally affected the licensees sales, which in turn negatively affected the royalty payments they made to Warsaw.  NuVasive challenged this as Warsaw’s effort to recover lost profits from other companies  On this issue, the Federal Circuit explained that “[t]o be entitled to lost profits, we have long recognized that the lost profits must come from the lost sales of a product or service the patentee itself was selling.”  Normally, “if the patentee is not itself selling a product, by definition there can be no lost profits.”  Thus, the Court found that the lost royalty payments were not recoverable as lost profits.

Additionally the Federal Circuit disallowed, as lost profits, the “true up” payments made by MSD to Warsaw.  These were part of a complex structure designed to comply with tax and accounting laws and based on transfer pricing agreements.  The Court found Warsaw failed to distinguish between the types of true up payments and accordingly they were not recoverable as lost profit.

The Federal Circuit noted that its rejection of Warsaw’s lost profits claims did not mean that Warsaw was precluded from recovery altogether—it was entitled to a reasonable royalty.  The Court thus remanded the case for the district court to determine which—if any—related party licensing agreements should be considered as part of the royalty determination.

Finally, the Federal Circuit did not address the supplemental damages question, but instructed that it be addressed at a new trial on damages.