Lost Profits Damages & On-Sale Bar to Patentability Hinge on Equipment Contract Interpretation
In the appeal from the district court’s judgment in this case, the Federal Circuit, inter alia, (1) reversed the district court’s rejection of Venture’s on-sale bar defense and (2) affirmed the district court’s rejection of Sunoco’s demand for lost profits damages. Both issues ultimately turned on the courts’ interpretation of an equipment installation contract. . . .
In Sunoco Partners Marketing & Terminals L.P. v. U.S. Venture, Inc., Nos. 2020-1640, 2020-1641 (Fed. Cir. April 29, 2022), the plaintiff-patentee, Sunoco, had asserted four patents against Venture in the Northern District of Illinois. The four patents were directed to equipment and processes for blending gasoline with butane to increase fuel volatility and enhance cold-weather vehicle performance. Following a bench trial, the district court ruled that the butane blending equipment that Venture had installed and operated at its gasoline storage terminals infringed the four patents and awarded damages of $2 million based on a reasonable royalty.
Only two of the four patents, U.S. Patent Nos. 7,032,629 (“the ’629 patent”) and 6,679,302 (“the ’302 patent”), were at issue on appeal. After the bench trial, the other two patents were invalidated by a judgement in a separate proceeding before the Patent Trial and Appeal Board, which was affirmed by the Federal Circuit. See id. at 16 (citing Sunoco Partners Mktg. & Terminals L.P. v. Magellan Midstream Partners L.P., 853 F. App’x 668 (Fed. Cir. 2021)).
In the appeal from the district court’s judgment in this case, the Federal Circuit, inter alia, (1) reversed the district court’s rejection of Venture’s on-sale bar defense and (2) affirmed the district court’s rejection of Sunoco’s demand for lost profits damages. Both issues ultimately turned on the courts’ interpretation of an equipment installation contract between Sunoco and third-party, Equilon Enterprise LLC., which was executed two days before the patents’ critical date of February 9, 2000. See Sunoco, Nos. 2020-1640, 2020-1641 at 5-6 n.2 (applying pre-AIA § 102(b)). According to the contract, Sunoco agreed to install butane blending equipment at Equilon’s Detroit facility “‘in consideration for’ Equilon’s commitment to purchase at least 500,000 barrels of butane from [Sunoco] over roughly five years.” Id. at 6.
For two reasons, the district court rejected Venture’s contention that the installation contract resulted in an on-sale bar to patentability. First, the district court observed that the contract had “‘two distinct sections,’” one for the installation of equipment and another for the purchase of butane. Id. at 9. According to the district court’s reading of the contract, Sunoco bore the expense of installing the equipment, and the only thing Equilon agreed to purchase was butane—and “‘butane is not the invention.’” Id. Second, the district court relied on certain contractual provisions permitting Sunoco to test the installed equipment to conclude “that this transaction occurred primarily for experimental, rather than commercial purposes” and therefore fell within the experimental use exception to the on-sale bar. Id. at 6.
In reversing the district court’s ruling, the Federal Circuit looked to both the “‘law of contracts as generally understood’” and to specific provisions of the Equilon contract to determine “[w]hether the Equilon transaction was for primarily experimental or commercial purposes.” Id. at 6 (quoting Meds. Co. v. Hospira, Inc., 827 F.3d 1363, 1373 (Fed. Cir. 2016) (en banc). In addition to the contract recitals, the Federal Circuit analyzed the contract’s description of the transaction:
[Sunoco] agrees to sell to Equilon, and Equilon agrees to purchase, the Equipment (as hereinafter defined) along with a license to use certain technology and software owned by [Sunoco] pertaining to the computerized blending of Butane and gasoline stocks, in consideration for the purchase and sale of Butane as set forth herein.
Id. at 7 (emphasis in original).
The Federal Circuit concluded that this provision “expressly describe[d] the transaction as a sale” of the equipment “without reference to any experimental purpose.” Id. Other contract language underscored Sunoco’s intention to sell and Equilon’s intention to purchase the equipment. According to the contract, “The ownership and title to the Equipment shall be conveyed to Equilon by [Sunoco] upon completion of the Equipment installation and training. . . .” Id. at 8 (emphasis in original). Moreover, the contract provided that after fulfilling those conditions, “[Sunoco] shall execute a bill of sale in the form attach[ed] hereto . . . to effectuate the conveyance of ownership of the Equipment to Equilon.” Id. (emphasis in original). These contract provisions, therefore, show that Equilon had agreed to purchase not only 500 barrels of butane, but also the butane-blending equipment installed at its Detroit facility.
Conveyance of title notwithstanding, Sonoco argued that the purpose of the contract was “to experiment at an actual tank farm and determine whether their idea was capable of performing its intended purpose in its intended environment.” Id. at 10. The contract, therefore, was drafted in such a way to grant Sonoco “access to Equilon’s facility to test under actual conditions.” Id. at 11.
As proof of this alleged contractual purpose, Sonoco directed the Federal Circuit to the contract section entitled “Equipment Testing” that “describes two sets of testing: pre-installation testing and post-installation testing.” Id. at 10. The pre-installation testing provisions permitted Sunoco to test the equipment prior to delivery to ensure that it met “minimum operating standards.” Id. at 10. If the equipment failed the pre-installation testing, then Sunoco could unilaterally terminate the contract. Id.
The Federal Circuit concluded that the pre-installation testing “does not necessarily evidence intent to experiment” and “indicates merely that the sale was conditioned upon testing to ensure satisfactory operation.” Id. In the court’s view, “this provision standing alone is inconclusive and insufficient to show a primarily experimental purpose.” Id. Moreover, the court pointed to evidence that Sunoco’s pre-installation testing did not involve an evaluation of the butane-blending performance of the equipment. Instead, Sunoco merely tested the equipment’s software to ensure that individual pieces of equipment were in communication with each other. Id. The court concluded that the pre-installation testing “could have been done before or without the agreement” and a “need to perform this [pre-installation] testing, therefore, cannot have been the primary purpose for the Equilon sale.” Id.
According to the Federal Circuit, “The post-installation testing provisions fare no better.” Id. at 13. Those provisions gave Sunoco a period of 90 days after installation “to determine whether the Equipment is properly blending butane.” Id. The court viewed this provision as demonstrating nothing more than commercial acceptance testing to confirm that the equipment “is working as promised.” Id. Consistent with the notion of acceptance testing, the contract included a recital in which Sunoco “represents and warrants that upon transfer of title to the Equipment, the Equipment . . . will at such time be fit for the purpose of blending Butane. . . .” Id.
For these reasons, the Federal Circuit concluded that the testing contemplated by the contract was intended only “to 'verify’ and 'confirm’ that the installed system functioned as . . . warranted.” The Federal Circuit therefore ruled that the tests were “not ‘experiments’ in the way the experimental-use doctrine contemplates” and did not shield the commercial transaction from operation of the on-sale bar to patentability. Id.
After applying the on-sale bar to the patents in suit, only one claim of the ’629 patent and one claim of the ’302 patent survived. Id. at 15. The Federal Circuit affirmed the district court’s judgment that Venture had infringed the two remaining claims and further reviewed Sunoco’s cross appeal of the district court’s denial of lost profits damages.
Sunoco had asserted that Venture’s installation and use of its own butane-blending equipment had deprived Sunoco of the profits it would have earned by selling butane-blending equipment to Venture. The district court found that Sunoco had adequately proven three of the four Panduit prerequisites to lost profits damages—(1) “demand for the patented product,” (2) “absence of non-infringing alternatives,” and (3) “manufacturing and marketing capability to exploit the demand.” Id. at 26-27 (citing Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F.2d 1152, 1156 (6th Cir. 1978)). The district court, however, determined that “Sunoco had failed to prove factor (4), the amount of profit it would have made.” Id. at 27.
At trial, Sunoco relied on its equipment installation contract to establish the earnings and profits that it would have earned if Venture had purchased and installed Sunoco’s equipment at Venture’s gasoline storage terminals. Sunoco’s expert opined that Sunoco and Venture would have agreed to a fifty-fifty split of profits earned by Venture from the sale of butane-blended gasoline produced from butane supplied by Sunoco and blended using Sunoco’s equipment. See id. at 26-27. According to Sunoco’s expert, Sunoco’s share of profits under that arrangement would have totaled $31.585 million. Id.
Having found that the payments that Sunoco receives under its equipment installation contract are derived from the sale of butane, the district court rejected Sunoco’s measure of lost profits because those revenues “do not accurately reflect the value of the patented invention—since ‘neither butane nor blended gasoline is the patented invention.’” Id. The Federal Circuit affirmed that ruling, explaining that the contract payments “reflect a bundle of goods and services beyond just the patented invention—e.g., the purchase and sale of butane, equipment maintenance and monitoring, and a license to more than just the patented technology.” Id.
Without expressly saying as much, the Federal Circuit in essence ruled that Sunoco had failed to apportion the resulting lost profits among the invention’s contribution to profits and the other profit generating features of the contract. The Federal Circuit explained that Sunoco’s asserted $31.585 million lost profits award “represents more than just the damage Sunoco incurred” and “does not translate into the value of the patent.” Id. The Federal Circuit therefore found no clear error and “decline[d] to disturb the [district court’s] decision to deny lost-profits damages.”