U.S. Federal Circuit Reverses Lost Profits Judgment

Last week the United States Court of Appeals for the Federal Circuit handed down a damages opinion in Calico Brand, Inc. v. Ameritek Imports, Inc., NoS. 2008-1324, 2008-1341 (Fed. Cir. July 18, 2013).  The opinion can be found on the Federal Circuit's website, here.  The opinion is nonprecedential--presumably because it doesn't break any new legal ground--but is interesting nonetheless for its application of the law of willful infringement and lost profits.

The plaintiff, Calico, owns three patents on "a combination of components comprising a lock mechanism that  allows a user to operate a [utility] lighter in a safe, non-complicated manner."  Ameritek imported infringing lighters from China and sold them to Acme, which in turn sold them to retailers.  In October 2004, Calico notified Ameritek and Acme that it believed its lighters infringed Calico's patents.  Acme sought reassurance from Ameritek that Ameritek would indemnify Acme in the event damages were awarded against Acme.  (While awaiting Ameritek's response, Acme sold 74,556 lighters.  At trial, however, Calico did not establish that these particular lighters infringed Calico's patents.  Calico filed suit in January 2005, after which Ameritek conceded that the imported lighters infringed.)  The district court concluded that the patents were valid and trial was held on damages.  The jury found willful infringement and awarded lost profits damages of $719,395 against Ameritek and $178,035 against Acme.  In the alternative, the jury determined that a reasonable royalty would be $113,471 as to Ameritek and $23,250 as to Acme.  The district court overturned the finding of willful infringement, and both parties appealed the resulting judgment.  The Federal Circuit affirmed the district court's judgment that the infringement was not willful, but reversed the lost profits judgment and remanded with instruction to enter judgment in the amount of the reasonable royalty.

Writing for the court, Judge Reyne first turned his attention to willfulness, stating that the district court

analyzed uncontroverted evidence presented at trial and concluded that there was no showing that Acme had knowledge of Calico's patents at the time it was selling the infringing Ameritek lighters before October 22, 2004. Rather, the district court found that, when informed of Calico's patents, Acme switched to selling readily-available non-infringing lighters and returned the inventory of infringing lighters to Ameritek. J.A. 9. Weighing the totality of the evidence, the district court determined that “[p]erhaps Acme should have done more to ensure that Ameritek was not selling [it] infringing goods,” but that this failure constituted, at most, negligent conduct. Id.

On the issue of lost profits, the court set out the Panduit factors ("In general, a patent owner must prove causation in fact by showing (1) a demand for the patented product, (2) an absence of acceptable non-infringing substitutes, (3) the manufacturing and marketing capability to exploit the demand, and (4) the amount of profit the patent owner would have made") and concluded that factors (1) and (2) were lacking.  As for customer demand:

. . . Acme argues that the district court erred in finding lost profits to be an available form of damages because the child safety features claimed in the patents in suit are divorced from consumer demand. Acme points to evidence indicating that the only distinguishing feature influencing consumers to buy the infringing lighters over the Calico lighters was price. Appellee Br. 31 (citing J.A. 166).

 

Calico responds that the evidence supports the conclusion that “but for” the infringement, Calico would have maintained its market share of 28.4% and would not have experienced a 7% decrease in sales during the period of infringement. . . .

Here, the district court credited testimony regarding accounting records for sales of Calico utility lighters as sufficient evidence of customer demand. J.A. 11. We disagree that evidence of gross sales data is sufficient under the Rite–Hite framework to establish consumer demand based on the patented safety mechanism. . . .

Similarly, on the issue of non-infringing alternatives, the court concluded:

Calico failed to demonstrate a reasonable probability that, in the absence of the infringing Ameritek lighters, Acme and/or its customers would have purchased Calico lighters rather than the non-infringing alternatives. . . .

There is no dispute that at all relevant times, Acme and Calico competed in the same market for utility lighters. But Calico and Acme were not the sole competitors in the market. At minimum, Easton Products, Beacon Products, BIC, and New York utility lighters also competed in the same market. J.A. 168. Given the crowded nature of this market, there is no reasonable basis to support an assumption that Calico would have made additional sales “but for” the presence of Ameritek lighters. The record evidence shows that there were 20 to 30 brands of utility lighters comparable to the Ameritek product. J.A. 189

Indeed, the district court acknowledged in its summary judgment ruling that Acme was able to switch to an alternative product and maintain its sales volume. J.A. 115. . . .  A seamless substitution of the asserted product with a non-infringing, alternative product that is sourced from a third party supplier, is evidence of acceptable non-infringing alternatives under the second Panduit factor.

Toward the end of the opinion, the court also noted that:

In entering judgment, the district court held that Acme and Ameritek were jointly and severally liable for damages. On appeal, neither party challenges the district court's decision to impose joint and several liability.

 The imposition of joint and several liability is, I believe, correct under U.S. law. I hope to take up the question of how this issue is determined in other countries in a future post.