NDGA rejects two-supplier market theory for lost profits

On January 6, 2014, Judge Duffey of the Northern District of Georgia issued an opinion in Hubbard/Downing, Inc. v. Kevin Heath Enters., Case No. 1:10-cv-1131-WSD (Doc. No. 97), in which the court addressed damages issues stemming from a contempt ruling. In earlier action, plaintiff accused defendants' products (neck brace devices for high performance racing vehicles) of infringing plaintiff's patent. The parties entered into a settlement agreement that required a Consent Order. Subsequently, plaintiff discovered new neck brace products marketed by defendants, and brought an action for contempt. The court ruled that the new product "is no more than colorably different than the [prior device that was found to infringe]," and that defendants "knowingly violated the [settlement] agreement and the Consent Order ...." [Slip op. at 8.]

Plaintiff then requested that the court award lost profits, to disgorge profits made by defendants, and to award attorneys' fees. In this order, the court determined the sanctions to be imposed for violation of the Consent Order, including lost profits.

Plaintiff argued that its product and defendants' product constituted a two-supplier market. The court recognized that two-supplier market is a viable theory for lost profits, and that in such a case, the Panduit test collapses into three elements: "1) the relevant market contains only two suppliers, 2) its own manufacturing and marketing capability to make the sales that were diverted [to the other supplier], and 3) the amount of profit it would have made from these diverted sales." Slip op. at 13 (quoting Micro Chem. v. Lextron, Inc., 318 F.3d 119, 1122 (Fed. Cir. 2003)). Under this theory, the market must first be defined, and the analysis must take into account whether there are "substitutes similar in physical and functional characteristics to the plaintiff's device alleged to have been infringed." Slip op. at 14.

Plaintiff, of course, attempted to narrowly define the market. It alleged that the market consisted of only "yoke-style head and neck support" devices and did not include head and neck supports that did not utilize a yoke-style restraint or that are not certified for use in racing events. Id. The plaintiff argued that head and neck supports without the yoke-style restraint exhibit "significantly different characteristics from the patented invention in design, comfort, and function." Id.

Defendants argued that there were more than two suppliers in the market because there were a variety of devices that meet the standards for head and neck support devices for high performance racing vehicles. Defendants submitted evidence of 8 such devices, including several made by a third party manufacturer, and also evidence of 3 other manufacturers of head and neck support devices.

The court rejected plaintiff's argument and found that the other devices were similar in physical and functional characteristics to the patented invention. The court stated:

It is undisputed that there are at least eight (8) head and neck support systems certified under SFI 38.1 for use in high-performance racing vehicles. That the NecksGen device is the only "yoke-style" device like Plaintiff's is not sufficient to show that only two devices, and therefore only two suppliers, exist in the relevant market here. The relevant market includes "devices or substitutes similar in physical and functional characteristics to the patented invention," excluding "alternatives 'with disparately different prices or significantly different characteristics.'" Micro Chem., 318 F.3d at 1124 (quoting Crystal Semiconductor, 246 F.3d at 1356). The test is not one of duplication of characteristics as Plaintiff suggests. That is, the market is not limited to only those that duplicate the characteristics of the patented device. It also includes those that are "similar in physical and functional characteristics" such that they may be considered by purchasers as alternatives to the patented device. Id. (emphasis added). Aware of this relevant market argument offered by Defendants, Plaintiff failed to offer, at the December 13, 2013, hearing or anywhere else in the record, sufficient or reliable evidence to show that Plaintiff's and the NecksGen devices differ significantly in physical and functional characteristics from the other SFI 38.1 certified devices. The relevant market thus may consist of at least eight (8) head and neck support systems, which are supplied by Plaintiff, Defendants, and at least one additional supplier. Plaintiff has failed to meet its burden to show that the two-supplier test applies in this action.

The court also rejected the two-supplier lost profits theory on two additional grounds. First, the court held that plaintiff did not present evidence that a sale of the defendants' device would necessarily have been made by plaintiff, citing the failure by plaintiff to provide evidence of demand and price elasticity. Second, the court found that plaintiff failed to present sufficient evidence to show marketing and manufacturing capacity. The court cited evidence that at times plaintiff's devices were not available for "significant periods, sometimes more than 30 days," and that plaintiff's expert failed to analyze how this inability to fill orders would impact purchasers' conduct. Slip op. at 18-19. The expert admitted that he had no way of knowing what a purchaser would do if it was informed that it would have wait 3-4 weeks for plaintiff's product. The court concluded: "Plaintiff simply fails to provide any analysis showing customer response to inventory shortages and, specifically, whether availability would cause a purchaser to buy a device other than one manufactured by Plaintiff." Slip op. at 19.

On these various grounds, the court concluded that it did not have a sufficient basis to award lost profits as a sanction for violation of the Consent Order.