Precedential Patent Cases From the Federal Circuit in the Past Week
Warsaw – The Circuit affirms judgments of validity and infringement of the three patents in suit, two of which were asserted by a Medtronic company, Warsaw Orthopedic, and one of which was asserted by defendant-counterclaimant NuVasive. But the Circuit vacates a $101 million damage award to Warsaw and remands for a new trial on damages based upon reasonable royalty, and not lost profits. A $660,000 award to NuVasive for infringement of its patent is affirmed.
Warsaw Orthopedic, Inc. v. NuVasive, Inc., Fed. Cir. Case 2013-1576 -1577 (March 2, 2015)
Warsaw's ‘973 and ‘933 patents are directed to devices and methods used in spinal surgery. A ‘236 NuVasive patent relates to neuromonitoring during surgery. The jury found that the '973 patent was not invalid (infringement was not in dispute), that the '933 patent was infringed (validity was not in dispute), and that the '236 patent was infringed by Warsaw and a related company Medtronic Sofamor Danek USA, Inc. ("MSD") (validity was not in dispute). The jury awarded damages for each. After trial, Warsaw filed a motion seeking supplemental damages and both parties moved for JMOL and new trial as to infringement, validity and damages. All motions were denied and the parties appealed.
The panel affirms the district court's rulings as to validity of the ‘973 patent and as to infringement of the ‘933 and 236 patents, but the more interesting parts of the opinion relate to damages so that will be the focus of this summary.
New trial is granted as to the '973 and '933 Damages Issues
Although Warsaw owns the '933 and '973 patents, it does not practice the patented technologies. Rather, it (1) licenses the technologies to related companies "Deggendorf" and "M Proc", which manufacture and sell the patented products to MSD and pay royalties to Warsaw and (2) manufactures "fixations," rods and screws used in such surgery, which it sells to MSD, who packages the fixations and the patented products together into medical kits for sale to hospitals and surgeons.
Warsaw asserts it has three sources of income related to the patented technologies. First, it receives revenue from the sale of fixations to MSD, which it argues should be treated as convoyed sales; second, it receives royalty payments from M Proc and Deggendorf; third, it receives payments from MSD resulting from an inter-company transfer pricing agreement, which are characterized by Warsaw as "true-up" payments.
A. Convoyed Sales
To be entitled to lost profits for convoyed sales, the related products (e.g., the fixations) must be functionally related to the patented product and losses must be reasonably foreseeable. Being sold together merely for convenience or business advantage is not enough. If the convoyed sale has a use independent of the patented device, that suggests a non-functional relationship.
The panel rules that the fixations here are not convoyed sales recoverable as lost profits, as Warsaw failed to prove a functional relationship necessary to support a jury verdict awarding lost profits for convoyed sales. Warsaw points to its marketing material, in which it touted the kits' "comprehensive set of instruments and implants including fully integrated neuromonitoring, streamlined access instrumentation, anatomically designed implants and percutaneous fixation systems." This does not establish a functional relationship. Warsaw never presented testimony that the fixations it sold to MSD had no independent function—that is, that they would not work as well in other surgeries not involving the patented technologies. Therefore, the district court erred in denying NuVasive's JMOL motion on this issue.
B. Royalty Payments from M Proc and Deggendorf
To be entitled to lost profits, those profits must come from the lost sales of a product or service the patentee itself was selling. As we explained in Rite-Hite Corp. v. Kelley, 56 F.3d 1538 (Fed. Cir. 1995), normally, if the patentee is not selling a product, by definition there can be no lost profits." Here, there is a failure of proof and as a result the revenue stream is not recoverable.
C. True-Up Payments
It is not immediately clear from Warsaw's accounting witness' testimony what the underlying transactions were that made the 95% true-up payments necessary. The true-up payments from MSD to Warsaw appear to result from a variety of transactions. Some are for royalty payments, suggesting an implied licensing agreement between MSD and Warsaw for the sale of various patented technologies. Others, as suggested by spreadsheets in the record, are for other transactions—for example, management fees or implied licenses on other patents.
Warsaw apparently contends that the true-up payments are recoverable because they contain, in part, royalty payments from MSD to Warsaw for sales of the patented products to surgeons and hospitals. But Warsaw makes no effort to distinguish what percentage of the true-ups was attributable to those payments as opposed to payments on unrelated transactions. Indeed, the transfer pricing policies indicate that the true-ups are established on a company-by-company, not a technology-by-technology or even a product-by-product basis. The district court erred in denying JMOL as to these payments. Just as the payments from M Proc and Deggendorf are not recoverable as lost profit, so too are the true-up payments not recoverable as lost profit.
D. Reasonable Royalty
Warsaw is entitled to a reasonable royalty sufficient to compensate it for the value of what was taken from it, the value of the patented technology. A reasonable royalty compensates the owner not for the damage he suffered, but for the value of what was taken. Neither party argues it is possible to parse out and compute a reasonable royalty based on the jury verdict. Although the jury verdict did state a reasonable royalty rate, it is not entirely clear the period for which that reasonable royalty was determined or whether the jury impermissibly relied on evidence not probative of the value of the patented technology. The panel therefore remands for a new trial to determine a reasonable royalty on the patented technologies.
Evidence of a number of existing royalty agreements entered into at arms-length can be evidence of the value of the patent. But, royalties paid by related parties have little probative value as to a patent's value. As discussed above, the true-up payments have no relevance to the calculation of the reasonable royalty because Warsaw made no effort to determine what percentage of these payments represented royalties for the asserted patents. The panel does not decide whether royalty payments by Deggendorf and M Proc have any relevance in determining a reasonable royalty, but leaves that question to the district court on remand to determine in the trial proceedings.
E. Supplemental Damages
Warsaw challenges the district court's denial of supplemental damages. Discovery closed in June of 2010, but the jury did not render its verdict until September of 2011. Neither the court's instructions nor the verdict form specified the period of infringement during which the jury should award damages. The court held that whether damages for the gap period were awarded was within the province of the jury. Because the court lacked "critical information about the jury's calculations, the court was unable to formulate a supplemental damages award that would be consistent with the jury's verdict." Any attempt to do so, the district court explained, "would be an improper invasion of the province of the jury." Warsaw contends on appeal that the district court erred in not awarding supplemental damages.
The panel indicated it did not need to resolve this issue because, as noted above, it is remanding for a new trial on damages. At the new trial, Warsaw may appropriately assert a claim for supplemental damages limited to a reasonable royalty. But the time period of the claim must be presented to the jury with clarity so as to avoid the ambiguity that existed at the first trial.
F. Ongoing Royalty
Finally, the district court set the ongoing royalty rate for the '973 patent at 13.75% of sales of infringing implants and set the ongoing royalty rate for the '933 patent at 8.25% of sales of infringing retractors. Warsaw argues that the award is too low because it does not fully compensate Warsaw for lost profits, fails to account for the fact that validity and infringement must be assumed when determining ongoing royalties, and fails to account for the fact that some kits were used multiple times, thus resulting in multiple acts of infringement of the method claims. However, because the ongoing royalty impermissibly includes a lost profits component, the panel vacates the award and remands for the district court to determine an appropriate ongoing royalty rate in light of this opinion and the jury verdict after a new trial.