You may hold a patent but have decided not to make, use or sell the patented device. In a 1995 case, the United States Court of Appeals ruled that such patent owners may be entitled to lost profit damages for infringement if lost sales for a non-patented, competing device can be demonstrated.
In King Instruments Corp. v. Perego, 65 F.3d 941 (Fed. Cir. 1995), the U.S. Court of Appeals for the Federal Circuit ruled that a patentee may recover lost profits for infringement even where the patentee has never made, used or sold a device embodying the infringed patent. The court awarded lost profits to a patentee for lost sales of a device that was not covered by the patent at issue in the suit, further extending the court's holding in Rite-Hite Corp. v. Kelley, 56 F.3rd 1538 (Fed. Cir. 1995) (en banc).
King Instrument Corporation ("King") and Tapematic SrL market competing machines which are used in loading magnetic audio or video tape into closed cassettes. King sued Tapematic for infringement of three patents:
- No. 3,637,153 -- a partially automated machine for loading magnetic tape into a cassette using a mechanical splicing block,
- No. 3,997,123 -- a winding machine which more fully automates the invention disclosed in the '153 patent, and
- No. 3,825,461 -- a splicing assembly for connecting magnetic and leader tapes.
The district court found that Tapematic did not infringe the '153 or '123 patents, but did infringe the '461 patent.
The district court also found that the infringement of the '461 patent caused King to sustain an economic injury in the form of lost profits and awarded damages for lost sales of a device which did not embody the invention ("non-patented device") but was in competition with the infringing device. Tapematic appealed, challenging the damage award and asking the court to address whether lost profits can be awarded to one who neither makes nor sells the patented device.
The Court of Appeals rejected Tapematic's challenge, citing Rite-Hite:
This court held in Rite-Hite, sitting en banc, that a patent owner who has suffered lost profits is entitled to lost profits damages regardless of whether the patent owner has made, used, or sold the patented device. King, 65 F.3d at 947.
In Rite-Hite, the court first referenced the "but for" test generally used to determine damages for infringement:
[W]e have held that the general rule for determining actual damages to a patentee that is itself producing the patented item is to determine the sales and profits lost to the patentee because of infringement. ... To recover lost profits damages, the patentee must show a reasonable probability that, "but for" the infringement, it would have made the sales that were made by the infringer. Rite-Hite, 56 F.3d at 1545.
The Rite-Hite court then expanded the "but for" test to encompass an injury that was or should have been reasonably foreseeable by an infringing competitor, and reasoned that the loss of sales of a non-patented, competitive device was "surely foreseeable." Id. at 1546. In Rite-Hite, the patentee was awarded lost profits for lost sales of both a patented device and a competing non-patented device.
Unlike the patent owner in Rite-Hite, King never made, used or sold the patented device. However, this was not, in the court's view, a basis to limit King's damages to a reasonable royalty. The court reasoned that under the "but for" standard, a patentee is entitled to recover lost profits damages if it can present evidence sufficient to show a reasonable probability that it would have made the asserted profits "but for" the infringement. King, 65 F.3d at 952.
King was entitled to prove its lost sales on a competing, non-patented product that did not embody the invention of the '461 patent. This holding expands Rite-Hite beyond the patentee who makes, uses or sells both a patented and non-patented counterpart for the infringing product.
The court justified its decision on the language, history and policy of the Patent Act. Under the Act, a patent confers "the right to exclude others from making, using, or selling the invention." 35 U.S.C. § 154(a)(1). The patentee has this right regardless of whether it chooses to make, use or sell the patented device itself.
The Act entitles the patentee to the award of "damages adequate to compensate for the infringement." 35 U.S.C. § 284. According to the court, neither Congress or the Supreme Court has ever interpreted this provision to require "exploitation of the invention as a prerequisite to recovery of lost profits." Id. at 947. Rather, the Act provides "economic redress sufficient to restore the patentee to its rightful position absent the infringement." Id.
Thus, if the patentee can meet its burden to present evidence sufficient to show a reasonable probability that it would have received additional profits absent infringement, lost profit damages is the most accurate measure of the patentee's loss. If the record permits the determination of actual damages, that determination more accurately measures the patentee's loss than a reasonable royalty. Id.
The court also considered the policy behind the Patent Act -- the encouragement of investment-based risk. Id. at 950. "The Patent Act creates an incentive for innovation. The economic rewards during the period of exclusivity are the carrot." Id. The economic reward may come through the right to exclude infringing, competing products. Market conditions may dictate whether the patentee manufactures the patented product. As in King's case, the patentee may acquire better returns on its investment by excluding infringers from competing with the patentee's non-patented product.
The court concluded that the Act does not require that the economic return come from the sale of patented products. The return may come instead from the right to exclude. "The patentee's sale of a competing product not covered by the patent within that market does not change the policy justification for restoring the parties to the positions they would have occupied absent the infringement." Id. at 949. Limiting the patentee's recovery to a reasonable royalty would give the infringer what the market had denied -- a license.
Along with Rite-Hite, this case has far reaching implications for patent owners, changing the method of calculating damages in patent cases. The patentee may now be awarded damages without first proving that the invention created consumer demand for the patented product which the patentee would have satisfied "but for" the infringement. Instead, the patentee may be awarded damages solely for lost sales of a competing, non-patented product. The patent holder now has more leverage to exclude others from making, using, or selling the patented device.