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Written Confidentiality Agreement Is Not Required to Show That the Invention Was Not in Public Use, and a Patentee Is Not Entitled to Lost Profits on Convoyed Sales Where There Is a Lack of Functional Relationship Between the Patented and Non-Patented Product

January 29, 2008

Decision icon Decision

Last Month at the Federal Circuit - February 2008

Judges: Mayer (author), Bryson, Fogel (District Judge sitting by designation)

[Appealed from: W.D. Mich., Judge Cohn]

In American Seating Co. v. USSC Group, Inc., Nos. 07-1112, -1135 (Fed. Cir. Jan. 29, 2008), the Federal Circuit affirmed the district court’s decision that upheld the jury verdict that U.S. Patent No. 5,888,038 (“the ’038 patent”) was not invalid for public use and that set aside the portion of the jury’s verdict compensating the patentee, American Seating Company (“American Seating”), for convoyed sales. In addition, the Court affirmed the district court’s decision to uphold the jury’s verdict on sales of noninfringing systems where USSC Group, Inc. (“USSC”) first made offers to sell the infringing systems, but ultimately delivered noninfringing systems.

American Seating owns the ’038 patent, entitled “Tie-Down for Wheelchairs.” The ’038 patent is directed to a wheelchair restraint system that secures wheelchairs and holds them in place while buses and trains are in motion. USSC manufactures wheelchair tie-down devices, the VPRo I and VPRo II. American Seating sued USSC for infringement.

The district court granted SJ of literal infringement with respect to VPRo I, but left for the jury issues of validity and infringement by VPRo II. The jury concluded that USSC failed to show that American Seating’s restraint system was in public use before the critical date and awarded American Seating $2.3 million in lost profits, which included lost profits from diverted sales of American Seating’s patented system and from diverted collateral sales of accompanying passenger seats. USSC moved for JMOL, a new trial, or remittitur. The district court granted-in-part USSC’s motion by setting aside the portion of the verdict relating to convoyed sales, thereby reducing the award to $676,850. American Seating appealed, and USSC cross-appealed.

On appeal, the Federal Circuit first addressed the public use issue. The test, noted the Court, for whether an invention is ineligible for a patent due to public use “is whether the purported use: (1) was accessible to the public; or (2) was commercially exploited.” Slip op. at 4-5 (citation omitted). The Court explained that consideration of public use includes analysis of, inter alia, the nature of and public access to activities involving the invention, confidentiality obligations imposed upon observers, commercial exploitation, and the circumstances surrounding testing and experimentation. It noted 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 of confidentiality. However, noted the Court, “use of an invention by the inventor himself, or [by] 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.” Id. at 5 (quoting City of Elizabeth v. Am. Nicholson Pavement Co., 97 U.S. 126 (1877)).

Applying these principles, the Federal Circuit concluded that the district court was correct in upholding the jury verdict that the ’038 patent was not invalid for public use. The Court explained that the fact that the inventors revealed the prototype of their invention to a select group of individuals without a written confidentiality agreement was not dispositive. It reasoned that “[w]hen 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.” Id. at 6. It determined that in this case, the jury was entitled to conclude that the inventors and the limited number of people permitted to view the tie-down restraint system prototype shared a general understanding of confidentiality. The Court added that there was no evidence that the prototype was placed in service before the critical date or that an unrestricted number of people unconnected with the development of the invention observed the invention in use.

The Federal Circuit next turned to the district court’s decision to set aside the verdict for convoyed sales. Specifically, the district court set aside the damages award that did not relate to sales of the patented restraint system and instead related to collateral sales of passenger seats. In affirming the district court’s decision on this issue, the Federal Circuit noted that a “convoyed sale” refers to the relationship between the sale of a patented product and a functionally associated non-patented product. It explained that “[a] patentee may recover lost profits on unpatented components sold with a patented item, a convoyed sale, if both the patented 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.’” Id. at 7 (quoting Rite-Hite Corp. v. Kelly Co., 56 F.3d 1538, 1560 (Fed. Cir. 1998)). The Court added, however, that “[a] functional relationship does not exist when independently operating patented and unpatented products are purchased as a package solely because of customer demand.” Id.

The Federal Circuit found that although the restraint system and passenger seats were usually purchased from the same company, package sales were for reasons of convenience and “one-stop shopping,” not because of an absolute requirement that the two items function together. Id. It noted that the evidence showed that passenger seats commanded a market value and served a useful purpose independent of the patented product. Accordingly, the Court concluded that because “no interrelated or functional relationship inhere[d] between the seats and the tie-down restraint system on a passenger bus, the district court was correct that the jury had no basis to conclude that lost profits on collateral sales of passenger seats were due [to] American Seating.” Id. at 9.

Finally, the Federal Circuit turned to the issue of whether the jury was correct in awarding American Seating lost profits based on sales of the noninfringing VPRo II systems where USSC first made offers to sell VPRo I, but ultimately delivered the VPRo II system. In holding that the jury properly awarded such damages, the Federal Circuit noted that to prove lost profits, the patent owner bears the initial burden of showing a reasonable probability that “but for” the infringement, he would have made the sales. Once this reasonable probability is shown, noted the Court, the burden shifts to the infringer to show that the “but for” causation analysis is unreasonable under the specific circumstances. The Court observed that here, the jury appears to have determined that American Seating met its initial burden, and that USSC failed to persuasively rebut.

The Federal Circuit reasoned that “a non-infringing replacement product is not considered a substitute unless it is ‘acceptable to all purchasers of the infringing product.’” Id. at 11 (quoting Grain Processing Corp. v. Am. Maize-Prods. Co., 185 F.3d 1341, 1343 (Fed. Cir. 1999)). In other words, noted the Court, “buyers must view the substitute as equivalent to the patented device.” Id. The Court found that here, the jury did not conclude that customers viewed the VPRo II system as an equivalent substitute for American Seating’s patented system and that based on all the evidence, it was reasonable for the jury to decline to find that the VPRo II was an acceptable substitute for the patented device and the infringing VPRo I. The Federal Circuit concluded that although the evidence in this case was “relatively sparse,” it sufficed for the jury to find that absent USSC’s offer to sell the VPRo I, the sales would have gone to American Seating. Id.