product, it is reasonable to infer that the patent owner would have made the sales made by the infringer." Del Mar, 836 F.2d at 1327 (citing Lam, 718 F.2d at 1065).
The generally accepted, though not exclusive, manner that a patentee can establish "but for" causation entitling it to lost profits, is by meeting the four-factor test enunciated by the Sixth Circuit in Panduit Corp. v. Stahlin Bros., 575 F.2d 1152 (6th Cir. 1978). See Rite-Hite, 1995 WL 358097 at *5, *8; Kearns, 32 F.3d at 1551. The "Panduit test" requires that the patentee establish the following four factors: (1) demand for the patented product; (2) the absence of acceptable non-infringing substitutes; (3) the patent owner's manufacturing and marketing capability to exploit the demand; and (4) the amount of profit the patent owner would have made. Rite-Hite, 1995 WL 358097 at *5; Kearns, 32 F.3d at 1551 (citing Panduit, 575 F.2d at 1156).
Satisfying the Panduit test "permits a court to reasonably infer that the lost profits claimed were in fact caused by the infringing sales, thus establishing a patentee's prima facie case with respect to 'but for' causation." Rite-Hite, 1995 WL 358097 at *5. The burden then shifts to the infringer to show that "the inference is unreasonable for some or all of the lost sales." Id.
Finally, the Federal Circuit recently explained in Rite-Hite that the "but for" test for compensability of damages must be read in light of the "reasonable limits of liability" imposed on damages by the law. Id. at *6. These limits include reasonable, objectively foreseeable damages. Accordingly, when deriving lost sales due to infringement, the court can compensate the plaintiff for "a particular injury that was or should have been reasonably foreseeable by an infringing competitor in the relevant market," absent a persuasive reason to the contrary. Id. (holding that lost sales of a patentee's product which directly competed with the infringing product but which was not covered by the infringed patent, was a reasonably foreseeable injury and clearly compensable).
Osteonics seeks lost profit damages for the time period January 1, 1990 until March 31, 1993. The plaintiff's principal damages witness was Dr. MARION STEWART, an economist specializing in microeconomics involving industrial competition, narrowly focused in a particular industry. He is also an expert in the more specialized field of "harm and damages" in patent infringement cases. Presenting the defendant's position on the issue of lost profits as damages was JAMES J. NAWROCKI, who is a certified public accountant and a consultant in litigation specializing in valuation of damages, lost profits, and reasonable royalties in the intellectual property field. Nawrocki reviewed all the documents and exhibits and depositions in this case, interviewed the Intermedics personnel and rendered opinions to the defendant. His company was paid in excess of $ 200,000 for his services in this case.
Dr. Stewart testified with regard to the plaintiff's damages in two categories, (1) lost profits, including the Panduit factors, and (2) reasonable royalty. He covered the period of January, 1990 through March 1993 and calculated pre-judgment interest through July 15, 1993. Dr. Stewart calculated the lost profits sustained by Osteonics in the 023 patent infringement case based on a review of the financial data produced by both parties, the deposition testimony, and discussions with Osteonics personnel, including ALBERT J. ZARNOWSKI, the Osteonics Director of Product Development prior to October 1991, and presently Director of Special Products. Dr. Stewart's efforts were a major undertaking. He and his staff worked on this matter for approximately 1100 hours. The results of his analyses are compiled in Plaintiff's Exhibit 709(A). The following analysis of lost profits is based on Dr. Stewart's testimony and analyses, the documentary evidence, the testimony of the Intermedics's witnesses and the totality of the evidence.
B. Evidence Regarding Osteonics's Lost Profits
(1) Panduit Factor One: Demand for the Patented Product
Under the first Panduit factor, the plaintiff must establish demand for the patented product. This factor presupposes that the patented product and infringing product are sufficiently similar to compete in the same market for the same customers, and thus that demand for the infringer's and patent owner's products are interchangeable. Bic Leisure, 1 F.3d at 1218-19. Accordingly, in considering the first factor, evidence of sales of the infringing product may suffice to show demand for the patented product. Id. (citing Gyromat Corp. v. Champion Spark Plug Co., 735 F.2d 549, 552 (Fed.Cir. 1984)).
As an initial matter, the Court notes that the patented product, as reflected in its commercial embodiment the Omniflex hip implant, and the infringing device, the APR II, are sufficiently similar to directly compete in the same market for the same customers. See, e.g., Tr. at 1029 and 1030 (the Omniflex and APR II directly compete in the "high priced state-of-the-art market"); Tr. at 839 (both the Omniflex and APR II compete by selling to surgeons in the community); Tr. at 1252-53 (testimony that in promoting the APR II to surgeons, comparison to the Omniflex is made); Plaintiff's Exh. 670 at 5-7 (describing Intermedics's competitors in the hip implant market); and Defendant's Exh. YC at IOI 077200 (stating that the APR II competes in the in the "high priced state-of-the-art" hip implant market).
In this case there was overwhelming evidence of demand for the patented product, reflected, among other ways, in sales of the patent's commercial embodiment, the Omniflex, sales of the APR II infringing product, and comparisons of the sales of these two products to their respective predecessors, the Omnifit and APR I.
According to the record, from February 1988 until April 1993 Osteonics sold approximately 29,000 Omniflex hip systems, at a value of approximately $ 100 million dollars. (Tr. at 376). By April 1993 APR II sales -- consisting of the entire APR II, including the acetabular component, the stem and the distal sleeve -- had reached approximately $ 38 million dollars. (Defendant's Exhibit AOJ at Appendix IV -- delineating sales of APR II components for years 1990-1993); Plaintiff's Exhibit 940A (showing a 19% royalty rate plus accumulated interested on sales of the APR II)). The increases in sales and sales volume of the products shows demand for the patented product.
An even more interesting indicator of demand for the patented product is the comparison of demand for the Omniflex relative to its predecessor the Omnifit, and for the APR II relative to the APR I. By 1990, Omniflex unit sales had grown to well over 600 units per month (Plaintiff's Exh. 709 at 15), and Omniflex dollar sales were three times the amount of Omnifit dollar sales. (Tr. at 637). Plaintiff's Exh. 813 is a chart formulated by Dr. Stewart from Osteonics's records comparing sales of the Omniflex to sales of the Omnifit. It shows, among other things, the increased demand for the Omniflex relative to the Omnifit from January 1988 until September, 1990. The vacillation in Omniflex sales relative to the Omnifit after September 1990 was attributed by Dr. Stewart to inventory buildup or "pipeline fill" (Tr. at 627-628) and to the introduction of hydroxyapatite coating on first the Omnifit and the Omniflex affixation surfaces (Tr. at 597-99 (hydroxyapatite forms a bio-chemical bond with bone tissue and is, thus, more conducive to bone ingrowth than conventional porous coatings)). However, despite this vacillation in Omniflex sales after September 1990, Dr. Stewart testified that "there's at least a gradual upward trend over time for the total of OMNIFLEX plus the non-modular." (Tr. at 606).
A similar comparison of the APR II sales to the APR I shows the rapid decline of the outmoded, non-distal sleeved APR I and the steep and rapid rise of sales of the APR II after the introduction of the APR II in January 1990. (See Plaintiff's Exh. 709A at 17, and Plaintiff's Exh. 815). According to Dr. Stewart, the comparisons of the APR II and APR I sales present a controlled experiment showing demand for the APR II. (Tr. at 467-68). In the Court's view, this evidence also clearly demonstrates demand for the patented product. Indeed, the Court notes from the data a correspondence between the increased sales of the APR II and the decline in sales of the Omniflex.
The industry and the defendant also recognized the increased demand for the patented product. The authoritative Frost & Sullivan Market Outlet Series for 1992, (Plaintiff's Exh. 604), described Osteonics's increasing market share potential:
Osteonics had an estimated 11% share of the total hip market in 1990, on almost $ 60 million in sales, with leading designs in both porous coated and standard surface segments. In 1988, the company released the Omniflex, a new modular hip system available in both porous coated and standard surface designs that allows more precise fit via a modular head and a modular distal tip on the femoral stem. By 1989, the Omniflex was Osteonics' leading porous coated hip and the Omnifit, its leading cemented design. Osteonics has succeeded in this market owing to strong management, a well-trained sales force and a reputation for state-of-the-art product.
Osteonics's increase in market share for hip implants was recognized by Intermedics. In an Intermedics document entitled "Orthopedic Market Overview," offered as Plaintiff's Exh. 670, Intermedics described the rapid rise of the Omniflex as a "20% growth every year," and an increase in market share "by almost 10 points." According to the document, it was Intermedics's opinion that "Osteonics will continue to have a strong presence in the hip market." (Plaintiff's Exh. 670 at 6-7). Among other things, Intermedics realized that the Omniflex "capitalized on an emerging modular trend with its choice of heads and its modular distal tips," and that the market's future lay in capitalizing on modularity: "Overall, the trend toward providing more anatomically precise fits through press fit, modular and custom prostheses is at the beginning of the growth curve, with most of the market potential still ahead. (Plaintiff's Exh. 670 at 6, 9) (emphasis supplied).
The evidence adduced at trial supports IOI's forecast and establishes that the market share of hip implants featuring modular distal tips or sleeves increased from 0% in 1988 to 18.6% in 1992. (Defendant's Exh. AOJ at 081703; Tr. at 3372).
When asked to what he attributed the demand for the Omniflex, Albert Zarnowski answered -- the patented modular distal tip. (Tr. at 376). The Court agrees and finds that demand for the APR II was also driven by the modular distal sleeve feature of the device. The evidence supporting this finding includes the plethora of evidence cited earlier in this Opinion when discussing the literal infringement of limitation (iii) of claim 1, see section II.1.B.(1)(b), supra. In particular, the Court recalls the testimony of Cindrich, the President of Intermedics, who testified that the APR II distal sleeve was what brought his company back into the hip implant market after the APR I's commercial failure. (See Tr. at 285-286). Further support is found, among other evidence, in (a) the testimony and evidence cited in the discussion of the literal infringement of limitation (ii) of claim 1, section II.1.B.(2)(b), supra, particularly the hip market forecast report in Intermedics's Orthopedic Market Overview (Plaintiff's Exh. 670 at 9), and (b) the multitude of Intermedics's marketing and sales literature which stress the value of the modular distal sleeve, see, e.g., the brochure entitled "FIT WITHOUT FORFEIT" (Defendant's Exh. JP at 000539), and the excerpts from IOI salesperson's sales pitches, compiled in Plaintiff's Exh. 895 and excerpted from the sales presentation training videotapes that are Plaintiff's Exhibits 665 and 666, which were reviewed by Dr. Stewart (Tr. at 483-89).
Despite the overwhelming evidence of demand for the patented product, the defendant contends that the plaintiff has failed to meet its burden with respect to the first Panduit factor. Essentially, Intermedics contends that the plaintiff has not shown that the APR II was selected by surgeons because of its sleeve option. According to the defendant, most of the surgeons do not use the sleeve when implanting the APR II, and sleeve usage with the APR II is currently in the 12 to 15 percent range. Moreover, the defendant claims that it markets the APR II by stressing a variety of its features, including proximal fit, anatomical shape and the collar.
The Court is unpersuaded by the defendant's contentions, because they are belied by the defendant's own marketing and sales strategy -- among other evidence -- which emphasize selling the APR II as one unit. Indeed, the APR modular distal sleeve was the key functional feature of the APR II, because without it the defendant's representations about the APR II's ability to prevent toggling and to fit and fill the bone cavity would have been rendered meaningless. (See Tr. at 1267 [one of the "biggest selling features" of the APR II is the distal sleeve]; Tr. at 1034 [the ability to make the advertising claim of "fit and fill" or "fit without forfeit" could not be made without the APR II distal sleeve]).
During his testimony, Nawrocki agreed that the APR II is marketed as a total system, including the acetabular and femoral components, and that the Intermedics sales agents generally try to sell all of the components of the APR II. (Tr. at 35[Illegible Number]9). Intermedics Director of Marketing Belen also testified that both the APR II and APR II-T are marketed as a complete system rather than by individual components and that the sleeves are part of the entire system. (Tr. at 1035).
Further, the evidence is clear that Intermedics never manufactured or marketed an APR II hip implant without a sleeve option. Robert J. Guerrin, an owner of the co-defendant Marli, testified in a deposition as follows:
Q Were you aware of any literature put out by IOI which promotes just the stem and sleeve portion of the APR II hip system?