CAFC affirms willfulness and damage award despite multiple opinions of counsel.

Applied Medical Resources Corp. v. United States Surgical Corp. (Fed. Cir. 2006).

By Gautham Bodepudi

Facts and History:

U.S. Surgical appealed the decision of the district court for the Central District of California, granting judgment of the willful infringement of U.S. Patent 5,385,553 to Applied Medical, and awarding damages, enhanced damages, attorney fees, and prejudgment interest totaling $64.5 million.

Applied Medical’s ‘553 patent relates to surgical devices called trocars. Trocars are used as access ports into the abdomen during laparoscopic surgery.

Applied first sued U.S. Surgical for their use of the Versaport trocar in the United States District Court for the Eastern District of Virginia (‘Applied I’), and the jury found that U.S. Surgical willfully infringed claims 4 and 18 of the ‘553 patent. The district court permanently enjoined U.S. Surgical, and awarded damages in the form of a 7% reasonable royalty rate.

During the Applied I litigation, U.S. Surgical began redesigning its Versaport trocar, completed its redesign shortly after the Applied I verdict, and began selling the redesigned Versaport (‘Versaport II’) shortly thereafter.

Two years later, Applied Medical filed a second infringement suit (Applied II) against U.S. surgical for their use of Versaport II, and the district court held that Versaport II infringed claim 3 of the ‘553 patent, and entered a permanent injunction against them.

In a separate trial for damages, U.S. Surgical tried to establish that the reasonable royalty for infringing sales of Versaport II was 7%, as established in Applied I and is binding under the principles of collateral estoppel. In addition, U.S. Surgical moved for judgment as a matter of law to establish that their infringement was not willful due to U.S. Surgical’s due care and good faith in designing around the ‘553 patent. Lastly, U.S. Surgical sought preclude evidence relating to the jury’s finding of willfulness in Applied I. However, the judge denied all three motions, and U.S. Surgical appealed.

Issues and Rulings:

I. Is the reasonable royalty rate established in Applied I binding in Applied II under the principles collateral estoppel?

The Court held that collateral estoppel should not be given effect in Applied II because the necessary reasonable royalty determination in Applied II is not identical to that decided in Applied I.

In laying the groundwork, the Court noted that reasonable royalty calculations are employed when actual damages cannot be adequately proved, and that when using such a calculation, the court may determine a reasonable royalty based on hypothetical negotiations between a willing licensor and willing licensee.

However, a reasonable royalty determination for purposes of making an evaluation for damages must relate to the time infringement occurred. The Court stated that the reasonable royalty damage calculation in Applied II is not identical to the issue of reasonable royalty damages in Applied I because the infringements requiring compensation began at separate and distinct times. The infringement in Applied II was caused by sales of Versaport II, which began in 1997, whereas the infringement in Applied I was caused by sales of Versaport I, which began in 1994. There were thus two separate infringements, and each commenced on a different date.

Thus, the Court reasoned, the reasonable royalties of the two different infringements, beginning at two different times, may be different from one another, and therefore the district court was correct in not applying collateral estoppel to the issue of reasonable royalty determination.

II. Was their substantial evidence to support the jury’s verdict that U.S. Surgical’s infringement was willful, despite U.S. Surgical’s good faith and due care to design around the ‘533 patent?

Despite U.S. Surgical arguments that it engaged in an intense and deliberate program to design around the ‘553 patent, regularly consulted with its in-house counsel during the redesign process, requested the advice of outside law firms, and avoided making a single sale until after U.S. Surgical received a written second opinion from a patent attorney from another firm, the Court still held that substantial evidence supports the jury’s verdict of willful infringement.

Notably, the Court held that a jury could reasonably infer that U.S. Surgical desperately needed a universal seal trocar to remain competitive in the surgical business, that U.S. Surgical’s management did not properly oversee or adequately participate in the development of Versaport II, and that U.S. Surgical’s management placed intense time pressure on their engineers to create a new product. Specifically, the Court noted that of the three opinions of counsel relied upon by U.S. Surgical, one did not even address the issue of infringement, and another letter arrived after U.S. Surgical began selling Versaport II. In addition, U.S. Surgical’s General Counsel admitted that U.S. Surgical wanted “no gap” in the supply of Versaport trocars once the Applied I injunction took effect. Based on this evidence, the Court concluded that a jury could have reasonably determined that U.S. Surgical paid little if any attention to the opinion letters, and that they would have proceeded to manufacture Versaport II despite outside legal opinions to the contrary.

Therefore, the district court did not err in denying U.S. Surgical’s motion for judgment as a matter of law as to whether U.S Surgical’s infringement was willful.

III. Did the district court abuse its discretion in allowing Applied to introduce evidence regarding the Applied I litigation, including the jury’s finding that U.S. Surgical’s infringement was willful?

The Court held that district did not abuse its discretion because the Applied I litigation was relevant to U.S. Surgical’s state of mind with respect to willfulness. Specifically, the Court reasoned that the Applied I litigation was relevant to the reasonable royalty analysis because the hypothetical negotiation in 1997 took place on the heels of the Applied I jury verdict. In addition, the jury’s determination of willfulness in Applied I is relevant because U.S. Surgical’s in-house counsel testified that U.S. Surgical initiated the design of Versaport II because Applied had commenced the Applied I litigation. Furthermore, the Court noted that U.S. Surgical admitted that the Applied I verdict caused U.S. Surgical to redouble its efforts to avoid willful infringement.

Thus, because the Applied I litigation was relevant to U.S. Surgical’s state of mind, and because U.S. Surgical could not show that the probative value of this evidence was outweighed by the danger of unfair prejudice, the Court held that the district court did not abuse its discretion in allowing the evidence to be introduced.

Gautham Bodepudi received a B.S. in electrical engineering from the University of Illinois and a J.D. from the University of Chicago School of Law. He is an associate in MBHB’s Chicago office. Contact Gau.