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Lost Profits Award Set Aside Where Patentee Did Not Sell Product During Period of Infringement and No Evidence That Patentee Would Have Made Sales but for the Infringement

May 18, 2007

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Last Month at the Federal Circuit - June 2007

Judges: Mayer (dissenting-in-part), Gajarsa, Prost (author)

[Appealed from: C.D. Cal., Judge Snyder]

In Wechsler v. Macke International Trade, Inc., Nos. 05-1242, -1243 (Fed. Cir. May 18, 2007), the Federal Circuit (1) reversed the district court’s grant of JMOL that an individual defendant was personally liable for inducing patent infringement of a corporation defendant, and (2) set aside an award for lost profits damages because there was insufficient evidence to support such an award.

In 1997, U.S. Patent No. 5,636,592 (“the ’592 patent”) issued to Lawrence Wechsler for a portable device that permits the dispensing of water, potable liquids, particulate solids, and other such feed material to dogs and other animals from a reservoir. In late 1998, Macke International Trade, Inc. (“Macke”) began distributing the “Handi-Drink” portable device for carrying and dispensing water for a pet. In 1999, Anthony O’Rourke, president and sole employee of Macke, learned of the ’592 patent while prosecuting a patent application for the Handi-Drink device. While O’Rourke believed that the ’592 patent was invalid and not infringed by the “Handi-Drink,” he nonetheless had counsel for Macke enter into licensing negotiations with Wechsler. However, licensing negotiations broke down in 1999 when Wechsler sued Macke and O’Rourke for patent infringement. Macke kept the original Handi-Drink on the market until April 2000, and then replaced it with a redesigned version.

In 2004, the district court ruled on SJ that O’Rourke was not the alter ego of Macke and was not liable for infringement under 35 U.S.C. § 271(a). A jury later returned a verdict that Macke and O’Rourke willfully infringed the ’592 patent, but that O’Rourke was not personally liable for inducing Macke’s infringement. However, the district court granted Wechsler’s motion for JMOL that O’Rourke was personally liable for inducement. The jury awarded Wechsler lost profits and reasonable royalties. Judge Snyder then denied a motion by Macke and O’Rourke to set aside the lost profits damages.

On appeal, O’Rourke challenged the district court’s grant of JMOL that O’Rourke was personally liable for inducement. The district court granted JMOL on this issue because it found that the jury’s special verdict that O’Rourke was not personally liable for inducement was inconsistent with the special verdict of willful infringement by both defendants.

The Federal Circuit found that this action by the district court was erroneous. “A trial court is rarely entitled to disregard jury verdicts that are supported by substantial evidence,” it stressed, quoting the Ninth Circuit’s ruling in Duk v. MGM Grand Hotel, Inc., 320 F.3d 1052, 1058 (9th Cir. 2003). Moreover, a trial court “cannot choose to ignore a legitimate finding that is partof the special verdict,” it added, quoting Floyd v. Laws, 929 F.2d 1390, 1397 (9th Cir. 1991). The district court did not find that the special verdict of no personal liability for inducement lacked substantial evidence.

Given that the jury instructions only referred to Macke, the Federal Circuit found that the most reasonable interpretation of the special verdicts is that the jury intended to find that Macke willfully infringed, but that O’Rourke was not personally liable for that infringement. Thus, “rather than disregarding the jury’s explicit finding that O’Rourke was not personally liable for infringement,” slip op. at 8, the district court should have interpreted the finding of willful infringement as extending only to Macke. Doing so would have resolved any apparent inconsistency between the two special verdicts and been consistent with both the jury instructions that referred to willful infringement by Macke alone and the grant of SJ that Macke was not the alter ego of O’Rourke. Accordingly, the Federal Circuit reversed the district court’s JMOL as to O’Rourke’s personal liability.

The Federal Circuit then turned to the district court’s denial of the motion by Macke and O’Rourke for JMOL on the award of lost profits. Macke and O’Rourke argued that lost profits should not be available to Wechsler as a matter of law because he lacked the ability to produce a product while the Handi-Drink was on the market. Quoting Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1548 (Fed. Cir. 1995), the Federal Circuit recognized that “if the patentee is not selling a product, by definition there can be no lost profits.” Slip op. at 10. The only exception is where the patentee has the ability to manufacture and market a product, but for some legitimate reason does not. Even in these situations, though, “the burden on a patentee who has not begun to manufacture the patented product is commensurately heavy.” Id. (quoting Hebert v. Lisle Corp., 99 F.3d 1109, 1120 (Fed. Cir. 1996)).

The Federal Circuit then noted that the evidence was clear that Wechsler lacked the capability to manufacture his device during the period of infringement. And although “Wechsler could still receive lost profit damages if Macke’s infringing sales preempted subsequent sales by Wechsler and/or eroded the market price Wechsler was able to charge for his product,” id. at 11, the Court found that “Wechsler and his expert presented little more than conclusory evidence on these theories.” Id. For example, Wechsler and his expert testified that Wechsler could have sold his product to those people who were desirous of a product like that sold by Macke. The Court noted though that the appropriate inquiry is not whether Wechsler could have sold his product to those individuals but whether Wechsler would have sold his product to those individuals. Nothing in the record indicated that such sales would have happened. Similarly, with regard to price erosion, nothing in the record linked any price difference to Macke’s earlier presence in the market. In fact, nothing even indicated that Wechsler ever attempted to sell his product at his originally intended price. Moreover, since Macke’s and Wechsler’s products were not on the market contemporaneously, there could not have been any direct price competition between the two. Accordingly, finding that the jury’s award of lost profits was not supported by substantial evidence, the Federal Circuit reversed the denial of Macke and O’Rourke’s motion for JMOL on lost profits.

Dissenting from the reversal on the lost profits issue, Judge Mayer argued that there was substantial evidence to support the jury award. He first quoted Rite-Hite’s statement, 56 F.3d at 1545, that a patentee “must show a reasonable probability that, ‘but for’ the infringement, it would have made the sales that were made by the infringer” to recover lost profits damages. Mayer Dissent at 1. He noted that the jury was presented with expert testimony that Wechsler could have sold every infringing unit sold by Macke but for the infringement. Additionally, the expert’s opinion was premised on the lack of a suitable noninfringing alternative product and demand for the patented product. “With evidence of demand for the product and no suitable alternative, the jury was free to reasonably conclude that Wechsler would have made the sales made by the infringer.” Id. at 4.

Judge Mayer added that the jury was also presented evidence of the damages amount, including evidence as to pricing of similar goods on the market, the lack of suitable alternatives, Wechsler’s manufacturing costs, price erosion, and testimony on calculating damages. The jury presumably found this evidence credible, and, without proof of a suitable alternative, “it was free to conclude that Wechsler would have made all of the sales made by Macke.” Id.

Finally, a patent owner’s burden of proof is not absolute, but rather one of reasonable probability. Id. (citing Lam, Inc. v. Johns-Manville Corp., 718 F.2d 1056, 1065 (Fed. Cir. 1983)). Quoting Lam, he added that since the “amount of the damages cannot be ascertained with precision, any doubts regarding the amount must be resolved against the infringer.” Id. Therefore, Judge Mayer dissented from the Court’s reversal of the lost profits award.