Damages for Indirect Infringement: Smith & Nephew v. Arthrex

This morning the Federal Circuit handed down an opinion in Smith & Nephew Inc. v. Arthrex, Inc (available here).  The litigation has had a somewhat tortuous history, including "three trials and two previous appeals" over a patent concerning "a method used by surgeons to anchor a suture in bone, thereby helping to attach (or reattach) tissue to the bone."  Smith & Nephew (S&N) alleged that Arthrex indirectly infringed "by selling certain SutureTak and PushLock anchors having attached sutures . . . that surgeons use to perform the claimed methods."  A 2011 retrial resulted in a jury verdict in favor of S&N, a lost profits damages award in the amount of $67,793,868, and a reasonable royalty in the amount of $16,987,556 for infringing uses that did not deprive S&B of sales.  The judge entered a JMOL for Arthrex, which was reversed on appeal; on remand, and over Arthrex's objections, the court reinstated the jury verdict which forms the basis of the present appeal. 

Much of the dispute centers on whether the district court was correct in precluding Arthrex from relitigating certain matters on remand.  The court affirms the trial court's judgment that Arthrex was not entitled to relitigate validity.  It concludes that the district court erred, however, in refusing to consider Arthrex's post-remand challenges to the lost profit award, but "[o]n the merits . . . reject[s] Arthrex’s contention that the lost-profits award lacks substantial evidence support. See Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1310 (Fed. Cir. 2009) (applying substantial-evidence review of factual findings within methodologically proper damages determination)."

The lost profits inquiry is complicated in that, again, the defendant is accused of indirectly infringing by selling anchors that surgeons used to directly infringe the patent; and there are substitute anchors the surgeons' use of which would not have resulted in the infringement of the method patent.  S&N's theory was that it was entitled to recover lost profits on sales it would have made of these substitute anchors, based on its share of the market: 

To establish entitlement to lost profits, “the burden rests on the patentee to show a reasonable probability that ‘but for’ the infringing activity, the patentee would have made the infringer’s sales,” Crystal Semiconductor Corp. v. TriTech Microelecs. Int’l, Inc., 246 F.3d 1336, 1353 (Fed. Cir. 2001), though not necessarily all of those sales. S&N put on evidence to show (a) what products constituted “acceptable noninfringing substitutes” for the Arthrex Bio-SutureTak, Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978), and (b) S&N’s percentage of sales of that class of acceptable non-infringing substitutes (considering all sellers, including Arthrex). It is not meaningfully disputed on appeal that, if S&N was correct as to (a), then S&N, having ample production capacity, was entitled to apply the (b) percentage to Arthrex’s infringing sales and to receive an award of the profits it would have made on that number of sales. See Ericsson, Inc. v. Harris Corp., 352 F.3d 1369, 1377 (Fed. Cir. 2003) (citing State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1577–80 (Fed. Cir. 1989)) (endorsing a market-share approach). S&N’s expert presented that calculation to the jury, which adopted it.

The only aspect of the calculation meaningfully challenged by Arthrex on appeal is the identification of “acceptable non-infringing substitutes,” Panduit, 575 F.2d at 1156, by S&N’s expert as unduly narrow. We consider the evidentiary support for the jury determination bearing in mind that the object of the inquiry is to identify what products those surgeons who actually bought Bio-SutureTak anchors would have bought if Arthrex had not sold that product. And we also recognize that the inquiry typically “excludes alternatives to the patented product with disparately different prices or significantly different characteristics.” Crystal Semiconductor, 246 F.3d at 1356. 

On this issue, the court concludes that there was substantial evidence to support S&N's contention that "the class of acceptable non-infringing alternatives in this case consisted of anchors that were (1) bioabsorbable, (2) premounted on an inserter, (3) pre-loaded with a suture, and (4) inserted via a push-in or tap-in procedure," rather than a broader class including screw-in and toggle anchors proposed by Arthrex.  More specifically, "the S&N definition properly reflected the anchor features that matter for the lost-profits inquiry, namely, the features that mattered to the group of surgeons who in fact chose to use (and therefore controlled the buying of) the specific Arthrex product at issue. The jury could properly find that the preference for particular anchor characteristics revealed by the actual market behavior of those surgeons determined where those surgeons would have taken their business if they could not have purchased what they in fact bought."  Reviewing the record, the majority concludes that "The jury’s conclusion that surgeons chose anchors based on their insertion methods (and therefore that only press-in anchors were acceptable, non-infringing alternatives here) is supported by substantial evidence. The jury was free to disbelieve or discount Arthrex’s limited evidence pointing the other way."  The majority also was not persuaded by Arthrex's arguments about what it would have done but for the infringement, calling the evidence "scanty" and noting among other things that Arthrex was not actually a selling a noninfringing anchor during the relevant period. "The jury could find, given the dearth of evidence on the subject, that Arthrex would not have offered an acceptable non-infringing substitute in the 'but-for' world."

As for supplemental damages, “'[T]he amount of supplemental damages following a jury verdict is a matter committed to the sound discretion of the district court.” SynQor, Inc. v. Artesyn Techs., Inc., 709 F.3d 1365, 1384 (Fed. Cir. 2013) (internal quotation marks omitted).'"  Arthrex challenged the award of supplemental damages on the basis, inter alia, that during the time in between the JMOL and the reversal on appeal it had a good-faith belief that the sales it continued to make post-JMOL did not induce infringement of the patent in suit.  Implicitly noting that the issue of whether a good faith belief negates the state of mind necessary to sustain an judgment of induced infringement is currently before the Supreme Court in Commil USA, LLC v. Cisco Systems, Inc., the Federal Circuit rejected the challenge for the following reasons:

Whatever else may be said about Arthrex’s argument, the district court’s ruling and pronouncement could, at most, create a factual question, not an entitlement to a no-knowledge finding as a matter of law. But Arthrex does not request further factual adjudication, only a judgment as a matter of law of no indirect infringement for this period. We therefore reject Arthrex’s contention, without the need to consider more fully whether, as Arthrex suggests, liability for indirect infringement can turn successively off and on, based on the knowledge requirement, when a trial court reaches one conclusion but the conclusion is then reversed on appeal.

Judge Dyk dissented from the majority holding as it related to the lost profits award, based on his conclusion that substantial evidence did not support the characterization of push-in anchors as the only noninfringing alternative.

Addendum:  Upon re-reading the above this afternoon, I began to wonder if I had understood the plaintiff's damages theory correctly.  Was S&N requesting lost profits on lost sales of noninfringing push-in anchors (that is, push-in anchors the use of which would not result in the use of the method claim in suit, perhaps because they lack the necessary "intrinsic resiliency," see opinion p.3) that it would have sold, but for the infringement?  That's what I thought the court meant when it talked about "S&N's percentage of sales of that class of acceptable non-infringing substitutes," but then I wondered whether that meant that S&N was not selling any push-in anchors that could be used to practice the patented method.  A brief that S&N filed with the district court (2013 WL 5206244) now leads me to believe that S&N's position was that its BioRaptor product could be used to practice the patented method, so maybe what the court meant was that S&N's push-in anchors (which claimed 87.5% of the market for such products, according to Judge Dyk) were noninfringing, either because they weren't being used to practice the patented method or because their use for that purpose was authorized by S&N.  In the latter instance, I guess the court's use of the term noninfringing "substitutes" denotes substitutes for the defendant's product, not necessarily substitutes for the products that can be used to practice the method.  If any readers can clarify this point, I'd appreciate it.

Further Addendum:  I failed to note in my post yesterday that the above case is a nonprecedential opinion, and that the author is Judge Taranto.