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Damages for Unpatented Items
Category 1: Convoyed (or Collateral) Sales
Generally, “convoyed sales” refers to an unpatented item that is sold with the patented item and where the two items are “analogous to components of a single assembly or [are] parts of a complete machine, or they must constitute a functional unit.” Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1550 (Fed. Cir.) (en banc), cert. denied, 516 U.S. 867 (1995); see also American Seating Co. v. USSC Group, Inc., 514 F.3d 1262, 1268 (Fed. Cir. 2008 (“A ‘convoyed sale’ refers to the relationship between the sale of a patented product and a funtionality associated non-patented product.”). They arise when a patentee seeks damages not only for sales of the infringing product, but also for sales of unpatented items that the infringer may sell or market together with the infringing product. Normally, the “convoyed” sale is the unpatented item that is sold with the infringing product and the latter drives the sale.
The introductory web page on unpatented items addresses how courts have applied the EMVR in the context of convoyed sales. Under Rite-Hite and its progeny, a patentee may recover damages on convoyed sales if (a) the infringing and noninfringing products form a functional unit and (b) the patentee’s loss was reasonably foreseeable. Rite-Hite, 56 F.3d at 1549, 1550. The first element has been referred to as the “functional unit” test. See Juicy Whip, Inc. v. Orange Bang, Inc., 382 F.3d 1367 (Fed. Cir. 2004) (“[T]he Rite-Hite ‘functional unit’ test set forth the key criterion for lost profits of unpatented materials used with a patented device); American Seating Co. v. USSC Group, Inc., 514 F.3d 1262, 1268 (Fed. Cir. 2008) (upholding refusal to award damages on convoyed sales where the requisite functional relationship did not exist between the patented and unpatented devices; however, when analyzing damages for the patented device (a machine with patented and unpatented features), the court observed it was undisputed that “the patented features … prompted customer demand”); Golden Blount, Inc. v. Robert H. Peterson Co., 438 F.3d 1354, 1370-72 (Fed. Cir. 2006) (applying the functional unit test); Tec Air, Inc. v. Denso Mfg. Mich., Inc., 192 F.3d 1353, 1361 (Fed. Cir. 1999) (affirming a judgment where a jury awarded damages based on the EMVR and the functional relationship between patented fans and unpatented radiator and condenser assemblies). As discussed on the introductory page, the three-part EMVR test from the Cornell case (Chief Judge Rader sitting by designation), if applicable to convoyed sales, may also require the patentee to prove the patented item is the “basis for demand” for the unpatented item. Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 286-87 (N.D.N.Y. 2009).
If the patentee can prove the EMVR applies on the facts, the unpatented, collateral product may be compensable in lost profits or as part of the royalty base. Paper Converting, 745 F.2d at 23 (allowing lost profits on unpatented collateral item); Interactive Pictures Corp. v. Infinite Pictures, Inc., 274 F.3d 1371, 1384-86 (Fed. Cir. 2001) (allowing unpatented collateral item to be part of the royalty base). In addition, the existence of convoyed sales may be a factor in determining a reasonable royalty rate; indeed, convoyed sales are listed in Georgia-Pacific as factor #6. Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp. 1116, 1120 (S.D.N.Y. 1970) (“6. The effect of selling the patented specialty in promoting sales of other products of the licensee; that existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.”). In Interactive Pictures, the Federal Circuit found no error by the district court’s inclusion of the unpatented items in the royalty base and also factoring the convoyed sales into the royalty rate. 274 F.3d at 1385. Notably, moreover, in the context of the royalty rate, there appears to be no explicit requirement of a “functional unit”; rather, the patentee may argue that the existence of convoyed sales by the infringer acts to increase the reasonable royalty, whereas an infringer could argue that the absence of convoyed sales has the opposite impact, without having to prove that the unpatented and patented items form a functional unit or are part of a single assembly.
Despite Rite-Hite‘s requirement of a “single assembly” or “functional unit,” cases before and after Rite-Hite, even in the lost profits domain, seem to have applied a more relaxed standard for recovery of damages on convoyed sales. For example, prior to Rite-Hite, in Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11 (Fed. Cir. 1984), the Federal Circuit suggested that the patent owner should be entitled to lost profits on collateral items that have a marketing and financial dependence—rather than a functional dependence. Seven years later, but also prior to Rite-Hite, the Federal Circuit applied this same reasoning in Kaufman Co. v. Lantech, Inc., 926 F.2d 1136, 1144 (Fed. Cir. 1991). After Rite-Hite, the Federal Circuit in Golden Blount, Inc. v. Robert H. Peterson Co., 438 F.3d 1354, 1372 (Fed. Cir. 2006), allowed lost profits on unpatented and patented items that did not appear to have been part of a functional unit but were – as “standard practice in the industry” – simply sold together.
In fact, in some cases where the unpatented articles have a major impact on sales and profits, it is possible to have a reasonable royalty that exceeds the expected profit margin on the accused products, because the profit margin does not account for collateral sales while the royalty rate does. See, e.g., Deere & Co. v. Int’l. Harvester Co., 710 F.2d 1551, 1559 (Fed. Cir. 1983); Mosinee Paper Corp. v. James River Corp. of Virginia, 1992 WL 41690, 22 U.S.P.Q.2d 1657, 1662 (E.D. Wis. Feb. 18, 1992) (“The testimony showed that dispensers were placed in the customers’ facilities for little or no charge in an attempt to sell paper” and the resulting royalty rate was assessed accordingly, based upon the collateral sale of paper towels, not upon the infringing paper towel dispenser).
Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538 (Fed. Cir.), cert. denied, 516 U.S. 867 (1995).
Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11 (Fed. Cir. 1984).
Interactive Pictures Corp. v. Infinite Pictures, Inc., 274 F.3d 1371 (Fed. Cir. 2001).
Juicy Whip, Inc. v. Orange Bang, Inc., 382 F.3d 1367 (Fed. Cir. 2004).
Golden Blount, Inc. v. Robert H. Peterson Co., 438 F.3d 1354, 1370-72 (Fed. Cir. 2006).
American Seating Co. v. USSC Group, Inc., 514 F.3d 1262, 1268 (Fed. Cir. 2008).