Patent Damages: Compensatory Damages From Sale of a Business with Infringing Products

Lost profits and royalties are not the only way to measure patent damages. In Minco Inc. v. Combustion Eng’g, Inc., 95 F.3d 1109, 1120 (Fed. Cir. 1996), the Federal Circuit recognized that a patent owner might have been entitled to damages resulting from a third parties’ purchase of the infringer’s business, if it had proven that the infringing products were an important factor in the sale.

Patent owner Minco sought damages arising from defendant infringer CE’s sale of its fused silica business to a third party. Minco sought as damages the difference between the sale price of CE’s Business and an expert valuation of CE’s business without the infringing kilns. Minco argued that if CE had not infringed, the third party would have purchased Minco’s business instead of CE’s.

The court recognized that in theory Minco might have been entitled to some recovery from CE’s sale of its business because it included infringing kilns. But, the court determined that Minco did not show that infringing kilns were an important factor in the sale. After the third party acquired CE’s business, the third party switched to its own patented furnace, which undermined Minco’s claim that kilns drove the sale.

Patent Damages: Reasonable Royalty

A reasonable royalty for the infringer’s use of the invention is one way to measure damages for patent infringement (others include lost profits and established royalties).

A reasonable royalty is a amount determined by a court to result from a hypothetical negotiation between the patent owner and the infringer. The hypothetical negotiation attempts to determine the royalty that the reasonable parties would have agreed to had they successfully negotiated an agreement just before infringement began. Wordtech Sys. v. Integrated Networks Sols., Inc., 609 F.3d 1308, 1319 (Fed. Cir. 2010).  This necessarily involves a degree of approximation and uncertainty.

Courts often consider the Georgia-Pacific factors in determining a reasonable royalty. Those factors are:

1. The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.

2. The rates paid by the licensee for the use of other patents comparable to the patent in suit.

3. The nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold.

4. The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.

5. The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promotor.

6. The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.

7. The duration of the patent and the term of the license.

8. The established profitability of the product made under the patent; its commercial success; and its current popularity.

9. The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results.

10. The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention.

11. The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use.

12. The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions.

13. The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.

14. The opinion testimony of qualified experts.

15. The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee — who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention — would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.

[Ga.-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970)].

While the Federal Circuit has approved use of the Georgia-Pacific factors, it has also said that they are a comprehensive list but unprioritized and often overlapping. ResQNet.com, Inc. v. Lansa, Inc, 594 F.3d 860, 869 (Fed. Cir. 2010). The factors are also not exclusive in that other factors could be considered.

The Georgia-Pacific factors can be grouped in two categories according to Chisum on Patents. 1-20 Chisum on Patents § 20.07 (2017). The first group is directed to general and specific market conditions in the industry. The second group sets a range of feasible rates “since a willing patent owner would demand a greater than minimum rate for a profitable invention and a willing user would concede no more than the expected amount of profit.” Chisum says that “The first group of factors points to the rate that the parties would have adopted within that range.”

Patent Damages: Established Royalty

An established royalty is one way to measure damages for patent infringement (others include lost profits and reasonable royalties).

When the patent owner has licensed its patent for comparable acts to those engaged in by the infringer, those prior licenses may define an established royalty rate. The federal circuit has said “When the patentee has consistently licensed others to engage in conduct comparable to the defendant’s at a uniform royalty, that royalty is taken as established and indicates the terms upon which the patentee would have licensed the defendant’s use of the invention.” Monsanto Co. v. McFarling, 488 F.3d 973, 979 (Fed. Cir. 2007).

For prior negotiated royalties to provide an established royalties they need to be: (1) paid or secured before the present infringement, (2)  paid by a sufficient number of persons/entities as to  indicate a general acquiescence in the  reasonableness of the royalty, (3) uniform at the places where the licenses where issued, (4) not paid under threat of suit, and (5) for similar rights or activities as those at issue in the present infringement. Rude v. Westcott, 130 U.S. 152 (1889).

Therefore, in many cases it will be hard to show there is an established royalty unless the patent owner is engaged in a campaign of licensing outside of litigation. Established royalties are different from reasonable royalties, which I will discuss in a later post.

 

Patent Damages: Lost Profits

A patent infringer is liable to a patent owner for damages adequate to compensate the patent owner for infringement, but no less than a reasonable royalty for the use made of the invention by the infringer. 35 USC 284.

Traditionally, there are three ways of measuring compensatory damages for patent infringement: (1) lost profits, (2) established royalty, or (3) a reasonable royalty. Today I’m going to discuss lost profit damages.

Lost Profits

In order to recover lost profits, the patent owner must “show ‘causation in fact,’ establishing that ‘but for’ the infringement, he would have made additional profits.” Wechsler v. Macke Int’l Trade, Inc., 486 F.3d 1286, 1293 (Fed. Cir. 2007). The “but for” causation asks, if the infringement had not occurred, would the patent owner made the alleged lost profits? If the patent owner is not selling a product, then usually there is no lost profits, except if the patent owner has the ability to manufacture and market the product, but for some legitimate reason is not. Id. 

Courts have allowed patent owners to present “market reconstruction theories showing all of the ways in which they would have been better off in the ‘but for world,’ [a world without the infringement] and accordingly to recover lost profits in a wide variety of forms.” Grain Processing Corp. v. Am. Maize-Products Co., 185 F.3d 1341, 1350 (Fed. Cir. 1999)

Lost profits can arise from a showing that but for the infringement the patent owner would have (1) made greater sales, (2) charged higher prices, or (3) incurred lower expenses.

Courts sometimes use the Punduit test to determine whether the patent owner proved causation for lost profit damages. The Punduit test requires the patent owner to establish: (1) demand for the patented product; (2) absence of acceptable non-infringing substitutes; (3) manufacturing and marketing capability to exploit the demand; and (4) the amount of the profit it would have made. Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1545 (Fed. Cir. 1995) (citing Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F.2d 1152, 1156 (6th Cir. 1978)). 

If there are only two suppliers for the product at issue in the relevant market, the patent owner and the accused infringer, the first two Punduit test factors collapse into one in the two-supplier test. Under the two-supplier test a patent owner must show: (1) the relevant market contains only two suppliers, (2) its own manufacturing and marketing capability to make the sales that were diverted to the infringer, and (3) the amount of profit it would have made from these diverted sales. Micro Chem., Inc. v. Lextron, Inc., 318 F.3d 1119, 1124 (Fed. Cir. 2003). 

Lost Sales or Diverted Sales

When lost sales are the basis for lost profits, the interaction of the patent owner and the infringer in the market is important. “If the patentee and infringer do not sell their products in the same market segment, “but for” causation cannot be demonstrated.” Crystal Semiconductor Corp. v. Tritech Microelectronics Int’l, Inc., 246 F.3d 1336, 1360 (Fed. Cir. 2001)

Reduction in Prices or “Price Erosion”

A reduction of prices by the patent owner caused by the infringing competition is a proper ground for lost profit damages. The patent owner must show that “but for” infringement, it would have sold its product at a higher price. Id.

In a later post I will discuss royalties damages for patent infringement.

Update: A post on established royalties for patent infringement.

Update: A post on reasonable royalties for patent infringement.

Who is an Inventor?

The US statute defines an inventor as “the individual or, if a joint invention, the individuals collectively who invented or discovered the subject matter of the invention.” 35 USC 100(f). 

For US patent purposes, an inventor is a natural person, and is not a corporation or sovereign. Univ. of Utah v. Max-Planck-Gesellschaft zur Forderung der Wissenschaften E.V., 734 F.3d 1315, 1323 (Fed. Cir. 2013).

Inventors are individuals that conceive of the invention. The Federal Circuit said:

“Conception is the touchstone of inventorship, the completion of the mental part of invention. It is the formation in the mind of the inventor, of a definite and permanent idea of the complete and operative invention, as it is hereafter to be applied in practice. Conception is complete only when the idea is so clearly defined in the inventor’s mind that only ordinary skill would be necessary to reduce the invention to practice, without extensive research or experimentation. [Conception] is a mental act…” Id.

The question about who owns the invention is different from who is an inventor. By default the inventor is an owner, unless by contract or law someone else is the owner, such as an employer of the inventor.

Patent Drafting: The Best Mode Requirement

US4652259_FigWhen describing an invention in a patent application, every inventor must disclose the best mode of carrying out the invention, known to the inventor. This requirement is found at 35 USC 112(a).  Therefore if the inventor knows of multiple ways of making or using the invention, he/she must not withhold the best way known to him or her while disclosing one or more inferior ways. That is the inventor must not withhold disclosure of his/her preferred mode.

Courts have described the best mode requirement as one ensuring that the patent applicant plays ‘fair and square’ with the patent system. The requirement ensures a quid pro quo of disclosure exchanged for the patent grant. Amgen, Inc. v. Chugai Pharmaceutical Co., Ltd., 927 F.2d 1200, 1209-10 (Fed. Cir. 1991).

Go Medical Industries Example

Let’s see the best mode requirement in action. Go Medical Industries sued Alpine Medical for, among other things, infringement of US Patent No. 4,652,259 (the ‘259 patent). Go Medical Industries Pty., Ltd. v. Inmed Corp., 471 F.3d 1264 (Fed. Cir. 2006).

The ‘259 patent is directed to a catheter having a stop member that limits the insertion of a sheath of the catheter. It was known that urinary catheters can increase the risk of urinary tract infections because inserting a catheter can push bacteria into the normally sterile bladder. But, most of the bacteria are concentrated in the first 1.5 cm to 2 cm of the urethra, due to a natural pressure barrier located about 1.5 cm from the outer end.

The claims of the ‘259 patent are directed a stop member to limit the insertion of the sheath to either “about 1.5 cm” or moving the sheath along the urethra such that the distal end is in a “known position of maximum pressure,” but not beyond that position.

The original parent application did not contain a description of the 1.5 cm depth. Further, the inventor testified that when drafting the patent application, he purposefully “avoid[ed] any comment with relation to the length” because he “was aware that numbers would become limiting themselves.”

The appeals court concluded the inventor did not comply with the best mode requirement because the inventor viewed the (1) 1.5cm depth as the best mode and (2) did not disclose it in the original application. As a result, the ‘259 patent did not get the benefit of the parent application and was invalided by intervening prior art.

Lack of Best Mode No Longer a Defense

The American Invents Act changed the law to remove a best mode violation as an invalidity defense in an infringement suit. 35 USC 282(b)(3)(A). Therefore, the best mode might seem like a requirement with no teeth.

Reasons for Disclosing Best Mode

However, withholding the best mode is still not a good idea. The law requires it be disclosed. If it is not disclosed, then it will not be a part of your patent application. It may be that details about your best mode are necessary to obtain a patent over the prior art and the failure to include them will prevent you from obtaining a patent or from obtaining a patent with meaningful scope. Further, the failure to disclose the best mode might also result in a violation of the written description requirement.

What is a Continuation-in-Part Patent Application?

A continuation-in-part patent application can be thought of as a part-child of a prior filed “parent” patent application. A continuation-in-part application is sometimes referred to as a CIP application.

A CIP application contains some or all of the subject matter from the prior parent application and some new matter that was not in the prior parent application.

The Manual of Patent Examining Procedure provides that a continuation-in-part is “an application filed during the lifetime of an earlier nonprovisional application, repeating some substantial portion or all of the earlier nonprovisional application and adding matter not disclosed in the said earlier nonprovisional application.” MPEP 201.08.

A CIP application can have claims with different priority dates depending on whether a given claim is completely supported in the parent application or whether it contains new matter that was not supported in the parent application.

Unless you need a split set of claims where some claims are completely supported in the original parent application and some are not, then you might want to consider not filing the application as a CIP but rather as just a new application. This is true because the downside of a CIP is that the resulting patent life (term) will be measured from the filing date of the parent application. Therefore, if you do not need the benefit of the parent application, then you will probably want to longer patent term afforded by not claiming priority to the parent.

 

Is that Patented Design Really New?

United General Supply sued Rural King alleging Rural King sold products infringing three design patents, one of which is D577,520 (the ‘520 patent) for a chair back.

D577520_fig9RuralKing

The claimed chair back has 5 slats, the center slat being wider than the lateral pairs. The claimed design also includes a longer upper horizontal bar and a shorter lower horizontal bar extending behind the slats. The remaining part of the chair shown in figure 9 is in broken lines and therefore not claimed. The accused Rural King product is shown in the color photo and looks pretty close to the claimed design.

One might ask, “is that patented design new?” or “Doesn’t this five slat design exist in the prior art?” And that’s what every defendant in a patent infringement asks and searches to answer. Because if the design is in the prior art, then the patent is invalid and the defendant wins. However, don’t just look at the slats. You must consider the upper and lower horizontal bars that are claimed.

But even as to the slats, the prior art cited by the patent examiner in the ‘520 patent does not get close enough to the claimed design. Below are figures from some of the patents cited by the Examiner during the prosecution of the ‘520 patent.

PriorArtChairBacks

 

None of the figures above show a chair back with a wide center slat and smaller lateral slats.

Defendants look beyond the prior art cited during the prosecution of the patent. They search US and foreign patents and patent applications, as well as non-patent prior art to try to invalidate the patent.

Yet, design patent scope is often quite narrow. That means small changes may be sufficient to distinguish the prior art. And therefore invalidating design patents based on the prior art can be challenging.

If Rural King is to succeed it will need to deal with the ‘520 patent as well as U.S. D597,352 which is directed to the rocking chair frame. The ‘352 patent, shown below, provides more details and may be harder to attack.

D597325

Citation: United General Supply Co., Inc. v. Rural King Administration, Inc., No. 2:18-cv-02004 (C.D.Ill 2018).

Patent Examiner Interviews

Most patent applications are rejected, at least in part, on the first review by a patent examiner. The rejection is issued in a writing called an Office Action. The applicant has the option to file a written response. But the applicant also has the option to hold an interview with the patent examiner. The interview can be in-person, by phone, or by video conference. The applicant need only provide a proposed amendment or an agenda of topics to discuss with the Examiner during the interview.

An oral discussion can often be a very effective and dynamic way to advance and defend an argument. Plato recognized this in the extreme when he determined that certain knowledge should not be written down (i.e. Plato’s unwritten doctrines). He explained in Phaedrus: “He who has knowledge of the just and the good and beautiful … will not, when in earnest write them in ink, sowing them through a pen with words, which cannot defend themselves by argument and cannot teach the truth effectively.”

In other words, an oral discussion allows a party to dynamically respond to the opposition.

I think that Plato’s point can be modified for our purposes: an oral discussion with the patent examiner can be an important supplement to a written response. It can serve to quickly identify and resolve differences between the patent applicant and the examiner. It can quickly illustrate an agreeable path toward allowed patent claims.

An Examiner interview is not always needed, for example, if the path to overcoming the rejection is very clear and simple. However, an interview is often helpful to understand the Examiner’s position and advance a patent application to allowance.

What is a Continuation Patent Application?

A continuation patent application can be thought of as a “child” application of an earlier filed “parent” application, in a way similar to a divisional application. The continuation application must be filed while the parent application is pending.

A continuation application is often filed to introduce into the application a new set of claims and to establish a right to further examination. Continuation application does what it’s name says, it “continues” the examination and prosecution of the application. It is one way to keep negotiating with the patent office (another way is to file a request for continued examination (RCE)).

Unlike a divisional, the new or amended claims in a continuation application are not necessarily directed an independent or distinct invention.

The Manual of Patent Examining Procedure provides that a continuation application “is an application [e.g. a child application] for the invention(s) disclosed in a prior-filed copending [1] nonprovisional application, [2] international application designating the United States, or [3] international design application designating the United States [e.g. parent application].” MPEP 201.07. It also provides, “The disclosure presented in the continuation must not include any subject matter which would constitute new matter if submitted as an amendment to the parent application.”

Therefore, no new subject matter can be added in a continuation application. Rather, the continuation application merely claims an invention that was already described in the original parent application.