Federal Circuit Vacates Judgment Including Lost Profits on Convoyed Sales

On Monday I blogged about the Federal Circuit’s nonprecedential opinion last week in Roland v. InMusic, which discussed (among other things) the “inexorable flow” exception to the U.S. rule that a patent owner can recover lost profits only for its own lost profits, and not for those of a subsidiary or other affiliated company.  Last week’s other Federal Circuit decision on damages, Wash World, Inc. v. Belanger Inc., is a precedential opinion authored by Judge Stark, joined by Judges Lourie and Prost.  Much of the opinion addresses the question of whether the defendant forfeited certain arguments relating to claim construction by not raising them in a timely fashion before the district court.  (The Federal Circuit’s answer:  yes as to two issues of claim construction, no as to the third but it doesn’t matter because the district court’s construction was correct.)  A similar question comes up in connection with the damages award, but the court concludes that there was no forfeiture.  The damages issue on appeal is therefore whether there was sufficient evidence for the jury award of $9.6 million in lost profits, given that about $2.6 million of it apparently related to “convoyed” sales.  The Federal Circuit concludes that there was not, and therefore remands with instructions to remit the $2.6 million.

Convoyed sales are sales of goods or services that are complementary to the sale of the patented article.  They may include things such as spare parts or other nonpatented subject matter that may typically be sold along with the patented subject matter.  In Rite-Hite Co. v. Kelley Corp., 56 F.3d 1538, 1550 (Fed. Cir. 1995) (en banc), the Federal Circuit announced the following standard for deciding when the patent owner may recover lost profits on sales of these convoyed goods:

. . . when recovery is sought on sales of unpatented components sold with patented components, to the effect that the unpatented components must function together with the patented component in some manner so as to produce a desired end product or result. All the components together must be analogous to components of a single assembly or be parts of a complete machine, or they must constitute a functional unit. Our precedent has not extended liability to include items that have essentially no functional relationship to the patented invention and that may have been sold with an infringing device only as a matter of convenience or business advantage.

As I discuss in my forthcoming book Remedies in Intellectual Property Law, the requirement that the convoyed goods “function together with the patented article,” and not merely be sold along with the infringing product as a matter of convenience, differs from the rule followed in the U.K., France, Japan, and Germany, all of which apply a simple but-for principle, albeit subject to limitations on damages for harms that are too remotely caused by the infringement.  In our article Rethinking Patent Damages, 10 Tex. Intell. Prop. L.J. 1, 89 (2001), Roger Blair and I argued that the Federal Circuit's rule might be justified as a sort of bright-line proximate causation rule.  In Patent Remedies for Complex Products:  Toward a Global Consensus (C. Bradford Biddle et al. eds., 2019), on the other hand, my coauthors and I, in the chapter titled Lost Profits and Disgorgement, recommended that courts should award lost profits on sales of convoyed goods “provided that the patentee can demonstrate both (1) “but for” causation and (2) proximate causation, which is established by demonstrating that sales of the unpatented component, part, or good was ‘reasonably foreseeable by an infringing competitor in the relevant market,’” and I am inclined to think that that is the better view.  The meaning of “function together with the patented component” is itself not always clear, as the Wash World case shows.  There, the relevant claim was for a “spray-type car wash system” comprising three elements: a carriage, a spray arm mounted from the carriage, and a lighting system distributed along the arm.  The convoyed goods were unpatented dryers (see opinion p.24).  As Dennis Crouch points out, however, in his post yesterday about the case, although “according to the court, the patentee did not present evidence of how the components functionally interacted or depended on each other,” perhaps the patentee could have “presented specific evidence showing that the dryers were functional aspects of a carwash system–part of a single unit that is ordinarily sold together”--or drafted its claims more broadly to cover the entire car wash system, not just the novel feature.  If so, the Federal Circuit’s rule seems kind of arbitrary.  Moreover, while a full compensation rule may or may not be necessary to provide the optimal incentive to invent (or optimal deterrence of infringement), it is a simple rule to understand; and traditional proximate causation analysis arguably is sufficient to ensure that losses that are too remote, unforeseeable, indirect, etc. would be excluded.

Federal Circuit Orders New Trial on Damages in Roland v. InMusic

The nonprecedential opinion, released last Thursday, is Roland Corp. v. InMusic Brands, Inc., authored by Judge Chen and joined by Judges Lourie and Reyna.  The case involved five patents relating to electronic drums and drumheads, and three relating to cymbals.  Plaintiff Roland first accused InMusic of infringing certain cymbal patents in 2011, but “after some back-and-forth between the parties,” Roland stated that “it did ‘not intend to pursue this matter’ if InMusic discounted the cymbals as represented and ‘does not engage in other infringing activities.’”  Then in 2015, “Roland wrote to inMusic, again accusing it of infringement and expressing Roland’s “surprise[]” to find certain inMusic products on display at a trade show. . . . InMusic responded on February 12, 2015, stating that the identified cymbal product line was 'radically redesigned after 2011' and that inMusic believed it had ‘Roland’s implied consent’ to sell these cymbals.”  Roland filed suit in 2016 (pp. 7-8).  The district court granted summary judgment of noninfringement as to three of the drum patents and one of the cymbal patents.  The jury found that the two drum and two cymbal patents in suit were infringed, and awarded Roland $2.7 million in lost profits and $1.9 million in reasonable royalties.   The district court denied prejudgment interest, however.  I will limit my discussion to the damages issues.

The lost profits award included profits lost not only by Roland itself but also by its U.S. subsidiary, Roland’s expert having “calculated a single, consolidated lost profits figure for the two entities in the first instance, and . . . an ‘alternative calculation’ in the event Roland is not entitled to the lost profits of Roland U.S.” (p.24).  The panel concludes that this was error:

The general rule is that “a patentee may not claim, as its own damages, the lost profits of a related company.” Warsaw, 778 F.3d at 1375. Roland attempts to claim as its own the lost profits of Roland U.S. under an exception known as “inexorable flow.” Under that theory, which has been previously argued to this court, the subsidiary’s profits flow inexorably or inherently to the plaintiff parent company. See Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359, 1367 (Fed. Cir. 2008), mandate recalled and amended on other grounds, 557 F.3d 1377 (Fed. Cir. 2009). In Mars, we affirmed a grant of summary judgment to the defendant on the plaintiff’s claim of lost profits because the record could not support a finding that the wholly owned subsidiary’s profits flowed inexorably to the plaintiff. Id. at 1364, 1367. Because we concluded that the subsidiary’s profits did not in fact flow inexorably to the plaintiff, we expressly declined to “decide whether a parent company can recover on a lost profits theory when profits of a subsidiary actually do flow inexorably up to the parent.” Id. at 1367. This court has not since addressed whether inexorable flow is a legally cognizable theory of lost profits. Nor must we do so now, for like the Mars court, we conclude that Roland did not offer sufficient evidence to support a factual finding of inexorable flow of profits.

 

Roland argues that it established inexorable flow based on a single sentence of testimony from Roland’s Senior Executive Office and Roland U.S.’s Executive Vice President, Naoyuki Tamura . . . :

 

Q. What happens to the profits of Roland U.S. on those sales of mesh drums?

 

[A.] Because Roland U.S. is a 100 percent owned subsidiary of Roland Japan, the profit it made will be returned to Roland Japan in the form of dividends.

 

Mr. Tamura’s conclusory testimony provided no basis for the jury to find that Roland U.S.’s profits inherently flowed to Roland during the relevant period . . . .   

 

Roland argues that even if it is not entitled to the lost profits of Roland U.S., it is still entitled to that portion of the award comprising its own lost profits. However, the jury rendered a single lost profits award that did not separate Roland’s profits from Roland U.S.’s. . . . And we cannot say that the jury necessarily accepted or would have accepted [Roland’s expert] Ms. Heinemann’s alternative calculation accounting for only Roland’s own lost profits. . . (pp. 25-27).

As I note in my forthcoming book on IP Remedies, the formalism embodied in the U.S. rule that “a patentee may not claim, as its own damages, the lost profits of a related company” is somewhat different from the standards applied in some other countries, including the U.K., Spain, and Japan.

As for reasonable royalties, Roland’s expert relied on three licenses to support a $20 per drumhead royalty for the two drum patents asserted at trial (’458 and ’535).  Two of these, however, licensed ’458 and a patent not asserted at trial, and the third licensed ’535 and three other patents not asserted at trial. Moreover, each covered “only single-layer mesh drumheads, in contrast to the double-layer mesh technology at issue in the parties’ hypothetical negotiation.” In the court’s view, the expert’s testimony did not sufficiently account for these differences.  Moreover, one of the licenses was in settlement in litigation, and while this is not disqualifying in and of itself, there needed to be testimony addressing this contextual difference as well (pp. 28-32).  The expert also testified to a $2 per cymbal royalty for the cymbal patents, but the expert included in her calculation “pre-design cymbal sales that were not found by the jury to infringe” (pp.32-33).  The court also notes, however, that the district court allocated very little time for the testimony on damages, because of pre-existing travels plans on the part of the expert and a juror, and so it concludes that “the fairer option is to afford Roland a new trial on both lost profits and reasonable royalties” (p.34).

The court rejects the defendant’s argument that Roland was equitably estopped from enforcing its patents, because there was conflicting testimony concerning whether Roland indicated in 2011 that it wasn’t going to enforce the cymbal patents (pp. 35-36).  It agrees with the plaintiff, however, that there were insufficient grounds to deny prejudgment interest:

We have previously explained that an “award of prejudgment interest is ‘the rule, not the exception.’” Energy Transp. Grp., Inc. v. William Demant Holding A/S, 697 F.3d 1342, 1358 (Fed. Cir. 2012) (citation omitted); see also Gen. Motors Corp. v. Devex Corp., 461 U.S. 648, 655–57 (1983); 35 U.S.C. § 284. Still, “it may be appropriate to limit prejudgment interest, or perhaps even deny it altogether, where the patent owner has been responsible for undue delay in prosecuting the lawsuit.” Gen. Motors, 461 U.S. at 657. In order to “show that delay was undue, a defendant must, at least generally, show that it was prejudiced.” Kaufman, 34 F.4th at 1375.

 

            The district court denied prejudgment interest after finding that “Roland knew of inMusic’s accused cymbals as early as 2011, yet Roland waited until 2015 to raise complaints about inMusic’s cymbals’ configuration, and waited until August 2016 to sue.” . . . The court concluded that Roland’s delay was undue and “economically prejudiced inMusic because inMusic expanded its cymbals by incorporating them into newly launched kits while under the understanding that Roland had approved the redesigned cymbals during a call with Mr. Gill in 2011.” Id. The court reasoned that “had Roland not sat on its hands during this years-long delay, inMusic could have taken remedial steps and could have dedicated resources to other non-infringing designs.” Id. For two separate reasons, however, the district court abused its discretion in denying prejudgment interest . . . .

 

First, the finding of undue delay based on the alleged call with Mr. Gill cannot be squared with the district court’s findings and analysis of the evidence in its order denying inMusic’s equitable estoppel defense. . . . Though the district court might permissibly rely on other evidence to find that Roland independently learned of the redesign prior to prosecuting its suit against inMusic (and hence, there could be undue delay to justify denying prejudgment interest, but no misleading conduct for purposes of equitable estoppel), the court cited no such evidence (or any evidence) in denying prejudgment interest. On remand, the court may not again limit or deny prejudgment interest to Roland absent analysis of how other evidence in the trial record supports a finding of undue delay.

 

Second, even if Roland knew of the redesign, the district court relied on an incorrect standard for prejudice. The court reasoned that inMusic was prejudiced because it expanded its cymbal line before Roland brought suit, whereas inMusic “could have” instead explored noninfringing cymbal designs . . . . But speculation about what inMusic “could have [done] to not infringe” the Cymbal Patents, without “evidence that it would have” done so, is insufficient to demonstrate prejudice. Kaufman, 34 F.4th at 1375. . . . We remand for the district court to resolve this factual dispute—specifically, what inMusic would have done absent any delay by Roland—and to determine whether inMusic demonstrated prejudice sufficient to limit or deny prejudgment interest to Roland.²²

 

²²  The district court’s denial of prejudgment interest was also based solely on Roland’s purported knowledge of the accused cymbals and delay in prosecuting its suit with respect to infringement of the Cymbal Patents. On remand, to the extent that Roland seeks, and the jury awards, separate damages for infringement of the Drum Patents, the district court should not limit or deny prejudgment interest with respect to that category of damages (pp. 37-39).

Blogging Break

This week, I'm going to try to finish a draft of the manuscript for my book Wrongful Patent Assertion:  A Comparative Law and Economics Analysis.  I plan to return to blogging next week.

Munich Higher Regional Court Issues Oral Ruling on FRAND Defense

Discussion of today’s hearing in HMD Global Oy v. VoiceAge EVS GmbH & Co. KG can be found on JUVE Patent and on ip fray; a written decision is said to be forthcoming but not available yet.  Once the written decision becomes publicly available, I will read it and have something to say about it.

For now, as I understand it, the Higher Regional Court’s position is that an implementer can show its willingness to license by depositing security in the amount of the SEP owner’s offer.  At that point, the court should undertake a review of the offer to see if it is within the FRAND range.  In the case before the court, however, the amount of security offered by the implementer apparently wasn’t sufficient.  If I understand correctly, the court also rejects the EC amicus brief’s recommendation that the court follow the steps laid out in Huawei v. ZTE in a strictly sequential manner.

Next stop will be the BGH.  For previous discussion on this blog, see, e.g., here, here, and here.

Will the Federal Trade Commission Lose Its Independence?

I just saw the news that President Trump has fired the two Democratic Federal Trade Commissioners, Alvaro Bedoya and Rebecca Kelly Slaughter.  This may set up a test case to determine, ultimately, whether the Supreme Court will uphold Humphrey's Executor v. United States, 295 U.S. 602 (1935), which essentially held that Congress can create independent agencies such as the FTC (which deals with antitrust and unfair competition matters), and can restrict the president's ability to terminate commissioners without cause.  I am not an administrative law scholar, so I have little to offer concerning how the current Supreme Court might rule in this case when it reaches them.  (We can pretty sure of an ideological split, though, given the current justices' past writings.)  Nor have I always been in agreement with the views expressed by Commissioners Bedoya and Slaughter during their tenure.  But I do think the ongoing assault on independent agencies (this is not the only example) is a wrong-headed policy, and my hope is that this is one case in which the Court will respect stare decisis.  

In the interim, this is huge news because the Commission now has two Republican Commissioners and a third on the way.  By statute, it is supposed to have five commissioners, no more than three from one party.  Will the courts reinstate Commissioners Bedoya and Slaughter, while the matter is litigated?  If not, will Trump try to fill the two Democratic vacancies, or leave them open?   

Some further thoughts (3-20-2025): Regarding the second paragraph above, it's kind of difficult to imagine any two Democrats agreeing to fill the positions, but the statute (15 U.S.C. section 41) only says that no three members may be from any one party.  So what if the administration tries to fill the two positions with, say, two Independents, or two Libertarians--or maybe two Republicans who opportunistically switch parties?  And what happens (whether the positions are filled or not) if, as I hope, the Supreme Court reaffirms Humphrey's Executor?  Is every decision the FTC makes in the absence of Commissioners Slaughter and Bedoya thereby null and void?  What a mess.  

UPC Choice of Law Principles for Damages

Last week the Mannheim Division of the UPC published its decision in Hurom Co. v. NUC Electronics Europe GmbH, establishing some choice of law principles for patent infringement actions filed in the UPC.  There has already been some discussion of the case on JUVE Patent and on ip fray.  The principal question of interest is whether UPC law or national law applies with respect to damages, especially where the infringement is ongoing in the sense that it began prior to the UPC startup date of June 1, 2023 and continued thereafter.  The court’s summary of the decision states, in relevant part, the following:

3. . . . with regard to the determination whether substantive law as laid down in the UPCA or substantive national laws of the UPCA member states applies to acts allegedly infringing traditional European bundle patents, the following applies:

 

a) to acts committed after the entry into force of the UPCA, the substantive law as laid down in the UPCA applies;

 

b) to acts committed before the entry into force of the UPCA, the substantive national laws apply;

 

c) to ongoing acts started before the entry into force of the UPCA and continued after the entry into force on 1 June 2023, the substantive law as laid down in the UPCA applies.

 

4. When assessing whether infringing acts are in that sense “ongoing” and justify the application of the UPCA as a general rule, an overly formalistic approach which runs counter to the aims of the Agreement must not be applied. What is decisive is to categorize such acts not in a formalistic manner which only takes into account, if, when viewed from a pure natural perspective, such acts can be referred to as separable acts, but which looks at the scenario from a normative and therefore evaluative perspective. Before this backdrop it is justified to apply the UPCA as a harmonized set of national law of the contracting member states of the UPCA to ongoing acts, if the infringer continues its infringing behaviour although he could have stopped the infringement in the light of the entry into force of the new regime on 1 June 2023. In that case, however, each party reserves the right to rely on provisions of the national laws for acts before 1 June 2023 being favourable to its position compared to the provisions of the UPCA and the RoP. The party which advances the argument based on national law has to elaborate on such rules of national law and set out with a sufficient degree of substantiation why that rule of national law supports its argument.

 

5. With regard to a right to information, the question of intertemporal applicability and the question of the scope of the period, for which information has to be provided, have to be distinguished. The rights to information provided by the UPCA as laid down in particular in Art. 67 UPCA and Art. 68 (3) (a) (b) UPCA in conjunction with R. 191 sentence 1 alternative 2 RoP are to interpreted to encompass time periods which resided before the entry into force of the UPCA.

Here are a few things that I found interesting.

First, the court concludes that a permanent injunction is appropriate only in the UPC member states in which the patent in suit has been infringed, not the entire UPC (paras. 107-08).

Second, if I am reading this correctly the court implicitly characterizes the law of damages as “substantive” rather than “procedural.”  Under general principles of private international law, as I understand them, even when court concludes that it should apply another state’s substantive law to a particular issue, it usually applies its own procedural law.  But damages law sort of straddles the border between procedure and substance, and there are differing views of whether it should be classified as one or the other.  (See, e.g., the sources I cite in my article Extraterritorial Damages in Copyright Law, 74 Fla. L. Rev. 123, 163 n.204 (2022).)  My own view is that it makes more sense to classify them as substantive, so that if the court is adjudicating foreign patent rights—as courts within the E.U. may have to do now following the Court of Justice’s decision last month in BSH Hausgeräte GmbH v. Electrolux AB, Case C‑339/22—it would apply the foreign state’s damages law.  (That issue will be addressed in this case at a later proceeding, as it relates to damages for the infringement of non-UPC member state patents.  See decision para. 45.)  So I think the UPC is right to conclude that UPC damages law applies to infringement occurring after June 1, 2023, and national damages law to infringements occurring before.  For infringements that span that date, I’m inclined to think that it makes sense to apply UPC law as a default, though as the court indicates, subject to permitting the patent owner and the defendant to argue for more favorable treatment under domestic law.  On the other hand, the right of information is more clearly procedural, and therefore applies to UPC actions involving infringements occurring both before and after the UPC’s entry into force.  Interestingly, the court explicitly characterizes the right to recall and removal of infringing goods from the channels of commerce as substantive (para. 129).

Third, there are a variety of other remedial issues the court briefly addresses, among them (1) the court accepts that injunctive relief is not mandatory but rather may be limited by the principal of proportionality, but here there is no evidence of disproportionality (para. 113); (2) the possibility of damages for moral prejudice is not excluded by virtue of the plaintiff calculated the amount of interim damages it wanted as a reasonable royalty, but there is no evidence here of any such damages having been suffered (para. 119); (3) there is no basis here to award interim damages, to order publication of the decision, to exclude an interim award of costs because the plaintiff didn’t first send a warning letter, or to order security for enforcement pending appeal (paras. 120, 130-35); (4) the fact that the destruction of the infringing goods will have environmental effects is not, by itself, sufficient to reject an order for destruction (para. 126); and (5) damages for pre-grant use of the patent in suit may be available under German domestic law, para. 118 and operational portion B.1).     

Today's Oral Argument in EcoFactor v. Google

Here is a link to the recording.  It was a good argument, with many probing questions by the judges and a great deal of specific attention paid to the evidence in the record.  I thought Google's counsel Ginger Anders was particularly good, and that on balance the court might be leaning toward sending the matter back for a new trial--but it is hard to get a sense of how things will play out when there are ten judges participating, and some of course are more active questioners during oral argument than others.