On June 1, 2009, the Federal Circuit issued a decision in DePuy Spine Inc. v. Medtronic Inc. that addressed lost profits issues related to demand and convoyed sales.

The Federal Circuit reversed the jury’s award of $77.2 million in lost profits on unpatented products but upheld the remaining $149.1 million in lost profits damages. The patent at issue involved spinal surgery screws.

The court’s decision may have the effect of lowering the bar for establishing lost profit damage awards. Specifically, the court held that for the first Panduit factor, there only needs to be demand for the patented product as opposed to the higher hurdle of demand for the patented feature.

Plaintiff DePuy advanced a lost profits damages theory under the four-factor Panduit test,
which requires that the plaintiff show:

1. demand for the patented product,
2. absence of acceptable noninfringing substitutes,
3. manufacturing and marketing capability to exploit the demand, and
4. the amount of profit that would have been made. ¹

Defendant Medtronic argued that the requisite demand under the first Panduit factor requires showing demand for the specific feature that distinguishes the patented product from a noninfringing substitute, not simply demand for the product incorporating the patented technology.

This argument appears consistent with prior interpretation of the first Panduit factor as being “demand for the patented feature, not demand for the product.” ²

If customers were unaware of the patented feature, or the patented feature was not a consideration or driving part of their buying decision, the patent owner may fail the first prong of the Panduit test.

However, the Federal Circuit rejected Medtronic’s argument holding that “all that the first factor states, and thus requires, is ‘demand for the patented product’” which is simply demand for a product that is “covered by the patent in suit or that directly competes with the infringing device.”

In other words, it is unnecessary to focus on particular feature corresponding to individual claim limitations … when considering whether demand exists for a patented product under the first Panduit factor.”

Writing for the court, Judge Linn suggested that requiring a plaintiff to show demand for the specific feature would “conflate the first and second Panduit factor.”

To reach this decision, Judge Linn distinguished three prior cases.

In two of those cases, Grain Processing ³ and Slimfold, ⁴ although the court found that there was no specific demand for the patented technology, the principal reason lost profits were denied was not because demand was lacking under the first Panduit factor but rather because noninfringing substitutes were acceptable and available under the second Panduit element.

Judge Linn distinguished the third case, Ferguson, ⁵ on the grounds that it was an “entire market value rule” case.

It is worth noting that while the DePuy court’s suggestion that demand can be inferred simply by pointing to infringing sales, it appears that the patented technology did primarily drive the sales of both the infringing screws and the plaintiff’s screws.

Both parties agreed that the demand for the competing screws at issue was driven primarily by their “polyaxial capability,” a feature inherent in the relevant products.

The question arises as to what effect the court’s ruling will have going forward. Does sale of an infringing product establish the first Panduit factor regardless of how important or unimportant the technology at issue is? If so, this appears to lower the hurdle for establishing lost profits damages.

Creating a presumption of demand in a lost profits damages context is particularly interesting in light of recent decisions addressing the entire market value rule that appear to have the effect of, if anything, raising the bar for plaintiffs in reasonable royalty damages.

For example, in Cornell v. Hewlett Packard, ⁶ Judge Rader (sitting by designation) reiterated that the entire market value rule permits recovery of damages based on the value of the entire apparatus only where the patent related feature is the basis for customer demand.

In Cornell, Judge Rader cautioned that :

“an over-inclusive royalty base including revenues from the sale of noninfringing components is not permissible simply because the royalty rate is adjustable.”

Convoyed Sales — Functional Relationship and Independent Use?

The Federal Circuit reversed the jury’s $77.2 million award to DePuy of lost profits based on lost sales of unpatented “pull-through” products. The pull-through products had “no functional relationship with the patented pedicle screws and can be used independently of the patented pedicle screws.”

However, sales of the patented screw product created business relationships that apparently led to subsequent sales of other products not used in spinal surgeries. DePuy contended that it lost those subsequent sales because the infringement prevented it from establishing the essential business relationships.

In its attempt to distinguish Rite-Hite ⁷ and American Seating, ⁸ DePuy argued that cases where the unpatented products are sold in separate transactions following the initial sales of the patented devices should be treated differently from instances where the patented and unpatented products were sold together.

Rejecting DePuy’s argument, the court termed this a “distinction without a difference.”

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¹ Panduit Corp. v. Stahlin Bros. Fibre Works Inc., 575 F.2d 1152, 1156 (6th Cir. 1978).

² See, e.g., Carolyn Blankenship and Laura Stamm, Proving Patent Damages, IP Litigator, 8 (May/June 2009; see also Gordon V. Smith & Russell L. Parr, INTELLECTUAL PROPERTY: VALUATION, EXPLOITATION AND
INFRINGEMENT DAMAGES, 623 (2005).

³ Grain Processing Corp. v. Am. Maize-Prods. Co., 185 F.3d 1341 (Fed. Cir. 1999).

⁴ Slimfold Mfg. Co. Inc. v. Kinkead Indus. Inc., 932 F.2d 1453 (Fed. Cir. 1991).

⁵ Ferguson Beauregard/Logic Controls, Div. of Res. Inc. v. Mega Sys., LLC, 350 F.3d 1327 (Fed. Cir. 2003).

⁶ 2009 WL 1082485 (N.D.N.Y.).

⁷ Rite-Hite Corp. v. Kelley Co, 56 F.3d 1538 (Fed. Cir. 1995)(en banc).

⁸ America Seating Co. v. USSC Group, 514 F.3d 1262 (Fed. Cir. 2008).