CASRIP Newsletter - Winter 1997, Volume 4, Issue 1
Patent Infringement Damages After Rite-Hite
Lost Profits Damages for Unpatented Products
The second en banc decision decided during the period of 1995 through 1996, Rite-Hite Corp. v. Kelley Company Inc.,1 did not attract as much attention as the other two decisions, Hilton Davis and Markman; however, Rite-Hite will also significantly impact future U.S. case law development as a result of its decision which affirmed lost profits damages for unpatented products. The Rite-Hite en banc decision only dealt with damage issues because the district court bifurcated the trial into liability and damage phases. The Federal Circuit had affirmed the district court's judgment on the liability issues2 long before the damage phase came to be reviewed by the Court.
The most important issue among those decided by the en banc Court was the availability of lost profits damages for two types of defendant's products not covered by any of the disputed patents: (1) products competing with the patentee's product covered by the disputed patent; and (2) products which are physically separate but sold together with the patentee's patented product. The latter type of products, the sales of which are helped by the patented product, are often called "collateral sales" or "convoyed sales."3
The Federal Circuit en banc majority, which consisted of eight judges, awarded damages for the first type of product. The late Judge Nies, joined by three other judges, wrote a dissenting opinion limiting damage awards to lost sales of products covered by the disputed patent. Citing pre-1946 Supreme Court Precedent, she opined that the legal scope of actual damages for infringement should be limited to the extent of the defendant's interference with the patentee's market in goods embodying the invention covered by the disputed patent. She argued that this limitation was supported by the patent policy to promote commercialization of new products.
Rejecting lost profits damages for the second type of product, the plurality, which consisted of six judges, reasoned that patentees can recover lost profits damages for collateral sales only if the product functions together with the product to produce a desired result. Judge Nies and three other judges agreed with the plurality's conclusion, but in applying the same reasoning as the plurality, they declined to award damages for the unpatented competing product, i.e., lost sales were recoverable only for products covered by the disputed patent.
Judge Newman, joined by Judge Rader in a dissenting opinion, advocated the award of damages for the lost profits of collateral sales, because the patentee established that the lost sales were the direct cause of the defendant's infringement. She argued that limiting damage awards for collateral sales only to situations where the patented product and the collateral item are functionally inseparable, regardless of the close relationship between the defendant's infringement and the patentee's lost sales, would fail to accomplish the main goal of patent and general tort damages law, i.e., to fully compensate the patentee's injury.
As explained by Professor Keeton, whose tort law treatise was cited by both the Rite-Hite majority and the dissenters, the scope of recoverable damages must be determined, and must reflect some social idea of justice and policy.4 These different limitations on patent infringement damages proposed by the Federal Circuit majority and dissenters reflect the judges' different views on the sense of justice and policy, particularly with respect to patent law policy and general tort law damage policy.
Patentee's Exploitation of Invention
Although the en banc review was intended to harmonize the split authorities among the Federal Circuit panels, cases after Rite-Hite highlight the Federal Circuit judges' different views on general tort damages and patent law policies. In King Instruments Corp. v. Perego,5 the panel majority, which consisted of Judge Rader and Judge Newman (Rite-Hite dissenters who advocated the award of damages for functionally unrelated collateral sales), extended the Rite-Hite ruling by awarding damages for the lost profits of an unpatented product, even though the disputed patent only covered an accessory of the product and the patentee had not used the invention at all.
King's patents directed to a machine which loaded magnetic audio and video tapes in closed cassettes. Since these cassettes were manufactured with only non-magnetic closed tape connected to two winding hubs, the manufacturer used the loading machine to splice the magnetic tape into the middle of the non-magnetic tape. The district court found that the defendant's tape-loading machine did not infringe King's two patents, but found that the splicer in the reel-changer infringed King's third patent. Since King did not embody the patent in its competing tape-loading machine, the defendant argued that King was not entitled to recover lost profits.
This case provided an opportunity to highlight the policy discussion on whether or not patent law promotes commercialization of patented inventions as advanced by Judge Nies in her Rite-Hite dissenting opinion. Rejecting the defendant's argument, Judge Rader repeated Rite-Hite majority's holding that a patentee who has suffered lost profits is entitled to lost profits damages regardless of her own exploitation of the invention. He emphasized that: (1) neither the language nor the history of the patent act gives any indication that a patentee is required to exploit his patented invention as a prerequisite to requesting lost profits damages; and (2) a patentee is entitled to economic reward through exclusive rights when he fulfills his duty to the public by properly disclosing his invention.
An interesting discussion put forth by Judge Rader is that the patent right is not affected by inventors' exploitation, because inventors inherently obtain the natural right to use their inventions (subject to patent rights of others) apart from any government grant. Because the essence of the patent right granted by the government in exchange for an inventor's disclosure of a protectable invention is to exclude others from exploiting the patented invention, an inventor can choose an option for maximizing the economic reward through exclusivity of the market for the patented invention - regardless of the patentees' own exploitation.
Judge Rader then explained how patentees may be insufficiently compensated if only a reasonable royalty is available for those who do not exploit their invention; he gave a hypothetical example in which the relevant market conditions indicated that the patentee profitsed more by supplying all the demand for the invention than by licensing competitors upon terms by which the competitors reasonably operated. In such a situation, the patentee was not fully compensated by reasonable royalty damages, because the market allowed more profits through exclusivity than licensing, and the patentee essentially fell into a compulsory licensing situation. At the same time, this profited infringers because they were able to obtain a license that would have been denied by the market conditions; this unhappy situation encouraged infringement.
Final points to support his view are the disadvantages in determining the patentee's exploitation for awarding lost profits damages, that is: (1) the infringement remedy depends on the type and number of claims, rather than their scope; and (2) the step which requires deciding whether or not the patentee's product embodies the patented invention makes infringement trials more cumbersome.
After the extensive policy discussion, the panel majority simply applied the "but for" test and affirmed the district court's judgment on the award for the lost sales of King's loading machine and its spare parts.In her dissenting opinion, Judge Nies criticized the Rite-Hite majority for deviating from Congress's intent and Supreme Court precedent by awarding lost profits damages for injury to the patentee's business in goods unprotected by the infringed patent. She argued that in pre Rite-Hite precedent, the entire market value rule dealt only with products which included an infringing part, but that the Rite-Hite majority applied the rule to lost profits for the product having no infringing part without giving any explanation on why the rule is applicable. The Rite-Hite ruling, however, at least required the patentee to make and sell the product competing with the infringing product. She distinguished King from Rite-Hite in that King did not provide a competing counterpart with the infringing reel-changer; she also opposed the King panel majority's award of lost profits for unpatented products because it expanded the unwarranted Rite-Hite ruling by eliminating the requirement of a competing counterpart provided by the patentee.
With respect to Judge Rader's policy discussion on the basis of the nature of patent rights, she agreed that the purpose of government-granted patent rights was to exclude others; nevertheless, she argued that a patent infringement could not injure the patent right itself, but only injured the property rights protected by the patent, i.e., the patentee's exclusive market for the patented goods. When patentees fail to exploit their inventions, they lack the market to be protected and, thus, fail to suffer any injury. Judge Nies did not agree that awarding a reasonable royalty would result in insufficient compensation and a compulsory license to a patentee; her rationale was that the award of a reasonable royalty as damages is not a license, but is a method of calculating damages. She opposed Judge Rader's view that an award of a reasonable royalty would encourage infringement, explaining that the amount of damages cannot operate as a "deterrent" where infringement is innocent (as the situation in King). She indicated that Congress allowed infringers to profits from infringement if the infringement is not willful, citing the language of § 284, which provides for a reasonable royalty. Judge Nies feared the chilling effect on the market of unpatented products.
Accessory to Constitute Infringement
In Stryker Corp. v. Intermedics Orthopedics. Inc.,6 the ruling of Rite-Hite and King was also extended to lost profits for an unpatented product, although only an optional accessory of the product was found to infringe the disputed patent. Stryker's dispute centered around a patent directing to a small part of an implant or prosthesis that replaced part of a natural hip joint in a total hip replacement. The patented femoral prosthesis consisted of a joined stem and distal tip and was found to be infringed by the defendant's prosthesis with a distal sleeve. Interestingly, the distal sleeve was connected to the stem only when the surgeon decided to use the sleeve. Since the decision was always made in surgery, the defendant always supplied the entire system (including the distal sleeve) to the operating room. As a result, the defendant sold 20,966 stems but sold only 4718 distal sleeves. The district court nevertheless awarded damages for all lost sales of the entire system, regardless of whether or not the distal sleeves were connected to the stems.
Stryker is similar to Rite-Hite and King in awarding damages for the lost sales of an unpatented product, but is different from King in that Stryker embodied the disputed patent in the competing product. Stryker is similar to King because both cases dealt with an accessory which was essential for the finding of infringement, but can be distinguished from King because claims for King covered part of the accessory and exploitation of the accessory independent from the main product constituted infringement, but claims for Stryker required both the main product and the accessory as elements; thus, the exploitation of either the main product or the accessory could not give rise to infringement.
The defendant appealed on the issue of damages, arguing that the system did not infringe the patent until the distal stem was connected to the stem, and thus the district court made a clear error in not excluding the sales of the systems without sleeves from damages. The Federal Circuit disagreed and affirmed the district court's judgment on lost profits damages, stating that the patentee lost an opportunity to sell their own products whenever a surgeon went into the operating room with the defendant's entire system, which included distal sleeves. In extending the award of damages to the unpatented stem without the distal sleeve, the Federal Circuit found that the distal sleeve was the key functional feature, which affected the surgeon's decision in purchasing the defendant's product, and agreed with the district court that the patentee established the "but for" test being met with reasonable probability. Although the court's discussion did not touch upon the entire market value rule, it appears to apply the rule because it confirmed the recovery of unpatented stems, which were not connected to distal sleeves, on the basis of the finding that the stem connectable to the distal sleeve was the key function. This finding tends to confirm the requirement for applying the rule that the demand of the unpatented product must be created by the patented product.
Lost Sales of Unpatented Products Made by Infringing Process
Another question relating to the recovery of damages for unpatented products is whether or not a patentee can recover lost profits for the sales of unpatented products made by the infringing manufacturing process or machine. In Minco, Inc. v. Combustion Engineering Inc., the Federal Circuit answered the question affirmatively, stating that the form of damages recoverable by a patentee is not limited to diverted sales of a commercial embodiment of the patented invention. 7 In Minco, although the disputed patent directed to a rotary furnace, the district court awarded both lost profits and a reasonable royalty on the basis of sales of fused silica made by the defendant's furnace, which was found to be infringed by the defendant's furnace. The Federal Circuit affirmed the district court's judgment, applying the foreseeability standard to limit the scope of general tort damages law. Unlike Rite-Hite, the court did not inquire as to the relationship between the patented product and the unpatented product sales.
King, Stryker and Minco clearly indicate the difficulty in establishing a limitation which is universally applicable to damage liability. Despite the announcement of the standard in Rite-Hite to limit the damage scope on the sales of collateral products, functional dependency, neither the King nor the Stryker court applied the standard, because the standard did not fit their respective fact patterns.
Another difficulty in applying the standard is a lack of definition distinguishing a "product," "component of product" or "collateral product." The distinction between a product and a component or part of a product is important, because after Rite-Hite, the patentee must overcome the limitation of functional dependency once two separate products are found to be involved in the case. Case law, however, gives no clear distinction.
Rite-Hite suggests physical separation as a key standard in distinguishing a product from a component, but that standard failed to clearly answer whether the stem and distal sleeve in Stryker were separate products. Neither the King nor the Stryker court discussed whether the disputed items, i.e., the reel-exchanger and the loading machine; and the stem without the sleeve, the sleeve only and the stem with the sleeve; constituted separate products.
If they were found to be separate products, the court should have inquired about the relationship between the two products. Rite-Hite should be read as setting at least one limitation which the patent must overcome in order for an extension of damage liability to another product, regardless of whether or not the test is functional dependency. Otherwise, the liability extends unlimitedly regardless of the scope of the claims selected by the patentee.
The same problem applies to damages for lost sales of products resulting from a patented manufacturing process and apparatus, because the Minco court neither set a limitation nor gave a definition on the product made through the use of the patented invention. Thus, it seems that liability may extend to products which are materially changed by subsequent processes.
This recent tendency of removing the framework of a product has made distinctions between "apportionment," "the entire market value rule," and "convoyed sales, collateral sales, accessory and spare part" meaningless in conducting damage analyses. In failing to create a universal standard for limiting damage scope which can accommodate the variety of business arrangements and market conditions involved in particular cases, the Federal Circuit judges decided to apply the general tort principle of foreseeability upon the basis of their own sense of social justice and patent and tort law policies.
As a comparative law note, the debates between Judges Rader and Nies on whether to require the patentee's own exploitation for claiming lost profits is the most interesting issue for the German and Japanese patent law communities. In Germany and Japan, a patentee's lack of exploitation of the patented invention automatically results in the rejection of claims for recovering lost profits. As a result, most patentees do not bother to claim lost profits if they do not exploit their inventions.
Contrary to Judge Rader's expectation, this practice significantly reduces the time and costs for deciding the availability of lost profits, and also contributes to judicial economy.8 Japanese courts particularly prefer a reasonable royalty over lost profits damages, because the language and history of Japanese Patent Law Article 102, the statute comparable to 35 U.S.C. § 284, clearly indicate that the legislators are more interested in protecting innocent infringers, than in fully compensating inventors. The policy of Japanese general tort damages law also strongly influences Japanese judges, because the goal of Japanese civil remedy is to restitute the injured party.
Under the Japanese legal system, the function of deterrence and punishment is exclusive to the government through criminal sanctions. Because German and Japanese courts do not discriminate between infringers and licensees, patentees often only receive the money that would have resulted from a license negotiation, resulting in a situation in which innocent infringers benefit from infringement as endorsed by Judge Nies.9 Responding to the concern that the current practice encourage infringement, the Japanese Patent Office is currently considering revison of Article 102 to include a provision for punitive damages.10
Japanese and German judges can readily accept Judge Nies' view that no property right to be injured exists when a patentee does not exploit the patented invention. In contrast, it is very difficult for them to agree with Judge Rader's view that a patentee has the freedom to maximize the exclusivity granted by the government, because Japanese and German patent rights grant power to exclusively exploit patented inventions.11 To secure rights to exploit and to balance the interests of patentees and the public, Japanese and German patent laws provide for compulsory licenses with conditions.12
Although Judge Rader and other Federal Circuit judges use the term "compulsory license" in a negative sense to suggest a conflict with U.S. patent policy, a compulsory license is perfectly in line with Japanese and German patent policy. In particular, the goal of Japanese patent law is "to encourage inventions by promoting and utilizing inventions so as to contribute to the development of industry," and this utilization is understood to include both the use of disclosed information from the invention and exploitation of the invention.13
Since Japanese industry has accomplished great success through cross-licensing arrangements among Japanese companies and with American and European companies, it would be difficult for Japanese industry to accept the view of suppressing of the introduction of new products through the exclusivity of patents.
Another issue which attracts the interest of German and Japanese patent experts is the availability of damages for unpatented parts or products. Unlike U.S. courts, Japanese and German courts, which follow civil law traditions, tend not to use factors or tests which are developed through case law by synthesizing and distinguishing facts involved in particular cases. Instead, they directly apply language of codes and related legal theory to cases. In determining the scope of damages, they apply the general tort law limitation of foreseeability or proximate cause. This practice parallels the recent practice in the Federal Circuit, but Japanese and German courts seldom affirm foreseeability on the lost sales of an unpatented part of a product, much less on the lost sales of a collateral product. When the infringed patent covers only part of a product, courts place the burden of proof on the patentee to establish the amount of contribution made by the patented part.
It seems the difficulty German and Japanese courts face are shared by the Federal Circuit, i.e., how to limit the liability of infringement damages. In Japan and Germany, however, the type of claims selected by the patentee serve a significant role in defining the scope of damages. The significant difference resulting from the application of the same tort damage laws reflects judges' views on the sense of justice and policy in each jurisdiction. For German and Japanese judges, it seems unfair for innocent infringers to be liable for damages on lost sales of unpatented products, for which the patentee could not draft a claim to cover because of the lack of patentability, or could have drafted but failed to do so.
- Toshiko Takenaka
156 F.3d 1538, 35 U.S.P.Q.2d 1065 (1995)
2Rite-Hite Corp. v. Kelley Co., 819 F.2d 1120, 2 U.S.P.Q.2d 1915 (Fed. Cir. 1987).
3Karen McDaniel & Gregory Ansems, Damages in the Post Rite Hite Era: Convoyed Sales Illustrate the Dichotomy in Current Damages Law, 78 J. Pat. & Trade. Off. Soc'y 581 (1996).
4W. Page Keeton et al., Prosser & Keeton on the Law of Torts§ 41, at 264 (5th ed. 1984). For a general disucssion of availability of damages for unpatented part or product, see Donald Chisum, Patents § 20.03[c](1978, Supp. 1996).
565 F.3d 941, 36 U.S.P.Q.2d (BNA) 1129 (Fed. Cir. 1995)
696 F.3d 1409, 40 U.S.P.Q.2d 1065 (Fed. Cir. 1996).
795 F.3d 1109, 40 U.S.P.Q. 2d 1001 (Fed. Cir. 1996).
8For Japanese law, see Toru Toyama, Study with respect to Proper Civil Remedies for Infringements of Intellectual Property, 1996 IIC Bulletin 62 (1996). For German law, see Benhardt Kraßer, Lehrbuch des Patentrecht § 35, 629 (4d 1986); Georg Benkard, Patentgesetz § 139, 1186 (8d, 1988).
9For Japanese royalty rates, see supra note 8, Toyama; for German royalty rate, see Michael Groß, Aktuelle Lizenzgebühren in Patentlizenz-, Know-How und Computerprogrammlizenz-Verträgen (Actual Royalty Rates for Patent, Know-How and Computer Program Licensing Agreements), 18 Betreibs-Berater (Zeitschrift für Recht und Wirtschaft, Munich) at 885, May 4, 1995.
10Tokkyo Shingai Baishougaku Neage (Increasing Patent Infringement Damages), Nihon Keizai Shinbun (Tokyo), February 21, 1997. However, the Japanese Supreme Court repeatedly held that a remedy amount to more than actual damages is against public policy and rejected to enforce rules and provision for such remedies.
11German Patent Law § 9; Japanese Patent Law, Article 68.
12German Patent Law § 13; Japanese Patent Law Article 82, 92 and 93.
13Japanese Patent Law Article 1.