Federal Circuit Orders New Trial on Damages in Roland v. InMusic

The nonprecedential opinion, released last Thursday, is Roland Corp. v. InMusic Brands, Inc., authored by Judge Chen and joined by Judges Lourie and Reyna.  The case involved five patents relating to electronic drums and drumheads, and three relating to cymbals.  Plaintiff Roland first accused InMusic of infringing certain cymbal patents in 2011, but “after some back-and-forth between the parties,” Roland stated that “it did ‘not intend to pursue this matter’ if InMusic discounted the cymbals as represented and ‘does not engage in other infringing activities.’”  Then in 2015, “Roland wrote to inMusic, again accusing it of infringement and expressing Roland’s “surprise[]” to find certain inMusic products on display at a trade show. . . . InMusic responded on February 12, 2015, stating that the identified cymbal product line was 'radically redesigned after 2011' and that inMusic believed it had ‘Roland’s implied consent’ to sell these cymbals.”  Roland filed suit in 2016 (pp. 7-8).  The district court granted summary judgment of noninfringement as to three of the drum patents and one of the cymbal patents.  The jury found that the two drum and two cymbal patents in suit were infringed, and awarded Roland $2.7 million in lost profits and $1.9 million in reasonable royalties.   The district court denied prejudgment interest, however.  I will limit my discussion to the damages issues.

The lost profits award included profits lost not only by Roland itself but also by its U.S. subsidiary, Roland’s expert having “calculated a single, consolidated lost profits figure for the two entities in the first instance, and . . . an ‘alternative calculation’ in the event Roland is not entitled to the lost profits of Roland U.S.” (p.24).  The panel concludes that this was error:

The general rule is that “a patentee may not claim, as its own damages, the lost profits of a related company.” Warsaw, 778 F.3d at 1375. Roland attempts to claim as its own the lost profits of Roland U.S. under an exception known as “inexorable flow.” Under that theory, which has been previously argued to this court, the subsidiary’s profits flow inexorably or inherently to the plaintiff parent company. See Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359, 1367 (Fed. Cir. 2008), mandate recalled and amended on other grounds, 557 F.3d 1377 (Fed. Cir. 2009). In Mars, we affirmed a grant of summary judgment to the defendant on the plaintiff’s claim of lost profits because the record could not support a finding that the wholly owned subsidiary’s profits flowed inexorably to the plaintiff. Id. at 1364, 1367. Because we concluded that the subsidiary’s profits did not in fact flow inexorably to the plaintiff, we expressly declined to “decide whether a parent company can recover on a lost profits theory when profits of a subsidiary actually do flow inexorably up to the parent.” Id. at 1367. This court has not since addressed whether inexorable flow is a legally cognizable theory of lost profits. Nor must we do so now, for like the Mars court, we conclude that Roland did not offer sufficient evidence to support a factual finding of inexorable flow of profits.

 

Roland argues that it established inexorable flow based on a single sentence of testimony from Roland’s Senior Executive Office and Roland U.S.’s Executive Vice President, Naoyuki Tamura . . . :

 

Q. What happens to the profits of Roland U.S. on those sales of mesh drums?

 

[A.] Because Roland U.S. is a 100 percent owned subsidiary of Roland Japan, the profit it made will be returned to Roland Japan in the form of dividends.

 

Mr. Tamura’s conclusory testimony provided no basis for the jury to find that Roland U.S.’s profits inherently flowed to Roland during the relevant period . . . .   

 

Roland argues that even if it is not entitled to the lost profits of Roland U.S., it is still entitled to that portion of the award comprising its own lost profits. However, the jury rendered a single lost profits award that did not separate Roland’s profits from Roland U.S.’s. . . . And we cannot say that the jury necessarily accepted or would have accepted [Roland’s expert] Ms. Heinemann’s alternative calculation accounting for only Roland’s own lost profits. . . (pp. 25-27).

As I note in my forthcoming book on IP Remedies, the formalism embodied in the U.S. rule that “a patentee may not claim, as its own damages, the lost profits of a related company” is somewhat different from the standards applied in some other countries, including the U.K., Spain, and Japan.

As for reasonable royalties, Roland’s expert relied on three licenses to support a $20 per drumhead royalty for the two drum patents asserted at trial (’458 and ’535).  Two of these, however, licensed ’458 and a patent not asserted at trial, and the third licensed ’535 and three other patents not asserted at trial. Moreover, each covered “only single-layer mesh drumheads, in contrast to the double-layer mesh technology at issue in the parties’ hypothetical negotiation.” In the court’s view, the expert’s testimony did not sufficiently account for these differences.  Moreover, one of the licenses was in settlement in litigation, and while this is not disqualifying in and of itself, there needed to be testimony addressing this contextual difference as well (pp. 28-32).  The expert also testified to a $2 per cymbal royalty for the cymbal patents, but the expert included in her calculation “pre-design cymbal sales that were not found by the jury to infringe” (pp.32-33).  The court also notes, however, that the district court allocated very little time for the testimony on damages, because of pre-existing travels plans on the part of the expert and a juror, and so it concludes that “the fairer option is to afford Roland a new trial on both lost profits and reasonable royalties” (p.34).

The court rejects the defendant’s argument that Roland was equitably estopped from enforcing its patents, because there was conflicting testimony concerning whether Roland indicated in 2011 that it wasn’t going to enforce the cymbal patents (pp. 35-36).  It agrees with the plaintiff, however, that there were insufficient grounds to deny prejudgment interest:

We have previously explained that an “award of prejudgment interest is ‘the rule, not the exception.’” Energy Transp. Grp., Inc. v. William Demant Holding A/S, 697 F.3d 1342, 1358 (Fed. Cir. 2012) (citation omitted); see also Gen. Motors Corp. v. Devex Corp., 461 U.S. 648, 655–57 (1983); 35 U.S.C. § 284. Still, “it may be appropriate to limit prejudgment interest, or perhaps even deny it altogether, where the patent owner has been responsible for undue delay in prosecuting the lawsuit.” Gen. Motors, 461 U.S. at 657. In order to “show that delay was undue, a defendant must, at least generally, show that it was prejudiced.” Kaufman, 34 F.4th at 1375.

 

            The district court denied prejudgment interest after finding that “Roland knew of inMusic’s accused cymbals as early as 2011, yet Roland waited until 2015 to raise complaints about inMusic’s cymbals’ configuration, and waited until August 2016 to sue.” . . . The court concluded that Roland’s delay was undue and “economically prejudiced inMusic because inMusic expanded its cymbals by incorporating them into newly launched kits while under the understanding that Roland had approved the redesigned cymbals during a call with Mr. Gill in 2011.” Id. The court reasoned that “had Roland not sat on its hands during this years-long delay, inMusic could have taken remedial steps and could have dedicated resources to other non-infringing designs.” Id. For two separate reasons, however, the district court abused its discretion in denying prejudgment interest . . . .

 

First, the finding of undue delay based on the alleged call with Mr. Gill cannot be squared with the district court’s findings and analysis of the evidence in its order denying inMusic’s equitable estoppel defense. . . . Though the district court might permissibly rely on other evidence to find that Roland independently learned of the redesign prior to prosecuting its suit against inMusic (and hence, there could be undue delay to justify denying prejudgment interest, but no misleading conduct for purposes of equitable estoppel), the court cited no such evidence (or any evidence) in denying prejudgment interest. On remand, the court may not again limit or deny prejudgment interest to Roland absent analysis of how other evidence in the trial record supports a finding of undue delay.

 

Second, even if Roland knew of the redesign, the district court relied on an incorrect standard for prejudice. The court reasoned that inMusic was prejudiced because it expanded its cymbal line before Roland brought suit, whereas inMusic “could have” instead explored noninfringing cymbal designs . . . . But speculation about what inMusic “could have [done] to not infringe” the Cymbal Patents, without “evidence that it would have” done so, is insufficient to demonstrate prejudice. Kaufman, 34 F.4th at 1375. . . . We remand for the district court to resolve this factual dispute—specifically, what inMusic would have done absent any delay by Roland—and to determine whether inMusic demonstrated prejudice sufficient to limit or deny prejudgment interest to Roland.²²

 

²²  The district court’s denial of prejudgment interest was also based solely on Roland’s purported knowledge of the accused cymbals and delay in prosecuting its suit with respect to infringement of the Cymbal Patents. On remand, to the extent that Roland seeks, and the jury awards, separate damages for infringement of the Drum Patents, the district court should not limit or deny prejudgment interest with respect to that category of damages (pp. 37-39).

EWHC Awards £13.4 Million in Patent Damages

The decision of the Patents Court (England and Wales), authored by Miss Charlotte May KC sitting as Deputy High Court Judge and handed down on September 27, is Geofabrics Limited v. Fiberweb Geosynthetics Limited [2022] EWHC 2363 (Pat.).  Claire Wilson and Eden Winslow have published a detailed summary on EPLaw and on the Kluwer Patent Blog, which I commend to readers’ attention.  Although, with one exception noted below, the legal issues in the case seem fairly straightforward, the factual issues relating to the appropriate lost profits damages for the infringement of the plaintiff’s patent (for a geosynthetic railway track bed liner) were complex.  The final paragraph gives you a sense of the painstaking analysis the court went into to determine the appropriate award (ultimately calculated by the parties, following the court’s factual conclusions): 

284. For the reasons set out above, I have concluded as follows:

 

i) In the counterfactual, there would not have been an exclusive distribution agreement between the Claimant and [third party distributor] Aqua for the sales of [plaintiff’s product] Tracktex to Network Rail.

ii) All sales of [accused product] Hydrotex 2 in the actual would have been sales of Tracktex in the counterfactual, and the Claimant would have had capacity to make them.

iii) The price of Network Rail sales should be based on the 2011-2012 Network Rail price matrix, with an annual price increase of 3.25% applied every two years.  The price of non-Network Rail sales should be based on the 2011-2012 Aqua price matrix, with an annual price increase of 2% applied  every year. The pricing matrices should be calculated on the basis of number of rolls.  There should not be an additional rebate in respect of the non-Network Rail sales beyond that included with the pricing matrix.

iv) The Claimant’s damages should be reduced by a figure of £189,008 to reflect the savings that it made from redundancies that would not have occurred in the counterfactual.

v) Future losses should be calculated by reference to a period of price depression over two years and based on Mr Chapman’s approach to estimating the ASP.

 

vi) The Claimant cannot recover damages based on the £6.50 Crossrail price, which is too remote.

vii) The appropriate interest rate is 2% above base.

 

285. The parties will need to carry out calculations in accordance with my findings. I will hear further argument on this if necessary, and in due course as to the appropriate form of order.

As stated above, the legal issues for the most part seemed fairly straightforward; the plaintiff has the burden of proving but-for causation (“that ‘but for’ the infringement, the damage would not have occurred”), but “cannot recover damages for losses that are too remote” (paras. 69-70). The court also has “discretion to award simple interest for such period and at such rate as it thinks fit” (para. 78).  The part that is less straightforward relates to the “loss of chance” doctrine, which the court (after summarizing other cases and authorities) boils down to the following:

 

77. These authorities make clear that the “loss of chance” analysis applies if the uncertainty on quantum rests on hypothetical future events or the actions of a third party. By contrast, where the uncertainty on quantum rests on what the claimant hypothetically would have done, then this is determined on the balance of probabilities.

In the present case, the application of the rules summarized in para. 77 resulted in the court rejecting one of the defendant’s arguments for a damages reduction.  Specifically, there was testimony that, in the real world, the plaintiff entered into an exclusive distribution agreement with Aqua “to avoid the risk of Aqua purchasing Hydtrotex 2 instead of Tracktex and to maintain good relations with Aqua” (para. 33).  The plaintiff argued that the exclusive distribution agreement was less profitable for the plaintiff than it would have been to deal directly with end customers.  The defendant countered that the plaintiff would have entered into an exclusive distribution agreement with Aqua even in the absence of the infringement, but the court disagrees:

 

80. The Defendant argues that the Claimant would have entered into an exclusive distribution agreement with Aqua in the counterfactual, either (i) because the Claimant would have offered it or (ii) because Aqua would have demanded it. The parties agree that I should assess (i) as a balance of probabilities because it is dependent upon what the Claimant would have done and (ii) as a % chance because it is dependent upon the hypothetical actions of a third party. That is consistent with the case law that I have set out above. . . .

 

111. . . . I reject the Defendant’s arguments that the Claimant would have offered an exclusive distribution agreement to Aqua in respect of all Tracktex sales. On the balance of probabilities, the Claimant would have continued the supply arrangements that were in place immediately before Hydrotex 2 came onto the market, which comprised direct supply to Network Rail and exclusive distribution via Aqua to contractors, specific projects, and non-Network rail customers. . . .

 

118. For all these reasons, there was no material before me upon which I could conclude that there was any real chance that Aqua would have demanded an exclusive distribution agreement, and I reject this part of the Defendant’s case also.

 

119. I should note for completeness that Mr Hicks also argued that even if there was a chance that Aqua would have demanded an exclusive distribution agreement in the counterfactual, then the Claimant would have refused that demand on the balance of probabilities. It was not put to Mr Donald in cross-examination that the Claimant would have agreed to an exclusive distribution agreement if Aqua had demanded one, and there was no other evidence to support this part of the  Defendant’s case. Based on what I have held above, I do not have to decide this point. However, in case it matters, I would have held that it is more likely than not that the Claimant would have refused the demand if it had been made. This is essentially for the same reasons that I have given above in support of my view that the Claimant would not have been likely to offer an exclusive distribution agreement. The Claimant would not have needed to accede to such a demand, and it would not have been in its commercial interest to do so.

I’ll stop with this, and note only (as I have noted before, see here, here, and here, as well as the coauthored "Lost Profits" chapter from Patent Remedies for Complex Products, pp. 71-72) that although damages for loss of chance are available, under some circumstances, in IP disputes in (at least) the U.K., Canada, and France, to my knowledge they are not available in IP disputes in the U.S. (though a few U.S. states award loss of chance damages in medical malpractice cases).  On its face, the unavailability of such damages under U.S. law seems (to me) likely to be suboptimal, but I must confess that this is a theoretical matter that I have yet to devote sufficient attention to.  There is a established law-and-economics literature on the subject, including for example this recent article by Professor Robert Rhee, that I need to familiarize myself with, and would welcome any insights or further materials on point from readers.

Federal Circuit Reverses Denial of Prejudgment Interest

The case is Kaufman v. MicrosoftCorp., precedential decision by Judge Taranto, joined by Judges Dyk and Reyna.  Most of the opinion is devoted to other issues, most importantly claim construction, as discussed by Dennis Crouch on Patently-O.  The Federal Circuit affirms on liability, but on the plaintiff’s cross-appeal it reverses the district court’s denial of the plaintiff’s motion for an award of prejudgment interest.   From the opinion:

  

           Damages awarded in patent-infringement cases must be “adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.” 35 U.S.C. § 284 (emphases added). The Supreme Court has explained that Congress intended that “prejudgment interest should ordinarily be awarded where necessary to afford the plaintiff full compensation for the infringement.” General Motors Corp. v. Devex Corp., 461 U.S. 648, 654 (1983). “In the typical case an award of prejudgment interest is necessary to ensure that the patent owner is placed in as good a position as he would have been had the infringer entered into a reasonable royalty agreement.” Id. at 655. The Court added, however, that because interest is “fixed by the court,” a district court has some discretion to decide whether to award prejudgment interest, and “it may be appropriate to limit prejudgment interest, or perhaps even to deny it altogether, where the patent owner has been responsible for undue delay in prosecuting the lawsuit,” among other potential, unnamed circumstances. Id. at 656–57. In any case, “some justification” is required to withhold prejudgment interest. Id. at 657.

 

            The district court provided two rationales for denying prejudgment interest to Mr. Kaufman: first, that the jury verdict “subsumed interest,” and second, that Mr. Kaufman was responsible for “undue delay” in bringing the lawsuit, causing prejudice to Microsoft. Prejudgment Interest Order, 2021 WL 260485, at *1. Neither rationale is supportable on the record here.

 

            The jury verdict cannot reasonably be understood to include interest. . . .

 

            [The jury instructions] stated that “the parties have agreed that a reasonable royalty in this case should take the form of a single lump-sum payment for the life of the patent, discounted to present value.” Id. That mention of “present value” did not suggest to the jury that its calculation should add interest accruing from the 2011 hypothetical negotiation date to the present; rather, it was a reminder that—consistent with the expert testimony, J.A. 3920–22—the lump-sum royalty payment should incorporate the hypothetical future royalty payments by using a discount rate to calculate the 2011 value of the stream of such payments, hence decreasing their numeral amounts. . . .

 

            The district court also erred in concluding that Mr. Kaufman was responsible for undue delay justifying denial of prejudgment interest. For one, the fact that Mr. Kaufman did not sue for five years after he became aware of Microsoft’s potential infringement does not alone justify a finding of undue delay. . .  (pp. 19-22, emphases in original).

The court goes on to note that Microsoft did not show that it was prejudiced by the five-year delay.  Among other things, the jury didn’t credit Microsoft’s evidence that it would have designed around the patent, or that its proposed noninfringing alternative was acceptable.

Overall, this is not a surprising outcome.  Prejudgment interest is necessary to restore the patentee to the position it would have occupied, but for the infringement.  Preferably it should be compounded to properly take into account the time value of money, but to my knowledge there is no fixed practice on this issue in the U.S., nor on the appropriate interest rate.  For discussion of pre- and postjudgment interest in patent litigation in the U.S. and elsewhere, see Colleen V. Chien, Jorge L. Contreras, Thomas F. Cotter, Brian J. Love, Christopher B. Seaman & Norman V. Siebrasse, Enhanced Damages, Litigation Cost Recovery, and Interest, in Patent Remedies and Complex Products: Toward a Global Consensus 204, 254 (C. Bradford Biddle, Jorge L. Contreras, Brian J. Love & Norman V. Siebrasse eds. 2019), available here.

Also on Friday, the court vacated decision of the Eastern District of Texas dismissing a claim for a declaratory judgment of noninfringement and invalidity, and remanded for further proceedings.  See Mitek v. United Services Automobile Ass’n.