Proving causation for lost sales undermines an expert's testimony

In lost profits cases, the causation element puts the plaintiff’s damages expert in a quandary, we reported here a few weeks ago. Do you assume liability and strictly focus on damages, or testify to it?

In a recent patent infringement case, the expert unsuccessfully opted to do the latter. Both parties produced “advanced energy” surgical products for laparoscopic and minimally invasive procedures. The plaintiffs claimed the defendant violated three of its patents for ultrasonic surgical devices and the federal court (D. Conn.) agreed.

To establish the requisite linkage between the defendant’s violation and their lost sales under the Panduit test, the plaintiffs tried to establish the market share allocation they would have had “but for” the defendants’ infringing devices. The court agreed with the definition of the market the plaintiffs’ expert proposed: a single market for advanced energy cutting and coagulating devices in which the litigants were the largest players and competed directly with each other. The plaintiffs did so with two different types of products, instruments using ultrasonic energy and those using radiofrequency (RF). Witnesses agreed that both types of energy worked for the same surgeries. This, the expert stated, meant they could function interchangeably.

If, in the 2010 “actual market,” the plaintiffs had a 24% market share, in the 2010 “but for” market, the plaintiffs would have a 54.2% market share, regardless of the defendant’s access to “immune” ultrasonic products and its own line of RF products, the expert calculated. For 2011, the plaintiffs’ actual market share was 27.5%, but, under the expert’s reconstruction, it would be 60.2%. This increase was due to a steady rise in the use of RF technology, he said, referencing a 2010 report from the Millennium Research Group (MRG) on vessel-sealing instruments.

The defendant’s expert claimed primarily that the “immune” products would fill in the “hole” the absence of the infringing devices left in the market. The court rejected this model but also found the market reconstruction of the plaintiffs’ expert problematic. The research study included information that “undercut” his “but for” market reconstruction. There was insufficient evidence to infer that “RF technology would have taken over the advanced energy market to the extent [the plaintiffs’ expert] claimed.” Because the plaintiffs did not prove causation, their case for lost profits damages failed.

However, the expert’s reasonable royalty analysis fared much better. Ultimately, the court awarded $141 million in royalty damages. Read the complete digest of Tyco Healthcare Group LP v. Ethicon Endo-Surgery, Inc., 2013 U.S. Dist. LEXIS 43992 (March 28, 2013) in the JuneBusiness Valuation Update; the opinion will be available soon at BVLaw.