In patent infringement suits, acceptable noninfringing alternatives are often considered in the determination of damages. Such alternatives can affect the result of a hypothetical negotiation when determining a reasonable royalty or affect the availability or amount of lost profits. In its opinion in Presidio Components, Inc., v. American Technical Ceramics Corp. (“Presidio v. ATC”), the Court of Appeals for the Federal Circuit (CAFC) provides guidance regarding the proper consideration of acceptable noninfringing alternatives in lost profits matters and the burden of proof required of the plaintiff when seeking lost profits damages.
Since 1978, lost profits damages in patent infringement matters have nearly always been analyzed in light of the so-called Panduit factors, originating in Panduit Corp. v. Stahlin Brothers Fibre Works, Inc. ("Panduit"). In Panduit, the Sixth Circuit Court of Appeals established four elements to determine whether lost profits damages should be awarded to compensate the patent owner:
The second of these factors, the absence of acceptable noninfringing substitutes, requires the parties to consider whether the defendant had access to an available alternative that would have been economically acceptable to it and its customers while avoiding infringement of the patent-in-suit. In 1999, the CAFC refined this test, ruling in Grain Processing Corporation v. American Maize-Products Company (“Grain Processing”) that the relevant time period for determining the availability of such an alternative was the damages period, and that “[s]witching to a noninfringing substitute after the accounting period does not alone show availability of the noninfringing substitute during this critical time.”
Grain Processing added further clarity regarding the burden of proof for establishing an available, commercially acceptable noninfringing alternative whose existence was theoretical, rather than one that was based on historical sales during the damages period. The decision stated:
When an alleged alternative is not on the market during the accounting period, a trial court may reasonably infer that it was not available as a noninfringing substitute at that time. The accused infringer then has the burden to overcome this inference by showing that the substitute was available during the accounting period. Mere speculation or conclusory assertions will not suffice to overcome the inference. After all, the infringer chose to produce the infringing, rather than noninfringing, product. Thus, the trial court must proceed with caution in assessing proof of the availability of substitutes not actually sold during the period of infringement. Acceptable substitutes that the infringer proves were available during the accounting period can preclude or limit lost profits; substitutes only theoretically possible will not.
If Grain Processing provides important insights on the availability aspect of the second Panduit factor, Standard Havens Products, Inc. v. Gencor Industries, Inc. relates to the acceptability aspect. In this 1991 decision, the CAFC ruled that:
The mere existence of a competing device does not necessarily make that device an acceptable substitute. A product on the market that lacks the advantages of the patented product can hardly be termed a substitute acceptable to the customer who wants those advantages. Accordingly, if purchasers are motivated to purchase because of particular features available only from the patented product, products without such features – even if otherwise competing in the marketplace – would not be acceptable noninfringing substitutes. Thus, to prove that there are no acceptable noninfringing substitutes, the patent owner must show either that: 1) the purchasers in the marketplace generally were willing to buy the [plaintiff’s] patented product for its advantages, or 2) the specific purchasers of the infringing product purchased on that basis.
On September 2, 2014, Presidio filed suit against ATC for patent infringement in the Southern District of California. The suit concerned ATC’s alleged infringement of U.S. Patent No. 6,816,356 (the ’356 patent). The ’356 patent describes technology related to a certain type of electronic component called a capacitor. Specifically, the patent teaches a multilayer integrated network of capacitors that are connected electrically in series and in parallel.
Presidio claimed that ATC’s 550 Series of capacitors infringed the ’356 patent. ATC also sold a line of capacitors known as the 560L capacitors, which were not accused of infringing the ’356 patent. Presidio sold a line of capacitors that it identified as its BB capacitors. While the BB capacitors did not practice the technology taught by the ’356 patent, Presidio claimed that sales of its BB capacitors were adversely affected by ATC’s infringing sales. At trial, Presidio sought lost profits damages based on lost sales of its BB capacitors resulting from ATC’s infringement and argued that ATC’s 560L capacitors did not represent an acceptable noninfringing alternative. On April 18, 2016, the jury returned its verdict, finding against ATC with regard to both direct infringement and induced infringement. The jury awarded Presidio lost profits damages amounting to $2,166,659.
ATC filed various post-trial motions, including a motion for judgment as a matter of law (JMOL), claiming that Presidio was not entitled to lost profits.
At trial, Presidio had relied on the four-factor Panduit test to prove that it was entitled to lost profits. In its motion for JMOL, ATC argued that Presidio had failed in its consideration of the second Panduit factor related to the absence of acceptable noninfringing alternatives. ATC argued that its 560L capacitor was a noninfringing alternative and that to satisfy the second Panduit factor, it was Presidio’s burden to demonstrate that the 560L was either not available or not an acceptable alternative.
ATC claimed that the only evidence Presidio presented that the 560L was not an available alternative was conclusory testimony by its damages expert. The expert identified three reasons that were the bases for his conclusion. First, he was not aware that the 560L was widely marketed or widely used in the marketplace. Second, he did not believe the 560L was touted as a product that competed with Presidio’s BB capacitor. And third, he cited Presidio’s CFO, Lambert Devoe, who was unaware of the 560L capacitor.
ATC argued that the first two bases were insufficient because Presidio’s expert failed to confirm his views by talking to customers or competitors and because he never established himself to be sufficiently familiar with the market to be able to independently draw such conclusions. Moreover, citing Grain Processing, ATC argued that a product does not have to be marketed at all to be considered available. Regarding the expert’s reliance on Presidio’s CFO, ATC contended that this was also insufficient to demonstrate that the 560L was not available.
Moreover, ATC pointed to three admissions made at trial by the expert that suggested the 560L was available. The expert admitted that the 88,000 560L capacitors sold during the infringement period were available. He also admitted that the 10 560L capacitors physically presented at trial were available. Finally, he admitted more generally that the 560L capacitors were currently available.
With regard to the acceptability of the 560L capacitors, ATC argued that Presidio failed to offer any evidence that they were not acceptable alternatives. Although Presidio’s damages expert testified that “it does not appear that they have been accepted by the market,” he later agreed that the relevant question was whether they were acceptable in the market, not whether they had been accepted by the market.
Additionally, ATC argued that purchasers chose such capacitors based on bulk capacitance and low insertion loss. ATC indicated that the 560L was acceptable with regard to these parameters and, in fact, outperformed Presidio’s BB capacitors with regard to insertion loss.
In its response, Presidio reiterated the opinion of its damages expert and the bases for that opinion. Presidio also argued that the product was not acceptable, in part, because it was made available to only a single customer. Presidio reasoned that if it had been acceptable, “it would have been made available to the market without such strict limitations.” Additionally, Presidio pointed out that ATC’s Vice President of Sales did not identify the 560L as an acceptable alternative in the same market as Presidio’s BB capacitor and the 550 capacitor. Finally, Presidio indicated that it was necessary to view all this evidence in the light most favorable to Presidio and that Presidio must have the benefit of all reasonable inferences. As such, Presidio argued there was substantial evidence supporting the jury’s conclusion that lost profits were appropriate, at least with respect to the second Panduit factor.
With regard to the issue of availability, the district court sided with Presidio, noting that ATC did not present any evidence at trial disputing Presidio’s damages expert testimony and/or bases for such testimony (with regard to the second Panduit factor). The district court also sided with Presidio with regard to acceptability. The court specifically cited testimony that the 560L capacitors were not as good as the 550 capacitors in certain respects that were important to customers. Additionally, the court indicated that during the relevant time period, only 88,000 560L capacitors were sold, compared with more than 1 million 550 capacitor sales. As a result, the district court ruled in favor of Presidio, finding that there was sufficient evidence in the record to allow the jury to find that the 560L was not an acceptable noninfringing alternative.
The CAFC disagreed with the district court’s findings with regard to both availability and acceptability. Regarding availability, the CAFC reaffirmed the holding in Grain Processing that an alternative need not be on the market to be available. Moreover, it recognized that, in this case, the 560L was indeed on the market, as evidenced by the 88,000 sales that were not disputed by Presidio. It also dismissed the argument that minimal or no advertising of the 560L capacitors indicates that they were not available. Citing Grain Processing, it stated:
Without the infringing product, a rational would-be infringer is likely to offer an acceptable, noninfringing alternative, if available, to compete with the patent owner rather than leave the market altogether. The competitor in the “but for” marketplace is hardly likely to surrender its complete market share when faced with a patent if it can compete in some other lawful manner.
Regarding the acceptability of the 560L capacitors, the CAFC took issue with the district court’s analysis. Specifically, the CAFC found the district court erred by relying on comparisons of the 560L capacitor with the infringing product rather than contemplating competition between the 560L capacitor and Presidio’s BB capacitor in a hypothetical market that did not include the infringing product. It stressed that to correctly consider the second Panduit factor, one must consider “whether a noninfringing alternative would be acceptable compared to the patent owner’s product, not whether it is a substitute for the infringing product.” The CAFC found that evidence of the 560L’s lower price and lower insertion loss (for at least some frequencies) indicated that it performed better than Presidio’s BB capacitor.
The CAFC therefore concluded that Presidio failed to demonstrate that the 560L capacitor was either not an available or not an acceptable noninfringing alternative. As such, it reversed the denial of judgment as a matter of law and set aside the jury’s award of lost profits. Because the jury was not asked to determine a reasonable royalty if it instead awarded lost profits, the CAFC ordered a new trial to determine an appropriate reasonable royalty award.
It should be noted that ATC also claimed that Presidio was not entitled to lost profits because it failed to apportion damages between patented and non-patented features. Because the CAFC ruled that lost profits were not warranted due to Presidio’s failure to demonstrate the absence of noninfringing alternatives, it did not provide any insight into the merits of ATC’s apportionment argument. The district court did, however, rule on this issue and sided with Presidio. The district court provided a number of reasons for reaching its conclusion, including the following: 1) there was sufficient evidence that the patented feature creates the basis for customer demand or substantially creates the value of the accused products, 2) there was sufficient evidence for the jury to determine that the asserted claims cover the accused products as a whole, and 3) ATC failed to cite any case indicating that a party that satisfied the four-factor Panduit test and established entitlement to lost profits was required to further apportion its lost profits. While the CAFC did not rule on this question in this decision, we note that it provided insight on a similar question in March 2017 in Mentor Graphics Corp. v. EVE-USA, Inc.
The CAFC’s ruling in Presidio v. ATC provides guidance to parties trying to recover lost profits in patent infringement matters. Damages experts and attorneys should take note of the following guidance resulting from this case: