Consideration of non-infringing alternatives may be informative in determining financial damages associated with patent lawsuits under both a reasonable royalty analysis and a lost profits analysis. However, the following case law examples suggest that non-infringing alternatives serve a different role when considered under a royalty analysis compared to consideration under a lost profits analysis.
In the U.S. District Court for the Eastern District of Texas, in the matter of Joe Andrew Salazar v. HTC Corporation, Joe Andrew Salazar accused HTC Corporation (“HTC”) of infringing his patent relating to two-way communication through HTC’s manufacture and sale of various smartphone models.1 Mr. Salazar sought to exclude the expert testimony of HTC’s damages expert, who opined to damages under a reasonable royalty analysis. Mr. Salazar argued that HTC’s proposed non-infringing alternatives were not “acceptable” as the alternatives did not provide some of the advantages of the claimed limitations, and, as such, HTC’s damages expert’s opinions concerning these alternatives should be excluded. HTC countered that a non-infringing alternative did not need to have the patented feature to be considered “acceptable”.2
The court denied Mr. Salazar’s motion, citing to two distinct failures.
First, the court denied Plaintiff’s motion noting that the opinion of HTC’s damages expert did not relate to a lost profits analysis, explaining that the concept of an “acceptable non-infringing alternative” was a criterion to recover lost profits under a Panduit analysis.3 In a reasonable royalty analysis, the courts consider the next-best available alternative, which might not necessarily meet the same standards as that of a non-infringing alternative in a lost profits determination. To support this opinion, the court relied on the two landmark cases in patent damages: Grain Processing Corp. v. Am. Maize-Products Co. (“Only by comparing the patented invention to its next-best available alternative(s)… can the court discern the market value of the patent owner’s exclusive right, and therefore his expected profit or reward…”) and Georgia-Pacific Corp. v. U.S. Plywood Corp (“The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results.”). As such, the definition of an “acceptable” non-infringing alternative as described by Panduit did not apply to HTC’s damages expert’s reasonable royalty opinion. The court noted that the next-best alternative should be considered, regardless of whether that alternative met the same level of “acceptability” under Panduit. In this case, the next-best alternative identified by HTC’s damages expert was still relevant, despite its lack of certain claimed features.4
Secondly, even if the next-best alternative had to be “acceptable” under Panduit, the court found that Mr. Salazar failed to demonstrate that consumers specifically demanded the claimed features. The court recognized that although there is no set definition for “acceptability” of a non-infringing alternative under a lost profits analysis, if the patent owner can show that consumers specifically wanted products embodying certain advantages, a non-infringing alternative cannot be considered “acceptable” without the desired advantages.5 However, the court found that Mr. Salazar failed to present any evidence that consumers specifically wanted the claimed features. As such, even if there was a requirement for a next-best alternative in a reasonable royalty determination to be “acceptable” under Panduit, Mr. Salazar failed to meet his burden of proof.
A more recent ruling in the U.S. District Court for the Central District of California similarly highlighted the distinct roles of non-infringing alternatives in lost profits determinations and reasonable royalty determinations as the court rejected proposed jury instructions that conflated model instructions pertaining to lost profits with those pertaining to reasonable royalties. In the matter of Colibri Heart Valve LLC v. Medtronic CoreValve LLC et al., Colibri Heart Valve LLC (“Colibri”) alleged that Medtronic CoreValve LLC (“Medtronic”) infringed its patents relating to artificial heart valves and methods for using them.6 Colibri’s damages expert opined to damages due in the form of reasonable royalties. Colibri proposed instructing the jury that Medtronic had the burden to prove that a non-infringing alternative was available. In response, Medtronic argued that Colibri relied on model instructions and authorities that related to lost profits – not reasonable royalties. Medtronic argued that this was an important distinction as the availability of non-infringing substitutes in the context of reasonable royalty analyses is merely one of many factors to be considered, while in a lost profits analysis, the availability of non-infringing substitute is a “binary ‘yes’ or ‘no’ issue.” Colibri also proposed that the jury be instructed on what it means for a non-infringing substitute to be “acceptable” – again relying on authorities and model instructions pertaining to lost profits.7
Ultimately, the court rejected Colibri’s proposed language on the basis that Colibri’s reliance on authorities and model instructions pertaining to lost profits is not appropriate in the context of a reasonable royalty analysis. Instead, the court adopted model instructions pertaining to reasonable royalty, without the language proposed by Colibri.
These cases indicate that the role of non-infringing alternatives applicable to lost profits and reasonable royalty analyses are not necessarily the same. As such, parties should take care in applying the correct interpretation of non-infringing alternatives based on the form of damages they are seeking.
This publication is for educational and general information purposes only. It may contain errors and is provided as is. It is not intended as specific advice, legal, or otherwise. Opinions and views are not necessarily those of J.S. Held or its affiliates and it should not be presumed that J.S. Held subscribes to any particular method, interpretation, or analysis merely because it appears in this publication. We disclaim any representation and/or warranty regarding the accuracy, timeliness, quality, or applicability of any of the contents. You should not act, or fail to act, in reliance on this publication and we disclaim all liability in respect to such actions or failure to act. We assume no responsibility for information contained in this publication and disclaim all liability and damages in respect to such information. This publication is not a substitute for competent legal advice. The content herein may be updated or otherwise modified without notice.
1 Memorandum Opinion, March 28, 2018, Joe Andrew Salazar v. HTC Corporation, Case No. 2:16-CV-01096-JRG-RSP (E.D. Tex. Mar. 28, 2018).
2 “[B]y definition, noninfringing products do not represent an embodiment of the invention,” and “a noninfringing alternative need not have the patented feature in order to be deemed ‘acceptable’” citing Apple, Inc. v. Samsung Elecs. Co., No. 11-cv-01846-LHK, 2013 WL 5958178, at *2 (N.D. Cal. Nov. 7, 2013), and SmithKline Diagnostics, Inc. v. Helena Labs. Corp., 926 F.2d 1161, 1166 (Fed. Cir. 1991)).
3 To recover lost profits “requires the patent owner to prove an absence of “acceptable” noninfringing substitutes” Presidio Components, 875 F.3d at 1380 (citing Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978)).
4 Memorandum Opinion, March 28, 2018, Joe Andrew Salazar v. HTC Corporation, Case No. 2:16-CV-01096-JRG-RSP (E.D. Tex. Mar. 28, 2018).
5 Citing Slimfold Mfg. Co. v. Kinkead Indus., Inc., 932 F.2d 1453, 1458 (Fed. Cir. 1991).
6 First Amended Complaint for Patent Infringement, June 12, 2020, Colibri Heart Valve LLC v. Medtronic CoreValve LLC et al., Case No. 8:20-cv-00847-DOC-JDE.
7 Order re: Disputed Jury Instructions and Jury Verdict Form, November 2, 2022, Colibri Heart Valve LLC v. Medtronic CoreValve LLC et al., Case No. 8:20-cv-00847-DOC-JDE.