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The Risk-Reward Factors of U.S. Patents

Damages awards in U.S. patent infringement cases have been recognized as reaching magnitudes rarely seen in other countries. During the last decade there have been about 20 to 30 patent infringement cases a year with published judicial awards of calculated infringement damages. The total for this period reaches about $1.5 billion dollars. Of these individual cases, about 60% had awards in excess of $1 million dollars, with over 20 ranging between $10 and $100 million dollars and at least 6 more above $100 million dollars. Nearly 20% of the total awards is attributable to pre- and post-judgment interest on the actual damages. For those cases where damages are based on a reasonable royalty, over 70% used a royalty rate in excess of 6%, with about 15% exceeding a 20% royalty rate.

The most dramatic recent case (in 1991) in terms of dollar value (just under $900,000,000) resulted from Eastman Kodak infringing several of Polaroid's patents for instant cameras and film. However, the Federal Circuit's 1995 en banc decision in Rite-Hite by far exceeds Polaroid in legal dramatics. This case, as discussed below, permitted a recovery of lost profits for sales lost by the patentee of items that were not protected by the infringed patent but which were sold in competition with the infringer's product.

While these decisions and their reasoning present attractive prospects for patent owners, and awesome risks for potential infringers, nonetheless U.S. jurisprudence illustrates time and time again that nearly equal (or greater) damage awards have been nullified by prior careless corporate management with inattention to fundamental, well-established legal principles. Actually, some of the very cases which award large damages provide significant guidelines on how to maximize such awards, as well as (for the infringer) how to avoid, or at least minimize, them.

For instance, despite Polaroid's vigorous attempt to show that Kodak had willfully and deliberately infringed, those efforts were tersely dismissed by Judge Mazzone with the words, "That dog won't hunt." This was because Kodak had had the foresight and wisdom to commission thorough and extensive legal opinions on the strength and merit of Polaroid's patents and had cooperated with and paid careful attention to its counsel's advice. Even though the court ultimately disagreed with counsel's conclusions, the fact that Kodak had first obtained those carefully considered opinions enabled it to avoid an additional $1.2 billion dollar multiple damages award, as well as an assessment of Polaroid's legal fees of several million more dollars.

By contrast, in the September, 1995, in the Stryker case the patentee did receive a handsome double damages award of over $52,000,000, from infringement of a patent for an artificial hip joint prosthesis. A telling piece of evidence was that the infringer's counsel's preliminary "re-design" advice to the defendant had been ignored at the time the infringing acts were commenced. With knowledge of the patent, the infringement thereafter continued, unabated (even on through the lawsuit). There was no request for a full opinion of counsel until after the lawsuit was filed. As a result, willful and deliberate infringement was found and damages were doubled. (Over the last ten years or so, about 50% of the reported U.S. patent infringement cases have resulted in multiple damages awards.)

There is nothing really new about the reasoning in Stryker. In 1983, the Federal Circuit, in Underwater Devices, very clearly imposed on would-be infringers the "affirmative duty [which] includes, inter alia, the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity. (Original emphasis.). Similarly, in 1984 the Federal Circuit held in the Bandag case, "The salient fact remains that by not obtaining legal counsel, when it was made aware of the possibility of infringement, [the infringer] remained uninformed about the potential costs it risked in choosing not to avoid infringing."

Prudent patent owners will also exercise equal due care and consult thoroughly with counsel before initiating notices of infringement and a lawsuit. The Federal Circuit pointed out in the 1990 Eltech case, "[T]here is and should be no difference in the standards applicable to patentees and infringers who engage in bad faith litigation. In Eltech, the rash filing of the lawsuit without a full opinion of counsel led to an award of attorneys fees and double costs to an improperly-sued accused infringer,

Nonetheless, the Stryker award might have been some $5,000,000 higher if the patent owner had carefully complied with the marking statute. Under that statute, the patent owner must apply the patent number to the device itself or, if that is not possible, to the package in which the device is marketed. The court rejected Stryker's argument that the patent number appeared on widely distributed product brochures, some of which had been packaged with the patented product. Instead, the court held the marking statute is strictly construed. One wonders why Stryker went to the trouble of printing the patent number on the product brochures but committed the fatal error of failing to do so on the package labels.

This limitation to the Stryker award was plainly foreshadowed by the 1993 Federal Circuit decision in the Amsted case. In Amsted, the patent owner failed to comply with the U.S. statute requiring marking of patented products made by the patent owner, or those licensed under him, and in the alternative to give a clear, unequivocal, early notice of a claim of infringement to the defendant. This led to a loss on appeal of about one-half of the damages which had been awarded at trial. Again, the Amsted ruling was made in a case where the infringement was otherwise held to be willful and deliberate, with full actual knowledge of the patent.

Still another September, 1955, decision, by the Federal Circuit, Pall Corp. v. Micron Separations, Inc., presents a nice contrast to another issue in Stryker. Whereas Stryker had declined to make any modification to the accused device, even during the lawsuit, in Pall Corp. the infringer did exactly that. While, ultimately, both the original and the modified products were held to infringe, the Federal Circuit ruled that, "Attempts to avoid or mitigate infringement, whether or not successful, do not of themselves enlarge the culpability of the continuing [earlier] activity." Micron Separations was able to successfully avoid multiple damages.

Pall Corp. also illustrates the effect on damages of an earlier settlement with another infringer. In May, 1990, Pall had settled an earlier litigation with a third party infringer, after which that infringer became a licensee. For the period prior to the settlement, Pall recovered its lost profits (at a rate of 45% of sales) on 100% of the unit sales made by Micron Separations. However, for the period after May, 1990, Pall's lost profits recovery was limited to its then remaining 25% share of the market in which both the licensee and the defendant infringer now participated. For the remaining 75% of the defendant's sales, the recovery was a royalty of 8%. This decision adheres to the 1989 Federal Circuit decision in State Industries, and earlier cases, which also made combined awards of lost profits and a reasonable royalty based on the patent owner's market share when there are multiple infringers.

The significance of Federal Circuit's en banc June 15, 1995 decision in Rite-Hite Corporation et al v. Kelley Company, Inc., is its clarification and extension of the damages which may be recovered for patent infringement. Rite-Hite recovered lost profits not only for sales of the patented item but also for sales of a competing item sold by the patentee not protected by the infringed patent but as to which the patent owner lost sales due to the infringing acts. The Court held, "We see no basis for Kelley's conclusion that the lost sales must be of products covered by the infringed patent." Under Rite-Hite only a "reasonable, objective foreseeability" of the injury is required. Rite-Hite expresses the Federal Circuit's conclusion that "[T]he language of the [damages § 184] statute is expansive rather than limiting ... providing only a lower limit [a reasonable royalty] and no other limitation." The court further held that "[t]he Supreme Court has interpreted [the statute] to mean that the patentee receive 'adequate damages' [which] should approximate those damages that will fully compensate the patentee for infringement." This is perhaps the broadest statement of a patent owner's right to recover damages that the Federal Circuit has ever uttered. The Rite-Hite ruling was reiterated in 1995 in the Federal Circuit's King Instruments decision which approved full lost profits recovery even though two of the three patents for splicing and winding magnetic tapes were held to be not infringed and the patent owner did not practice the other infringed patent. Consequently, lost profits, if proven, may now be recovered whether or not the patent owner has made, used or sold the invention of the patent in suit.

However, Rite-Hite also limited the patent owner's damages by imposing a new boundary on the "entire market value" rule. Rite-Hite's patent was for a levelling device for trucks backed up to a cargo loading dock. Typically, when selling the patented device, both Rite-Hite and the infringer also sold an unpatented restraining device or hook which secured the truck against inadvertent movement away from the loading dock. This provided substantial safety, e.g. for fork-lift operators driving palleted loads into the truck. Nonetheless, Rite-Hite's claim for damages from lost sales of the restraining devices was disallowed because there was no real "functional" interaction between the two devices. This now appears to be the essential test for application of the so-called "convoyed goods" or "entire market value" rule, rather than a mere marketing or commercial relationship (which had been the apparent rationale of prior cases such as Paper Converting).

Rite-Hite strongly suggests that careful and imaginative claiming strategies in the drafting of patent applications is now all the more important to enhance a patent owner's potential return on the patent portfolio investment. Had the Rite-Hite patent been able to claim a combination of the restraining device with the levelling device, far greater damages would have been recovered.

The 1995 Fonar case, tried to a jury, involved a patent on a magnetic resonance imaging (MRI) apparatus component permitting generation of multiple images at different orientations ("multi angle oblique", MAO). General Electric was held to infringe and a verdict of nearly $62,000,000 damages was awarded. In addition, an unreported amount of pre-judgment interest was assessed, calculated on the average 52-week U.S. Treasury bill rate for the period of two years preceding entry of the judgment, computed daily and compounded annually. The damages award had two components: (1) recovery of $27,825,000 lost profits from 75 MRI sales and (2) royalties of $34,125,000 for another 525 infringing units, at a rate of about 4.5% of GE's anticipated operating profits. Both awards were based on the "entire market value" of the MRI machines, even though only the MAO component was patented. In part, this award was calculated on the GE's original expected profit level rather than on its later, much less, actual realized profits (due to a later declining demand), all following the reasoning in Rite-Hite.

The importance of the "entire market value" rule is illustrated by the finding that the Fonar patent owner had actually sold the patented MAO component as a separate and distinct feature for only about $1,000 to $1,500, or as part of an upgrade package worth $15,000. By basing the damages calculation on the total value of the MRI machine, Fonar's "reasonable royalty" recovery was from 18 to 65 times the established sales price of the patented item when it was sold separately.

However, the jury's award of an additional $13,625,000 to Fonar for inducement of infringement based on GE's repair of apparatus units it had sold prior to receiving a notice of infringement was set aside (again, there had been no patent marking). While repair of an infringing device can also be inducement of infringement, inducement of infringement requires intent and some underlying act of direct infringement. Here, the court held that to the extent apparatus units were sold by GE prior to its receipt of the patent owner's notice of infringement, those units were not infringing units for purposes of damages recovery. i.e., there could not earlier have been an intent to infringe and consequently no inducement of infringement arising from the repair of those units.

Fonar illustrates once again the importance of early and consistent marking of the patented product and an early issuance of a notice of infringement, strictly complying with the specific requirements of Rite-Hite.

Two other 1995 cases resulted in jury verdicts of large damages, $51.8 million in Texas Instruments v. Cypress Semiconductors, and $129 million in Exxon Chemical Patents Inc. v. Lubrizol Corp. However, in both cases the jury verdict was vacated. In Texas Instruments, this occurred at the district court level, on post-trial motions, on the basis that a reasonable jury simply could not properly have found infringement. In Exxon Chemical, the Federal Circuit vacated the verdict of willful and deliberate infringement, holding that the trial judge had erroneously simply chosen between the respective conflicting claim interpretations offered by the parties and had neither properly, nor independently, construed the patent claims at issue. Consequently, the jury had not received proper instructions on patent claim interpretation. Neither of these decisions actually challenged the magnitude of the damages; although, Cypress was granted a new trial on damages in the event the trial court's non-infringement ruling was overturned on appeal.

Both Texas Instruments and Exxon Chemical illustrate the substantive impact of the earlier 1995 Markman case which ruled that claim interpretation is strictly an obligation for the trial judge and not an issue for determination by a jury.

Without doubt, a strong U.S. patent for a commercially attractive product can be a lucrative corporate asset, well worth the investment made for its acquisition. But managing that asset also requires careful and continuing attention to an interrelated bundle of legal principles to maximize the potential return on the investment. By the same token, investment in product development and marketing research which fails to appreciate the care to be taken to avoid the patents of others is an invitation to financial disaster entirely apart from the ever-present threat of a preliminary or permanent injunction having the effect of shutting down the assembly line.

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