Monday, May 2, 2022

Federal Circuit Reverses Enhanced Damages Award, Affirms Reasonable Royalty

The case, decided this past Friday, is Sunoco Partners Marketing & Teminals L.P. v. U.S. Venture, Inc., precedential opinion by Judge Prost, joined by Judges Reyna and Stoll.  The patents at issue “describe a system and method for blending butane with the gasoline at a point close to the end of the distribution process: immediately before being distributed to the tanker trucks that take gasoline to consumer gas stations” (p.3, quoting the district court).  Among the issues presented are the application of the experimental use exception to the on-sale bar under U.S. law and claim construction.  I will pass over those and discuss the damages issues, first Venture’s appeal from an award of enhanced damages and second Sunoco’s cross-appeal relating to the type and amount of actual damages.

The district court concluded, and the Federal Circuit affirms, that the defendants had infringed claim 17 of U.S. Patent No. 6,679,302 (reciting “a method for blending gasoline and butane at a tank farm”) and claim 31 of U.S. Patent No. 7,032,629 (reciting “a computer-implemented method for blending a butane stream and a gasoline stream”).  The court awarded a $2 million royalty, which it trebled for a $6 million award.  On the issue of enhancement, the Federal Circuit notes that the Read v. Portec factors, one of which refers to “whether the infringer investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed,” can be relevant.  (Under Patent Act § 298, “[t]he failure of an infringer to obtain the advice of counsel with respect to any allegedly infringed patent, or the failure of the infringer to present such advice to the court or jury, may not be used to prove that the accused infringer willfully infringed,” but the defendant is free to offer such evidence to show that it had a good-faith belief, and I believe that is what happened here.)  The district court concluded nonetheless that the opinion letter by attorney John Manion “does not show that venture had a good-faith belief that it was not infringing.”  In this regard, claim 17 of the ‘302 Patent recites, among other elements, that the method involves “blending the butane and gasoline streams, at the tank farm, to form a blend” and “dispensing the blend to gasoline transport vehicles using a dispensing unit located at a rack.”  (A “tank farm” is a storage facility or terminal, and a “rack” is “the location where gas is dispensed to trucks.”)  In providing a noninfringement opinion, the attorney “relied on the fact that Venture’s system inserted an intermediate tank between the blending unit and the rack,” which the district court understood as suggesting that the attorney “did not know the blended gasoline in Venture’s system could still flow immediately from the intermediate tank to the rack where it would be dispensed” (p.24).  But this was a misunderstanding of the attorney’s knowledge:


            But as Venture demonstrates, Manion’s testimony makes clear that he did indeed understand this point. E.g., J.A. 7467 (“As an engineer, I realized that there was product flowing in to the tank and there’s product flowing out of the tank, and it’s conceivable that that could be happening simultaneously.”); J.A. 7473 (“[A]gain, the proposed system was blending to a tank; and as we talked about before, you know, it’s very common for you to be filling a tank and emptying a tank at the same time. There’s nothing that says you can’t drain a tank while you’re filling a tank. . . . So, it’s very normal to be filling and dispensing at the same time.”). The district court disregarded that testimony because of other testimony that it saw as indicating that Manion “had never heard of the type of tank that Venture used between the blending instrument and rack.” Post-Trial Op., 436 F. Supp. 3d at 1134. But the record shows that Manion was merely confused by an unfamiliar term—“online rack tank”—that Sunoco’s attorney was using. E.g., J.A. 7459 (“I’m sorry, you said an online rack tank? . . . . I don’t know what an online rack tank is. . . . I would have to figure out what that means.”); J.A. 7468 (“Like I said previously, I’d never heard of an online rack tank.”).


            This error also undermines other grounds the district court relied on for enhancement (pp. 24-25).

On the cross-appeal, the district court concluded that Sunoco had proven the absence of an acceptable noninfringing alternative, it had not proven the amount of its purported lost profits.  Specifically, Sunoco had argued that, but for the infringement, Venture would have signed a butane-supply agreement with Sunoco under which the latter would have earned about $64 million, which the parties would have split 50-50.  According to the district court and the Court of Appeals, however, this figure “reflect[s] a bundle of goods and services beyond just the patented invention” and thus “more than just the damages Sunoco incurred from Venture’s agreement” (p.27).  I found this part of the appellate opinion a little obscure, so I looked at the district court opinion (436 F. Supp. 3d at 1128), and if I understand correctly that court concluded that the infringement was either not the cause-in-fact of the failure to conclude a supply agreement, or that if it was the proposed damages nevertheless were excluded under Rite-Hite v. Kelley's limitation on awards of damages for convoyed (collateral) sales:

            . . . the problem with this analysis is that neither butane nor blended gasoline is the patented invention. And neither butane nor blended gasoline constitute a “functional unit” with the patented invention. Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1549–50 (Fed. Cir. 1995) (explaining that in cases in which “the entire market value” of the patented and unpatented components are considered for a damages calculation, “the unpatented and patented components together were considered to be components of a single assembly or parts of a completed machine, or they constituted a functional unit”). After all, Sunoco does not even require their blending partners to use Sunoco-supplied butane. (Trial Tr. at 536:13–16.) That $31.585 million figure represents more than just the damage Sunoco incurred from Venture's infringement. As Venture's expert, Dr. James Malackowski testified, Sunoco's butane supply agreements do not translate into the value of the patent. (See id. at 1747:15–1748:1.)

As for a reasonable royalty, the court affirms the district court’s conclusion that $2 million was about right:

            Venture’s reasonable-royalty analysis . . . was based on the difference between using a manual blending system and using Sunoco’s automated system to blend butane—calculating a $5.6 million royalty as the maximum royalty the parties would have hypothetically agreed upon. . . . The district court then credited the opinion of Venture’s expert that a more likely royalty would be a $2 million lump sum, and it checked that figure against a $1.714 million figure calculated from a prior license Sunoco granted to the previous owner of its patents, Texon, after buying Texon’s blending business. . . . Because we see no clear error or abuse of discretion, we affirm the reasonable-royalty award. . . (p.28).

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