Patents: Use Them or Lose Them
Russell L. Parr, President of Intellectual Property Research Associates, Inc. (IPRA), is at the top tier of the IP valuation field. In addition to English, his eight books are published in Japanese, Korean, Italian, Chinese, Romanian and Russian. They are a pleasure to read for their insight and clarity. Russell has served and as an expert witness on more than 50 occasions, opining on everything from patents to content. IP INSIDER is honored to have Russell contribute its first Outside Perspective piece, “Patents: Use Them or Lose Them.”
Patent infringement damages just got much more interesting. It turns out that if you don’t optimize the implementation of your intellectual property you might just lose it. A recent decision in Arizona District Court regarding Bard Peripheral Vascular, Inc. v. W. L. Gore Inc. (No. CV-03-0597-PHX-MHM) denied Bard a permanent injunction because Gore made a better product using Bard’s patented technology than Bard.
Bard argued that Gore sells two types of infringing products. The first group are products for which Bard sells an alternative, nearly identical counterpart. These products are referred to as “Counterpart Products.” The Counterpart 
Products include PROPATEN grafts, INTERING grafts, cardiovascular patches, and other variations of those grafts and patches. The second group of products is made up of items for which Bard does not currently offer an alternative in the marketplace. These are referred to as “Non-Counterpart Products.” The Non-Counterpart Products include Gore’s VIABAHN stent-grafts, EXCLUDER stent-grafts, TAG stent-grafts, VIATORR stent-grafts, ACUSEAL patches, as well as other products.
Bard asked the Court to permanently enjoin Gore from making and selling the Counterpart Products, the Non-Counterpart Products, and from any further development of infringing products, including products for which it lacks or is presently seeking FDA approval. The Court heard testimony from surgeons telling about the superiority of Gore’s implementation of Bard’s patented technology. As a result, the Court decided not to enjoin Gore.
Bard was awarded lost profits for the Counterpart Products made and sold by Gore and also received a royalty on sales of the Non-Counterpart Products. What now remains to be decided is how Gore will compensate Bard for future 
use of Bard’s no longer exclusive patent rights. The parties will likely reach some agreement on the future royalties Gore will pay Bard for Non-Counterpart Products. The difficult question will be how to compensation Bard for Gore’s future sales of Counterpart Products, where Bard will directly compete. Bard will lose future sales and future incremental profits. A typical royalty rate will not be sufficient to compensate Bard for future lost incremental profits. Currently, a Plaintiff may win a patent infringement case but lose exclusive use of its own patented technology.
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Very interesting piece. Would be interested to hear your thoughts on how to think about the abnormal royalty rate in this unusual situation.
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Lew:
A “standard” royalty rate will not be appropriate because each sale by Gore is possibly a lost sale to Bard and a loss of incremental profits to Bard. At the other extreme, a royalty pegged at the incremental profits earned by Gore is also inappropriate because it would put Gore in a loss position after subtracting operating expenses. Guidance might be provided by the profit differential calculation used in TWM v. Dura. I would look at Gore’s operating profit margin for the products to be licensedand compare them to the “normal” profits that would be expected from a non-patented (generic) medical device similar to the product to be licensed. In TWM v. Dura the court awarded the entire profit differential but there may be reasons to award only a portion of the differential. In the negotiation for a post-verdict royalty rate Bard must remember that the Gore product is considered superior and there is not guarantee that Bard would get all the Gore sales if Gore were out of the market. The profit differential is the place to start working out a compromise. Thanks for your question.
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Great piece. Forgive me, but I remain a little confused:
Do I understand it correctly that the money awarded to Bard was based on 1) the lost profits on “counterpart” products and 2) royalties based on “non-counterpart” products. In the ruling, a royalty rate of 10% (on non-counterpart sales) was determined to be appropriate.
Going forward, it is my understanding that Gore will continue to produce and sell both “counterpart” and “non-counterpart” products. I further assumed that Gore would pay Bard 10% of those sales based on the court ruling — I take it from your piece that that is faulty logic.
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