Federal Circuit Clarifies The Test for Convoyed Sales and the Effect of Bait and Switch Tactics on the Damage Awards

In American Seating Co. v. USSC Group Inc., 85 USPQ2d 1683 (Fed. Cir. 2008), American Seating Company is the owner of Patent No. 5,888,038 (the ‘038 patent).  The ‘038 patent is for a seating tie-down system to be used on buses for passengers in wheel chairs.  USSC manufactures wheelchair tie-down devices, the VPRo1 and the VPRo2.  American Seating sued USSC for infringement based upon the VPRo1 and the VPRo2.  The District Court concluded neither VPRo I nor VPRo II literally infringed ‘038.  American Seating appealed, and CAFC reversed the finding as to VPRo I and affirmed the non-infringement ruling of the lower court for VPRo II.  On remand, the jury found that the ‘038 patent was not in public use for purposes of 35 U.S.C. §102(b), and was therefore valid.  As such, the jury awarded American Seating $2,326,129 in lost profits.

The damages award included $1,366,612 related to lost profits from infringing sales of the VPRo I, and $959,517 as a result of USSC’s infringing offers to sell the VPRo I that resulted in deliveries of the VPRo II (i.e., a bait and switch). For the VPRo I sales, $387,931 was directly related to diverted sales of American Seating’s patented tie-down restraint system, and $971,681 was related to diverted sales of accompanying passenger seats (i.e., convoyed sales).  Similarly, of the infringing offers to sell the VPRo I that resulted in deliveries of the non-infringing VPRo II, $288,919 was directly from sales of tie-down restraint systems, and $670,598 was due to convoyed sales of passenger seats. Following the jury verdict, USSC moved for judgment as a matter of law, a new trial, or remittitur.  The District Court denied USSC’s motion in relation to public use, and granted USSC’s motion in part, setting aside the portion of the verdict relating to convoyed sales, thereby reducing the overall award to $676,850.

American Seating appealed the reduced damages award, and USSC cross-appealed the verdict on the basis that American Seating’s ‘038 patent is invalid for public use under 35 U.S.C. §102(b).

Public Use

For purposes of public use under 35 U.S.C. §102(b), the Federal Circuit restated the general rule outlined in Petrolite Corp. v. Baker Hughes Inc., 96 F.3d 1423, 1425 (Fed. Cir. 1996) that “an invention is in public use if it is shown to or used by an individual other than the inventor under no limitation, restriction, or obligation.  However, “use of an invention by the inventor himself, or of any other person under his direction by way of experiment, and in order to bring the invention to perfection has never been regarded as such a use.” City of Elizabeth v. Am. Nicholson Pavement Co., 97 U.S. 126, 134 (1877).  Further, relying on Moleculon Research Corp. v. CBS, Inc., 793 F.2d 1261, 1265-66; 229 USPQ 805 (Fed. Cir. 1986), the Federal Circuit concluded that when “access to an invention is clearly limited and controlled by the inventor, depending upon the relationships of the observers and the inventor, an understanding of confidentiality can be implied.” In the instant case, the Federal Circuit found that while the inventors permitting a limited number of people to view the tie-down restraint system prototype, this limited group shared a general understanding of confidentiality.  Therefore, the Court affirmed the District Court’s holding that the patent was not invalid for public use.

Convoyed Sales

As noted by the Federal Circuit, a “convoyed sale” refers to the relationship between the sale of a patented product and a functionally associated non-patented product.  Citing Rite-Hite Corp. V. Kelly Co. Inc., 56 F.3d 1538, 1550 (Fed. Cir. 1998), the Federal Circuit set forth the rule that a patentee may recover lost profits on unpatented components sold with a patented item (i.e., a convoyed sale) if both the patented product and unpatented products “together were considered to be components of a single assembly or parts of a complete machine, or they together constituted a functional unit.”

In examining whether there was evidence of a single functional unit, the Federal Circuit found that there was no absolute requirement that the two items (the passenger seat and the tie-down restraint system) function together. In contrast, the evidence showed that the reason both were usually purchased together was a matter of customer convenience, not functional necessity.  Therefore, the Federal Circuit found that the customer demand for tie-down assemblies and passenger seats did not constitute a functional relationship. Cf. Juicy Whip, Inc. v. Orange Bang, Inc., 382 F.3d 1367, 1372 (Fed. Cir. 2004) (noting that the non-patented syrup was central to the “visual appearance” of the patented dispenser and therefore could be included in the lost profit analysis). The Federal Circuit further found that the passenger seats had a market value and useful purpose independent of the patented product.  CfRite Hite, 56 F.3d at 1550 (citing Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11 (Fed. Cir. 1984) (indicating that lost profit damages are properly granted for collateral products that have no useful purpose or market value independent of the patented product)). The Federal Circuit therefore held that because there was no clear functional relationship between the seats and the tie-down restraint system, the District Court’s summary judgment in favor of USSC on the issue of collateral sales of passenger seats was appropriate.

Lost Profits

As noted by the Federal Circuit, in order to be entitled to lost profits from lost sales, the patent owner bears the initial burden to show a reasonable probability that “but for” the infringement, the owner would have made the sales.  Grain Processing Corp. v. Am. Maize-Products Co., 185 F.3d 1341, 1349 (Fed. Cir. 1999); State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1577 (Fed. Cir. 1989).  Once this reasonable probability is shown, the burden shifts to the infringer to show that the “but for” causation analysis is unreasonable under the specific circumstances.  Grain Processing, 185 F.3d at 1349.  Grain Processing further instructs that a non-infringing replacement product is not considered a substitute unless it is acceptable to all purchasers of the infringing product. See Id. at 1347 (emphasis added).

USSC argued that the sales of the non-infringing VPRo II resulting from an offer for sale of the infringing VPRo I should not have been included in the lost profits calculation.  However, the Federal Circuit noted that there was evidence that customers did not willfully switch from an ordered VPRo I to the VPRo II, but that this conversion was automatic since the VPRo I was no longer being offered.  As there was insufficient evidence that the customers consented to the switch, USSC had not shown that but for the offer to sell the infringing VPRo I, American Seating would have made the sale and that USSC’s bait and switch of the non-infringing VPRo II did not remove the existing offers for sale of the VPRo I from the lost profits calculation.  As such, from the evidence presented to the jury, The Federal Circuit affirmed the jury’s conclusion that the VPRo II was not an equivalent substitute for American Seating’s tie-down system and but for the offer of the VPRo I the sales would have gone to American Seating.

Significance to Patent Owners

American Seating Co. presents a reminder of the limit for damages beyond the specific patented product.  Thus, if the competitor’s infringing product is a significant factor in a customer purchasing other products from the competitor, unless the other product is functionally related to the infringed product convoy, damages will not be available for the combined sale. To successfully seek damages for the lost convoyed sales related to infringement on a patented product, the patent owner must show that the non-patented products are functionally related to the infringed patented products.

 

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