September 01, 2011

Siemens Medical Solutions USA, Inc. v. Saint-Gobain Ceramics & Plastics, Inc.

In recent years, The United States Court of Appeals for the Federal Circuit (“the Court”) has published several opinions that address the quantification of damages in patent infringement cases, more specifically relating to the quantification of reasonable royalty damages. Most of these opinions addressed insufficient evidence presented in support of damages awards. Recently, however, the Court published an opinion addressing issues relating to the quantification of lost profits damages in a patent infringement case. While this case does not create new precedent in the area of damages, it nevertheless reaffirms and clarifies issues that typically arise in cases where lost profits are at issue.

In Siemens Medical Solutions USA, Inc. v. Saint-Gobain Ceramics & Plastics, Inc., a jury awarded the plaintiff lost profits but the district court, in post trial motions, amended a portion of the jury award by excluding certain manufactured units in which the evidence did not support lost profits damages and the district court did not apply a reasonable royalty to these excluded manufactured units.

In addressing the district court’s consideration of lost profits the Court addressed the analysis of acceptable non-infringing substitutes and the appropriateness of including in the royalty base products that were manufactured but not actually sold.1

Background

At issue in Siemens was a patent that related to scintillator crystals that are used in Positron Emission Tomography Scanners (“PET Scanners”).2 Siemens holds the rights to U.S. Patent No. 4,958,080 (“the ‘080 patent”), which relates to radiation detectors comprising a LSO scintillator crystal and a photodetector.3 Saint-Gobain’s PET Scanners used scintillator crystals comprising a different chemical makeup, LYSO, but nevertheless infringed the ‘080 patent.4 Saint-Gobain sold infringing scintillator crystals to Philips Medical Systems (“Philips”), which manufactured and sold infringing PET Scanners. The accused PET Scanners were sold in direct competition with Siemens’ PET Scanners.

Procedural History

In April of 2007, Siemens filed suit against Saint-Gobain for infringing claims 1 and 2 of the ‘080 patent. At trial, the district court instructed the jury that if it found infringement it could consider both reasonable royalty and lost profits damages. The jury found the ‘080 not invalid and infringed, and awarded Siemens damages of $52.3 million (“the Jury Award”) based on a lost profits damages theory. Saint-Gobain filed a post-trial motion for a judgment as a matter of law or a new trial, challenging, among other issues, the district court’s decision to permit lost profits damages and for the district court to exclude part of the jury award due to speculation over the number of PET Scanners actually sold before the patent expired. In response to the post trial motions, the district court did not eliminate lost profits damages but it did reduce the award to $44.9 million (“the District Court Award”) to only account for documented sales actually made before the patent expired.5

Saint-Gobain appealed the district court’s denial of its motion, by challenging, among other things, the district court’s award of lost profits as the measure of damages. Siemens cross-appealed the reduction of the Jury Award.

The remainder of this article addresses the basis for the award of lost profits as the measure of damages and how the Court addressed the need to compensate the patent holder for the defendant’s infringement, recognizing that the district court eliminated lost profits in connection with a portion of Saint-Gobain’s infringing acts.

Recovery of Lost Profits

Before the Court, Saint-Gobain argued that the district court erroneously allowed the jury to consider lost profits damages because Siemens failed to demonstrate that it would have made Saint-Gobain’s sales “but for” the infringement. The Court reviewed de novo whether lost profits were legally compensable. Citing Wechsler v. Macke Int’l Trade, Inc., the court stated that “[t]o recover lost profits, the patent owner must show causation in fact, establishing that but for the infringement, he would have made additional profits.”6 The Court further stated that, in general, the plaintiff must prove the following four factors (commonly referred to as the “Panduit Factors”) to establish a claim for lost profits:

1 Demand for the patented product

2 An absence of acceptable non-infringing substitutes

3 The manufacturing and marketing capability to exploit the demand

4 The amount of profit the patent owner would have made7

At issue in the present case was whether there was an absence of acceptable non-infringing substitutes (Panduit factor #2). Specifically, Saint-Gobain presented two arguments in its efforts to establish that there were acceptable non-infringing substitutes. First, Saint-Gobain sought to establish that a three-supplier market existed for PET Scanners (including a supplier of a non-infringing PET Scanner) and therefore an acceptable non-infringing alternative existed for PET Scanner buyers. Saint-Gobain also argued that it had alternatives and could have switched technologies and manufactured an acceptable non-infringing substitute.

Support for Two-Supplier v. Three-Supplier Market

Saint-Gobain claimed that the market for PET Scanners was comprised of three suppliers, namely Siemens, Saint-Gobain, and General Electric (“GE”). Saint-Gobain claimed that GE’s PET Scanners contained a different technology (“BGO”) and were non-infringing alternatives.8 Saint-Gobain claimed that the GE PET Scanners were acceptable non-infringing alternatives since “Siemens and GE actively marketed [PET Scanners] to the same customers for the same purpose and that most of those customers elected to purchase GE’s BGO PET Scanners.”9

Siemens argued that the evidence presented at trial supported that although there may have been three PET Scanner suppliers, the market was nevertheless segmented into two distinct market segments: a higher end segment and a lower end segment. The higher end segment consisted of only two suppliers, Siemens and Saint-Gobain, selling LSO and LYSO PET Scanners, respectively. There was evidence presented to support that the non-infringing BGO PET Scanners were a cheaper, inferior alternative to LSO and LYSO technology and, therefore, not an acceptable alternative, particularly to those that desired a high-end PET Scanner. Citing Crystal Semiconductor, the Court stated that accurately defining a two-supplier market “requires an analysis which excludes alternatives to the patented product with disparately different prices or significantly different characteristics.”10 The district court credited testimony from Siemens’ head of marketing and sales who testified that BGO was an inferior technology and that LSO PET Scanners were purchased by customers who wanted the “highest performance and high technology.”11 Siemens’ head of marketing and sales testified that the BGO PET Scanners had poor image quality and were purchased by customers on a tight budget.12 The district court also credited Saint-Gobain documents and testimony of a two-supplier, “high-end PET Scanner market.”13

The district court did acknowledge that while Siemens lost some sales to GE there was not enough evidence to support the notion that GE’s BGO PET Scanner was an acceptable non-infringing alternative, particularly to customers who purchased Saint-Gobain’s high-end PET Scanners.

Saint-Gobain’s Non-infringing Substitute Claim

Saint-Gobain also claimed that it could have, and would have, switched technologies and made acceptable non-infringing PET Scanners containing lanthanum bromide (“LaBr3”). The issue before the Court was whether LaBr3 PET Scanners were “available.” Citing Micro Chem., Inc. v. Lextron, Inc., the Court stated that “[a] substitute need not be on sale at the time of infringement, but if the substitute cannot be commercialized, ‘readily,’ then it is not available for purposes of a lost profits determination.”14 The district court noted that the evidence supported LaBr3 being “at least a year and a half behind LYSO in development.”15 The district court also acknowledged several disadvantages with LaBr3 technology. Based on the record, the Court determined “the evidence reasonably supported a finding that LaBr3 was not an available alternative.”16

The Court’s Decision to Allow Lost Profits Damages

The Court stated that “[b]ecause of the substantial evidence in the record supporting the elements required for an award of lost profits, we find no legal error in the district court’s decision to permit the jury to consider lost profits damages.”17

Siemens’ Cross-Appeal of the Reduction of the Jury’s Damage Award

Another issue addressed by the Court was whether a royalty is due on a product that was never sold or had not yet been sold. Siemens states in a brief that “35 U.S.C. § 271 makes clear that it is an act of infringement to make, use, or offer to sell a patented invention, even if the infringing products are not actually sold.”18

The jury awarded lost profits based on sales of 79 PET Scanners. Of the 79 PET Scanners, there was proof of sale for only 61 of those PET Scanners. Although Saint-Gobain had supplied Phillips with enough crystals to manufacture 79 PET Scanners, and the evidence indicated that 79 PET Scanners were likely manufactured, there was insufficient evidence that those PET Scanners were actually sold. The district court adjusted the Jury Award to reflect sales of only 61 PET scanners and excluded lost profits on the remaining 18. Siemens argued that there was evidence to support lost profits damages on all 79 PET Scanners but that at a minimum they should be awarded reasonable royalty damages for the 18 PET Scanners if lost profits were not awarded on those PET Scanners.19 The Court determined that the evidence presented was insufficient to support lost profits damages relating to the 18 PET Scanners in question but that the district court erred in excluding those PET Scanners altogether.

The Court vacated a portion of the damages award and remanded for the district court to consider a reasonable royalty for the additional 18 infringing PET Scanners, acknowledging that “one who ‘makes’ a patented invention without authorization infringes the patent…[and that] the district court failed to consider whether any ‘damages adequate to compensate for infringement’ were owed to Siemens.”20 The damages on these 18 PET Scanners will be added to the $44,937,545 in lost profits. The Court instructed the district court to rely on the present record or elect to take additional expert testimony on a reasonable royalty.

In early June, the Court denied Saint-Gobain’s petition for both a panel rehearing and a rehearing en banc.

Conclusion

Siemens addressed proper support for a lost profits damages award and confirms the need to consider market segmentation in evaluating acceptable non-infringing alternatives. Siemens also confirmed that a damage award should compensate for all acts of infringement.

While Siemens does not create new precedent in the area of quantifying damages in a patent infringement case, it follows other recent cases that call for increased evidence to support damage awards. Siemens re-emphasized the need to properly evaluate the market, particularly market segments, in evaluating acceptable non-infringing substitutes available to buyers. Siemens also re-emphasized the importance of considering when alternative technologies could be commercialized by the infringer in evaluating whether acceptable non-infringing alternatives were available to the infringer. Lastly, Siemens re-emphasized that plaintiffs are entitled to compensation for every act of infringement – in this case a royalty on products manufactured but not yet sold.

 

Matthew Paye

 

1 It is not clear from the opinion whether there was proof regarding the number of PET Scanners that were actually manufactured.

2 PET Scanners provide a three-dimensional image of functional processes in the body.

3 The patent was filed on August 4, 1989 and expired October 6, 2008.

4 Siemens’ scintillator crystal consists of cerium-doped lutetium oxyorthosilicate (“LSO”). Saint-Gobain’s scintillator crystals consist of cerium-doped lutetium-yttrium orthosilicate (“LYSO”).

5 Documented sales refers to the products that were sold as opposed to manufactured. Siemens’ argued there was evidence that showed Philips either arranged to or would have sold all 79 PET Scanners.

6 Wechsler v. Macke Int’l Trade, Inc., 486 F.3d 1286, 1293 (Fed. Cir. 2007).

7 Panduit Corp. v. Stahlin Brothers Fibre Works, Inc. 575 F.2d 1152, 1156-7 (6th Cir. 1978). Emphasis added.

8 GE sold PET Scanners with bismuth germinate (“BGO”) scintillator crystals.

9 Reply Brief and Brief in Opposition of Defendant-Appellant/Cross-Appellee Saint-Gobain Ceramics & Plastics, Inc. at pg. 30, June 4, 2010.

10 Crystal Semiconductor Corp. v. TriTech Microelecs. Int’l, Inc., 246 F.3d 1336, 1356 (Fed.Cir.2001).

11 Siemens Medical Solutions USA, Inc. v. Saint-Gobain Ceramics & Plastics, Inc, 637 F.3d 1269, 1288, (C.A.Fed. Del. 2011).

12 Id.

13 Id.

14 Siemens Medical Solutions USA, Inc. v. Saint-Gobain Ceramics & Plastics, Inc., 637 F.3d 1269, 1288, (C.A.Fed. Del. 2011) citing Micro Chem., Inc. v. Lextron, Inc., 318 F.3d 1119, 1123 (Fed.Cir.2003).

15 Siemens Medical Solutions USA, Inc. v. Saint-Gobain Ceramics & Plastics, Inc., 637 F.3d at 1288, (C.A.Fed. Del. 2011).

16 Id.

17 Id. at 1289.

18 Brief for Plaintiff-Cross Appellant Siemens Medical Solutions USA, Inc. at pg. 30-31, April 22, 2010.

19 T here was testimony from a Philips representative that it was not in Philips’ interest to hold crystal inventory, instead they “would only buy crystals that they are prepared to incorporate into a PET Scanner and sell.” Brief for Plaintiff-Cross Appellant Siemens Medical Solutions USA, Inc. at pg. 25, April 22, 2010. Additionally, Saint-Gobain’s damages expert used a base of 79 PET Scanners in his damages figures.

20 Siemens Medical Solutions USA, Inc. v. Saint-Gobain Ceramics & Plastics, Inc., 637 F.3d at 1290, (C.A.Fed. Del. 2011).