Patent Infringement Damages: Riding The Wine Railway Can Be Expensive

Imagine hypothetical ABC Corp. selling a product that has generated sales revenue of $5 million per year for the last 6 years. There are similar products in the market, but none that bears a patent number warning ABC that its product might infringe a patent. ABC has never received constructive or actual notice of infringement of a patent.

Add to the picture patent owner XYZ Corp., which owns a patent that ABC unknowingly infringes, but which has never made a product protected by the patent. XYZ sues for infringement in 2003 without any warning or earlier notice to ABC. At the moment that XYZ serves its complaint (actual notice to ABC), the Wine Railway exception dictates that XYZ is entitled to six years of damages upon proof of infringement rather than a recovery commencing upon actual notice of infringement in 2003.

The ticket on the Wine Railway will cost ABC dearly. If ABC continues selling the product until the trial ends in 2005 it will be liable for 8 years of damages. At a 5% reasonable royalty, ABC's liability will be $2 million before pre-judgment interest. If there were no exception to either constructive or actual notice, ABC's liability would be $500,000. The Wine Railway rule multiplies ABC's liability four times what it would have been otherwise. In cases where the money is bigger the differences can be staggering.

No matter what one might think of the fairness of the Wine Railway rule (more about this later), it can have profound influence on the strategic aspects of a patent infringement case for both the patentee and the defendant. Both parties have important decisions to make.

The plaintiff likely does not know about the Wine Railway rule when it first approaches its litigation counsel. The plaintiff's attorney should learn early on that there has been no product made or sold under the patent. At that point, knowing that there is a possibility to collect six years of damages, the plaintiff and counsel should have a serious conversation during which several questions need to be answered. How long has the plaintiff owned the patent? If acquired by assignment, did the assignment include the right to recover for past infringement? Did the previous owner (if any) make or sell the patented invention and did he mark the product with the patent number? Does the plaintiff plan to make or sell the patented invention? If so, how soon? Has a license to produce the patented invention ever been granted and, if so, did the licensee make or sell the invention?

If the answers to the foregoing questions indicate that a product was made or sold under the patent, either by a patent owner or licensee, and was never marked with the patent number, then the opportunity to use the Wine Railway exception to the plaintiff's advantage evaporates. If the facts show that the patent article was never made, then the Wine Railway rule may be employed.

Care must be taken to examine the plaintiff's product(s) in view of the claims in the patent. It is possible that a product made by a patentee or licensee and not marked with the patent number was not the patented product, though the plaintiff or licensee may not have given that any consideration at the time. In other words, if an unmarked product was not within the claims of the patent, then the Wine Railway exception can still be used.

For a defendant, the options can be starkly unpleasant. If the plaintiff never made or sold a product within the protection of the patent, the defendant is stuck with the Wine Railway rule. The implications can be felt well before trial. Taking the example of ABC and XYZ companies above, absent the Wine Railway rule, the damages in the case would be $500,000, a sum that suggests a settlement early in the litigation. But, because XYZ has the opportunity to collect $2 million plus a minimum of 6 years of interest by pressing the litigation, a settlement either may not occur at all or, at least, will cause XYZ to seek considerably more compensation from ABC.

There may be cases in which the patentee plaintiff maintains that, although it has made products very similar to the patented product (and not marked them), they are not the patented product. For the defendant's counsel, this presents a serious dilemma. If defense counsel's analysis indicates that the plaintiff did make and sell the patented product without marking but is alleging otherwise to take advantage of the Wine Railway rule, the defendant's counsel must choose between two unpleasant options.

First, he or she can accept the plaintiff's position and risk that, on proof of infringement, the Wine Railway rule will bite the defendant hard. Or, he or she can undertake a very challenging trial task: presenting a defense against her client's alleged infringement of the patent-in-suit while simultaneously presenting a case that the plaintiff's product actually “infringed” its own patent.

Success in the latter effort would block the plaintiff from a Wine Railway 6-plus years' damages recovery. But experienced trial counsel will see that this choice risks major jury confusion and, perhaps, places the infringement defense at peril. The Wine Railway notice exception may have the undesirable effect of encouraging patentee's counsel to saddle the defendant's counsel with this difficult choice, whether or not the plaintiff is truly entitled to the benefit of the rule.

It should be clear that, in cases where the Wine Railway notice rule exception applies, or is argued to apply, a plaintiff has the opportunity to collect significant damages that would otherwise be unavailable in the absence of marking a product or actual notice of infringement. But should it be so? An exhaustive exploration of the statute and the Wine Railway ruling are for another forum. However, there are two significant considerations that are easy to present.

First, the Federal Circuit has stated that the purpose of the '287(a) notice requirement is three-fold: 1) helping avoid innocent infringement; 2) encouraging patentees to give notice to the public that an article is patented; and 3) helping the public identify whether an article is patented. None of these purposes is served by the Wine Railway rule. In fact, innocent infringers having no notice of another's patent can be subjected to crushing damages under the rule. Worse yet, patentees owning a patent but not making the patented product may be encouraged to “lie in wait” for an innocent infringer until the latter has sold enough product to make damages very rewarding.

The application of the rule can lead to incongruous results. Consider that a non-producing patentee who has owned his patent for six years can sue for infringement next Tuesday and collect six years' damages. But, if he or she makes and marks the patented article next Monday before suing on Tuesday he loses all entitlement to the six years' damages in one day, though he or she took the exemplary step of complying with '287. Absent the Wine Railway exception, of course, he or she would not have been entitled to the 6 years' recovery in the first place and there would be no anomaly.

If the Wine Railway exception is to be eliminated, it will require a Congressional amendment to '287(a). Until and unless that happens, counsel on both sides of patent cases must be prepared, willingly or not, to ride the Wine Railway. All aboard!

When the plaintiff in a patent litigation contends that it has never made or sold the product protected by its patent, alarm bells should start clanging in the ears of defense counsel. For the odds are that the plaintiff is angling to take advantage of a little-used aspect of the law of patent damages that can lead to a windfall recovery for patent infringement. It is the Wine Railway exception to the well-known “notice” provision of the patent statute. Created by the Supreme Court in Wine Railway Appliance Co. v. Enterprise Railway Equipment Co., 297 U.S. 387 (1936), the exception can lead to catastrophic and unforeseen patent damage awards. Such damages are unforeseen (and, some would argue, unfair and undeserved) because they arise without any notice of infringement, actual or constructive.

With the enactment of 35 U.S.C. '287(a), Congress limited the time period during which patent damages may be assessed against an infringer. The statute prevents the assessment of damages for any time before the patentee either a) gives notice of the patent to the public by marking the patent number on his product (constructive notice of the patent), or b) provides direct notice of infringement to the infringer (actual notice). The Supreme Court decided that there was an exception to the rule in cases where the patentee had not made a product under the patent. In such cases, the patentee can collect damages for the entire six year (prior to the filing of the complaint) statutory limitations period for patent damages, unrestricted by the '287(a) notice requirement.

In Texas Digital Systems, Inc. v. Telegenix, Inc., 308 F.3d 1193 (Fed.Cir. 2002), the Federal Circuit reaffirmed the Wine Railway exception in the face of a direct challenge by Telegenix. The court stated that there is no limit on the recovery of damages without notice where there is no “failure to mark.” In the absence of products made under the patent there is no opportunity to mark, thus no failure to do so, the same premise advanced by the Supreme Court in 1936. Demonstrating the power ' and the danger ' in the Wine Railway exception, Telegenix was assessed damages from 1992 through its 2001 trial, rather than commencing damages in 1998 when actual notice of infringement was delivered by Texas Digital Systems. (Telegenix's liability was vacated when the Federal Circuit reversed the district court's claim construction and remanded for a new trial on infringement and damages.)

Imagine hypothetical ABC Corp. selling a product that has generated sales revenue of $5 million per year for the last 6 years. There are similar products in the market, but none that bears a patent number warning ABC that its product might infringe a patent. ABC has never received constructive or actual notice of infringement of a patent.

Add to the picture patent owner XYZ Corp., which owns a patent that ABC unknowingly infringes, but which has never made a product protected by the patent. XYZ sues for infringement in 2003 without any warning or earlier notice to ABC. At the moment that XYZ serves its complaint (actual notice to ABC), the Wine Railway exception dictates that XYZ is entitled to six years of damages upon proof of infringement rather than a recovery commencing upon actual notice of infringement in 2003.

The ticket on the Wine Railway will cost ABC dearly. If ABC continues selling the product until the trial ends in 2005 it will be liable for 8 years of damages. At a 5% reasonable royalty, ABC's liability will be $2 million before pre-judgment interest. If there were no exception to either constructive or actual notice, ABC's liability would be $500,000. The Wine Railway rule multiplies ABC's liability four times what it would have been otherwise. In cases where the money is bigger the differences can be staggering.

No matter what one might think of the fairness of the Wine Railway rule (more about this later), it can have profound influence on the strategic aspects of a patent infringement case for both the patentee and the defendant. Both parties have important decisions to make.

The plaintiff likely does not know about the Wine Railway rule when it first approaches its litigation counsel. The plaintiff's attorney should learn early on that there has been no product made or sold under the patent. At that point, knowing that there is a possibility to collect six years of damages, the plaintiff and counsel should have a serious conversation during which several questions need to be answered. How long has the plaintiff owned the patent? If acquired by assignment, did the assignment include the right to recover for past infringement? Did the previous owner (if any) make or sell the patented invention and did he mark the product with the patent number? Does the plaintiff plan to make or sell the patented invention? If so, how soon? Has a license to produce the patented invention ever been granted and, if so, did the licensee make or sell the invention?

If the answers to the foregoing questions indicate that a product was made or sold under the patent, either by a patent owner or licensee, and was never marked with the patent number, then the opportunity to use the Wine Railway exception to the plaintiff's advantage evaporates. If the facts show that the patent article was never made, then the Wine Railway rule may be employed.

Care must be taken to examine the plaintiff's product(s) in view of the claims in the patent. It is possible that a product made by a patentee or licensee and not marked with the patent number was not the patented product, though the plaintiff or licensee may not have given that any consideration at the time. In other words, if an unmarked product was not within the claims of the patent, then the Wine Railway exception can still be used.

For a defendant, the options can be starkly unpleasant. If the plaintiff never made or sold a product within the protection of the patent, the defendant is stuck with the Wine Railway rule. The implications can be felt well before trial. Taking the example of ABC and XYZ companies above, absent the Wine Railway rule, the damages in the case would be $500,000, a sum that suggests a settlement early in the litigation. But, because XYZ has the opportunity to collect $2 million plus a minimum of 6 years of interest by pressing the litigation, a settlement either may not occur at all or, at least, will cause XYZ to seek considerably more compensation from ABC.

There may be cases in which the patentee plaintiff maintains that, although it has made products very similar to the patented product (and not marked them), they are not the patented product. For the defendant's counsel, this presents a serious dilemma. If defense counsel's analysis indicates that the plaintiff did make and sell the patented product without marking but is alleging otherwise to take advantage of the Wine Railway rule, the defendant's counsel must choose between two unpleasant options.

First, he or she can accept the plaintiff's position and risk that, on proof of infringement, the Wine Railway rule will bite the defendant hard. Or, he or she can undertake a very challenging trial task: presenting a defense against her client's alleged infringement of the patent-in-suit while simultaneously presenting a case that the plaintiff's product actually “infringed” its own patent.

Success in the latter effort would block the plaintiff from a Wine Railway 6-plus years' damages recovery. But experienced trial counsel will see that this choice risks major jury confusion and, perhaps, places the infringement defense at peril. The Wine Railway notice exception may have the undesirable effect of encouraging patentee's counsel to saddle the defendant's counsel with this difficult choice, whether or not the plaintiff is truly entitled to the benefit of the rule.

It should be clear that, in cases where the Wine Railway notice rule exception applies, or is argued to apply, a plaintiff has the opportunity to collect significant damages that would otherwise be unavailable in the absence of marking a product or actual notice of infringement. But should it be so? An exhaustive exploration of the statute and the Wine Railway ruling are for another forum. However, there are two significant considerations that are easy to present.

First, the Federal Circuit has stated that the purpose of the '287(a) notice requirement is three-fold: 1) helping avoid innocent infringement; 2) encouraging patentees to give notice to the public that an article is patented; and 3) helping the public identify whether an article is patented. None of these purposes is served by the Wine Railway rule. In fact, innocent infringers having no notice of another's patent can be subjected to crushing damages under the rule. Worse yet, patentees owning a patent but not making the patented product may be encouraged to “lie in wait” for an innocent infringer until the latter has sold enough product to make damages very rewarding.

The application of the rule can lead to incongruous results. Consider that a non-producing patentee who has owned his patent for six years can sue for infringement next Tuesday and collect six years' damages. But, if he or she makes and marks the patented article next Monday before suing on Tuesday he loses all entitlement to the six years' damages in one day, though he or she took the exemplary step of complying with '287. Absent the Wine Railway exception, of course, he or she would not have been entitled to the 6 years' recovery in the first place and there would be no anomaly.

If the Wine Railway exception is to be eliminated, it will require a Congressional amendment to '287(a). Until and unless that happens, counsel on both sides of patent cases must be prepared, willingly or not, to ride the Wine Railway. All aboard!