| English term or phrase: convoyed sales | Convoyed (or Collateral) Sales
Generally, “convoyed sales” refers to an unpatented item that is sold with the patented item and where the two items are “analogous to components of a single assembly or [are] parts of a complete machine, or they must constitute a functional unit.” Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1550 (Fed. Cir.) (en banc), cert. denied, 516 U.S. 867 (1995). They arise when a patentee seeks damages not only for sales of the infringing product, but also for sales of unpatented items that the infringer may sell or market together with the infringing product. Normally, the “convoyed” sale is the unpatented item that is sold with the infringing product and the latter drives the sale, though in some cases the situation may be reversed, i.e., the unpatented item drives sales.
Convoyed sales are allowed if (a) the infringing and noninfringing products form a functional unit and (b) the patentee’s loss was reasonably foreseeable. Id. at 1549, 1550. In this situation, the unpatented, collateral product may be compensable in lost profits or as part of the royalty base. Paper Converting, 745 F.2d at 23 (allowing lost profits on unpatented collateral item); Interactive Pictures Corp. v. Infinite Pictures, Inc., 274 F.3d 1371, 1384-86 (Fed. Cir. 2001) (allowing unpatented collateral item to be part of the royalty base). In addition, the existence convoyed sales may be a factor in determining a reasonable royalty rate; indeed, convoyed sales are explicitly listed in Georgia-Pacific as factor #6. Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp. 1116, 1120 (S.D.N.Y. 1970) (“6. The effect of selling the patented specialty in promoting sales of other products of the licensee; that existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.”). In Interactive Pictures, the Federal Circuit found no error by the district court’s inclusion of the unpatented items in the royalty base and also factoring the convoyed sales into the royalty rate. 274 F.3d at 1385. Notably, moreover, in the context of the royalty rate, there is no explicit requirement of a “functional unit”; rather, the patentee may argue that the existence of convoyed sales by the infringer acts to increase the reasonable royalty, whereas an infringer could argue that the absence of convoyed sales has the opposite impact, without having to prove that the unpatented and patented items form a functional unit or are part of a single assembly.
Despite Rite Hite's requirement of a “single assembly” or “functional unit,” cases before and afterRite-Hite, even in the lost profits domain, seem to have applied a more relaxed standard for recovery of damages on convoyed sales. For example, prior to Rite Hite, in Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11 (Fed. Cir. 1984), the Federal Circuit suggested that the patent owner should be entitled to lost profits on collateral items that have a marketing and financial dependence – rather than a functional dependence. Seven years later, but also prior to Rite Hite, the Federal Circuit applied this same reasoning in Kaufman Co. v. Lantech, Inc., 926 F.2d 1136, 1144 (Fed. Cir. 1991). After Rite Hite, the Federal Circuit in Golden Blount, Inc. v. Robert H. Peterson Co., 438 F.3d 1354, 1372 (Fed. Cir. 2006), allowed lost profits on unpatented and patented items that did not appear to have been part of a functional unit but were – as “standard practice in the industry” – simply sold together.
In fact, in some cases where the unpatented articles have a major impact on sales and profits, it is possible to have a reasonable royalty that in fact exceeds the expected profit margin on the accused products, because the profit margin does not account for collateral sales while the royalty rate does. See, e.g., Deere & Co. v. Int’l. Harvester Co., 710 F.2d 1551, 1559 (Fed. Cir. 1983); Mosinee Paper Corp. v. James River Corp. of Virginia, 1992 WL 41690, 22 USPQ2d 1657, 1662 (E.D. Wis. Feb. 18, 1992) (“The testimony showed that dispensers were placed in the customers’ facilities for little or no charge in an attempt to sell paper” and the resulting royalty rate was assessed accordingly, based upon the collateral sale of paper towels, not upon the infringing paper towel dispenser).
Links to Significant Cases
Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538 (Fed. Cir.), cert. denied, 516 U.S. 867 (1995).
Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11 (Fed. Cir. 1984).
Interactive Pictures Corp. v. Infinite Pictures, Inc., 274 F.3d 1371 (Fed. Cir. 2001). |
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