The BERO Group Publications

Convoyed Sales: Lost Profits v. Reasonable Royalty

By James L. McGovern, CPA/CFF, CVA, Fellow
July 2014

What good is a Bluetooth headset if it won't stay in your ear?

That was one of the issues behind Plantronics, Inc. v. Aliph, Inc., et al., a patent infringement suit that was heard by the Northern District Court of California in February 2014. The product in dispute was the earbud of a Bluetooth headset, a patented product that was sold both separately and in combination with Aliph's product. The judge's decision to deny motions to strike the testimony of the plaintiff's damages experts brought some interesting matters to light.

First, the court decided that Plantronics' expert could present his lost profits analysis because it held up under the first Panduit factor—that is, that there was, indeed, a demand for the patented product in question here, i.e. the earbud. Plantronics' expert included both the earbuds and the companion headsets in his definition of the market. Aliph argued that there was a duty to apportion consumer demand for the earbud. The court ruled, however, that under Panduit, a lost profits analysis does not require showing demand for a particular embodiment of the patented functionality. Nor does it require any allocation of consumer demand between the patented and non-patented features. Rather, the first Panduit factor simply asks whether there is demand for the patented product.

Second, the court considered whether it was proper to leverage the small earbud item to reach the sales of the vastly more complex and expensive Bluetooth headset. In this case, the court decided the answer was "yes" because the earbud and headsets were part of a convoyed sale, and as such the lost profits were recoverable.

WHAT MAKES A SALE "CONVOYED"?

A convoyed sale occurs when a non-patented item is sold with a functionally associated patented item and the items are part of a single, cohesive unit. Here, it's clear that even though the earbuds in question could be purchased elsewhere as spare or replacement parts, a Bluetooth headset simply wouldn't be functional without them, and therefore Plantronics had a right to sue for lost profits.

When it comes to calculating royalties, however, convoyed sales are treated differently. As recently as March 2014, the Northern District of Illinois addressed the issue of royalties on convoyed sales in Sloan Valve Co. v. Zurn Industries, Inc., a case that deals with dual-mode toilet flush valves (one mode for solid waste, another for liquid). In rejecting an expert's testimony, the court ruled that the expert improperly included profits from the convoyed sales of toilets and related accessories in the royalty base, citing a case in the Federal Circuit that found a patent holder could not include sales of unpatented items in the royalty base but could demonstrate that these items were relevant in determining the overall damages of the infringement. The court here held that under a reasonable royalty analysis, when a patented component is sold as part of a larger product that includes unpatented components, patentees can only recover damages based on the entire market value of the whole product if the patented feature is the basis of the consumer demand for that product.