Micro Chemical, Inc. v. Lextron, Inc.

• Decision Date: 24 January 2003
• Docket Number: No. 02-1155.,02-1155.
• Citation: 317 F.3d 1387
• Parties: MICRO CHEMICAL, INC., Plaintiff-Appellee, v. LEXTRON, INC. and Turnkey Computer Systems, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Federal Circuit

317 F.3d 1387

MICRO CHEMICAL, INC., Plaintiff-Appellee, v. LEXTRON, INC. and Turnkey Computer Systems, Inc., Defendants-Appellants.

No. 02-1155.

United States Court of Appeals, Federal Circuit.

January 24, 2003.

Gregory A. Castanias, Jones, Day, Reavis & Pogue, of Washington, DC, argued for plaintiff-appellee. With him on the brief was William K. Shirey. Of counsel on the brief was John Mozola, Mullin Hoard & Brown, LLP, of Amarillo, TX.

Dennis J. Mondolino, Morgan, Lewis & Bockius, LLP, of New York, NY, argued for defendants-appellants. With him on the brief was Edward M. Reisner.

Before MICHEL, Circuit Judge, PLAGER, Senior Circuit Judge, and LOURIE, Circuit Judge.

PLAGER, Senior Circuit Judge.

In this case the trial court entered a final judgment on a jury verdict awarding damages to Micro Chemical, Inc. The defendants, Lextron, Inc. and Turnkey Computer Systems, Inc. (collectively, "the defendants"), appeal, challenging the district court's understanding of Rule 702 of the Federal Rules of Evidence and of the Supreme Court's decision in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993). Defendants specifically challenge the district court's decision to admit the testimony of Micro Chemical's damages expert, as well as the district court's denial of their motion for judgment as a matter of law, or alternatively, for a new trial. Because we conclude that the district court properly performed its gatekeeping role, and did not abuse its discretion in allowing Micro Chemical's damages expert to testify, and because substantial evidence supports the jury's award of damages, we affirm the district court's judgment and its denial of the defendants' motion for a new trial.

BACKGROUND

Micro Chemical and Lextron are direct competitors in the business of providing goods and services to cattle feedlots. Among the goods they supply to their customers are drugs and equipment used to treat illnesses afflicting cattle, referred to by the parties in this litigation as "animal health products." They also offer their feedlot customers computerized medical records systems for tracking health histories and medical treatments of livestock. Micro Chemical's medical records system is the commercial embodiment of the invention in its U.S. Patent No. 5,315,505 ("the '505 patent"), the patent at issue in this case.

The evidence indicates that Micro Chemical provides its computer systems essentially free of charge to feedlots in an effort to promote sales of its animal health products. Lextron also places its computer systems in feedlots for free or at a substantial loss. The record contains evidence that Lextron's goal also is to generate sales of its animal health products, although Lextron disputes that on appeal.

Turnkey supplies accounting system software to cattle feedlots. Among the add-on software modules offered by Turnkey is an animal records module, which tracks health and treatment histories of livestock. Turnkey has also created interfaces between its accounting system and other companies' medical records systems. The record includes evidence that Turnkey underpriced its animal records module and that sales of the animal records module support sales of its accounting system.

When the '505 patent issued in 1994, Micro Chemical filed a patent infringement suit against Lextron and Turnkey. In the course of that litigation, the defendants stipulated that their original systems infringed the '505 patent. Both defendants then modified their systems to remove the feature they believed was necessary to a finding of infringement; this feature related to a displayed warning if an animal was scheduled for shipment to a slaughterhouse before the end of the withdrawal period for all drugs administered to the animal.

An issue remained as to whether Lextron's modified system infringed. The district court conducted a Markman hearing directed to a disputed claim limitation relating to a drug withdrawal calculation. After the court issued an order adopting Micro Chemical's claim construction, Lextron stipulated that its modified system infringed under that construction. The district court entered a stipulated judgment, and an earlier appeal to this court followed. On appeal this court disagreed with the district court's claim construction, vacated the judgment, and remanded for further proceedings. Micro Chem., Inc. v. Lextron, Inc., No. 97-1589, 1998 WL 386195 (Fed.Cir. June 17, 1998) (non-precedential).

In response, Micro Chemical amended its complaint to limit its infringement allegations to the defendants' unmodified systems. The only issue thus left for trial was the amount of damages from the date the patent issued to the dates in 1997 when the defendants modified their systems.

Prior to the trial on damages, the defendants filed motions in limine to preclude certain testimony by Micro Chemical's damages expert, Edward Fiorito. First, the defendants sought to prevent Fiorito from testifying that the defendants' 1997 modified systems could not be considered non-infringing alternatives for purposes of determining the amount of damages. The district court denied that motion without comment. The defendants also filed a motion to preclude Fiorito from testifying that a reasonable royalty for Lextron's infringing computer systems would be three percent of its revenues from sales of animal health products, as Fiorito had stated in his expert report. The trial court ruled that Micro Chemical could not recover a royalty on the animal health products themselves but could show that sales of animal health products were relevant to a reasonable royalty determination because Micro Chemical alleged that the defendants used their infringing systems as loss leaders to promote animal health product sales. The defendants further sought to preclude Fiorito from testifying at all on the grounds that his testimony would not satisfy the requirements for expert testimony set out in Rule 702 of the Federal Rules of Evidence and the Supreme Court's decision in Daubert. The district court reserved ruling on the defendants' Daubert motion.

At trial, Fiorito testified that a reasonable royalty for the defendants' infringing systems based upon a hypothetical negotiation between the parties at the time infringement began would be $400 per month per system. To support this figure, Fiorito analyzed the relevant factors set out in Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp. 1116, 166 USPQ 235 (S.D.N.Y.1970), modified and aff'd, 446 F.2d 295, 170 USPQ 369 (2d Cir.1971). Relying on statements made by employees of Micro Chemical and the defendants, Fiorito concluded that several factors would lead to a higher royalty, including Micro Chemical's established policy of not licensing its patents and evidence that the defendants supplied their customers with infringing systems to promote sales of other products (i.e., Lextron's animal health products and Turnkey's accounting systems). Multiplying by the number of systems and months of infringement, Fiorito testified that Lextron owed Micro Chemical damages of $1,539,600 and Turnkey owed damages of $145,600.

The defendants' damages expert, Walter Bratic, took the position that there was no connection between installation of the defendants' infringing systems and sales of the defendants' other products. He also opined that the value of the patented invention was negligible. Bratic testified that a reasonable royalty would be one percent of the defendants' imputed revenues, i.e., the revenues if the defendants had sold their infringing systems for full retail price. This would result in $12,717 in damages from Lextron and $735 from Turnkey.

The jury returned a verdict against Lextron in the amount of $1,015,180 and against Turnkey in the amount of $72,800. The defendants filed post-trial motions for judgment as a matter of law (JMOL), or in the alternative, for a new trial. The defendants now appeal the district court's decision not to exclude Fiorito's testimony, and the denial of those motions.

DISCUSSION

I.

Whether proffered evidence should be admitted in a trial is a procedural issue not unique to patent law, and therefore we review the district court's decision whether to admit expert testimony under the law of the regional circuit, here the Fifth Circuit. See Bose Corp. v. JBL, Inc., 274 F.3d 1354, 1360, 61 USPQ2d 1216, 1219 (Fed.Cir.2001). The Fifth Circuit reviews such evidentiary rulings for abuse of discretion. Snap-Drape, Inc. v. Comm'r, 98 F.3d 194, 197 (5th Cir.1996). The district court's interpretation of the Federal Rules of Evidence is reviewed without deference. See Bellaire Gen. Hosp. v. Blue Cross Blue Shield of Mich., 97 F.3d 822, 827 (5th Cir.1996).

A.

As a preliminary matter, we reject Micro Chemical's contention that the defendants waived their right to challenge on appeal the admission of Fiorito's testimony. Under the 2000 amendment to Rule 103 of the Federal Rules of Evidence, "[o]nce the court makes a definitive ruling on the record admitting or excluding evidence, either at or before trial, a party need not renew an objection or offer of proof to preserve a claim of error for appeal." Fed.R.Evid. 103(a) (emphasis added); see also Mathis v. Exxon Corp., 302 F.3d 448, 459 & n. 16 (5th Cir.2002) (noting that before the 2000 amendment, the Fifth Circuit required an objection at trial to preserve the error).

Here, the district court made definitive rulings either before or at trial on all of the defendants' objections to Fiorito's testimony. Before trial, the district court denied the defendants' motion in limine objecting to Fiorito's proposed testimony that defendants' modified systems were not relevant to the determination of a reasonable royalty. Regarding the defendants' motion in limine objecting to the use of animal health product sales in the damages determination, the district court ruled before...