Bait and Switch: From the Showroom to the Courtroom

On Jan. 29, 2008, the CAFC affirmed the judgment of the U.S. District Court for the Western District of Michigan in the matter of American Seating Company v. USSC Group, Inc. (No. 01-00578, W.D. Mich. Aug. 24, 2006.) The decision, which relates to a patent infringement litigation, provides interesting considerations for business managers with responsibility for accused, infringing, and/or non-infringing “alternative” products as well as for legal and financial professionals who deal with the determination of economic damages in patent infringement matters.

Summary of American Seating

American Seating brought suit for infringement of U.S. Patent No. 5,888,038 titled “Tie-Down for Wheelchairs.” The products embodying the invention related to a restraint system comprising a combination of belts and arms to secure a wheelchair in place on a train or bus. Defendant USSC sold two products, VPRo I and VPRo II. Although the VPRo II was found to not infringe the '038 patent, the court ruled that American Seating was entitled to collect lost profit damages on USSC's VPRo II “sales” to customers who were initially offered the infringing VPRo I, a so-called “bait-and-switch.” In summarizing the jury's verdict, the court wrote as follows:

It is undisputed that the patented features of American Seating's tie-down wheelchair restraint system prompted consumer demand, in large part because of its efficiency and ADA-compliance, and that USSC's VPRo I restraint system infringes these patented features. It is also undisputed that USSC's VPRo II restraint system does not infringe. In instances involving five transit authorities, however, the jury awarded American Seating lost profit damages for USSC sales of the non-infringing VPRo II restraint system, because in those cases USSC first made infringing offers to sell the VPRo I, but ultimately delivered the VPRo II.

On appeal, USSC proffered two arguments in an attempt to overturn the jury's lost profit damages award on sales of the non-infringing VPRo II. First, USSC argued that the jury's award was not supported by substantial evidence. Second, USSC argued that the VPRo II was an acceptable substitute to the VPRo I and that the presence of non-infringing alternatives precludes lost profit damages.

In rejecting USSC's first argument, the CAFC found that the VPRo II sales would have gone to American Seating “but-for” USSC's initial offer of the infringing VPRo I. The court's decision in that regard was based in part on an e-mail from USSC's vice president of sales announcing certain jobs needed to be “switched over” to the VPRo II and inconsistent testimony by USSC's president and owner regarding events surrounding the sales in question and whether customers were effectively informed about the switch.

With regard to USSC's second argument, the CAFC found that a non-infringing replacement product is not considered a substitute unless it is acceptable to purchasers of the infringing product and those purchasers view it as equivalent to the patented device. In that regard, the CAFC found it reasonable for the jury to conclude that USSC failed to prove that the VPRo II was an acceptable substitute to the VPRo I based on its review and demonstrations of both products and testimony of an American Seating sales manager regarding USSC's admission that a manager of the Los Angeles County Metropolitan Transit Authority objected to the switch from the VPRo I to VPRo II because of differences in the way the two devices lock into use.

Considerations for Business Managers

Underlying the CAFC's rejection of USSC's appeal arguments was its finding that “USSC did not prove that its customers specifically consented to receive the VPRo II rather than the VPRo I for the sales in question.” More specifically, American Seating's failure to establish that it had informed its customers that the VPRo II did not include the infringing feature incorporated into the VPRo I was a factor which prevented it from establishing that it would have made the VPRo II sales but-for its initial offer of the VPRo I.

Alternatively, had USSC demonstrated to a sufficient degree of certainty that its customers purchased the VPRo II despite knowing of the absence of the infringing feature, it could have more effectively argued that demand for the VPRo II was driven by factors other than the patented feature and that the VPRo II represented an acceptable non-infringing alternative to the VPRo I. Argued successfully, such positions may have been persuasive to the jury and precluded an award of lost profit damages on USSC's sales of the non-infringing VPRo II.

Therefore, when it comes to selling non-infringing “alternative” products in place of accused products, absent other available evidence regarding the factors which drive demand for the accused and/or alternative products, business managers may want to consider the suggestions listed below. Because the specific facts and circumstances surrounding a particular situation will dictate the relevance (if any) of the suggestions, the applicability of each should be considered in light of the fact-specific context of each situation.

• Communication with customers informing them of the differences between the accused and alternative products.
• Collection of letters of consent from customers stating the acceptance of the alternative products.
• Execution of survey(s) to determine the extent of knowledge and/or use (if any) by customers of the allegedly infringing feature.
• Removal of references to the infringing feature(s) from promotional and/or technical documents.
• Creation of new product name(s), number(s), and/or packaging for use with the alternative product.
• Review and documentation of customer feedback ( i.e., sales call reports) regarding the existence/absence/removal of the accused feature.
• Instruction and/or training of sales and marketing professionals with specific regard to the alternative products.

As stated above, the specific facts and circumstances of each particular matter will determine the extent to which any of the above suggestions may provide relevant insight into establishing what sales (if any) would have been made by the plaintiff but-for the defendant's offer of the infringing products. However, as can be seen in the example provided by American Seating, had USSC obtained written consent from the relevant purchasers of the VPRo II authorizing a “switch” from the VPRo I, that consent would likely have provided strong evidence in its defense of the bait'and-switch arguments put forth by American Seating.

Considerations for Legal And Financial Professionals

American Seating also provides interesting considerations for legal and financial professionals involved in patent infringement litigation matters. In that regard, American Seating reinforced the “but-for” standard for the collection of lost profit damages by ruling that “to prove lost profits from lost sales, the patent owner bears the initial burden to show a reasonable probability that 'but for' the infringement, he would have made the sales. Once this reasonable probability is shown, the burden shifts to the infringer to show that the 'but-for' causation analysis is unreasonable under the specific circumstances.”

In applying the but-for standard the court clearly ruled that a lost profits claim can extend beyond patented and convoyed products to include non-patented/non-convoyed products as well. As such, it becomes relevant to evaluate the facts surrounding the specific circumstances of the alleged infringement to not only determine the specific feature(s) which drove demand for the patented and accused products, but to also evaluate the quantum of the plaintiff's additional sales (if any) that would have been made but-for the defendant's promotion of the accused features. As can be seen by the court's decision in American Seating, to the extent that sales of non-accused products can be directly tied to the defendant's promotion of accused feature(s), it may be possible for a plaintiff to argue for the inclusion of such products in its claim for lost profits damages under a “bait'and-switch” theory.

American Seating may also provide insight into another “acceptability” consideration with regard to non-infringing alternatives. In finding an absence of proof that the VPRo II represented an “acceptable” alternative to certain customers who may not have known they were not receiving the VPRo I, American Seating sets forth an additional consideration by which the acceptability of potential alternatives may be judged.

Conclusion

The recent decision in American Seating outlines several interesting considerations for business managers with responsibility for the sale and marketing of patented, accused, and alternative products, as well as legal and financial professionals involved in patent infringement litigation matters. Those considerations, which can potentially impact the quantum of damages awarded in patent infringement litigation, should be considered in similar situations so as to prevent/allow for lost profit damages under the theory of “bait and switch.”

Michael K. Milani, a member of this newsletter's Board of Editors, is a Managing Director and Daniel J. Steinert is an Associate in Ocean Tomo, LLC's Expert Testimony practice, which is focused on assisting clients and counsel with the determination of economic damages in intellectual property infringement litigation. They are based out of the firm's Chicago and San Francisco offices respectively.

On Jan. 29, 2008, the CAFC affirmed the judgment of the U.S. District Court for the Western District of Michigan in the matter of American Seating Company v. USSC Group, Inc. (No. 01-00578, W.D. Mich. Aug. 24, 2006.) The decision, which relates to a patent infringement litigation, provides interesting considerations for business managers with responsibility for accused, infringing, and/or non-infringing “alternative” products as well as for legal and financial professionals who deal with the determination of economic damages in patent infringement matters.

Summary of American Seating

American Seating brought suit for infringement of U.S. Patent No. 5,888,038 titled “Tie-Down for Wheelchairs.” The products embodying the invention related to a restraint system comprising a combination of belts and arms to secure a wheelchair in place on a train or bus. Defendant USSC sold two products, VPRo I and VPRo II. Although the VPRo II was found to not infringe the '038 patent, the court ruled that American Seating was entitled to collect lost profit damages on USSC's VPRo II “sales” to customers who were initially offered the infringing VPRo I, a so-called “bait-and-switch.” In summarizing the jury's verdict, the court wrote as follows:

It is undisputed that the patented features of American Seating's tie-down wheelchair restraint system prompted consumer demand, in large part because of its efficiency and ADA-compliance, and that USSC's VPRo I restraint system infringes these patented features. It is also undisputed that USSC's VPRo II restraint system does not infringe. In instances involving five transit authorities, however, the jury awarded American Seating lost profit damages for USSC sales of the non-infringing VPRo II restraint system, because in those cases USSC first made infringing offers to sell the VPRo I, but ultimately delivered the VPRo II.

On appeal, USSC proffered two arguments in an attempt to overturn the jury's lost profit damages award on sales of the non-infringing VPRo II. First, USSC argued that the jury's award was not supported by substantial evidence. Second, USSC argued that the VPRo II was an acceptable substitute to the VPRo I and that the presence of non-infringing alternatives precludes lost profit damages.

In rejecting USSC's first argument, the CAFC found that the VPRo II sales would have gone to American Seating “but-for” USSC's initial offer of the infringing VPRo I. The court's decision in that regard was based in part on an e-mail from USSC's vice president of sales announcing certain jobs needed to be “switched over” to the VPRo II and inconsistent testimony by USSC's president and owner regarding events surrounding the sales in question and whether customers were effectively informed about the switch.

With regard to USSC's second argument, the CAFC found that a non-infringing replacement product is not considered a substitute unless it is acceptable to purchasers of the infringing product and those purchasers view it as equivalent to the patented device. In that regard, the CAFC found it reasonable for the jury to conclude that USSC failed to prove that the VPRo II was an acceptable substitute to the VPRo I based on its review and demonstrations of both products and testimony of an American Seating sales manager regarding USSC's admission that a manager of the Los Angeles County Metropolitan Transit Authority objected to the switch from the VPRo I to VPRo II because of differences in the way the two devices lock into use.

Considerations for Business Managers

Underlying the CAFC's rejection of USSC's appeal arguments was its finding that “USSC did not prove that its customers specifically consented to receive the VPRo II rather than the VPRo I for the sales in question.” More specifically, American Seating's failure to establish that it had informed its customers that the VPRo II did not include the infringing feature incorporated into the VPRo I was a factor which prevented it from establishing that it would have made the VPRo II sales but-for its initial offer of the VPRo I.

Alternatively, had USSC demonstrated to a sufficient degree of certainty that its customers purchased the VPRo II despite knowing of the absence of the infringing feature, it could have more effectively argued that demand for the VPRo II was driven by factors other than the patented feature and that the VPRo II represented an acceptable non-infringing alternative to the VPRo I. Argued successfully, such positions may have been persuasive to the jury and precluded an award of lost profit damages on USSC's sales of the non-infringing VPRo II.

Therefore, when it comes to selling non-infringing “alternative” products in place of accused products, absent other available evidence regarding the factors which drive demand for the accused and/or alternative products, business managers may want to consider the suggestions listed below. Because the specific facts and circumstances surrounding a particular situation will dictate the relevance (if any) of the suggestions, the applicability of each should be considered in light of the fact-specific context of each situation.

• Communication with customers informing them of the differences between the accused and alternative products.
• Collection of letters of consent from customers stating the acceptance of the alternative products.
• Execution of survey(s) to determine the extent of knowledge and/or use (if any) by customers of the allegedly infringing feature.
• Removal of references to the infringing feature(s) from promotional and/or technical documents.
• Creation of new product name(s), number(s), and/or packaging for use with the alternative product.
• Review and documentation of customer feedback ( i.e., sales call reports) regarding the existence/absence/removal of the accused feature.
• Instruction and/or training of sales and marketing professionals with specific regard to the alternative products.

As stated above, the specific facts and circumstances of each particular matter will determine the extent to which any of the above suggestions may provide relevant insight into establishing what sales (if any) would have been made by the plaintiff but-for the defendant's offer of the infringing products. However, as can be seen in the example provided by American Seating, had USSC obtained written consent from the relevant purchasers of the VPRo II authorizing a “switch” from the VPRo I, that consent would likely have provided strong evidence in its defense of the bait'and-switch arguments put forth by American Seating.

Considerations for Legal And Financial Professionals

American Seating also provides interesting considerations for legal and financial professionals involved in patent infringement litigation matters. In that regard, American Seating reinforced the “but-for” standard for the collection of lost profit damages by ruling that “to prove lost profits from lost sales, the patent owner bears the initial burden to show a reasonable probability that 'but for' the infringement, he would have made the sales. Once this reasonable probability is shown, the burden shifts to the infringer to show that the 'but-for' causation analysis is unreasonable under the specific circumstances.”

In applying the but-for standard the court clearly ruled that a lost profits claim can extend beyond patented and convoyed products to include non-patented/non-convoyed products as well. As such, it becomes relevant to evaluate the facts surrounding the specific circumstances of the alleged infringement to not only determine the specific feature(s) which drove demand for the patented and accused products, but to also evaluate the quantum of the plaintiff's additional sales (if any) that would have been made but-for the defendant's promotion of the accused features. As can be seen by the court's decision in American Seating, to the extent that sales of non-accused products can be directly tied to the defendant's promotion of accused feature(s), it may be possible for a plaintiff to argue for the inclusion of such products in its claim for lost profits damages under a “bait'and-switch” theory.

American Seating may also provide insight into another “acceptability” consideration with regard to non-infringing alternatives. In finding an absence of proof that the VPRo II represented an “acceptable” alternative to certain customers who may not have known they were not receiving the VPRo I, American Seating sets forth an additional consideration by which the acceptability of potential alternatives may be judged.

Conclusion

The recent decision in American Seating outlines several interesting considerations for business managers with responsibility for the sale and marketing of patented, accused, and alternative products, as well as legal and financial professionals involved in patent infringement litigation matters. Those considerations, which can potentially impact the quantum of damages awarded in patent infringement litigation, should be considered in similar situations so as to prevent/allow for lost profit damages under the theory of “bait and switch.”

Michael K. Milani, a member of this newsletter's Board of Editors, is a Managing Director and Daniel J. Steinert is an Associate in Ocean Tomo, LLC's Expert Testimony practice, which is focused on assisting clients and counsel with the determination of economic damages in intellectual property infringement litigation. They are based out of the firm's Chicago and San Francisco offices respectively.