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Reasonable Royalty Rate Determination in First Case Is Not Binding in Second Case

January 24, 2006

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Last Month at the Federal Circuit - February 2006

Judges: Lourie (author), Rader, and Linn

In Applied Medical Resources Corp. v. U.S. Surgical Corp., No. 05-1149 (Fed. Cir. Jan. 24, 2006), the Federal Circuit affirmed the U.S. District Court for the Central District of California’s (1) finding that substantial evidence supports the jury’s verdict that U.S. Surgical Corporation (“U.S. Surgical”) willfully infringed a patent assigned to Applied Medical Resources Corporation (“Applied”); (2) refusal to apply collateral estoppel to the reasonable royalty rate; and (3) admission of evidence regarding a prior litigation.

The patent at issue, U.S. Patent No. 5,385,553 (“the ’553 patent”) is directed to surgical devices called trocars, which are used as access ports during laparoscopic surgery. In an earlier case, which the Court labeled “Applied I,” Applied alleged that U.S. Surgical’s “Versaport I” device infringed the ’553 patent. In that case, a jury found that U.S. Surgical willfully infringed the ’553 patent, plus other Applied patents, and awarded damages based on a 7% reasonable royalty.

Shortly after the Applied I verdict, U.S. Surgical began selling the Versaport II, a device developed during the Applied I litigation. Applied filed a second complaint in the Central District of California, alleging that the Versaport II infringed the ’553 patent (“Applied II”). The district court granted Applied’s motion for SJ that the Versaport II infringed the ’553 patent. The Federal Circuit affirmed.

The district court then held a trial to determine damages and willfulness. It denied a motion filed by U.S. Surgical to establish a 7% reasonable royalty based on the rate in Applied I under principles of collateral estoppel. The jury thenfound U.S. Surgical liable for willful infringement and awarded damages of $43.5M. On motion, the district court entered enhanced damages of $64.5M.

On appeal, the Federal Circuit held that the district court properly denied giving collateral estoppel effect to the Applied I jury’s 7% royalty rate. The Court reasoned that collateral estoppel is not appropriate because the determination of the rate in Applied II is not identical to the determination in Applied I. The Court held that the determination must relate to the time of infringement and that “reasonable royalty damages are not calculated in a vacuum without consideration of the infringement being redressed.” The Court noted that the infringements in Applied I and Applied II “began at separate and distinct times” and that it “cannot relate reasonable royalty damages for Versaport II sales back to a separate and past infringement caused by Versaport I sales.” Further, the Court found that U.S. Surgical had conceded, in arguing that the Versaport II did not infringe, that the devices were different and the infringement issues were different. The Court held, “Indeed, simply because the same company sold two different products which infringed a patent does not prevent the patentee from litigating and collecting separate damages for each infringement.” Slip op. at 10 (emphases in original). The Federal Circuit also recognized that “[t]he damages issues are not the same.”

Regarding willfulness, the Federal Circuit found that substantial evidence supports the jury’s verdict. Specifically, the Court found that the evidence showed that U.S. Surgical desperately needed a competitive universal seal trocar and its management did not properly oversee or participate in the development of the Versaport II, but instead placed “intense time pressure” on its engineers to create a new product. The Court also concluded that a reasonable jury could have believed based on the evidence that U.S. Surgical was not concerned about infringement and would have proceeded to manufacture Versaport II despite receiving outside legal opinions. Therefore, the Federal Circuit held that the district court did not err in denying U.S. Surgical’s JMOL motion of no willful infringement.

Lastly, the Federal Circuit held that the district court did not abuse its discretion in admitting evidence regarding the Applied I litigation. The Court concluded that the Applied I litigation “was relevant to the reasonable royalty analysis” in Applied II, partly because the hypothetical negotiation for Applied II “took place on the heels of the Applied I jury verdict.” The Court further concluded that the Applied I litigation was also relevant to the jury’s willfulness determination in Applied II because “Applied I was clearly relevant to U.S. Surgical’s state of mind.”