The Federal Circuit recently addressed the issue of collateral estoppel in a jury’s determination of a reasonable royalty where two infringing products were sold at different times, thus making the hypothetical royalty negotiations different.

In Applied Medical Resources Corporation v. United States Surgical Corporation, the U.S. Court of Appeals for the Federal Circuit (05-1149, Jan. 24, 2006) upheld a $64.5 million award stating that collateral estoppel doesn’t apply in setting the reasonable royalty rate in a judgment of willful infringement.

United States Surgical Corporation (“U.S. Surgical”) tried to appeal an earlier District Court decision finding U.S. Surgical willfully infringed U.S. Patent 5,385,553 of Applied Medical Resources Corporation (“Applied”), awarding damages, enhanced damages, attorney fees, and prejudgment interest of $64.5 million.

The ’553 patent relates to surgical devices called trocars, which are used as access ports into the abdomen during laparoscopic surgery. Laparoscopic surgery is performed by inflating the abdomen and inserting instruments through trocars. It is important for the trocar to maintain a seal with the instrument; otherwise, the insufflation gas used to inflate the abdomen would leak and potentially cause serious complications.

Early trocars did not accommodate instruments of different diameters. For example, inserting a relatively small instrument through a large seal would produce a gap between the instrument and the seal, allowing the insufflation gas to leak out from the abdomen. The invention of the ’553 patent eliminates the need for adapters, describing a trocar which maintains a seal around instruments of various sizes, using a “floating seal.”

Specifically, claim 3 recites a trocar whose seal includes excess material at its outer portions, which permits the seal orifice to move without allowing gas to leak. Claim 4, which depends from claim 3, further requires that the excess material be configured in a bellows shape.

Earlier, a District Court found that U.S. Surgical’s sale of its original Versaport trocars infringed the ’553 patent, as well as two other Applied patents. In 1997, a jury found that U.S. Surgical willfully infringed claims 4 and 18 of the ’553 patent as well as two other Applied patents, and awarded damages in the form of a 7% reasonable royalty.

Before trial in the present case, U.S. Surgical moved to establish as a matter of law that the reasonable royalty for infringing sales of new, improved version of the trocar now found to infringe was 7%, arguing that the reasonable royalty established in earlier case for infringing sales of first design was binding under principles of collateral estoppel. The District Court denied the motion saying that the jury would make “its own ‘independent’ determination of the reasonable royalty rate in 1997.”

The Federal Circuit then held that:

We agree with Applied that the district court properly denied collateral estoppel effect to the 7% reasonable royalty rate found by the jury in Applied I. “Under collateral estoppel, once a court has decided an issue of fact or law necessary to its judgment, that decision may preclude relitigation of the issue in a suit on a different cause of action involving a party to the first case.”

Collateral estoppel is appropriate only if: (1) the issue to be decided is identical to one decided in the first action; (2) the issue was actually litigated in the first action; (3) resolution of the issue was essential to a final judgment in the first action; and (4) the parties had a full and fair opportunity to litigate the issue in the first action. Here, collateral estoppel is not appropriate because the necessary reasonable royalty determination in Applied II is not identical to that decided in Applied I.

When an established royalty does not exist, a court may determine a reasonable royalty based on “hypothetical negotiations between willing licensor and willing licensee.” Fromson, 853 F.2d at 1574. We have held that a reasonable royalty determination for purposes of making a damages evaluation must relate to the time infringement occurred.

Consistent with our precedent, reasonable royalty damages are not calculated in a vacuum without consideration of the infringement being redressed. Id. We are required to identify the infringement requiring compensation, and evaluate damages based on a hypothetical negotiation at the time that infringement began, not an earlier one. Id. Here, the issue of reasonable royalty damages 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.

Because the determination of reasonable royalty damages is tied to the infringement being redressed, a separate infringement beginning at a different time requires a separate evaluation of reasonable royalty damages. To argue otherwise, U.S. Surgical would have to concede that it has willfully violated the permanent injunction in Applied I.

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