Warsaw Orthopedic, Inc. v. Nuvasive, Inc. , 778 F.3d 1365 ( 2015 )

United States Court of Appeals
for the Federal Circuit
______________________
WARSAW ORTHOPEDIC, INC.,
Plaintiff/Counterclaim Defendant-Appellant
MEDTRONIC SOFAMOR DANEK USA, INC.,
Counterclaim Defendant-Appellant
MEDTRONIC PUERTO RICO OPERATIONS CO.,
MEDTRONIC SOFAMOR DANEK DEGGENDORF,
GMBH,
Counterclaim Defendants
v.
NUVASIVE, INC.,
Defendant/Counterclaimant-Cross Appellant
______________________
2013-1576, 2013-1577
______________________
Appeals from the United States District Court for the
Southern District of California in No. 08-CV-1512, Judge
Cathy Ann Bencivengo.
______________________
Decided: March 2, 2015
______________________
LUKE DAUCHOT, Kirkland & Ellis LLP, Los Angeles,
CA, argued for plaintiff/counterclaim defendant-
2 WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC.
appellant, counterclaim defendant-appellant. Also repre-
sented by ALEXANDER FRASER MACKINNON, NIMALKA R.
WICKRAMASEKERA, SHARRE LOTFOLLAHI; JOHN C. O’QUINN,
LIAM PATRICK HARDY, Washington, DC.
DEANNE MAYNARD, Morrison & Foerster LLP, Wash-
ington, DC, argued for defendant/counterclaimant-cross-
appellant. Also represented by BRIAN ROBERT MATSUI;
RYAN MALLOY, Los Angeles, CA; FRANK SCHERKENBACH,
Fish & Richardson, P.C., Boston, MA; CRAIG EARL
COUNTRYMAN, MICHAEL ARI AMON, TODD GLEN MILLER,
San Diego, CA; MICHAEL J. KANE, Minneapolis, MN.
______________________
Before LOURIE, DYK, and REYNA, Circuit Judges.
DYK, Circuit Judge.
Warsaw Orthopedic (“Warsaw”) brought suit against
NuVasive, Inc. (“NuVasive”) for infringement of U.S.
Patent Nos. 5,860,973 (“the ’973 patent”) and 6,945,933
(“the ’933 patent”). NuVasive counterclaimed for in-
fringement of U.S. Patent No. 7,470,236 (“the ’236 pa-
tent”) against Warsaw and its related company,
Medtronic Sofamor Danek USA, Inc. (“MSD”). For each of
the three patents, the district court sustained jury find-
ings of infringement, awarded damages for past infringe-
ment, and awarded an ongoing royalty rate. Both parties
appealed. We affirm the district court with respect to
invalidity and infringement of all three patents, but we
remand for a new trial on damages with respect to
the ’973 and ’933 patents.
BACKGROUND
We limit our discussion to the patents relevant to this
appeal: the ’973 patent, the ’933 patent, and the ’236
patent. Warsaw owns the ’973 patent and the ’933 pa-
WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC. 3
tent. The ’973 patent claims oversized spinal implants.
The ’933 patent claims methods and devices for retracting
tissue to create a working channel for minimally invasive
spinal surgery. NuVasive owns the ’236 patent, which
relates to neuromonitoring during surgery.
On October 6, 2008, Warsaw and MSD filed a com-
plaint against NuVasive, alleging infringement of the ’973
and ’933 patents. NuVasive counterclaimed, asserting
infringement of the ’236 patent. At trial, Warsaw assert-
ed claims 24, 41, 42, 57, and 61 of the ’973 patent and
claims 21, 57, and 66 of the ’933 patent. NuVasive as-
serted claims 1, 5, and 9 of the ’236 patent. On Septem-
ber 20, 2011, the jury found that the asserted claims of
the ’973 patent were not invalid (infringement was not in
dispute), that the asserted claims of the ’933 patent were
infringed under the doctrine of equivalents (validity was
not in dispute), and that the asserted claims of the ’236
patent were infringed (validity was not in dispute). The
jury awarded damages for each.
After trial, Warsaw filed motions seeking supple-
mental damages and a permanent injunction with respect
to the ’973 and ’933 patents, and a motion for judgment as
a matter of law (“JMOL”) or a new trial with respect to
the jury’s finding of infringement of the asserted claims of
the ’236 patent. NuVasive also moved for JMOL or a new
trial, challenging the jury’s finding of no invalidity of the
asserted claims of the ’973 patent, infringement of the
asserted claims of the ’933 patent, and Warsaw’s entitle-
ment to lost profits. The district court denied the motions
for JMOL or a new trial and denied Warsaw’s requests for
supplemental damages and a permanent injunction for
infringement of the ’973 and ’933 patents. The court set
ongoing royalty rates.
4 WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC.
Warsaw appealed, arguing that the district court
erred in denying supplemental damages to compensate for
NuVasive’s infringement between the close of discovery
and trial and in declining to award a higher ongoing
royalty rate. Warsaw also argues that the district court
erred in determining that MSD infringed the ’236 patent.
NuVasive cross-appealed, challenging the determinations
that the asserted claims of the ’973 patent were not
invalid, the determination that NuVasive infringed the
asserted claims of the ’933 patent, and the damages
calculation for infringement of the asserted claims of
the ’973 and ’933 patents.
We have jurisdiction pursuant to 28 U.S.C. § 1295.
We review denials of motions for judgment as a matter of
law de novo. See Revolution Eyewear, Inc. v. Aspex Eye-
wear, Inc., 563 F.3d 1358, 1370 (Fed. Cir. 2009); Janes v.
Wal-Mart Stores, Inc., 279 F.3d 883, 886 (9th Cir. 2002).
We review the district court’s claim construction under
the standard set forth in Teva Pharm. USA, Inc. v.
Sandoz, Inc., No. 13-854, slip op. at 13 (Jan. 20, 2015).
We review underlying factual determinations concerning
extrinsic evidence for clear error. Id. at 12. We review
intrinsic evidence and the ultimate construction of the
claim de novo. Id. Infringement is a question of fact,
DePuy Spine, Inc. v. Medtronic Sofamor Danek, Inc., 469
F.3d 1005, 1013 (Fed. Cir. 2006), reviewed for substantial
evidence. Transocean Offshore Deepwater Drilling, Inc. v.
Maersk Drilling USA, Inc., 699 F.3d 1340, 1356–57 (Fed.
Cir. 2012). We review damages determinations by the
court for “an erroneous conclusion of law, clearly errone-
ous factual findings, or a clear error of judgment amount-
ing to an abuse of discretion.” Micro Chem., Inc. v.
Lextron, Inc., 318 F.3d 1119, 1122 (Fed. Cir. 2003) (inter-
nal quotation marks, citation omitted).
WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC. 5
DISCUSSION
I. Invalidity and Infringement
We address first the arguments with respect to the
district court’s liability determinations as to the asserted
claims of the ’973, ’933, and ’236 patents.
A. ’973 Patent Invalidity
The ’973 patent claims are directed to oversized spinal
implants capable of lateral insertion. The human spine
has a series of stacked vertebrae. In between each verte-
brae is a disk, which is composed of spongy material and
provides flexibility to the spine. Prior to the invention,
implants were typically smaller than the size of the
corresponding vertebrae and were inserted either anteri-
orly or posteriorly, i.e., from the front or back, rather than
the side. The claims of the ’973 patent disclosed an over-
sized spinal implant capable of lateral insertion. The
oversized implant arguably provided more stability than
the smaller implants, and the lateral directionality of the
insertion arguably made the surgery safer. Although
claim 35 is not asserted, most of the asserted claims
depend from claim 35, 1 and NuVasive appears to argue
that the invalidity of the asserted claims turns on the
invalidity of claim 35. Claim 35 covers:
A translateral spinal implant for insertion from
the lateral aspect of the spine in the disc space be-
tween two adjacent vertebrae, said implant hav-
ing
1 Claim 24 depends from independent claim 1;
claims 41, 42, and 57 depend from independent claim 35;
and claim 61 is an independent claim.
6 WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC.
a length that is greater than one half the trans-
verse width of the vertebrae,
said length being substantially greater than the
depth of the vertebrae,
a height for contacting each of the two adjacent
vertebrae, and
a width that is at least as great as the height.
’973 patent, col. 13 ll. 1–7 (line breaks added). NuVasive
argues that the claim is anticipated and obvious in light
of two prior art references: spinal implants used by sur-
geon Dr. John Brantigan before the critical date and U.S.
Patent No. 5,192,327 to Brantigan (collectively, the
“Brantigan references”).
The district court construed the preamble of claim 35
not to be limiting, but nonetheless instructed the jury
that “said implant” refers to “a spinal implant capable of
being inserted translaterally,” and that “capable” should
be given its plain meaning. See J.A. 206. We see no error
in the court’s determination that the claims require
lateral insertion, and NuVasive therefore fails to show its
entitlement to a new trial on that issue.
Warsaw also presented substantial evidence to the
jury distinguishing the ’973 patent from the Brantigan
references. Warsaw argued that the Brantigan references
were not “capable” of lateral insertion because (1) the
FDA had not approved the implant for lateral insertion,
(2) the ridges, grooves, and tool holes of the Brantigan
references suggested they were intended for anterior or
posterior insertion, not lateral insertion, and (3) the lack
of tapering or rounding on the Brantigan implant made it
ill-suited for lateral insertion. Because there was sub-
stantial evidence for the jury to conclude that the Branti-
gan references did not teach an implant capable of lateral
WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC. 7
insertion, the jury was entitled to find that the Brantigan
references did not anticipate or render obvious the assert-
ed claims of the ’973 patent.
NuVasive also argues that the asserted claims of
the ’973 patent are indefinite because, given the relative
nature of the claim limitations, one cannot know whether
an implant infringes until it is selected for a particular
patient. Under the Supreme Court’s decision in Nautilus,
Inc. v. Biosig Instruments, Inc., 134 S. Ct. 2120 (2014), a
claim is indefinite if “viewed in light of the specification
and prosecution history,” it does not “inform those skilled
in the art about the scope of the invention with reasona-
ble clarity.” Id. at 2129. The relative nature of the claim
does not itself make it indefinite, and NuVasive failed to
establish, by clear and convincing evidence, that human
anatomy varies so significantly that reliance on the well-
known dimensions of human vertebrae makes the claims
indefinite. See Howmedicia Osteonics Corp. v. Tranquil
Prospects, Ltd., 401 F.3d 1367, 1371–73 (Fed. Cir. 2005).
Indeed, the parties stipulated that “[t]he average dimen-
sions of the human vertebrae are well-known, easily
ascertainable, and well-documented in the literature.”
J.A. 2882.
B. ’933 Patent Infringement
The ’933 patent is directed to instruments and meth-
ods for minimally invasive tissue retraction during sur-
gery. It discloses a two-pronged device in which each
prong forms one-half of a hollow cylinder. In combination,
the two prongs form a working channel through the
cylinder, through which the surgeon can pass instruments
for spinal surgery. Neither prong is fixed—both can be
moved away from each other and pivoted to adjust the
8 WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC.
size of the channel. Although claim 1 is not asserted, one
of the asserted claims depends from claim 1, 2 and NuVa-
sive appears to argue that the infringement of the assert-
ed claims turns on the infringement of claim 1. Claim 1
provides:
A tissue retractor for percutaneous surgery in a
patient, comprising:
a first portion having a proximal end and a distal
end; and
a second portion having a proximal end and a dis-
tal end, said second portion forming with said first
portion a working channel in communication with
an exterior of said first and second portions at
said proximal ends and said distal ends with said
working channel being enclosed by said first por-
tion and said second portion between said distal
and proximal ends, wherein said working channel
is enlargeable by laterally moving each of said
first and second portions away from one another
and pivoting each of said distal ends of said first
and second portions away from one another such
that only a portion of said working channel is en-
closed by said first and second portions.
’933 patent, col. 13 ll 32–48.
As NuVasive identifies, the accused product has
three, not two, portions. Moreover, one of the portions is
fixed—incapable of lateral movement or pivoting. Thus,
although NuVasive does not dispute that the other claim
limitations are met, NuVasive argues that the accused
2 Claim 21 depends from independent claim 1,
claim 57 depends from independent claim 56, and claim
61 depends from independent claim 63.
WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC. 9
device does not literally infringe the asserted claims of
the ’933 patent because there are three, not two, prongs,
and the third prong is not capable of lateral movement or
pivoting. Warsaw argues that the jury did not err in
finding infringement under the doctrine of equivalents.
NuVasive disagrees.
Warsaw submitted substantial evidence that the dif-
ferences between the accused device and the patented
technology are insubstantial. For example, there are
admissions by NuVasive’s own witnesses that a working
channel enclosed by three prongs “i[s] the same working
channel as with only two [prongs]” and that “when the
working channel is in the closed position, two and three
[prongs] are equivalent.” J.A. 10735, 11755–56. Thus,
substantial evidence exists to support a finding of in-
fringement under the doctrine of equivalents because a
jury could find that two enclosing prongs capable of
lateral movement and pivoting was equivalent to three
enclosing prongs, two of which were capable of lateral
movement and pivoting. 3
C. ’236 Patent Infringement
The ’236 patent is directed to a method for detecting
the presence of and measuring the distance to a nerve
3 NuVasive argues that application of the doctrine
of equivalents would result in claim vitiation. As we
recently explained, vitiation is not a separate argument
from insubstantiality. See Brilliant Instruments, Inc. v.
GuideTech, LLC, 707 F.3d 1342, 1347 (Fed. Cir. 2013)
(“‘Vitiation’ is not an exception to the doctrine of equiva-
lents, but instead a legal determination that the evidence
is such that no reasonable jury could determine two
elements to be equivalent.” (quoting Deere & Co. v. Bush
Hog, LLC, 703 F.3d 1349, 1356 (Fed. Cir. 2012))).
10 WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC.
during surgery. During surgery, surgeons want to avoid
contact with or damage to any nerves, as doing so could
result in patient paralysis. The patented monitoring
device sends a series of signals in increasing strength.
When a nerve fires after receiving a signal, the device can
predict its proximity to the nearest nerve based on the
signal strength most recently sent by the device. The
farther away it is from a nerve, the stronger the signal
must be to trigger a response. Claim 1 is representative.
It provides:
A method for assessing the proximity of a spinal
nerve relative to a distal end of at least one probe
or surgical tool being introduced towards at least
one of a lumbar region and thoracic region of a pa-
tient's spine, said lumbar region and said thoracic
region of said spine having a ventral column and a
dorsal column, said ventral column including a
plurality of vertebral bodies and a plurality of in-
tervertebral discs disposed in between said verte-
bral bodies, said vertebral bodies and
intervertebral discs each having an anterior as-
pect, a posterior aspect opposite from said anterior
aspect, and a lateral aspect extending between
said anterior and posterior aspects, said dorsal
column including a plurality of bone elements ex-
tending from said vertebral bodies to form a spi-
nal canal that contains and protects the spinal
chord, said spinal nerve exiting from said spinal
canal and disposed generally parallel to a longitu-
dinal axis of said spine along said lateral aspect,
the method comprising:
(a) emitting a stimulus signal from an electrode
disposed on a probe or surgical tool as said probe
or tool is introduced towards a lateral aspect of at
least one of a vertebral body and an intervertebral
WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC. 11
disc of at least one of a lumbar region and thoracic
region of a patient's spine;
(b) electromyographically monitoring muscles
coupled to said spinal nerve to determine if a pre-
determined neuromuscular response is elicited by
the stimulus signal;
(c) increasing the intensity level of said stimulus
signal until said predetermined neuro-muscular
response is elicited by said stimulus pulse and
stopping the emission of said stimulus signal im-
mediately after said predetermined neuro-
muscular response is detected; and
(d) communicating to an operator said intensity
level of said stimulus signal required to elicit said
predetermined neuro-muscular response, wherein
said intensity level required to elicit said prede-
termined neuro-muscular response represents the
proximity of said spinal nerve to said probe or
surgical tool.
’236 patent, col. 17 l. 47–col. 18 l. 6. The court construed
“stimulus signal” to mean “an electrical signal for eliciting
a neuromuscular response.” J.A. 208.
MSD argues that its product, the NIM-Eclipse, does
not infringe because, contrary to step (c), the NIM-Eclipse
does not “stop[] the emission of said stimulus signal
immediately after said predetermined neuromuscular
response is detected.” ’236 patent, col. 17 ll. 58–60.
According to MSD, “stopping” requires the termination of
subsequent pulses, whereas the accused product contin-
ues to emit pulses, just at a lower level of power. MSD
also argues that there is insufficient evidence to prove
induced infringement.
12 WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC.
NuVasive urges that the NIM-Eclipse signal does
“stop.” According to NuVasive, a “signal” is a series of
increasing pulses. Signal strength decreases when a
neuromuscular response is elicited. By decreasing the
signal strength, the old signal terminates and a new one
begins. This understanding is consistent with the claim
construction presented to the jury. The district court
defined “stimulus signal” in functional terms, to mean “an
electrical signal for eliciting a neuromuscular response.”
J.A. 208. Thus, according to NuVasive and consistent
with the claim construction, the old signal successfully
elicited a response, and the decreased pulse is not part of
the previous series of increasing pulses. Instead, it is the
first pulse of a new signal. This “restart” involves a stop
followed by a start.
There was substantial evidence to support a finding of
infringement. Treating a “restart” as a type of stop was
clearly envisioned by the claims. For example, dependent
claims 4, 5, 6, 8, 9, and 10 all claim methods in which the
method of claim 1 is repeated. And, NuVasive’s expert
testified that a “stimulus signal,” which he interpreted to
be a series of continually increasing pulses, stopped after
eliciting a response because the pulse strength dropped
and the gradual increase in pulse strength started over.
Additionally, NuVasive put forth enough evidence to
support a jury finding of induced infringement. There
was evidence that MSD was aware of the patent prior to
the litigation and that MSD specifically taught doctors to
use the product during the surgical procedures in an
infringing manner.
In rebuttal, MSD argues that interpreting the stop-
ping step in such a way is barred by the prosecution
history, in which “stop” was added to overcome a prior art
reference. But, no construction of the “stopping” step was
WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC. 13
presented to the jury, nor did Warsaw request a construc-
tion beyond its plain and ordinary meaning. We have
previously explained that, “where the parties and the
district court elect to provide the jury only with the claim
language itself, and do not provide an interpretation of
the language in the light of the specification and the
prosecution history, it is too late at the JMOL stage to
argue for or adopt a new and more detailed interpretation
of the claim language and test the jury verdict by that
new and more detailed interpretation.” Hewlett-Packard
Co. v. Mustek Sys., Inc., 340 F.3d 1314, 1321 (Fed. Cir.
2003).
II. ’973 and ’933 Damages Issues
Having sustained the district court’s determinations
with respect to liability under the three asserted patents,
we consider Warsaw’s and NuVasive’s appeals from the
damages awards for the ’973 and ’933 patents. Warsaw
does not appeal the denial of injunctive relief.
Although Warsaw owns the ’933 and ’973 patents, it
does not practice the patented technologies. Rather, it (1)
licenses the technologies to related companies Medtronic
Sofamor Danek Deggendorf, GmBH (“Deggendorf”) and
Medtronic Puerto Rico Operations Co. (“M Proc”), which
manufacture and sell the patented products to MSD and
pay royalties to Warsaw on those sales and (2) manufac-
tures “fixations,” 4 which it sells to MSD for profit. MSD
packages the fixations and the patented products together
into medical kits, which it sells to hospitals and surgeons.
4 “Fixations” are medical products such as surgical
rods and screws that are used in connection with the
patented devices during surgery.
14 WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC.
Warsaw asserts it has three sources of income related
to the patented technologies. First, it receives revenue
from the sale of fixations to MSD, which it argues should
be treated as convoyed sales; second, it receives royalty
payments from M Proc and Deggendorf; third, it receives
payments from MSD resulting from an inter-company
transfer pricing agreement, which are characterized by
Warsaw as “true-up” payments.
At trial, Warsaw characterized all three sources of in-
come as representing potential lost profits to Warsaw and
sought to recover revenue declines allegedly the result of
infringement by NuVasive. Warsaw also sought to recov-
er a reasonable royalty. The jury awarded Warsaw
$101,196,000 in total damages. The verdict form indicat-
ed that the $101 million award was for “Lost Profit Dam-
ages (with royalty remainder)” and provided royalty rates
for each patent. It is impossible to determine from the
verdict form what portion of the verdict is attributable to
lost profits and what portion is attributable to a reasona-
ble royalty, much less how much of the lost profits portion
is attributable to each of the three different revenue
streams.
After trial, the district court denied Warsaw’s request
for supplemental damages, and it set the ongoing royalty
rate for the ’973 patent at 13.75% of sales of infringing
implants and set the ongoing royalty rate for the ’933
patent at 8.25% of sales of infringing retractors. NuVa-
sive challenges the award of lost profits. Warsaw chal-
lenges the district court’s refusal to award supplemental
damages and the ongoing royalty rate.
Our treatment of damages is guided by the statute,
which provides in part: “the court shall award the claim-
ant damages adequate to compensate for infringement,
but in no event less than a reasonable royalty for the use
WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC. 15
made of the invention by the infringer.” 35 U.S.C. § 284.
Our case law recognizes two measures of damages: lost
profits and reasonable royalties. As we have previously
explained:
Through section 284, Congress sought to ensure
that the patent owner would in fact receive full
compensation for any damages he suffered as a
result of the infringement. Damages is the
amount of loss to a patentee. A patentee may
seek to recover actual damages, usually, the
amounts of profits actually lost, or if unable to
prove actual damages, the patentee is entitled to a
reasonable royalty.
SmithKline Diagnostics, Inc. v. Helena Labs. Corp., 926
F.2d 1161, 1164 (Fed. Cir. 1991) (internal quotation
marks, citations omitted).
At least with respect to any particular sale, a patentee
is entitled to either a reasonable royalty or lost profits—
not both. See id. at 1164. At oral argument, counsel for
Warsaw admitted it was not entitled to both a reasonable
royalty and lost profits on a single sale, nor was it seeking
both.
Lost profits and reasonable royalties measure damag-
es differently. Lost profits as a measure of damages is
intended to make the party whole—to compensate the
patent holder for profits lost as a result of the infringe-
ment. It is not solely a “but for” test. Rite-Hite Corp. v.
Kelley Co., Inc., 56 F.3d 1538, 1546 (Fed. Cir. 1995) (en
banc).
A reasonable royalty, on the other hand, is intended
to compensate the patentee for the value of what was
taken from him—the patented technology. See Aqua
Shield v. Inter Pool Cover Team, 774 F.3d 766, 770 (Fed.
Cir. 2014) (“The ‘value of what was taken’—the value of
16 WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC.
the use of the patented technology—measures the royal-
ty.” (quoting Dowagiac Mfg. Co. v Minn. Moline Plow Co.,
235 U.S. 641, 648 (1915))).
Under our case law a patentee may not claim, as its
own damages, the lost profits of a related company. See
Poly-America, L.P. v. GSE Lining Tech., Inc., 383 F.3d
1303, 1311 (Fed. Cir. 2004) (explaining that related
companies “may not enjoy the advantages of their sepa-
rate corporate structure and, at the same time, avoid the
consequential limitations of that structure—in this case,
the inability of the patent holder to claim the lost profits
of its non-exclusive licensee”); see also Mars, Inc. v. Coin
Acceptors, Inc., 527 F.3d 1359, 1365 (Fed. Cir. 2008)
(refusing to award “lost profits” to the patent holder when
its subsidiary corporation lost sales due to infringement),
mandate recalled and amended on other grounds, 557
F.3d 1377 (Fed. Cir. 2009). Indeed, Warsaw admits it is
not entitled to the lost profits of Deggendorf, M Proc, or
MSD.
A. Convoyed Sales
NuVasive challenges treating decreases in revenue
from the sale of fixations (e.g., rods and screws for holding
the implant and vertebrae in place) as “lost profits.” At
trial, Warsaw’s damages expert testified that NuVasive’s
infringement of the patented technologies resulted in
Warsaw’s making fewer sales of fixations to MSD, be-
cause MSD itself lost sales of the patented medical kits as
a result of NuVasive’s infringement. The expert calculat-
ed that Warsaw lost $27.8 million in lost sales, $24.5
million of which was lost profits (the remaining $3.3
million was recouped in cost savings). Such a claim is
based on the theory that the sales were convoyed sales. A
convoyed sale is a sale of a product that is not patented,
but is sufficiently related to the patented product such
WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC. 17
that the patentee may recover lost profits for lost sales.
See Am. Seating Co. v. USSC Grp., Inc., 514 F.3d 1262,
1268 (Fed. Cir. 2008).
To be entitled to lost profits for convoyed sales, the re-
lated products (e.g., the fixations) must be functionally
related to the patented product and losses must be rea-
sonably foreseeable. See Rite-Hite, 56 F.3d at 1546–50.
Being sold together merely for “convenience or business
advantage” is not enough. Am. Seating, 514 F.3d at 1268.
If the convoyed sale has a use independent of the patent-
ed device, that suggests a non-functional relationship.
See, e.g., DePuy Spine, Inc. v. Medtronic Sofamor Danek,
Inc., 567 F.3d 1314, 1333 (Fed. Cir. 2009).
On appeal, NuVasive argues that the sale of fixations
to MSD are not recoverable as “convoyed sales” because
there is no functional relationship between the alleged
convoyed sales and the patented products. That is, ac-
cording to NuVasive, the unpatented components “can be
and are frequently used independently of the patented
implants and retractors.” NuVasive’s Opening Br. 48. In
rebuttal, Warsaw argues that these sales are recoverable
as convoyed sales because the unpatented components are
part of comprehensive medical kits that “contain every-
thing necessary for a fusion procedure.” Warsaw’s Reply
Br. 48.
The fixations here are not convoyed sales recoverable
as lost profits. Warsaw failed to prove a functional rela-
tionship necessary to support a jury verdict awarding lost
profits for convoyed sales. Warsaw points to its market-
ing material, in which it touted the kits’ “comprehensive
set of instruments and implants including fully integrated
neuromonitoring, streamlined access instrumentation,
anatomically designed implants and percutaneous fixa-
tion systems.” J.A. 20587. This does not establish a
18 WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC.
functional relationship. This is the precise sort of conven-
ience or business strategy excluded by American Seating.
See Am. Seating, 514 F.3d at 1268 (“Our precedent has
not extended liability to include items that have essential-
ly no functional relationship to the patented invention
and that may have been sold with an infringing device
only as a matter of convenience or business advantage.”
(quoting Rite-Hite, 56 F.3d at 1538)). Warsaw never
presented testimony that the fixations it sold to MSD had
no independent function—that is, that they would not
work as well in other surgeries not involving the patented
technologies. Therefore, the district court erred in deny-
ing NuVasive’s JMOL motion on this issue.
B. Royalty Payments from M Proc and Deggendorf
NuVasive next challenges the inclusion of lost royalty
payments from M Proc and Deggendorf in the lost profits
award. At trial, Warsaw explained that, under its busi-
ness model, it would license the patented technologies to
related companies such as Deggendorf and M Proc, who
would manufacture the patented devices. NuVasive’s
infringement detrimentally affected those manufacturers’
sales, which in turn negatively affected the royalty pay-
ments they made to Warsaw.
On appeal, NuVasive argues that Warsaw is effective-
ly claiming as “lost profits” the lost profits of its related
companies. That is, that Deggendorf and M Proc are the
companies actually harmed by NuVasive, and that by
claiming “lost profits,” Warsaw is seeking to recover the
lost profits of those companies. Warsaw recognizes that
Poly-America prohibits it from claiming its related com-
panies’ lost profits as its own, but it argues that it is not
seeking damages that other companies suffered. Rather,
because those companies would remit money back to
Warsaw, Warsaw argues it is asking for that money—the
WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC. 19
money it would have received but-for NuVasive’s in-
fringement.
To be entitled to lost profits, we have long recognized
that the lost profits must come from the lost sales of a
product or service the patentee itself was selling. As we
explained in Rite-Hite, “[n]ormally, if the patentee is not
selling a product, by definition there can be no lost prof-
its.” 56 F.3d at 1548. Similarly, in Poly-America we
noted, “the patentee needs to have been selling some item,
the profits of which have been lost due to infringing sales,
in order to claim damages consisting of lost profits.” 383
F.3d at 1311. Here, there is a failure of proof and as a
result the revenue stream is not recoverable. 5
C. True-Up Payments
NuVasive’s final challenge is to the inclusion of the
“true-up” payments from MSD to Warsaw. At trial,
Warsaw’s accounting witness explained that Warsaw
engages in various transactions with related companies
throughout the year. But, those initial transactions do
not necessarily reflect the fair market value of the product
or service exchanged. To comply with relevant tax and
accounting laws, a transfer pricing agreement is used to
require those related companies to transfer funds back
and forth to compensate each other for the fair market
value of the property previously exchanged. The “true-up”
payments are post hoc transfers to ensure that Warsaw
receives fair-market-value. The number is substantial;
MSD remits back 95% of the profit it made from the sale
5 Warsaw also argues that Warsaw, not its related
manufacturers, was the one that really made the sales
because the manufacturers were nothing more than
Warsaw’s contractual agents. The evidence does not
support this characterization.
20 WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC.
of patented technologies, and that accounts for the majori-
ty of the total lost profits requested by Warsaw.
It is not immediately clear from Warsaw’s accounting
witness’ testimony what the underlying transactions were
that made the 95% true-up payments necessary. The
true-up payments from MSD to Warsaw appear to result
from a variety of transactions. Some are for royalty
payments, suggesting an implied licensing agreement
between MSD and Warsaw for the sale of various patent-
ed technologies. Others, as suggested by spreadsheets in
the record, are for other transactions—for example,
management fees or implied licenses on other patents.
See J.A. 23556–637; see also Medtronic Sofamor Danek
USA, Inc. v. Globus Med., Inc., 637 F. Supp. 2d 290, 309
(E.D. Pa. 2009).
Warsaw apparently contends that the true-up pay-
ments are recoverable because they contain, in part,
royalty payments from MSD to Warsaw for sales of the
patented products to surgeons and hospitals. But War-
saw makes no effort to distinguish what percentage of the
true-ups was attributable to those payments as opposed to
payments on unrelated transactions. Indeed, the transfer
pricing policies indicate that the true-ups are established
on a company-by-company, not a technology-by-
technology or even a product-by-product, basis.
The district court erred in denying JMOL as to these
payments. Just as the payments from M Proc and Deg-
gendorf are not recoverable as lost profit, so too are the
true-up payments not recoverable as lost profit.
D. Reasonable Royalty
Our rejection of Warsaw’s claims for lost profits does
not mean that Warsaw is precluded from any recovery.
Warsaw is entitled to a reasonable royalty sufficient to
WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC. 21
compensate it for the value of what was taken from it—
the value of the patented technology. As we recently
explained, a reasonable royalty compensates the owner
not for the damage he suffered, but for the value of what
was taken. See Aqua Shield, 774 F.3d at 770 (“The ‘value
of what was taken’—the value of the use of the patented
technology—measures the royalty.” (quoting Dowagiac,
235 U.S. at 648)). Neither party argues it is possible to
parse out and compute a reasonable royalty based on the
jury verdict. Although the jury verdict did state a reason-
able royalty rate, it is not entirely clear the period for
which that reasonable royalty was determined or whether
the jury impermissibly relied on evidence not probative of
the value of the patented technology. We therefore re-
mand for a new trial to determine a reasonable royalty on
the patented technologies.
Evidence of a number of existing royalty agreements
entered into at arms-length can be evidence of the value
of the patent. See Georgia-Pacific Corp. v. U.S. Plywood
Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970) (listing
“[t]he royalties received by the patentee for the licensing
of the patent in suit, proving or tending to prove an
established royalty” as the first factor in determining a
reasonable royalty); Monsanto Co. v. McFarling, 488 F.3d
973, 978–79 (Fed. Cir. 2007) (“An established royalty is
usually the best measure of a ‘reasonable’ royalty for a
given use of an invention because it removes the need to
guess at the terms to which parties would hypothetically
agree.”). But, royalties paid by related parties have little
probative value as to the patent’s value. See Allen Ar-
chery, Inc. v. Browning Mfg. Co., 898 F.2d 787, 790 (Fed.
Cir. 1990) (rejecting agreements between related parties
as establishing a royalty rate because the transactions
were not arms-length).
22 WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC.
Here, the parties are related. As we discussed above,
the true-up payments have no relevance to the calculation
of the reasonable royalty because Warsaw made no effort
to determine what percentage of these payments repre-
sented royalties for the asserted patents. At this junc-
ture, we do not decide whether royalty payments by
Deggendorf and M Proc have any relevance in determin-
ing a reasonable royalty. 6 We leave that question to the
district court on remand to determine in the trial proceed-
ings. 7
6 We note that Judge Shapiro in Medtronic Sofamor
described the relationship between Warsaw and its relat-
ed companies as follows:
Warsaw, the patentee, is entitled to royalties un-
der its license agreements with [M Proc] and Deg-
gendorf. Under those agreements, Warsaw
receives royalties of 23% of net sales by the licen-
see. However, since [M Proc] and Deggendorf are
corporate entities related to Warsaw, the royalty
rates provided under the license agreements do
not prove a royalty rate established by an arms-
length transaction. There is no evidence that
Warsaw licensed the patents to unrelated parties
(although it retained the right to do so), so there is
no established royalty rate for the patents in suit.
This factor has no effect on the royalty rate.
637 F. Supp. 2d at 309.
7 We note that it is established that the impact in
the United States that granting a license might have on
sales of the patented inventions by Warsaw’s related
companies can be relevant to the hypothetical negotiation,
even if the amounts of intercorporate transfers are not.
WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC. 23
E. Supplemental Damages
Warsaw challenges the district court’s denial of sup-
plemental damages. Discovery closed in June of 2010, but
the jury did not render its verdict until September of
2011. Neither the court’s instructions nor the verdict
form specified the period of infringement during which
the jury should award damages. The district court held
that whether damages for the gap period were awarded
was within the province of the jury. Because the court
lacked “critical information about the jury’s calculations,
the court would . . . be unable to formulate a supple-
ment[al] damages award that would be consistent with
the jury’s verdict.” J.A. 30259. Any attempt to do so, the
court explained, “would be an improper invasion of the
provi[]nce of the jury.” Id. Warsaw contends on appeal
that the district court erred in not awarding supplemental
damages.
We need not resolve this issue because, as noted
above, we are remanding for a new trial on damages. At
the new trial, Warsaw may appropriately assert a claim
for supplemental damages limited to a reasonable royalty.
But, the time period of the claim must be presented to the
jury with clarity so as to avoid the ambiguity that existed
at the first trial. The jury instruction and jury verdict
forms should make clear the period for which the jury is
supposed to determine damages. If that period ends
before the date of the jury verdict, the district court may
award supplemental damages in light of that gap period.
See Union Carbide Chems. & Plastics Tech. Corp. v. Shell
Oil Co., 425 F.3d 1366, 1378 (Fed. Cir. 2005), overruled on
other grounds, Cardiac Pacemakers, Inc. v. St. Jude Med.,
Inc., 576 F.3d 1348 (Fed. Cir. 2009) (en banc).
24 WARSAW ORTHOPEDIC, INC. v. NUVASIVE, INC.
F. Ongoing Royalty
Finally, Warsaw challenges the district court’s deter-
mination of an ongoing royalty. Warsaw argues that the
award is too low because it does not fully compensate
Warsaw for lost profits, fails to account for the fact that
validity and infringement must be assumed when deter-
mining ongoing royalties, and fails to account for the fact
that some kits were used multiple times, thus resulting in
multiple acts of infringement of the method claims.
NuVasive argues that that the ongoing royalty determi-
nation should be redone because it includes a lost profits
component. Because the ongoing royalty impermissibly
includes a lost profits component, we vacate the award
and remand for the district court to determine an appro-
priate ongoing royalty rate in light of this opinion and the
jury verdict after a new trial.
CONCLUSION
We affirm the district court with respect to invalidity
and infringement for the ’973, ’933, and ’236 patents. We
vacate Warsaw’s damages award and remand for a new
trial on damages consistent with this opinion. At the new
trial, Warsaw will be limited to a reasonable royalty and
cannot recover lost profits.
AFFIRMED-IN-PART, VACATED-IN-PART, AND
REMANDED-IN-PART
COSTS
Costs to neither party.