The nonprecedential opinion, released last Thursday, is Roland Corp.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).
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