So, I must confess—on Friday, January 16, I published a short post about my newly-published book, Remedies in Intellectual Property Law. I also stated that “this morning the Federal Circuit released a 59-page nonprecedential (!) opinion in Sunoco v. Powder Springs Logistics dealing with, among other things, damages; I'll probably have something to say about it next week.” I then, apparently, forgot entirely about Sunoco until this morning, when I saw that Dennis Crouch had published a post titled Whole or Apportioned: Sunoco Asks the Supreme Court to Rethink Lost Profits, concerning Sunoco’s petition for certiorari. The petition poses the following two questions:
1. Whether the Federal Circuit’s standard for recovery of lost profits damages violates 35 U.S.C. § 284.
2. Whether Rule 702 requires courts to exclude expert testimony when record evidence is contrary to a critical fact upon which the expert relied, as the Federal Circuit holds, or whether juries should determine whether facts upon which an expert relied are true, as all other Circuits have held.
The principal issue presented by Question 1 is whether the district and appellate courts erred in holding that Sunoco was not entitled to present its lost profits argument to the jury.
The basic facts are these. Sunoco and Powder Springs both competed for a contract to be awarded by Colonial Pipeline Company, relating to the provision of services pertaining to the blending of gasoline with butane. Sunoco offered its standard contract, the Butane Supple Agreement (BSA), under which it obtains either a 40/60 or 50/50 share of the profits a customer earns on sales of gasoline gallons created. Under those contracts, as described by the Federal Circuit, “Sunoco (1) constructs and operates its patented system at a licensee's gasoline terminal, (2) supplies butane needed for the system, and (3) grants a limited license to its patents, all in exchange for sharing the licensee's profits from selling the extra gasoline created using the patented inventions. Also under the BSAs, Sunoco performs services related to (1) making and using the patented inventions, such as designing, engineering, constructing, and maintaining the blending systems; and (2) providing regulatory oversight support, maintenance and support services, risk management, customer services, and financial services related to butane hedging, among others. Additionally, Sunoco's BSAs include the use of its proprietary blending algorithm with its patented system.” (Slip op. at 13-14.) Powder Springs won Colonial's business, however, but ultimately was found to infringe one of Sunoco’s patents. While there were other issues on appeal, both substantive (patent eligibility) and damages-related (e.g., whether the lower court erred in not awarding a damages enhancement), the principal damages issue of interest here is whether Sunoco was entitled to present expert testimony that it would have made a profit on the Colonial business, in the amount of at least $150.3 million, but for the infringement. (Instead, based on the district court’s evidentiary rulings, the jury awarded a reasonable royalty in the amount of about $12 million.)
The Federal Circuit held that it was not an abuse of discretion to exclude Sunoco’s evidence pertaining to its lost profits theory, because Sunoco (1) had not apportioned these purported damages to account for the other services provided under the BSA, or shown that the patent in suit drove the demand for a BSA contract; and (2) did not satisfy what is sometimes thought of as an alternative method of apportionment under Mentor Graphics Corp. v. EVE-USA, Inc., 851 F.3d 1275 (Fed. Cir. 2017), under which proof of the four Panduit factors suffices to satisfy apportionment. (The Panduit factors, as originally set forth in Panduit Corp. v. Stahlin Bros. Fibre Works Inc., 575 F.2d 1152 (6th Cir. 1978), and subsequently adopted by the Federal Circuit for use in establishing lost profits, are “(1) demand for the patented product, (2) absence of acceptable noninfringing substitutes, (3) his manufacturing and marketing capability to exploit the demand, and (4) the amount of the profit he would have made.”)
So perhaps I should say a word first about Mentor Graphics. In fact, I’ll just quote what I say about that case in my aforementioned book at pages 146-47:
The plaintiff and defendant were the only two competitors in the market for a type of emulator system for which there was one single customer, Intel. The plaintiff had a patent on a process and apparatus essential to the functioning of its emulator systems, and for which there were no noninfringing alternatives (although the emulator systems incorporated “thousands of [other] hardware and software features” as well). The defendant’s emulator systems infringed the patent; and, the defendant conceded, but for that infringement, the plaintiff would have sold Intel additional emulator systems on which the plaintiff would have earned approximately $36 million. The defendant argued, however, that the patentee was obligated to “further apportion its lost profits to cover only the patentee’s inventive contribution.” Rejecting this argument, the Federal Circuit affirmed the judgment in favor of the plaintiff, stating:
While there may have been other features of the emulator that were important to Intel, only Mentor could sell Intel an emulator with all the features it required. Because Mentor had proprietary rights to the only means of satisfying this demand by Intel, because no other party could sell Intel an emulator with those two components, no one else had the right to sell emulators to Intel that satisfied all of Intel's requirements. In short, for these particular sales, no other party could satisfy the Panduit factors, making it impossible for multiple patentees to obtain lost profit damages for the same sales.
The court cautioned, however, that cases like this may be rare: “[w]ith such multi-component products, it may often be the case that no one patentee can obtain lost profits on the overall product—the Panduit test is a demanding one.” Nevertheless, “when the Panduit factors are met, they incorporate into their very analysis the value properly attributed to the patented feature.” Simply put, the but-for principle controls in the (perhaps unusual) cases in which infringement of a single component deprives the IP owner of sales of a multicomponent product.
In affirming the district court, the Federal Circuit panel in relevant part wrote (slip op. pp. 49-53):
Sunoco contends that Dr. Ugone established a prima facie case of “but for” causation for lost profits by opining on how the Panduit factors were met. As part of these opinions, Dr. Ugone calculated that Sunoco would have averaged a per-gallon profitability that ranged from $0.25/gallon (from a 40/60 profit-share) to $0.28/gallon (from a 50/50 profit-share) but for infringement, resulting in lost profits of $150.3 to $166.7 million. . . .
The district court did not abuse its discretion in striking Dr. Ugone's lost profits opinions under the Panduit factors for the same reasons discussed above related to his opinion on reasonable royalty and comparable licenses. Dr. Ugone used the full profit-share of the unapportioned BSAs to calculate Sunoco's lost profits. While Sunoco may be able to show demand for its BSAs, the BSAs are not coextensive with the asserted patents and instead encompass more services and products than the patented inventions. Thus, there was no prima facie showing under Panduit factor one—demand for the patented product—or Panduit factor four—the amount of profit Sunoco would have made— without apportioning the value of the patents from the other services. . . .
In [Mentor Graphics], we acknowledged that “apportionment is an important component of damages law generally, and we believe it is necessary in both reasonable royalty and lost profits analysis.” We then narrowly held (1) that “[i]n this case, apportionment was properly incorporated into the lost profits analysis and in particular through the Panduit factors,” and (2) “that on the undisputed facts of this record, satisfaction of the Panduit factors satisfies principles of apportionment: Mentor's damages are tied to the worth of its patented features.” Id. at 1288. We also emphasized that Mentor was “a highly factual case, and [the defendant] did not appeal any of the jury's fact findings relating to damages.” Id. at 1289.
There are no undisputed facts on the Panduit factors here. Indeed, Magellan contests both Panduit factors one and two. And again, as to factor one, Dr. Ugone did not start his analysis with demand for the claimed inventions; instead, he and Sunoco sought to conflate demand for the claimed inventions with the demand for the BSAs as a whole. But they cannot start with the demand for undisputedly more than the patented inventions—indeed, for an entire basket of services—to base patent damages on. See, e.g., VirnetX, 767 F.3d at 1326 (“[A] patentee must take care to seek only those damages attributable to the infringing features.”).10
10/ As to factor 2, Magellan points out that following the jury's verdict of infringement, Powder Springs switched to a non-infringing manual blending operation, indicating that there were acceptable non-infringing alternatives.
My take on this is that there were two possibilities at the time the parties were vying for the Colonial contract. First, it may be that Colonial would have considered an offer from Powder Spring that contemplated the use of a noninfringing manual blending operation to be more attractive than signing a BSA with Sunoco, at the price and for the services Sunoco was offering. In that case, the infringement didn’t cost Sunoco a sale, but Sunoco should get a reasonable royalty that reflects some portion of the benefit Powder Spring derived from the use of the infringing method. Alternatively, it may be that Colonial would have rejected such an offer and gone with Sunoco, in which case the infringement did cost Sunoco a sale, and Sunoco should recover the entire profit it would have made on that BSA, even though the BSA included more than just a license to the one patent that ultimately was in suit. What I can’t tell from the Federal Circuit opinion alone is what the state of the evidence was on noninfringing alternatives before the jury verdict. If there was conflicting evidence on this issue, I would be inclined to think that the plaintiff’s expert’s opinion should have been admissible; but otherwise, not. In other words, in my view, from an economic perspective the presence of an acceptable noninfringing alternative should be dispositive on the issue of whether the infringement caused the plaintiff to lose the contract with Colonial. Also relevant, however, as a practical matter, is the burden of proof. Under U.S. law, it’s the patentee’s burden to come forward with evidence of the absence of acceptable noninfringing alternatives. In that sense, I guess, one could say that we presume that there are acceptable NIAs, absent evidence to the contrary—though if the plaintiff does prove that there are no acceptable NIAs on the market, the burden shifts to the defendant to prove that an NIA nevertheless would have been available (see my book, p.143; one could debate, moreover, where the burden of proof should lie, as a matter of policy).
For this reason, I tend to think that all of the discussion about apportionment and “demand for the patented invention” tends to obscure the relevant economic question. Again, consider Mentor Graphics. That case was correctly decided, in my view, because the patentee was able to prove that but for the infringement, Intel would have selected Mentor Graphics over EVE-USA. Mentor therefore was entitled to the entire profit it would have earned on that lost sale, without any apportionment or reduction, even though the Mentor Graphics emulator incorporated many other valuable components. And while you could say, as the Federal Circuit did, that in a case like Mentor Graphics apportionment is already taken into account by the Panduit factors, I actually think it might be more accurate, or at least less confusing, simply to say that the relevant question is whether the patentee has adequately proven that but for the infringement it would have made the sale in question. I therefore have disagreed with critics of Mentor Graphics who would have required some further apportionment of the lost profit awarded in that case. In Sunoco, on the other hand, I would tend to conclude that if (but only if) the patentee didn’t adequately carry its burden of proving the absence of NIAs, the case was rightly decided.
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