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June 2, 2008

Coin of the Realm

The candy company Mars sucessfully sued Coinco for infringing 3,870,137 and 4,538,719, claiming ways to validate coins put in vending machines. Mars wanted damages on lost profits. After 15 years of enforcement action, those damages looked more like a lost cause.

Mars v. Coin Acceptors (Coinco) (CAFC 07-1409)

Lost Profits

The district court then began proceedings on damages. During the fifteen years that the infringement action was pending, several key events occurred that limited the damages available to Mars. First, on March 1, 1992, the '137 patent expired. Mars, 2006 WL 2927240, at *6.

Second, on March 31, 1994, Coinco introduced non-infringing alternative technology for electronic coin authentication. The parties therefore agreed that Mars was not entitled to lost profits for any lost sales after March 31, 1994.

Third, Mars entered into a set of agreements with its former vending machine subsidiary, MEI, transferring patent rights.

Finally, on July 1, 2003, the '719 patent expired. Mars, 2006 WL 2927240, at *6. The parties agree that Mars is not entitled to any damages for infringing sales after that date.

Mars sought the following damages: (1) lost profits, or, at minimum, a reasonable royalty for sales prior to March 31, 1994 (the period prior to Coinco's introduction of alternative technology); and (2) a reasonable royalty on Coinco's sales from April 1, 1994 until July 1, 2003 (the remaining life of the patents). Coinco acknowledged that Mars was entitled to a reasonable royalty prior to January 1, 1996 (the date on which the 1996 Agreements took effect), but disputed both Mars's claim to lost profits and its claim to any damages after January 1, 1996.

The district court ruled against Mars in summary judgment, "reasoning that Mars itself did not lose any sales (because it did not sell coin changers itself), and that there was no evidence that profits from MEI's sales flowed inexorably to Mars."

On Mars's motion for reconsideration, the district court modified its ruling on Mars's motion for leave to amend. The court held that the 1996 Agreements assigned all of Mars's interest in the '719 patent to MEI, and it therefore reasoned that MEI--but not Mars--had standing to pursue claims from January 1996 forward. Mars, 2006 WL 2927240, at *8. But relying on our holding in Schreiber Foods, Inc. v. Beatrice Cheese, Inc., 402 F.3d 1198 (Fed. Cir. 2005), the district court further held that Mars's lack of standing for the period after 1996 could "be cured by the 'imminent' transfer back to Mars of the rights to the '137 and '719 patents before final judgment." Mars, 2006 WL 2927240, at *8.

So Mars and MEI executed an assignment reversal, calling it a "Confirmation Agreement".

Apparently treating the Confirmation Agreement as a transfer of all of MEI's rights back to Mars, the district court held that MEI now lacked standing to pursue any claim for damages, but that Mars was entitled to recover damages during the period when MEI had owned the patents.

That didn't sway the judge as to method. Reasonable royalty. No lost profits.

The district court held a four-day bench trial on damages to determine the appropriate amount of a reasonable royalty. Following this trial, the district court issued a detailed oral opinion from the bench (spanning forty-six transcript pages), analyzing the fifteen Georgia-Pacific factors and concluding that a blended 7% royalty rate for the two patents was reasonable. After resolving post-trial motions, the district court applied this 7% royalty rate to Coinco sales up to July 1, 2003, resulting in damages of $14,376,062. The district court awarded prejudgment interest and entered final judgment on May 22, 2007.

The district court granted Coinco's motion for summary judgment on Mars's claim of lost profits because it concluded that: (1) Mars's arrangement with MEI was a licensing arrangement, rather than an arrangement where profits "flow[ed] inexorably from MEI to Mars"; (2) Mars's nonexclusive licensing policy signified that it expected only reasonable royalties, rather than lost profits; and (3) Mars lacked the capacity to manufacture the patented products itself, without relying on MEI. Mars, 2006 WL 2927239, at *6. The district court relied particularly on Poly-America L.P. v. GSE Licensing Technology, Inc., a case in which we held that a patent holder is not entitled to recover under a lost profits theory as a result of sales lost by a sister corporation, absent a showing that the patent holder itself had lost profits. 383 F.3d 1303, 1311 (Fed. Cir. 2004).

Appeal.

The CAFC snorted on torts. Ask for what from a turned-back clock.

Patent infringement is a tort. Schillinger v. United States, 155 U.S. 163, 196 (1894). "In patent cases, as in other commercial torts, damages are measured by inquiring: had the tortfeasor not committed the wrong, what would have been the financial position of the person wronged?" Brooktree Corp. v. Advanced Micro Devices, Inc., 977 F.2d 1555, 1579 (Fed. Cir. 1992); see also Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 507 (1964) (stating damages analysis as assessing "had the Infringer not infringed, what would the [Patentee] have made?").

Damages in patent infringement cases are governed by 35 U.S.C. § 284:

Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.

35 U.S.C. § 284. "[W]hile the statutory text states tersely that the patentee receive 'adequate' damages, the Supreme Court has interpreted this to mean that 'adequate' damages should approximate those damages that will fully compensate the patentee for infringement." Rite-Hite, 56 F.3d at 1545 (emphasis in the original). In enacting § 284, "Congress sought to ensure that the patent owner would in fact receive full compensation for 'any damages' he suffered as a result of the infringement." Gen. Motors Corp. v. Devex Corp., 461 U.S. 648, 654-55 (1983); see also Fromson v. W. Litho Plate & Supply Co., 853 F.2d 1658 (Fed. Cir. 1988) ("The statute, 35 U.S.C. § 284, mandates that damages shall be 'adequate to compensate' the patent owner for the infringement. That requirement parallels the criterion long applicable in other fields of law."), overruled on other grounds by Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed. Cir. 2004) (en banc).

Despite the broad damages language of § 284, patentees tend to try to fit their damages cases into the "lost profits" framework, or else fall back on the statutory grant of a reasonable royalty. See, e.g., 7 Donald S. Chisum, Chisum on Patents § 20.01 (2005) ("The three traditional modes of measuring compensatory damages are lost profits, established royalty, and reasonable royalty."); Herbert F. Schwartz, Patent Law and Practice, 212 (5th ed. 2006) ("The two traditional measures of monetary damages awarded under 35 U.S.C. §284 are lost profits and royalties . . . ."). But while lost profits is plainly one way to measure the amount of damages that will "fully compensate" the patentee under § 284, we have never held that it is the only one. "The assessment of adequate damages under section 284 does not limit the patent holder to the amount of diverted sales of a commercial embodiment of the patented product." Minco, Inc. v. Combustion Eng'g, Inc., 95 F.3d 1109, 1118 (Fed. Cir. 1996); see also Rite-Hite, 56 F.3d at 1544 ("[T]he language of the statute is expansive rather than limiting. It affirmatively states that damages must be adequate, while providing only a lower limit and no other limitation." (emphasis added)). We have previously recognized that patentees may be entitled to damages above a reasonable royalty on theories entirely distinct from lost profits. See, e.g., Minco, 95 F.3d at 1120 (recognizing that the patentee might have been entitled to damages as a result of overpaying for the infringer's business, if it had proven that the infringing products were an important factor in the sale). Nevertheless, Mars expressly elected to pursue only lost profits and reasonable royalty theories, and it stipulated that it would not seek "any other damages other than lost profits or a reasonable royalty." J.A. 2268.2 (Stipulation Concerning Damages, Doc. No. 321, Feb. 3, 2006). Mars is bound by this stipulation. Thus, we need not determine whether Mars would have been entitled to recover under any other damages theory for the economic injury that it suffered as a result of MEI's lost sales.

The correct measure of damages is a highly case-specific and fact-specific analysis. See Herbert v. Lisle Corp., 99 F.3d 1109, 1119 (Fed. Cir. 1996) ("The adequacy of the damages measure depends on the circumstances of each case."); Rite-Hite, 56 F.3d at 1546 ("The general principles expressed in the common law tell us that the question of legal compensability is one 'to be determined on the facts of each case upon mixed considerations of logic, common sense, justice, policy and precedent.'" (citing 1 Street, Foundations of Legal Liability 110 (1906))).

Mars claimed, by virtue of MEI being a subsidiary, that "all MEI's lost profits were inherently lost profits of Mars." The district court didn't buy that, because their arm's-length business relationship of MEI paying Mars under "a traditional royalty-bearing license agreement" spoke otherwise. The CAFC agreed.

We hold simply that the facts of this case cannot support recovery under a lost profits theory.

Standing

The appeals court then covered the thorny issue of standing, with the patents treated as a ping-pong ball between Mars and MEI.

Construction of patent assignment agreements is a matter of state contract law. Minco, 95 F.3d at 1117.

The CAFC ruled "that the Confirmation Agreement did not transfer title and that Mars lacks standing for the period from 1996 to 2003."

Reasonable Royalty

Coinco disputed the 7% reasonable royalty awarded, trying to argue down to 4%. No luck. 7% affirmed.

The heart of Coinco's first argument is that an infringer should not be required to pay more in reasonable royalty damages than it would have paid to avoid infringement in the first place by switching to an available noninfringing alternative. This claim fails for two reasons. First, Coinco is simply wrong to suggest that the district court found that there were available, acceptable, noninfringing alternatives. What the district court found was that "Coinco had the ability, the resources, and the desire to design around Mars' patents," that "it could probably figure out a way to avoid infringement," but that the available "design around was not as good as it would like." J.A. 125, 128, 130. There was, therefore, no available and acceptable noninfringing alternative to which Coinco could have switched at the time of the hypothetical negotiation; there was merely the possibility that it could have come up with one.

Second, even if Coinco had shown that it had an acceptable noninfringing alternative at the time of the hypothetical negotiation, Coinco is wrong as a matter of law to claim that reasonable royalty damages are capped at the cost of implementing the cheapest available, acceptable, noninfringing alternative. We have previously considered and rejected such an argument. See Montsanto Co. v. Ralph, 382 F.3d 1374, 1383 (Fed. Cir. 2004) (rejecting infringer's argument that "a reasonable royalty deduced through a hypothetical negotiation process can never be set so high that no rational self-interested wealth-maximizing infringer acting ex ante would ever have agreed to it"). To the contrary, an infringer may be liable for damages, including reasonable royalty damages, that exceed the amount that the infringer could have paid to avoid infringement.

The district court considered the potential availability of noninfringing alternatives, found that Coinco did not have--but probably could have designed--an acceptable alternative, and reduced the blended royalty rate accordingly, from 11.5% to 7%. Using a calculation methodology that did not limit Mars's damages to the cost of its least expensive noninfringing alternative was not an abuse of discretion, and the resulting 7% royalty rate was not clearly erroneous.

Profit margin was appropriately relied upon as a basis for reasonable royalty.

The district court found that the market for coin changers was "very profitable." J.A. 123. In reaching this conclusion, the district court relied on the incremental profit--rather than operating profit--of both Mars and Coinco. Coinco argues that this was error.

We disagree. We have never held that any one profit accounting methodology is appropriate in all industries, for all companies, in all cases. The selection of the appropriate method of profit accounting in the circumstances is properly left to the broad discretion of the district court. Here, the district court heard competing expert testimony and found that a profitability analysis based on incremental profits was appropriate. We defer to that finding. See, e.g., Monsanto, 488 F.3d at 981.

Moreover, we reject Coinco's argument that a reasonable royalty can never result in an infringer operating at a loss. "[A]lthough an infringer's anticipated profit from use of the patented invention is '[a]mong the factors to be considered in determining' a reasonable royalty, see Georgia-Pacific, 318 F. Supp. at 1120, the law does not require that an infringer be permitted to make a profit." Montsanto, 382 F.3d at 1384. See also State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989) ("There is no rule that a royalty be no higher than the infringer's net profit margin.").

Mars having standing to recover damages 1996-2003 was reversed. Remanded for recalculation. Otherwise affirmed.

Posted by Patent Hawk at June 2, 2008 4:33 PM | Damages