Convoyed Sales

The rules that govern the inclusion of convoyed sales in a reasonable royalty are different from the rules that govern the recovery of profits lost from collateral sales.

There is logic to USP's present argument distinguishing between the profits derivable from collateral or convoyed sales as one of the elements relevant to the fixation of a reasonable royalty (the current issue) and, on the other hand, the loss of profits from such sales as part of actually sustained damages (the issue previously litigated before the master).

Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1129 (S.D.N.Y., 1970).

Convoyed sales may not be included in the base of a reasonable royalty unless the entire market value rule applies.

Before trial, the district court ruled that Micro Chemical could not include sales of non-patented items in the royalty base.

Micro Chemical, Inc. v. Lextron, Inc., 317 F. 3d 1387, 1393 (Fed. Cir. 2003).

Convoyed sales may be informative for the determination of a royalty rate.

In fact, the district court did nothing more or less than take into account the impact of anticipated collateral sales of an admittedly non-infringing product line on the respective bargaining positions of the parties engaged in the theorized licensing negotiations. We consider this an eminently reasonable approach to the willing seller-willing buyer analysis.

Deere & Co. v. International Harvester Co., 710 F. 2d 1551, 1559 (Fed. Cir. 1983).

Lost profits damages may include convoyed sales only where the convoyed item is functionally related to the patented product and be reasonably forseeable.

To be entitled to lost profits for convoyed sales, the related products (e.g., the fixations) must be functionally related to the patented product and losses must be reasonably foreseeable.

Warsaw Orthopedic, Inc. v. NuVasive, Inc., 778 F. 3d 1365, 1375 (Fed. Cir. 2015).

Functionally related means the patented and non-patented components are part of a single assembly, are parts of a complete machine, or constitute a functional unit.

All the components together must be analogous to components of a single assembly or be parts of a complete machine, or they must constitute a functional unit.

Rite-Hite Corp. v. Kelley Co. Inc., 56 F.3d 1538, 1550 (Fed. Cir.1998).

Examples of a non-functional relationship include:

  1. Parts that are sold together merely because of customer demand;

    A functional relationship does not exist when independently operating patented and unpatented products are purchased as a package solely because of customer demand.

    American Seating Co. v. USSC Group, Inc., 514 F. 3d 1262, 1268 (Fed. Cir. 2008).

  2. Parts that are sold together for business advantage or convenience;

    Our precedent has not extended liability to include items that have essentially 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.

    Rite-Hite Corp. v. Kelley Co. Inc., 56 F.3d 1538, 1550 (Fed. Cir.1998).

  3. Parts sold together due to a businesses sales process or relationships; or

    Because it is undisputed that DePuy's unpatented pull-through products neither compete nor function with its patented… devices and were sold… only by virtue of DePuy's business relationship with surgeons, DePuy was not legally entitled to recover lost profits on those unpatented products.

    DePuy Spine, Inc. v. Medtronic Sofamor Danek, Inc., 567 F. 3d 1314, 1333 (Fed. Cir. 2009).

  4. Parts sold together due to a marketing advantage.

    . The fixations here are not convoyed sales recoverable as lost profits. … Warsaw points to its marketing material, in which it touted the kits’ comprehensive set of instruments and implants including fully integrated neuromonitoring, streamlined access instrumentation.… This does not establish a functional relationship.

    Warsaw Orthopedic, Inc. v. NuVasive, Inc., 778 F. 3d 1365, 1376–77 (Fed. Cir. 2015).

The courts may consider the extent to which convoyed articles serve a useful purpose independent of the patented product as evidence of a non-functional relationship.

If the convoyed sale has a use independent of the patented device, that suggests a non-functional relationship.

Warsaw Orthopedic, Inc. v. NuVasive, Inc., 778 F. 3d 1365, 1375 (Fed. Cir. 2015).

In Juicy Whip, Inc. v. Orange Bang, Inc., 382 F. 3d 1367 (Fed. Cir. Sept 3, 2004), the court found that a juice despenser and the syrups used for making juice are sufficiently functionally related that the profits from collateral sales of syrup may be included in a lost profits calculation.

Juicy Whip's dispenser, however, features a transparent bowl that creates the visual impression that the bowl is the primary source of the dispensed beverage, which induces sales of the beverage. … [The syrup and the dispenser] do function together to achieve one result.

Juicy Whip, Inc. v. Orange Bang, Inc., 382 F. 3d 1367 (Fed. Cir. Sept 3, 2004).

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