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The Read “Enhanced Damages” Standard Must Be Applied Separately from the Seagate “Willful Infringement” Standard

09-1564
June 13, 2011

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Last Month at the Federal Circuit - July 2011

Judges: Newman (author), Clevenger, Bryson

[Appealed from: D. Minn., Judge Schlitz]

In Spectralytics, Inc. v. Cordis Corp., Nos. 09-1564, 10-1004 (Fed. Cir. June 13, 2011), the Federal Circuit affirmed the district court’s determination that the plaintiff Spectralytics, Inc.’s (“Spectralytics”) U.S. Patent No. 5,852,277 (“the ’277 patent”) was valid, that the defendants Cordis Corporation (“Cordis”) and Norman Noble, Inc. (“Noble”) willfully infringed the ’277 patent, and that calculation of damages at a 5 percent royalty rate was valid. The Court, however, vacated the district court’s denial of enhanced damages and attorneys’ fees to Spectralytics, and remanded the case for reapplication of the law on those two issues.

Spectralytics and Noble manufacture medical devices, including coronary stents. At issue in this appeal is a process for cutting surgical devices, performed prior to Spectralytics’ ’277 patent by “Swiss-style” machines. The workpiece and the cutting tool on Swiss-style machines are separately and rigidly mounted to dampen vibration, but the vibration occurring during the cutting process nevertheless causes unwanted movement of the workpiece and cutting tool, thus limiting the precision of cutting. The ’277 patent, by contrast, specifies that the workpiece be rigidly mounted directly on the cutting tool. Therefore, if the workpiece and the cutting tool do vibrate, they move in precise unison, eliminating relative movement between them and thus improving the precision and intricacy of cutting.

Spectralytics and Noble had both hoped to be selected by Cordis as a producer of surgical devices. However, after representatives of Noble toured the Spectralytics plant, Noble built a machine in which, like the ’277 patent, the workpiece was mounted directly on the cutting tool. Cordis then entered into an exclusive supply contract with Noble, agreeing to indemnify Noble for any patent infringement.

Spectralytics sued Cordis for infringement of its ’277 patent and added Noble as a defendant thirteen months later. The jury in the district court sustained the validity of the ’277 patent, found that Cordis and Noble willfully infringed the patent, and awarded damages calculated as a 5 percent royalty on Noble’s infringing sales to Cordis. The district court, however, denied Spectralytics’ motion for enhanced damages and attorneys’ fees based on the jury’s verdict of willful infringement.

On appeal, Spectralytics argued that the district court misapplied the law and thus abused its discretion when it denied Spectralytics’ request for enhanced damages and attorneys’ fees. On cross-appeal, the defendants argued that the district court abdicated its role as the ultimate decisionmaker in relying on the presumed jury findings of the ’277 patent’s nonobviousness. The defendants also argued that the 5 percent royalty was excessive.

First, the Federal Circuit held that the district court did not err in relying on the presumed jury findings of nonobviousness. The Court explained that “[i]t is neither error nor dangerous to justice to submit legal issues to juries, the submission being accompanied by appropriate instructions on the law from the trial judge.” Slip op. at 7 (quoting R.R. Dynamics, Inc. v. A. Stucki Co., 727 F.2d 1506, 1515 (Fed. Cir. 1984)). The Court also cited Jurgens v. McKasy, 927 F.2d 1552, 1557 (Fed. Cir. 1991), for the proposition that the Court leaves the presumed factual findings of the jury undisturbed if supported by substantial evidence and then examines the legal conclusion de novo in light of those findings. The Court found that the district court discussed the evidence before the jury, the jury’s presumed findings were supported by substantial evidence, and such evidence supported the jury’s conclusion that obviousness had not been proved. Therefore, the Federal Circuit held that the district court did not err in relying on the presumed jury findings.

Specifically, the Federal Circuit held that the district court did not err in concluding that the jury could have found that prior art and prior knowledge “taught away” from attaching the workpiece to the cutting tool as is specified in the ’277 patent. The Court explained that whether prior art teaches away from the claimed invention is a question of fact. Additionally, although the Federal Circuit had in previous cases rejected assertions of “teaching away” on the ground that prior art did not directly warn against the claimed invention or teach that the claimed invention would not work, e.g., Baxter International, Inc. v. McGaw, Inc., 149 F.3d 1321, 1328 (Fed. Cir. 1998); In re Gurley, 27 F.3d 551, 553 (Fed. Cir. 1994), the Court here clarified that “‘[t]eaching away’ does not require that the prior art foresaw the specific invention that was later made, and warned against taking that path,” slip op. at 11.

The Court reasoned that the jury could have found, based on expert testimony, that Swiss-style machines taught away from “embracing” vibrations to improve cutting accuracy because all prior machines improved accuracy by “dampening” vibrations. Id. Thus, the Court held that, because substantial evidence such as expert testimony supported an “implicit finding of teaching away,” the district court applied the correct law. Id. at 11-12. The Court further noted that “teaching away” was not an essential element of a conclusion of nonobviousness, and that evidence of secondary considerations such as copying and commercial success could also be probative.

Second, the Federal Circuit held that the 5 percent royalty awarded by the jury to Spectralytics was not excessive. The Court explained that a party challenging a jury damages verdict “must show that the award is, in view of all the evidence, either so outrageously high or so outrageously low as to be unsupportable as an estimation of a reasonable royalty.” Id. at 14 (quoting Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554 (Fed. Cir. 1995) (en banc)). The Court also noted that, in accordance with 35 U.S.C. § 284, the damages awarded should be “in no event less than a reasonable royalty for the use made of the invention by the infringer.” Because expert testimony established that a 20 percent royalty was reasonable and appropriate in light of trade practices and the economic and competitive circumstances, and given that Spectralytics did not appeal the jury’s 5 percent royalty rate, the Court concluded that the jury’s choice of a 5 percent royalty rate was not “outrageously high” and therefore not excessive.

Third, the Federal Circuit held that the district court abused its discretion in denying Spectralytics’ request for enhanced damages. In In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc), the Federal Circuit set forth a willful infringement standard by which failure to exercise due care by obtaining an exculpatory opinion of counsel before commencing infringing activity is not of itself probative of willful infringement. However, in Read Corp. v. Portec, Inc., 970 F.2d 816 (Fed. Cir. 1992), the Court set forth a “distinct and separate” enhanced damages standard by which one of the factors that may be relevant to determination of whether damages should be enhanced is whether there was adequate investigation of patent rights. i4i Ltd. P’ship v. Microsoft Corp., 598 F.3d 831, 859 (Fed. Cir. 2010), cert. granted on other grounds (2010). Here, the district court applied the Seagate willful infringement standard when discounting the Read enhanced damages criterion of whether there was adequate investigation of adverse patent rights. Therefore, the Federal Circuit held that, because the district court misapplied the willful infringement standard to the separate determination of whether to enhance damages after willful infringement is found, the district court erred.

Finally, the Federal Circuit held that the district court erred in denying Spectralytics’ request for attorneys’ fees. The Court explained that, although attorneys’ fees are not mandatory when willful infringement has been found, precedent establishes that the Court should explain its decision not to award attorneys’ fees. Because the district court did not separately analyze the issue of attorneys’ fees but instead denied attorneys’ fees in conjunction with denial of enhanced damages, the Court held that reconsideration of the request for attorneys’ fees was warranted.

Accordingly, the Court affirmed the judgment of validity, infringement, and the royalty rate for measurement of damages. The Court vacated the denial of enhanced damages and attorneys’ fees, and remanded the case for redetermination of those two issues.