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Patentee Is Not Prevented from Recovering Royalties Until Licensee Challenges the Validity of the Patent

October 27, 2006

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Last Month at the Federal Circuit - November 2006

Judges: Michel (author), Archer, Linn

[Appealed from: N.D. Ga., Judge Thrash]

In Go Medical Industries Pty., Ltd. v. Inmed Corp., Nos. 05-1241, -1267, -1588 (Fed. Cir. Oct. 27, 2006), the Federal Circuit affirmed the district court’s grant of SJ of patent invalidity, denial of prejudgment interest, and reduction of the jury award for trademark infringement, but the Court vacated the district court’s reduction of damages for breach of contract. The Court also upheld a permanent injunction against Medical Marketing Group, Inc. (“MMG”) and Rüsch, International (“Rüsch”).

Dr. Alexander G.B. O’Neil obtained U.S. Patent No. 4,652,259 (“the ’259 patent”) for his invention of a catheter with a sheath that does not extend beyond the natural pressure barrier of the urethra, thereby reducing the likelihood of infection due to use of a catheter. The ’259 patent issued from a CIP that claimed priority to an application filed on September 12, 1979. Dr. O’Neil founded Go Medical Industries Party, Ltd. (“Go”), which manufactures and markets the catheters of the ’259 patent.

Go entered into a contract with MMG, a predecessor to defendant-appellant Alpine Medical, Inc., granting MMG the exclusive right to distribute the O’Neil catheters in the United States. MMG sold the catheters under the name “MMG/O’Neil” and registered that mark on January 12, 1993. The contract did not include a provision licensing the right to use the “O’Neil” mark.

C.R. Bard began to sell a competing catheter in 1992. MMG urged Go to sue for infringement of the ’259 patent, which Go did. The district court found the ’259 patent unenforceable due to inequitable conduct and invalid as anticipated in March 1999. The Federal Circuit reversed and remanded in August 2000. That case later settled. Nonetheless, in June 1999, MMG began placing its royalty payments in escrow and notified Go that it considered the contract terminated in view of the district court’s decision in the case with C.R. Bard. Go then terminated the contract and demanded that MMG cease using the “O’Neil” trademark. MMG refused, although it later changed the labeling of its catheters to “Rüsch/MMG” three years after selling its assets to Rüsch in February 2000. Go sued MMG and Rüsch in February 2001, alleging patent infringement, breach of contract, tortious interference with contract, conspiracy to breach fiduciary duty, trademark infringement, and unfair competition.

The district court granted SJ to MMG and Rüsch, finding the ’259 patent infringed but invalid as anticipated. The parties had agreed that a 1982 article by Dr. O’Neil anticipated the ’259 patent unless Go could establish a 1979 priority date. The district court found that Go was not able to claim priority to the parent application because it did not satisfy the written description or best mode requirements of 35 U.S.C. § 112. The district court granted SJ in favor of Go on the inequitable conduct issue, finding a lack of evidence to support a finding of a material misrepresentation.

The case then went to trial in February 2004, where the district court granted JMOL disposing of Go’s claims of breach of fiduciary duty and tortious interference with contract. The jury returned a verdict against MMG for breach of contract and trademark infringement and awarded damages based on a reasonable royalty and unjust enrichment, as well as punitive damages. The jury also found against Rüsch for trademark infringement, awarding damages based on a reasonable royalty and unjust enrichment. Further, the district court granted Go’s motion for a permanent injunction and prohibited both MMG and Rüsch from using the “O’Neil” mark. But the district court denied Go’s motion for prejudgment interest, finding that the contract claim was not a liquidated claim and, therefore, not eligible for prejudgment interest.

The district court later reduced the contract damages owed by MMG to preclude royalties after the date when the ’259 patent was found invalid in the C.R. Bard litigation. It also reduced the trademark damages, reasoning that the jury’s calculation was based on profits rather than actual damages. Specifically, the court found that Go’s expert arbitrarily chose “a wholly speculative royalty rate.” It further reduced the damages awarded to Go by setting aside the jury’s award of lost profits, finding that the jury was punishing MMG for actions under breach of contract, which is prohibited by statute.

On appeal, the Federal Circuit: (1) affirmed the grant of SJ of patent invalidity; (2) affirmed the denial of prejudgment interest; (3) vacated and remanded for a recalculation of the contract damages; (4) affirmed the district court’s adjustments of the jury awards under trademark infringement; and (5) affirmed the permanent injunction against MMG and Rüsch.

First, the Federal Circuit concluded that the district court correctly granted SJ of patent invalidity. Specifically, the Court found that the absence of best mode support for the priority claim warranted the grant of SJ. The Court found that Dr. O’Neil subjectively considered a best mode (i.e., the sheath length limitation) via an admission during his deposition. The Court held that “the 1979 application lacked sufficient disclosure to allow others to practice the best mode.” Slip op. at 10. Therefore, because the priority claim failed, the Court affirmed the SJ of patent invalidity
based on the anticipatory 1982 article.

Second, the Federal Circuit affirmed the denial of prejudgment interest, applying Eleventh Circuit law. Specifically, the Court found that the royalties due under the license depended on the fact-finder’s interpretation of the contract between the parties, which did not include a liquidated damages provision. Therefore, addition of prejudgment interest to these damages was not available.

Third, the Federal Circuit vacated and remanded the calculation of breach of contract damages because, under Lear, Inc. v. Adkins, 395 U.S. 653 (1969), “a licensee [is] not estopped from challenging the validity of the licensor’s patent” but “cannot invoke the protection of the Lear doctrine until it (i) actually ceases payment of royalties, and (ii) provides notice to the licensor that the reason for ceasing payment of royalties is because it has deemed the relevant claims to be invalid.” Slip op. at 13-14. The Court held that the district court erred in applying the Lear doctrine to relieve MMG of its entire obligation to pay royalties after the finding of invalidity in the C.R. Bard litigation. The Court noted that the C.R. Bard case had no effect on the contract between Go and MMG, and that MMG’s use of an escrow account was an implicit acknowledgment that Go was entitled to the royalty payments if the district court were reversed. Moreover, the Court noted that MMG did not inform Go of its reason for failing to pay royalties.

Fourth, the Federal Circuit affirmed the district court’s adjustments of the jury award due to trademark infringement. Specifically, the Court agreed with the district court’s observation that 15 U.S.C. § 1117 does not allow for a downward adjustment of actual damages for trademark infringement. The Court held that the jury’s reasonable royalty award was not supported by substantial evidence of actual damages. The Court noted that the contract did not explicitly include a royalty rate for use of the “O’Neil” mark and that Go’s expert arbitrarily found the trademark to contribute to 3% of MMG’s profits. Therefore, the Federal Circuit held that the district court did have discretion to reduce the award based on MMG’s profits rather than actual damages.

Further, the Federal Circuit noted that 15 U.S.C. § 1117 gives district courts “broad latitude to adjust” the award of profits. Id. at 16. The Court held that the district court pointed to equitable considerations weighing against the award of profits and also gave sufficient reasons to set aside the jury’s award of punitive damages.

Lastly, the Federal Circuit found that substantial evidence supported the jury’s findings that (1) the “O’Neil” mark had acquired secondary meaning, (2) the contract between Go and MMG included an implied trademark license, and (3) Go never abandoned the mark. Therefore, the Court found the permanent injunction to be the appropriate remedy.