Kelley Company appeals from a decision of the United States District Court for the Eastern District of Wisconsin, awarding damages for the infringement of U.S. Patent 4,373,847, owned by Rite-Hite Corporation. Rite-Hite Corp. v. Kelley Co., 774 F.Supp. 1514, 21 USPQ2d 1801 (E.D.Wis.1991). The district court determined, inter alia, that Rite-Hite was entitled to lost profits for lost sales of its devices that were in direct competition with the infringing devices, but which themselves were not covered by the patent in suit. The appeal has been taken in banc to determine whether such damages are legally compensable under 35 U.S.C. Sec. 284. We affirm in part, vacate in part, and remand.

On March 22, 1983, Rite-Hite sued Kelley, alleging that Kelley's "Truk Stop" vehicle restraint infringed Rite-Hite's U.S. Patent 4,373,847 ("the '847 patent").2 The '847 patent, issued February 15, 1983, is directed to a device for securing a vehicle to a loading dock to prevent the vehicle from separating from the dock during loading or unloading. Any such separation would create a gap between the vehicle and dock and create a danger for a forklift operator.

Rite-Hite distributed all its products through its wholly-owned and operated sales organizations and through independent sales organizations (ISOs). During the period of infringement, the Rite-Hite sales organizations accounted for approximately 30 percent of the retail dollar sales of Rite-Hite products, and the ISOs accounted for the remaining 70 percent. Rite-Hite sued for its lost profits at the wholesale level and for the lost retail profits of its own sales organizations. Shortly after this action was filed, several ISOs moved to intervene, contending that they were "exclusive licensees" of the '847 patent by virtue of "Sales Representative Agreements" and "Dok-Lok Supplement" agreements between themselves and Rite-Hite. The court determined that the ISOs were exclusive licensees and accordingly, on August 31, 1984, permitted them to intervene.3 The ISOs sued for their lost retail profits.

The district court bifurcated the liability and damage phases of the trial and, on March 5, 1986, held the '847 patent to be not invalid and to be infringed by the manufacture, use, and sale of Kelley's Truk Stop device. The court enjoined further infringement. Rite-Hite Corp. v. Kelley Co., 629 F.Supp. 1042, 231 USPQ 161 (E.D.Wis.1986). The judgment of liability was affirmed by this court. Rite-Hite Corp. v. Kelley Co., 819 F.2d 1120, 2 USPQ2d 1915 (Fed.Cir.1987).

On remand, the damage issues were tried to the court. Rite-Hite, 774 F.Supp. at 1514, 21 USPQ2d at 1801. Rite-Hite sought damages calculated as lost profits for two types of vehicle restraints that it made and sold: the "Manual Dok-Lok" model 55 (MDL-55), which incorporated the invention covered by the '847 patent, and the "Automatic Dok-Lok" model 100 (ADL-100), which was not covered by the patent in suit. The ADL-100 was the first vehicle restraint Rite-Hite put on the market and it was covered by one or more patents other than the patent in suit. The Kelley Truk Stop restraint was designed to compete primarily with Rite-Hite's ADL-100. Both employed an electric motor and functioned automatically, and each sold for $1,000-$1,500 at the wholesale level, in contrast to the MDL-55, which sold for one-third to one-half the price of the motorized devices. Rite-Hite does not assert that Kelley's Truk Stop restraint infringed the patents covering the ADL-100.

Of the 3,825 infringing Truk Stop devices sold by Kelley, the district court found that, "but for" Kelley's infringement, Rite-Hite would have made 80 more sales of its MDL-55; 3,243 more sales of its ADL-100; and 1,692 more sales of dock levelers, a bridging platform sold with the restraints and used to bridge the edges of a vehicle and dock. The court awarded Rite-Hite as a manufacturer the wholesale profits that it lost on lost sales of the ADL-100 restraints, MDL-55 restraints, and restraint-leveler packages. It also awarded to Rite-Hite as a retailer and to the ISOs reasonable royalty damages on lost ADL-100, MDL-55, and restraint-leveler sales caused by Kelley's infringing sales. Finally, prejudgment interest, calculated without compounding, was awarded. Kelley's infringement was found to be not willful.

On appeal, Kelley contends that the district court erred as a matter of law in its determination of damages. Kelley does not contest the award of damages for lost sales of the MDL-55 restraints; however, Kelley argues that (1) the patent statute does not provide for damages based on Rite-Hite's lost profits on ADL-100 restraints because the ADL-100s are not covered by the patent in suit; (2) lost profits on unpatented dock levelers are not attributable to demand for the '847 invention and, therefore, are not recoverable losses; (3) the ISOs have no standing to sue for patent infringement damages; and (4) the court erred in calculating a reasonable royalty based as a percentage of ADL-100 and dock leveler profits. Rite-Hite and the ISOs challenge the district court's refusal to award lost retail profits and its award of prejudgment interest at a simple, rather than a compound, rate.

We affirm the damage award with respect to Rite-Hite's lost profits as a manufacturer on its ADL-100 restraint sales, affirm the court's computation of a reasonable royalty rate, vacate the damage award based on the dock levelers, and vacate the damage award with respect to the ISOs because they lack standing. We remand for dismissal of the ISOs' claims and for a redetermination of damages consistent with this opinion. The issues raised by Rite-Hite are unpersuasive.

Because the technology, the '847 patent, and the history of the parties and their litigation are fully described in the opinions of the district court and that of the earlier panel of our court that affirmed the liability judgment, we will discuss the facts only to the extent necessary to discuss the issues raised in this appeal.

In order to prevail on appeal on an issue of damages, an appellant must convince us that the determination was based on an erroneous conclusion of law, clearly erroneous factual findings, or a clear error of judgment amounting to an abuse of discretion. Amstar Corp. v. Envirotech Corp., 823 F.2d 1538, 1542, 3 USPQ2d 1412, 1415 (Fed.Cir.1987); see also SmithKline Diagnostics, Inc. v. Helena Lab. Corp., 926 F.2d 1161, 1163-65 & n. 2, 17 USPQ2d 1922, 1924-25 & n. 2 (Fed.Cir.1991).

The district court's decision to award lost profits damages pursuant to 35 U.S.C. Sec. 284 turned primarily upon the quality of Rite-Hite's proof of actual lost profits. The court found that, "but for" Kelley's infringing Truk Stop competition, Rite-Hite would have sold 3,243 additional ADL-100 restraints and 80 additional MDL-55 restraints. The court reasoned that awarding lost profits fulfilled the patent statute's goal of affording complete compensation for infringement and compensated Rite-Hite for the ADL-100 sales that Kelley "anticipated taking from Rite-Hite when it marketed the Truk Stop against the ADL-100." Rite-Hite, 774 F.Supp. at 1540, 21 USPQ2d at 1821. The court stated, "[t]he rule applied here therefore does not extend Rite-Hite's patent rights excessively, because Kelley could reasonably have foreseen that its infringement of the '847 patent would make it liable for lost ADL-100 sales in addition to lost MDL-55 sales." Id. The court further reasoned that its decision would avoid what it referred to as the "whip-saw" problem, whereby an infringer could avoid paying lost profits damages altogether by developing a device using a first patented technology to compete with a device that uses a second patented technology and developing a device using the second patented technology to compete with a device that uses the first patented technology.

Kelley maintains that Rite-Hite's lost sales of the ADL-100 restraints do not constitute an injury that is legally compensable by means of lost profits. It has uniformly been the law, Kelley argues, that to recover damages in the form of lost profits a patentee must prove that, "but for" the infringement, it would have sold a product covered by the patent in suit to the customers who bought from the infringer. Under the circumstances of this case, in Kelley's view, the patent statute provides only for damages calculated as a reasonable royalty. Rite-Hite, on the other hand, argues that the only restriction on an award of actual lost profits damages for patent infringement is proof of causation-in-fact. A patentee, in its view, is entitled to all the profits it would have made on any of its products "but for" the infringement. Each party argues that a judgment in favor of the other would frustrate the purposes of the patent statute. Whether the lost profits at issue are legally compensable is a question of law, which we review de novo.

Our analysis of this question necessarily begins with the patent statute. See General Motors Corp. v. Devex Corp., 461 U.S. 648, 653-54, 103 S.Ct. 2058, 2061-62, 76 L.Ed.2d 211 (1983). Implementing the constitutional power under Article I, section 8, to secure to inventors the exclusive right to their discoveries, Congress has provided in 35 U.S.C. Sec. 284 as follows:

Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.

35 U.S.C. Sec. 284 (1988). The statute thus mandates that a claimant receive damages "adequate" to compensate for infringement. Section 284 further instructs that a damage award shall be "in no event less than a reasonable royalty"; the purpose of this alternative is not to direct the form of compensation, but to set a floor below which damage awards may not fall. Del Mar Avionics, Inc. v. Quinton Instrument Co., 836 F.2d 1320, 1326, 5 USPQ2d 1255, 1260 (Fed.Cir.1987). Thus, the language of the statute is expansive rather than limiting. It affirmatively states that damages must be adequate, while providing only a lower limit and no other limitation.

The Supreme Court spoke to the question of patent damages in General Motors, stating that, in enacting Sec. 284, Congress sought to "ensure that the patent owner would in fact receive full compensation for 'any damages' [the patentee] suffered as a result of the infringement." General Motors, 461 U.S. at 654, 103 S.Ct. at 2062; see also H.R.Rep. No. 1587, 79th Cong., 2d Sess., 1 (1946) (the Bill was intended to allow recovery of "any damages the complainant can prove"); S.Rep. No. 1503, 79th Cong., 2d Sess., 2 (1946), (same). Thus, while the statutory text states tersely that the patentee receive "adequate" damages, the Supreme Court has interpreted this to mean that "adequate" damages should approximate those damages that will fully compensate the patentee for infringement. Further, the Court has cautioned against imposing limitations on patent infringement damages, stating: "When Congress wished to limit an element of recovery in a patent infringement action, it said so explicitly." General Motors, 461 U.S. at 653, 103 S.Ct. at 2061 (refusing to impose limitation on court's authority to award interest).

In Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 84 S.Ct. 1526, 12 L.Ed.2d 457, 141 USPQ 681 (1964), the Court discussed the statutory standard for measuring patent infringement damages, explaining:

The question to be asked in determining damages is "how much had the Patent Holder and Licensee suffered by the infringement. And that question [is] primarily: had the Infringer not infringed, what would the Patentee Holder-Licensee have made?"

377 U.S. at 507, 84 S.Ct. at 1542, 141 USPQ at 694 (plurality opinion) (citations omitted). This surely states a "but for" test. In accordance with the Court's guidance, we have held that the general rule for determining actual damages to a patentee that is itself producing the patented item is to determine the sales and profits lost to the patentee because of the infringement. Del Mar, 836 F.2d at 1326, 5 USPQ2d at 1260; see State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1577, 12 USPQ2d 1026, 1028 (Fed.Cir.1989), cert. denied, 493 U.S. 1022, 110 S.Ct. 725, 107 L.Ed.2d 744 (1990) (award of damages may be split between lost profits as actual damages to the extent they are proven and a reasonable royalty for the remainder). To recover lost profits damages, the patentee must show a reasonable probability that, "but for" the infringement, it would have made the sales that were made by the infringer. Id.; King Instrument Corp. v. Otari Corp., 767 F.2d 853, 863, 226 USPQ 402, 409 (Fed.Cir.1985), cert. denied, 475 U.S. 1016, 106 S.Ct. 1197, 89 L.Ed.2d 312 (1986).

Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 197 USPQ 726 (6th Cir.1978), articulated a four-factor test that has since been accepted as a useful, but non-exclusive, way for a patentee to prove entitlement to lost profits damages. State Indus., 883 F.2d at 1577, 12 USPQ2d at 1028. The Panduit test requires that a patentee establish: (1) demand for the patented product; (2) absence of acceptable non-infringing substitutes; (3) manufacturing and marketing capability to exploit the demand; and (4) the amount of the profit it would have made. Panduit, 575 F.2d at 1156, 197 USPQ at 730. A showing under Panduit permits a court to reasonably infer that the lost profits claimed were in fact caused by the infringing sales, thus establishing a patentee's prima facie case with respect to "but for" causation. Kaufman Co. v. Lantech, Inc., 926 F.2d 1136, 1141, 17 USPQ2d 1828, 1831 (Fed.Cir.1991). A patentee need not negate every possibility that the purchaser might not have purchased a product other than its own, absent the infringement. Id. The patentee need only show that there was a reasonable probability that the sales would have been made "but for" the infringement. Id. When the patentee establishes the reasonableness of this inference, e.g., by satisfying the Panduit test, it has sustained the burden of proving entitlement to lost profits due to the infringing sales. Id. at 1141, 17 USPQ2d at 1832. The burden then shifts to the infringer to show that the inference is unreasonable for some or all of the lost sales. Id.

Applying Panduit, the district court found that Rite-Hite had established "but for" causation. In the court's view, this was sufficient to prove entitlement to lost profits damages on the ADL-100. Kelley does not challenge that Rite-Hite meets the Panduit test and therefore has proven "but for" causation; rather, Kelley argues that damages for the ADL-100, even if in fact caused by the infringement, are not legally compensable because the ADL-100 is not covered by the patent in suit.

Preliminarily, we wish to affirm that the "test" for compensability of damages under Sec. 284 is not solely a "but for" test in the sense that an infringer must compensate a patentee for any and all damages that proceed from the act of patent infringement. Notwithstanding the broad language of Sec. 284, judicial relief cannot redress every conceivable harm that can be traced to an alleged wrongdoing. See Associated General Contractors, Inc. v. California State Council of Carpenters, 459 U.S. 519, 536, 103 S.Ct. 897, 907-08, 74 L.Ed.2d 723 (1983).4 For example, remote consequences, such as a heart attack of the inventor or loss in value of shares of common stock of a patentee corporation caused indirectly by infringement are not compensable. Thus, along with establishing that a particular injury suffered by a patentee is a "but for" consequence of infringement, there may also be a background question whether the asserted injury is of the type for which the patentee may be compensated.

Judicial limitations on damages, either for certain classes of plaintiffs or for certain types of injuries have been imposed in terms of "proximate cause" or "foreseeability." See Consolidated Rail Corp. v. Gottshall, --- U.S. ----, ----, 114 S.Ct. 2396, 2406, 129 L.Ed.2d 427 (1994). Such labels have been judicial tools used to limit legal responsibility for the consequences of one's conduct that are too remote to justify compensation. See Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992). The general principles expressed in the common law tell us that the question of legal compensability is one "to be determined on the facts of each case upon mixed considerations of logic, common sense, justice, policy and precedent." See 1 Street, Foundations of Legal Liability 110 (1906) (quoted in W. Page Keeton et al., Prosser & Keeton on the Law of Torts Sec. 42, at 279 (5th ed. 1984)).5

We believe that under Sec. 284 of the patent statute, the balance between full compensation, which is the meaning that the Supreme Court has attributed to the statute, and the reasonable limits of liability encompassed by general principles of law can best be viewed in terms of reasonable, objective foreseeability. If a particular injury was or should have been reasonably foreseeable by an infringing competitor in the relevant market, broadly defined, that injury is generally compensable absent a persuasive reason to the contrary. Here, the court determined that Rite-Hite's lost sales of the ADL-100, a product that directly competed with the infringing product, were reasonably foreseeable. We agree with that conclusion. Being responsible for lost sales of a competitive product is surely foreseeable; such losses constitute the full compensation set forth by Congress, as interpreted by the Supreme Court, while staying well within the traditional meaning of proximate cause. Such lost sales should therefore clearly be compensable.

Recovery for lost sales of a device not covered by the patent in suit is not of course expressly provided for by the patent statute. Express language is not required, however. Statutes speak in general terms rather than specifically expressing every detail. Under the patent statute, damages should be awarded "where necessary to afford the plaintiff full compensation for the infringement." General Motors, 461 U.S. at 654, 103 S.Ct. at 2062. Thus, to refuse to award reasonably foreseeable damages necessary to make Rite-Hite whole would be inconsistent with the meaning of Sec. 284.

Kelley asserts that to allow recovery for the ADL-100 would contravene the policy reason for which patents are granted: "[T]o promote the progress of ... the useful arts." U.S. Const., art. I, Sec. 8, cl. 8. Because an inventor is only entitled to exclusivity to the extent he or she has invented and disclosed a novel, nonobvious, and useful device, Kelley argues, a patent may never be used to restrict competition in the sale of products not covered by the patent in suit. In support, Kelley cites antitrust case law condemning the use of a patent as a means to obtain a "monopoly" on unpatented material. See, e.g., Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 459, 60 S.Ct. 618, 626, 84 L.Ed. 852 (1940) ("The patent monopoly of one invention may no more be enlarged for the exploitation of a monopoly of another than for the exploitation of an unpatented article, or for the exploitation or promotion of a business not embraced within the patent."); Leitch Mfg. Co. v. Barber Co., 302 U.S. 458, 463, 58 S.Ct. 288, 291, 82 L.Ed. 371 (1938) ("[E]very use of a patent as a means of obtaining a limited monopoly on unpatented material is prohibited ... whatever the nature of the device by which the owner of the patent seeks to effect unauthorized extension of the monopoly.").

These cases are inapposite to the issue raised here. The present case does not involve expanding the limits of the patent grant in violation of the antitrust laws; it simply asks, once infringement of a valid patent is found, what compensable injuries result from that infringement, i.e., how may the patentee be made whole. Rite-Hite is not attempting to exclude its competitors from making, using, or selling a product not within the scope of its patent. The Truk Stop restraint was found to infringe the '847 patent, and Rite-Hite is simply seeking adequate compensation for that infringement; this is not an antitrust issue. Allowing compensation for such damage will "promote the Progress of ... the useful Arts" by providing a stimulus to the development of new products and industries. See 1 Ernest B. Lipscomb III, Walker on Patents 65 (3d ed. 1984) (quoting Simonds, Summary of the Law of Patents 9 (1883)) ("The patent laws promote the progress in different ways, prominent among which are by protecting the investment of capital in the development and working of a new invention from ruinous competition till the investment becomes remunerative.").6

Kelley further asserts that, as a policy matter, inventors should be encouraged by the law to practice their inventions. This is not a meaningful or persuasive argument, at least in this context. A patent is granted in exchange for a patentee's disclosure of an invention, not for the patentee's use of the invention. There is no requirement in this country that a patentee make, use, or sell its patented invention. See Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405, 424-30, 28 S.Ct. 748, 753-54, 52 L.Ed. 1122 (1908) (irrespective of a patentee's own use of its patented invention, it may enforce its rights under the patent). If a patentee's failure to practice a patented invention frustrates an important public need for the invention, a court need not enjoin infringement of the patent. See 35 U.S.C. Sec. 283 (1988) (courts may grant injunctions in accordance with the principles of equity). Accordingly, courts have in rare instances exercised their discretion to deny injunctive relief in order to protect the public interest. See, e.g., Hybritech, Inc. v. Abbott Lab., 4 USPQ2d 1001, 1987 WL 123997 (C.D.Cal.1987) (public interest required that injunction not stop supply of medical test kits that the patentee itself was not marketing), aff'd, 849 F.2d 1446, 7 USPQ2d 1191 (Fed.Cir.1988); Vitamin Technologists, Inc. v. Wisconsin Alumni Research Found., 64 USPQ 285 (9th Cir.1945) (public interest warranted refusal of injunction on irradiation of oleomargarine); City of Milwaukee v. Activated Sludge, Inc., 21 USPQ 69 (7th Cir.1934) (injunction refused against city operation of sewage disposal plant because of public health danger). Whether a patentee sells its patented invention is not crucial in determining lost profits damages. Normally, if the patentee is not selling a product, by definition there can be no lost profits. However, in this case, Rite-Hite did sell its own patented products, the MDL-55 and the ADL-100 restraints.

Kelley next argues that to award lost profits damages on Rite-Hite's ADL-100s would be contrary to precedent. Citing Panduit, Kelley argues that case law regarding lost profits uniformly requires that "the intrinsic value of the patent in suit is the only proper basis for a lost profits award." Kelley argues that each prong of the Panduit test focuses on the patented invention; thus, Kelley asserts, Rite-Hite cannot obtain damages consisting of lost profits on a product that is not the patented invention.7

Generally, the Panduit test has been applied when a patentee is seeking lost profits for a device covered by the patent in suit. However, Panduit is not the sine qua non for proving "but for" causation. If there are other ways to show that the infringement in fact caused the patentee's lost profits, there is no reason why another test should not be acceptable. Moreover, other fact situations may require different means of evaluation, and failure to meet the Panduit test does not ipso facto disqualify a loss from being compensable.

In any event, the only Panduit factor that arguably was not met in the present fact situation is the second one, absence of acceptable non-infringing substitutes. Establishment of this factor tends to prove that the patentee would not have lost the sales to a non-infringing third party rather than to the infringer. That, however, goes only to the question of proof. Here, the only substitute for the patented device was the ADL-100, another of the patentee's devices. Such a substitute was not an "acceptable, non-infringing substitute" within the meaning of Panduit because, being patented by Rite-Hite, it was not available to customers except from Rite-Hite. Cf. State Indus., 883 F.2d at 1578, 12 USPQ2d at 1030-31. Rite-Hite therefore would not have lost the sales to a third party. The second Panduit factor thus has been met. If, on the other hand, the ADL-100 had not been patented and was found to be an acceptable substitute, that would have been a different story, and Rite-Hite would have had to prove that its customers would not have obtained the ADL-100 from a third party in order to prove the second factor of Panduit.

Kelley's conclusion that the lost sales must be of the patented invention thus is not supported. Kelley's concern that lost profits must relate to the "intrinsic value of the patent" is subsumed in the "but for" analysis; if the patent infringement had nothing to do with the lost sales, "but for" causation would not have been proven. However, "but for" causation is conceded here. The motive, or motivation, for the infringement is irrelevant if it is proved that the infringement in fact caused the loss. We see no basis for Kelley's conclusion that the lost sales must be of products covered by the infringed patent.

Kelley has thus not provided, nor do we find, any justification in the statute, precedent, policy, or logic to limit the compensability of lost sales of a patentee's device that directly competes with the infringing device if it is proven that those lost sales were caused in fact by the infringement. Such lost sales are reasonably foreseeable and the award of damages is necessary to provide adequate compensation for infringement under 35 U.S.C. Sec. 284. Thus, Rite-Hite's ADL-100 lost sales are legally compensable and we affirm the award of lost profits on the 3,283 sales lost to Rite-Hite's wholesale business in ADL-100 restraints.8

Based on the "entire market value rule," the district court awarded lost profits on 1,692 dock levelers that it found Rite-Hite would have sold with the ADL-100 and MDL-55 restraints. Kelley argues that this award must be set aside because Rite-Hite failed to establish that the dock levelers were eligible to be included in the damage computation under the entire market value rule. We agree.

When a patentee seeks damages on unpatented components sold with a patented apparatus, courts have applied a formulation known as the "entire market value rule" to determine whether such components should be included in the damage computation, whether for reasonable royalty purposes,9 see Leesona Corp. v. United States, 599 F.2d 958, 974, 220 Ct.Cl. 234, 202 USPQ 424, 439, cert. denied, 444 U.S. 991, 100 S.Ct. 522, 62 L.Ed.2d 420 (1979), or for lost profits purposes, see Paper Converting Machine Co. v. Magna-Graphics Corp., 745 F.2d 11, 23, 223 USPQ 591, 599 (Fed.Cir.1984). Early cases invoking the entire market value rule required that for a patentee owning an "improvement patent" to recover damages calculated on sales of a larger machine incorporating that improvement, the patentee was required to show that the entire value of the whole machine, as a marketable article, was "properly and legally attributable" to the patented feature. See Garretson v. Clark, 111 U.S. 120, 121, 4 S.Ct. 291, 291-92, 28 L.Ed. 371 (1884); Westinghouse Elec. & Mfg. Co. v. Wagner Elec. & Mfg. Co., 225 U.S. 604, 615, 32 S.Ct. 691, 694-95, 56 L.Ed. 1222 (1912) (same). Subsequently, our predecessor court held that damages for component parts used with a patented apparatus were recoverable under the entire market value rule if the patented apparatus "was of such paramount importance that it substantially created the value of the component parts." Marconi Wireless Telegraph Co. v. United States, 53 USPQ 246, 250 (Ct.Cl.1942), aff'd in part and vacated in part, 320 U.S. 1, 63 S.Ct. 1393, 87 L.Ed. 1731 (1943). We have held that the entire market value rule permits recovery of damages based on the value of a patentee's entire apparatus containing several features when the patent-related feature is the "basis for customer demand." State Indus., 883 F.2d at 1580, 12 USPQ2d at 1031; TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 900-01, 229 USPQ 525, 528 (Fed.Cir.), cert. denied, 479 U.S. 852, 107 S.Ct. 183, 93 L.Ed.2d 117 (1986).

The entire market value rule has typically been applied to include in the compensation base unpatented components of a device when the unpatented and patented components are physically part of the same machine. See, e.g., Western Elec. Co. v. Stewart-Warner Corp., 631 F.2d 333, 208 USPQ 183 (4th Cir.1980), cert. denied, 450 U.S. 971, 101 S.Ct. 1492, 67 L.Ed.2d 622 (1981). The rule has been extended to allow inclusion of physically separate unpatented components normally sold with the patented components. See, e.g., Paper Converting, 745 F.2d at 23, 223 USPQ at 599. However, in such cases, the unpatented and patented components together were considered to be components of a single assembly or parts of a complete machine, or they together constituted a functional unit. See, e.g., Velo-Bind, Inc. v. Minnesota Mining & Mfg. Co., 647 F.2d 965, 211 USPQ 926 (9th Cir.), cert. denied, 454 U.S. 1093, 102 S.Ct. 658, 70 L.Ed.2d 631 (1981).

In Paper Converting, this court articulated the entire market value rule in terms of the objectively reasonable probability that a patentee would have made the relevant sales. See 745 F.2d at 23, 223 USPQ at 599-600. Furthermore, we may have appeared to expand the rule when we emphasized the financial and marketing dependence of the unpatented component on the patented component. See id. In Paper Converting, however, the rule was applied to allow recovery of profits on the unpatented components only because all the components together were considered to be parts of a single assembly. The references to "financial and marketing dependence" and "reasonable probability" were made in the context of the facts of the case and did not separate the rule from its traditional moorings.

Specifically, recovery was sought for the lost profits on sales of an entire machine for the high speed manufacture of paper rolls comprising several physically separate components, only one of which incorporated the invention. The machine was comprised of the patented "rewinder" component and several auxiliary components, including an "unwind stand" that supported a large roll of supply paper to the rewinder, a "core loader" that supplied paperboard cores to the rewinder, an "embosser" that embossed the paper and provided a special textured surface, and a "tail sealer" that sealed the paper's trailing end to the finished roll. Although we noted that the auxiliary components had "separate usage" in that they each separately performed a part of an entire rewinding operation, the components together constituted one functional unit, including the patented component, to produce rolls of paper. The auxiliary components derived their market value from the patented rewinder because they had no useful purpose independent of the patented rewinder.

Similarly, our subsequent cases have applied the entire market value rule only in situations in which the patented and unpatented components were analogous to a single functioning unit. See, e.g., Kalman v. Berlyn Corp., 914 F.2d 1473, 1485, 16 USPQ2d 1093, 1102 (Fed.Cir.1990) (affirming award of damages for filter screens used with a patented filtering device); TWM, 789 F.2d at 901, 229 USPQ at 528 (affirming award of damages for unpatented wheels and axles sold with patented vehicle suspension system); Kori Corp. v. Wilco Marsh Buggies & Draglines, Inc., 761 F.2d 649, 656, 225 USPQ 985, 989 (Fed.Cir.) (affirming an award of damages for unpatented uppers of an improved amphibious vehicle having a patented pontoon structure), cert. denied, 474 U.S. 902, 106 S.Ct. 230, 88 L.Ed.2d 229 (1985).

Thus, the facts of past cases clearly imply a limitation on damages, when recovery is sought on sales of unpatented components sold with patented components, to the effect that the unpatented components must function together with the patented component in some manner so as to produce a desired end product or result. All the components together must be analogous to components of a single assembly or be parts of a complete machine, or they must constitute a functional unit. Our precedent has not extended liability to include items that have essentially no functional relationship to the patented invention and that may have been sold with an infringing device only as a matter of convenience or business advantage. We are not persuaded that we should extend that liability. Damages on such items would constitute more than what is "adequate to compensate for the infringement."

The facts of this case do not meet this requirement. The dock levelers operated to bridge the gap between a loading dock and a truck. The patented vehicle restraint operated to secure the rear of the truck to the loading dock. Although the two devices may have been used together, they did not function together to achieve one result and each could effectively have been used independently of each other. The parties had established positions in marketing dock levelers long prior to developing the vehicle restraints. Rite-Hite and Kelley were pioneers in that industry and for many years were primary competitors. Although following Rite-Hite's introduction of its restraints onto the market, customers frequently solicited package bids for the simultaneous installation of restraints and dock levelers, they did so because such bids facilitated contracting and construction scheduling, and because both Rite-Hite and Kelley encouraged this linkage by offering combination discounts. The dock levelers were thus sold by Kelley with the restraints only for marketing reasons, not because they essentially functioned together. We distinguish our conclusion to permit damages based on lost sales of the unpatented (not covered by the patent in suit) ADL-100 devices, but not on lost sales of the unpatented dock levelers, by emphasizing that the Kelley Truk Stops were devices competitive with the ADL-100s, whereas the dock levelers were merely items sold together with the restraints for convenience and business advantage. It is a clear purpose of the patent law to redress competitive damages resulting from infringement of the patent, but there is no basis for extending that recovery to include damages for items that are neither competitive with nor function with the patented invention. Promotion of the useful arts, see U.S. Const., art. I, Sec. 8, cl. 8, requires one, but not the other. These facts do not establish the functional relationship necessary to justify recovery under the entire market value rule. Therefore, the district court erred as a matter of law in including them within the compensation base. Accordingly, we vacate the court's award of damages based on the dock leveler sales.

The ISOs asserted claims for patent infringement under 35 U.S.C. Sec. 281 as co-plaintiffs with Rite-Hite and were awarded damages calculated on the basis of a reasonable royalty at the retail level on both restraints and dock levelers, based on the number of sales each asserted it lost to Kelley. Kelley challenges any award of damages to the ISOs on the ground that the ISOs had no standing to seek recovery for patent infringement. The ISOs argue that the exclusivity of their sales territories gave them standing as "exclusive licensees." The question of standing to sue is a jurisdictional one, Imperial Tobacco, Ltd. v. Philip Morris, Inc., 899 F.2d 1575, 1580 n. 7, 14 USPQ2d 1390, 1393 n. 7 (Fed.Cir.1990), which we review de novo, Transamerica Ins. Corp. v. United States, 973 F.2d 1572 (Fed.Cir.1992). We agree with Kelley that the ISOs must be dismissed for lack of standing.

The right of a patentee to a remedy for patent infringement is created by the statute, Arachnid, Inc. v. Merit Indus., Inc., 939 F.2d 1574, 1578, 19 USPQ2d 1513, 1516-17 (Fed.Cir.1991), which provides that a "patentee" shall have remedy by civil action for infringement of his or her patent, 35 U.S.C. Sec. 281 (1988). The term "patentee" includes "not only the patentee to whom the patent was issued but also the successors in title to the patentee." 35 U.S.C. Sec. 100(d) (1988).

Generally, one seeking money damages for patent infringement must have held legal title to the patent at the time of the infringement. Crown Die & Tool Co. v. Nye Tool & Machine Works, 261 U.S. 24, 40-41, 43 S.Ct. 254, 258, 67 L.Ed. 516 (1923). A conveyance of legal title by the patentee can be made only of the entire patent, an undivided part or share of the entire patent, or all rights under the patent in a specified geographical region of the United States. Waterman v. Mackenzie, 138 U.S. 252, 255, 11 S.Ct. 334, 335, 34 L.Ed. 923 (1891). A transfer of any of these is an assignment and vests the assignee with title in the patent, and a right to sue infringers.10 Id. A transfer of less than one of these three interests is a license, not an assignment of legal title, and it gives the licensee no right to sue for infringement at law in the licensee's own name. Id.

Under certain circumstances, a licensee may possess sufficient interest in the patent to have standing to sue as a co-plaintiff with the patentee. See id. (if necessary to protect the rights of all parties, the licensee may be joined as co-plaintiff); Independent Wireless Tel. Co. v. Radio Corp. of America, 269 U.S. 459, 468, 46 S.Ct. 166, 169, 70 L.Ed. 357 (1926) (if the patentee refuses or is unable to join an exclusive licensee as co-plaintiff, the licensee may make him a party defendant). Such a licensee is usually an "exclusive licensee." To be an exclusive licensee for standing purposes, a party must have received, not only the right to practice the invention within a given territory, but also the patentee's express or implied promise that others shall be excluded from practicing the invention within that territory as well. See Independent Wireless, 269 U.S. at 468-69, 46 S.Ct. at 169. If the party has not received an express or implied promise of exclusivity under the patent, i.e., the right to exclude others from making, using, or selling the patented invention, the party has a "bare license," and has received only the patentee's promise that that party will not be sued for infringement. See Western Elec. Co. v. Pacent Reproducer Corp., 42 F.2d 116, 118, 5 USPQ 105, 106 (2d Cir.), cert. denied, 282 U.S. 873, 51 S.Ct. 78, 75 L.Ed. 771 (1930).

The ISOs maintain that they are allowed to join as co-plaintiffs because each claims it has a virtually exclusive license to sell products made by Rite-Hite to particular customers in an exclusive sales territory. To determine whether the ISOs have standing to be co-plaintiffs, we look to their contracts with Rite-Hite.

The typical original ISO contract provided in pertinent part:

Representative's right to solicit sales of the Company's products in the Territory shall be exclusive in that the Company will not appoint any other sales representative in the territory so long as, in Company's good faith judgment, Representative is doing an adequate job in the entire Territory for all listed products. [If not,] Company shall have the right to reduce the Territory, if it gives Representative notice of the change. Company shall in no event be liable for any violation or infringement of Representative's territorial rights hereunder except such as are committed directly by Company. Company also reserves the non-exclusive right to make sales of its products within the Territory directly to the motor freight industry, governmental agencies, government contractors, and any other purchasers which, in Company's judgement, can be served best by direct sales.

The subject products are "All Rite-Hite Mechanical and Hydraulic Dock Levelers and Related Equipment." The word "patent" appears nowhere in this document, although, just prior to their intervention as plaintiffs, many of the ISOs executed supplements to their contracts which specified that the "products" of the Sales Representative Agreement include "products manufactured and sold by [Rite-Hite] " that embody "any of the claims set forth in Rite-Hite patents relating to 'Dok-Lok' devices, including (but not by any way of limitation) U.S. Patent No. 4,373,847." Rite-Hite, 774 F.Supp. at 1523, 21 USPQ2d at 1807 (alteration in original) (first emphasis supplied). The agreement also provided that each ISO had, in addition to the right to solicit sales for Rite-Hite, the right to sell products made by Rite-Hite. Rite-Hite reserved the right to sell its products to the motor freight industry.11

In the original agreement, Rite-Hite itself expressly retained substantial rights to sell within the assigned territories to specific classes of purchases and to "any other purchasers which, in Company's judgement, can be served best by direct sales." The last minute modifications on the eve of litigation included for the first time products covered by the patent in the definition of the range of products covered by the agreement, and reduced the retained rights of Rite-Hite to sell within the assigned territories. Neither the original agreements nor the modifications granted the ISOs any right to exclude others under the patent.

We agree with Kelley that the district court's conclusion that these contracts conveyed a "sufficient, legally recognized interest in the rights secured by the ['847] patent" to confer standing on the ISOs was erroneous as a matter of law. Id., 774 F.Supp. at 1525, 21 USPQ2d at 1808 (alteration in original). The contracts in this case were not exclusive patent licenses. As noted, they did not mention the word "patent" until the eve of this lawsuit. The ISO contracts permitted the ISOs only to solicit and make sales of products made by Rite-Hite in a particular "exclusive" sales territory. While the agreements conveyed the right to sell restraints covered by the patent, any "exclusivity" related only to sales territories, not to patent rights. Even this sales exclusivity was conditional on Rite-Hite's judgment that the ISOs were doing an "adequate job."

Most particularly, the ISOs had no right under the agreements to exclude anyone from making, using, or selling the claimed invention. The ISOs could not exclude from their respective territories other ISOs, third parties, or even Rite-Hite itself. Any remedy an ISO might have had for violation of its rights would lie in a breach of contract action against Rite-Hite, if the agreement was breached, not in a patent infringement action against infringers. Rite-Hite had no obligation to file infringement suits at the request of an ISO and the ISOs had no right to share in any recovery from litigation. Moreover, appellees have not contended that such obligations and rights are to be implied. Nor do appellees even argue that the ISOs had the right under their contracts to bring suit for infringement against another ISO or a third party, making Rite-Hite an involuntary plaintiff. To the contrary, under their agreement, if an ISO sold in another's territory, the profits were shared according to Rite-Hite's "split commission" rules. While the patentee and the ISOs have cooperated in this litigation, that fact alone does not establish their right to sue.

Weinar v. Rollform, 744 F.2d 797, 223 USPQ 369 (Fed.Cir.1984), cert. denied, 470 U.S. 1084, 105 S.Ct. 1844, 85 L.Ed.2d 143 (1985), which is cited by Rite-Hite in support of the ISOs' position, is not to the contrary. In that case, a damage award was upheld to a licensee with the exclusive right to sell in the entire United States. Id. at 807, 223 USPQ at 374. However, the exclusive licensee in Weinar was found to have received more than a "bare" license from the patentee. Id. The exclusive licensee and the patentee "shar[ed] the property rights represented by a patent." Id. That is not the case here. The ISOs were not licensees under the patent, except perhaps as non-exclusive licensees by implication. They were not granted any right to exclude others under the patent. They do not accordingly "share" with the patentee the property rights represented by the patent so as to have standing to sue as a co-plaintiff with the patentee.

These agreements were simply sales contracts between Rite-Hite and its independent distributors. They did not transfer any proprietary interest in the '847 patent and they did not give the ISOs the right to sue. If the ISOs lack a remedy in this case, it is because their agreements with Rite-Hite failed to make provisions for the contingency that the granted sales exclusivity would not be maintained. The ISOs could have required Rite-Hite to sue infringers and arrangements could have been agreed upon concerning splitting any damage award. Apparently, this was not done.

The grant of a bare license to sell an invention in a specified territory, even if it is the only license granted by the patentee, does not provide standing without the grant of a right to exclude others. The ISOs are legally no different from the individual salespersons whom the district court earlier refused to allow to join the suit. Rite-Hite, 774 F.Supp. at 1536, 21 USPQ2d at 1818 (holding that sales persons employed by the sales organizations are not entitled to recover damages as agents of the exclusive licensee-sales organizations). They are not proper parties to this suit, and their claims must be dismissed.12

The district court found that Rite-Hite as a manufacturer was entitled to an award of a reasonable royalty on 502 infringing restraint or restraint-leveler sales for which it had not proved that it contacted the Kelley customer prior to the infringing Kelley sale. Rite-Hite, 774 F.Supp. at 1534, 21 USPQ2d at 1816. The court awarded a royalty equal to approximately fifty percent of Rite-Hite's estimated lost profits per unit sold to retailers. Id. at 1535, 21 USPQ2d at 1817. Further, the court found that Rite-Hite as a retailer was entitled to a reasonable royalty amounting to approximately one-third its estimated lost distribution income per infringing sale. Kelley challenges the amount of the royalty as grossly excessive and legally in error.

A patentee is entitled to no less than a reasonable royalty on an infringer's sales for which the patentee has not established entitlement to lost profits. 35 U.S.C. Sec. 284 (1988); Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1078, 219 USPQ 679, 681-82 (Fed.Cir.1983) ("If actual damages cannot be ascertained, then a reasonable royalty must be determined."). The royalty may be based upon an established royalty, if there is one, or if not, upon the supposed result of hypothetical negotiations between the plaintiff and defendant. Id. at 1078, 219 USPQ at 682.13 The hypothetical negotiation requires the court to envision the terms of a licensing agreement reached as the result of a supposed meeting between the patentee and the infringer at the time infringement began. Id. "One challenging only the court's finding as to amount of damages awarded under the 'reasonable royalty' provision of Sec. 284, therefore, must show that the award is, in view of all the evidence, either so outrageously high or so outrageously low as to be unsupportable as an estimation of a reasonably royalty." Lindemann Maschinenfabrik GmbH v. American Hoist & Derrick Co., 895 F.2d 1403, 1406, 13 USPQ2d 1871, 1874 (Fed.Cir.1990).

The district court here conducted the hypothetical negotiation analysis. It determined that Rite-Hite would have been willing to grant a competitor a license to use the '847 invention only if it received a royalty of no less than one-half of the per unit profits that it was foregoing. In so determining, the court considered that the '847 patent was a "pioneer" patent with manifest commercial success; that Rite-Hite had consistently followed a policy of exploiting its own patents, rather than licensing to competitors; and that Rite-Hite would have had to forego a large profit by granting a license to Kelley because Kelley was a strong competitor and Rite-Hite anticipated being able to sell a large number of restraints and related products. See Deere & Co. v. International Harvester Co., 710 F.2d 1551, 1559, 218 USPQ 481, 487 (Fed.Cir.1983) (court may consider impact of anticipated collateral sales); Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp. 1116, 166 USPQ 235, (S.D.N.Y.1970) (wide range of factors relevant to hypothetical negotiation), modified and aff'd, 446 F.2d 295, 170 USPQ 369 (2d Cir.), cert. denied, 404 U.S. 870, 92 S.Ct. 105, 30 L.Ed.2d 114 (1971). It was thus not unreasonable for the district court to find that an unwilling patentee would only license for one-half its expected lost profits and that such an amount was a reasonable royalty. The fact that the award was not based on the infringer's profits did not make it an unreasonable award. See State Indus., 883 F.2d at 1580, 12 USPQ2d at 1031 ("The determination of a reasonable royalty ... is based not on the infringer's profit margin[; t]here is no rule that a royalty be no higher than the infringer's net profit margin."); Stickle v. Heublein, Inc., 716 F.2d 1550, 1563, 219 USPQ 377, 387 (Fed.Cir.1983) (royalty need not be less than price of infringing unit). Furthermore, the fact that the award was based on and was a significant portion of the patentee's profits also does not make the award unreasonable. The language of the statute requires "damages adequate to compensate," which does not include a royalty that a patentee who does not wish to license its patent would find unreasonable. See Del Mar, 836 F.2d at 1328, 5 USPQ2d at 1261 ("[The] imposition on a patent owner who would not have licensed his invention for [a certain] royalty is a form of compulsory license, against the will and interest of the person wronged, in favor of the wrongdoer."). Moreover, what an infringer would prefer to pay is not the test for damages. See TWM, 789 F.2d at 900, 229 USPQ at 528 (that the parties might have agreed to a lesser royalty is of little relevance, for to look only at that question would be to pretend that the infringement never happened; it would also make an election to infringe a handy means for competitors to impose a compulsory license policy upon every patent owner).

We conclude that the district court made no legal error and was not clearly erroneous in determining the reasonable royalty rate. Accordingly, we affirm the trial court's calculation of a reasonable royalty rate. However, because we vacate the court's decision to include dock levelers in the royalty base, we remand for a redetermination of damages based only on the sale of the infringing restraints and not on the restraint-leveler packages.

Rite-Hite and the ISOs sought damages based on lost profits at the retail level for ADL-100 and MDL-55 restraints and dock levelers. The district court denied the award on the basis that both Rite-Hite and the ISOs failed to meet their evidentiary burden of proving lost profits. Rite-Hite has not persuaded us that the court's decision was erroneous. As for the ISOs, this issue is mooted by the above rulings.

Rite-Hite also argues that the district court erred in awarding interest at a simple rather than a compound rate because, as a matter of law, prejudgment interest must be compounded. We disagree. It has been recognized that "an award of compound rather than simple interest assures that the patent owner is fully compensated." Fromson v. Western Litho Plate & Supply Co., 13 USPQ2d 1856, 1862, 1989 WL 149268 (E.D.Mo.1989), aff'd mem., 909 F.2d 1495 (Fed.Cir.1990). However, the determination whether to award simple or compound interest is a matter largely within the discretion of the district court. Gyromat Corp. v. Champion Spark Plug Co., 735 F.2d 549, 557, 222 USPQ 4, 10 (Fed.Cir.1984) (declining to rule that prejudgment interest must be compounded as a matter of law). Rite-Hite has not persuaded us that the court abused its discretion in awarding interest at a simple rate.

On Kelley's appeal, we affirm the district court's decision that Rite-Hite is entitled to an award of lost profit damages based on its lost business in ADL-100 restraints. We affirm the court's determination of the reasonable royalty rate. We vacate the awards to the ISOs and vacate the damage award based on the dock levelers. We remand for the court to dismiss the ISOs as plaintiffs and recalculate damages to Rite-Hite. On Rite-Hite's cross-appeal, we affirm.

Each party will bear its own costs of this appeal.

AFFIRMED-IN-PART, VACATED-IN-PART, and REMANDED.

NIES, Circuit Judge, with whom ARCHER, Chief Judge, SMITH, Senior Circuit Judge, and MAYER, Circuit Judge join, dissenting-in-part.

The majority uses the provision in 35 U.S.C. Sec. 284 for "damages" as a tool to expand the property rights granted by a patent. I dissent.

No one disputes that Rite-Hite is entitled to "full compensation for any damages suffered as a result of the infringement." General Motors Corp. v. Devex Corp., 461 U.S. 648, 653-54, 103 S.Ct. 2058, 2062, 76 L.Ed.2d 211 (1983). "Damages," however, is a word of art. "Damages in a legal sense means the compensation which the law will award for an injury done." Recovery in Patent Infringement Suits: Hearings on H.R. 5231 [later H.R. 5311] Before the Committee on Patents, 79th Cong., 2nd Sess. 9 (1946) (statement of Conder C. Henry, Asst. Comm'r of Patents) (hereinafter "House Hearings"). Thus, the question is, "What are the injuries for which full compensation must be paid?".

The majority divorces "actual damages" from injury to patent rights.1 The majority holds that a patentee is entitled to recover its lost profits caused by the infringer's competition with the patentee's business in ADL restraints, products not incorporating the invention of the patent in suit but assertedly protected by other unlitigated patents. Indeed, the majority states a broader rule for the award of lost profits on any goods of the patentee with which the infringing device competes, even products in the public domain.

I would hold that the diversion of ADL-100 sales is not an injury to patentee's property rights granted by the '847 patent. To constitute legal injury for which lost profits may be awarded, the infringer must interfere with the patentee's property right to an exclusive market in goods embodying the invention of the patent in suit. The patentee's property rights do not extend to its market in other goods unprotected by the litigated patent. Rite-Hite was compensated for the lost profits for 80 sales associated with the MDL-55, the only product it sells embodying the '847 invention. That is the totality of any possible entitlement to lost profits. Under 35 U.S.C. Sec. 284, therefore, Rite-Hite is entitled to "damages" calculated as a reasonable royalty on the remainder of Kelley's infringing restraints.

I also disagree that the calculations of a reasonable royalty may be based on a percentage of Rite-Hite's lost profits. Under 35 U.S.C. Sec. 284, a reasonable royalty must be attributed to Kelley's "use of the invention." A royalty must be based on the value of the patented hook, not on other features in the infringing device, e.g., the motors, which form no part of the patented invention used by Kelley. Further, the trial court discounted or excluded significant evidence and otherwise improperly calculated a reasonable royalty rate.

Accordingly, for the reasons more fully presented below, I dissent from the majority on these issues. I concur in the result of part AII and join part AIII. I take no position on the cross-appeal regarding interest (part B) which is irrelevant to this dissent.

As a matter of legal analysis, the majority treats the issue of "damages" for a patentee's lost trade in competitive goods not embodying the invention of the patent in suit as one of first impression. It is not. The following outline sets out the established law:

(1) Patent "damages" are limited to legal injury to property rights created by the patent, not merely causation in fact.

(2) Under precedent in 1946, a patentee was entitled to recover, either at law or in equity, only the profits attributable to the invention. A patentee's property rights were limited to its exclusivity in the market for the patented goods in suit. "Damages" were awardable only for injury to that trade, and only to the extent of the contribution of the invention to profits. Apportionment of profits and the entire market value rule reflect these principles. Injury to the patentee's trade in other competitive products was deemed an indirect loss and not compensable. "Foreseeability" was not the test for legal injury for patent infringement.

(3) In 1946, Congress eliminated the remedy of an equitable accounting for a defendant's profits and reenacted the provision for "damages" in 1946 and 1952. Congress made no change in the precedential law of "damages" except for prejudgment interest.

(4) Since 1946, the Supreme Court has not overturned its precedent on "damages." Under the entire market value rule applicable to lost profits awards, a patentee must prove the invention in suit created consumer demand for the patented and infringing products.

(5) The majority's decision creates a conflict with the law of patent "damages" in all other circuits.

(6) The majority decision cannot be reconciled with other provisions of the patent statute or with public policies.

A. The Insufficiency of "But-For" as the Sole Test

As a preliminary matter, I wish to state my reasons for rejecting the arguments made by appellee Rite-Hite in support of the district court's judgment. The district court held, and Rite-Hite argues on appeal, supported by the amici, that the only restriction on the award of "actual damages" for patent infringement is proof of causation in fact, that is, satisfaction of a "but-for" test.2 Under that test, it would follow that Rite-Hite is entitled to any profits it lost due to the infringer's competition, whether it lost sales of restraints embodying the invention in suit, or those protected by other patents, or even products in the public domain, i.e., never patented or the subject of expired patents. The district court applied a "but-for" standard to award lost profits on dock levelers as well.

In support of the district court's ruling, Rite-Hite relies on the statement in Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 84 S.Ct. 1526, 12 L.Ed.2d 457 (1964), that a patentee's damages under the statute must be measured by "the difference between his pecuniary condition after the infringement, and what his condition would have been if the infringement had not occurred." 377 U.S. at 507, 84 S.Ct. at 1543 (plurality opinion) (quoting Yale Lock Mfg. Co. v. Sargent, 117 U.S. 536, 552, 6 S.Ct. 934, 942, 29 L.Ed. 954 (1886)). However, one of the most common sources of error occurs from quotations taken from opinions out of context. One might just as well try to play music merely by reading the lyrics. In Aro, the quoted statement was made in connection with limiting the amount of damages which could be recovered. As further explained respecting damages for contributory infringement:

[A]fter a patentee has collected from or on behalf of a direct infringer damages sufficient to put him in the position he would have occupied had there been no infringement, he cannot thereafter collect actual damages from a person liable only for contributing to the same infringement.

Aro, 377 U.S. at 512, 84 S.Ct. at 1545. The quotation from Aro on which Rite-Hite relies simply precludes double recovery. Aro does not mandate that a "but-for" test is the only restriction on recovery of patent infringement damages. Nor does Aro endorse the expansive view of damages adopted by the majority. In rejecting the patentee's damages theory, the opinion stated, "It would enable the patentee to derive a profit not merely on unpatented rather than patented goods--an achievement proscribed by the Motion Picture Patents [v. Universal Film Mfg. Co., 243 U.S. 502, 37 S.Ct. 416, 61 L.Ed. 871 (1917) ] and Mercoid [Corp. v. Mid-Continent Inv. Co., 320 U.S. 661, 64 S.Ct. 268, 88 L.Ed. 376 (1944) ] cases--but on unpatented and patented goods." 377 U.S. at 510, 84 S.Ct. at 1544-45 (plurality) (emphasis in original).

Rite-Hite's principal authority from this court for its "but-for" theory is Lam, Inc. v. Johns-Manville Corp., 718 F.2d 1056, 219 USPQ 670 (Fed.Cir.1983). The Lam rule, according to Rite-Hite, similarly requires only that the court answer the question: "Had the Infringer not infringed, what would Patent Holder ... have made?' " Lam, 718 F.2d at 1064, 219 USPQ at 677 (quoting Aro, 377 U.S. at 507, 84 S.Ct. at 1543). However, lost profits in Lam were awarded for interference with the patentee's sales of lamps which were "the embodiment of the claimed invention." Lam, 718 F.2d at 1059, 219 USPQ at 671. In Lam, indeed, in all of our previous decisions on "lost profits," we were addressing the factual issue of whether the patentee was entitled to its lost profits by reason of the infringer's diversion of the patentee's sales of products embodying the invention of the infringed patent.3 The issue of recovery for losses related to the marketing of a patentee's competitive product protected, if at all, under a different patent, was not involved.

Over centuries of judge-made law, the term "damages" has become a word of art in the common law carrying both factual and legal limitations. The legal limitations (frequently called "proximate cause," an unfortunate expression because of its confusing similarity to a but-for test) must be determined as a matter of law by the judge. W. Page Keeton, et al., Prosser and Keeton on the Law of Torts Sec. 41 (5th ed. 1984). Causation in fact of an injury (i.e., the but-for test) is applied after the legal determination is made that the asserted injury is a type which is legally compensable for the wrong. The but-for determination is a factual matter for the jury (or the judge in a bench trial). Thus, the common law term "damages" does not encompass any and all economic injury that one may suffer in fact from a wrong. Also, contrary to the district court's view, "proximate" or "legal" causation of patent damages is not merely a more closely scrutinized causation in fact test determined by "the quality of plaintiffs' proof." 774 F.Supp. at 1537, 21 USPQ2d at 1819. In connection with a tort created by a federal statute, the public purpose of the statute and the likely intent of Congress are the overriding considerations respecting the types of injuries for which damages may legally be awarded. Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 274, 112 S.Ct. 1311, 1321, 117 L.Ed.2d 532 (1992); Associated Gen. Contractors, Inc. v. California State Council of Carpenters, 459 U.S. 519, 538-40, 103 S.Ct. 897, 909-10, 74 L.Ed.2d 723 (1983); see also Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 697, 50 L.Ed.2d 701 (1977) ("[Plaintiff under section 7 of the Clayton Act] must prove more than injury causally linked to an illegal presence in the market. Plaintiffs must prove antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent.") Courts must be careful to discern and not exceed the purpose which the legislature intended. Cf. Keeton, et al., supra, Sec. 36.

The term "damages" in the patent statute must be interpreted in light of the familiar common law principles of legal or proximate cause associated generally with that term. In rejecting a "but-for" standard for determining "damages" in the Clayton Act,4 the Supreme Court observed:

[A] number of judge-made rules circumscribed the availability of damages recoveries in both tort and contract litigation--doctrines such as foreseeability and proximate cause, directness of injury, certainty of damages, and privity of contract. Although particular common-law limitations were not debated in Congress, the frequent references to common-law principles imply that Congress simply assumed that antitrust damages litigation would be subject to constraints comparable to well-accepted common-law rules applied in comparable litigation.

Associated Gen. Contractors, 459 U.S. at 532-33, 103 S.Ct. at 905-06 (citations omitted).

The Supreme Court has recently applied a similar analysis of the civil action damages provision of RICO.5 Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 264-71, 112 S.Ct. 1311, 1316-19, 117 L.Ed.2d 532 (1992). As stated in Holmes respecting the overriding necessity for "proximate cause" for an injury to be compensable under a statute awarding "damages":

[A] showing [must be made] not only that the defendant's violation [of RICO] was a 'but for' cause of [the plaintiff's] injury, but was the proximate cause as well. [As further explained] proximate cause [is used] to label generically the judicial tools used to limit a person's responsibility for the consequences of that person's own acts.

503 U.S. at 265-68, 112 S.Ct. at 1316-18 (emphasis added).6

Under this Supreme Court precedent, the law is clear that proximate cause is applied as a legal limitation on "damages" in connection with the statutory torts which the Court has considered. A "but-for" test tells us nothing about whether the injury is legally one which is compensable. As above stated, the lack of proximate causation will preclude recovery for certain losses even though a "but-for" standard of injury in fact is satisfied. See also Blue Shield of Va. v. McCready, 457 U.S. 465, 476-77, 102 S.Ct. 2540, 2547-48, 73 L.Ed.2d 149 (1982) (Clayton Act); Davis v. Avco Fin. Servs., Inc., 739 F.2d 1057, 1067 (6th Cir.1984), cert. denied, 470 U.S. 1005, 105 S.Ct. 1359, 84 L.Ed.2d 381 (1985) ("but-for" test may not be equated with "proximate cause"); Keeton, et al., supra, at 42.

Rite-Hite and the majority treat lost profits as the legal injury. However, lost profits is a way to measure compensation for a legal injury. Lost profits is not itself the legal injury. No rational basis is suggested by Rite-Hite or the amici for applying a different interpretation to the statutory term "damages" in connection with the tort of patent infringement. No legislative history even hints that patentees are so favored that a special or more expansive meaning was intended for patent "damages." A "but-for" test for "damages," which would mandate that all types of economic injury to a patentee's business traceable to the infringement are compensable, is as legally deficient a standard for patent infringement "damages" as for "damages" under the Clayton Act or RICO. Causation in fact is not the sole test for determining compensable "damages" under 35 U.S.C. Sec. 284.

That said, however, merely brings us to the issue of what are the legal limits on "damages" for patent infringement.

As will be shown, precedent before 1946 unequivocally established that compensable lost profits were restricted to those the patentee would have made from commercializing the invention. Further, Congress reenacted the provision for "damages" with that understanding.

The question raised in this appeal is one of statutory construction, but it is of constitutional dimension. Article I, section 8 of the Constitution provides for a patent system which will "promote the Progress ... of the useful Arts, by securing for limited Times to ... Inventors the exclusive Right to their Discoveries." Congress has provided in 35 U.S.C. Sec. 284 (1988):

Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.

When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed.

The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.

What stimulus, what financial rewards did Congress intend by the term "damages" to effect the purpose of promoting progress in the useful Arts?

The majority concludes that Congress enacted expansive language in Sec. 284, providing "only a lower limit and no other limitation." Op. at 1544.7 The majority finds support for its interpretation in the statement in Devex Corp., 461 U.S. at 653-54, 103 S.Ct. at 2061-62, that Congress sought to "ensure that the patent owner would, in fact, receive full compensation for 'any damages' [the patentee] suffered as a result of infringement" (quotation marks in original). The majority also states that the Devex Court cautioned against imposing limitations on patent infringement damages that were not explicit. Id. at 653, 103 S.Ct. at 2061. While true, that "caution" was only part of the Court's analysis. In Devex, the question was the interpretation of the provision for "interest" added in 1946, later codified in Sec. 284, with respect to which the Court explained:

This is not a case in which Congress has reenacted statutory language that the courts had interpreted in a particular way. In such a situation, it may well be appropriate to infer that Congress intended to adopt the established judicial interpretation.

Id.

The provision for "damages" in Sec. 284, unlike that for "interest," was reenacted language. While the statutory remedies have been modified over the years in other ways, a patentee has been entitled to recover actual damages at law since the beginning of the nineteenth century. See Seymour v. McCormick, 57 U.S. (16 How.) 480, 488-89, 14 L.Ed. 1024 (1853), for a review of the 1836 Act and earlier statutory provisions. See also Irah H. Donner, BIC Leisure v. Windsurfing, 4 Fed.Circuit Bar J. 167 (1994).

Immediately prior to 1946, the patent statute provided for recovery of the "damages" the patentee sustained, a remedy at law, which could, in appropriate cases, be the amount of a patentee's lost profits by diversion of its sales of patented goods, the amount of an established royalty or a reasonably royalty.8 In addition, a patentee was entitled to an equitable accounting for profits made by the infringer from the invention. To simplify proceedings, both remedies were made available by statute in an equity court where infringement suits were generally brought in order to obtain injunctive relief. Patent Act of 1870, ch. 230, 16 Stat. 206-7 (1870). The provision for "damages" and for an accounting for profits did not, however, allow double recovery. Common law "damages" were recovered to the extent the amount exceeded a defendant's profits.9

"By the 1946 amendments, [citation omitted] the statute was changed to its present form, whereby only 'damages' are recoverable." Aro Mfg. Co., 377 U.S. at 505, 84 S.Ct. at 1542. This was effected by eliminating an accounting for an infringer's profits. A specific provision for "damages" measured as a reasonably royalty was added, as well as a provision for prejudgment interest. Act of Aug. 1, 1946, ch. 726, Sec. 1, 60 Stat. 778 (codified as amended at 35 U.S.C. Secs. 281, 283-286, 290 (1988)). The 1952 codification of the patent statute did not change the substance of allowable "damages." Its stated purpose was merely "reorganization in language to clarify the statement of the statutes." Aro, 377 U.S. at 505 n. 20, 84 S.Ct. at 1542 n. 20 (quoting H.R.Rep. No. 1923, 82d Cong., 2d Sess. at 10, 29 (1952)). Thus, again "damages" is reenacted language and it would be reasonable to infer that Congress intended to adopt the established judicial interpretation. Id.

One need not rely on mere inference respecting the meaning Congress intended for the term "damages." As explained to Congress in hearings on the 1946 statute by officials of the Patent Office and other witnesses endorsing the bill, "Damages in a legal sense means the compensation which the law will award for an injury done." House Hearings at 9 (Henry statement). Respecting the restriction of profits to those created by the invention, all agreed "those [are] the only profits to which the patentee is entitled." Id. at 3 (Fish letter introduced by Hon. Robert K. Henry, Member of Congress). Those statements correctly reflect the pre-1946 meaning of "damages" in the patent statute.

An examination of pre-1946 Supreme Court precedent discloses that the legal scope of actual damages for patent infringement was limited to the extent of the defendant's interference with the patentee's market in goods embodying the invention of the patent in suit. This limitation reflects the underlying public policy of the patent statute to promote commerce in new products for the public's benefit. More importantly, it protects the only property rights of a patentee which are protectable, namely those granted by the patent. The patentee obtained as its property an exclusive market in the patented goods. "[I]nfringement was a tortious taking of a part of that property." Dowagiac Mfg. Co. v. Minnesota Moline Plow Co., 235 U.S. 641, 648, 35 S.Ct. 221, 224, 59 L.Ed. 398 (1915). In theory the infringer was a trustee of profits it made off the invention and/or was liable for lost profits the patentee would have made from its own sales of the patented goods.

In Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405, 430, 28 S.Ct. 748, 756, 52 L.Ed. 1122 (1908), the Supreme Court advised: "From the character of the right of the patentee we may judge of his remedies." Until the Act of 1952, the right granted to a patentee was stated in terms of the exclusive right to make and use and vend the protected invention.10 This language tracks the English Statute of Monopolies (1624) under which the Crown did give a monopoly to an inventor to make and work certain new manufactures within the realm for a limited period.11 The term "invention" itself meant the establishment of a new trade or industry. Thus, under the Statute of Monopolies, an "inventor" was anyone who developed an industry previously unknown in England. The period of exclusivity was given for the inventor to reap his reward in the marketplace without competition while thereby training others to make and use his invention at the end of the patent term.12 Indeed, failure to exploit in England was a basis for cancellation of the grant.

In contrast, in the United States, the grant of a patent did not convey to the inventor a right to make, use and vend his invention despite the statutory language originally to that effect. In interpreting a patentee's rights in Crown Die & Tool Co. v. Nye Tool & Machine Works, 261 U.S. 24, 26, 43 S.Ct. 254, 255, 67 L.Ed. 516 (1923), the Supreme Court explained that an inventor has a natural right to make, use and sell his invention, and that a patent augments an inventor's position by making that natural right exclusive for a limited time. The statutory language was interpreted to give a right to preclude others from interfering with the patentee's exclusivity in providing the patented goods to the public. Id. at 34, 43 S.Ct. at 256.13

An inventor is entitled to a patent by meeting the statutory requirements respecting disclosure of the invention. Prior commercialization of the invention has never been a requirement in our law to obtain a patent. An inventor is merely required to teach others his invention in his patent application. Thus, when faced with the question of whether a patentee was entitled to enjoin an infringer despite the patentee's failure to use its invention, the Supreme Court held for the patentee. Continental Paper Bag, 210 U.S. at 424-430, 28 S.Ct. at 753-754. Congress provided a right to exclusive use and to deny that privilege would destroy that right. Id. at 430, 28 S.Ct. at 756. An injunction preserves the patentee's exclusive right to market embodiments of the patented invention.

These clearly established principles, however, do not lead to the conclusion that the patentee's failure to commercialize plays no role in determining damages. That the quid pro quo for obtaining a patent is disclosure of the invention does not dictate the answer to the question of the legal scope of damages. The patent system was not designed merely to build up a library of information by disclosure, valuable though that is, but to get new products into the marketplace during the period of exclusivity so that the public receives full benefits from the grant. The Congress of the fledgling country did not act so quickly in enacting the Patent Act of 1790 merely to further intellectual pursuits. As explained in an early text, "The patent laws promote the progress in different ways, prominent among which are [inter alia ] by protecting the investment of capital in the development and working of a new invention from ruinous competition till the investment becomes remunerative." Simonds, Summary of the Law of Patents 9 (1883). Better or cheaper products in the marketplace which promote competition is the goal.

In Bement v. National Harrow Co., the Supreme Court recognized that the patent system was designed to stimulate the patentee to put new products into the market where the public would benefit from them:

"If [the patentee] see fit, he may reserve to himself the exclusive use of his invention or discovery. If he will neither use his device nor permit others to use it, he has but suppressed his own. That the grant is made upon the reasonable expectation that he will either put his invention to practical use or permit others to avail themselves of it upon reasonable terms, is doubtless true. This expectation is based alone upon the supposition that the patentee's interest will induce him to use, or let others use, his invention. The public has retained no other security to enforce such expectations."

186 U.S. 70, 90, 22 S.Ct. 747, 755, 46 L.Ed. 1058 (1902) (quoting Heaton-Peninsular Co. v. Eureka Specialty Co., 77 F. 288, 294, 47 U.S.App. 146, 160 (6th Cir.1896)) (emphasis added). Other statements of the Court are of like import. In Woodbridge v. United States, 263 U.S. 50, 55-56, 44 S.Ct. 45, 47, 68 L.Ed. 159 (1923), the Court opined: "Congress relies for the public benefit to be derived from the invention during the monopoly [i.e., the term of a patentee's exclusive market] on the natural motive for gain in the patentee to exploit his invention and to make, use and vend it or its products or to permit others to do so, for profit." The grant of a period in which a patentee has exclusivity in commercialization of its patented product without competition from infringing products of others is provided in order to attract the necessary capital to start up a new business. Exclusivity in commercialization enables a patentee to recoup its investment in research, production, and marketing a new product. The merits of the invention will determine the patentee's just reward from the public.

Thus, a patentee may withhold from the public the benefit of use of its invention during the patent term, and the public has no way to withdraw the grant for nonuse. Like the owner of a farm, a patentee may let his property lay fallow. In doing so, "he has but suppressed his own." Bement, 186 U.S. at 90, 22 S.Ct. at 755. But it is anomalous to hold that Congress, by providing an incentive for the patentee to enter the market, intended the patentee to be rewarded the same for letting his property lay fallow during the term of the patent as for making the investment necessary to commercializing a new product or licensing others to do so, in order that the public benefits from the invention. The status quo may serve the patentee's interest, but that is not the only consideration. The patent grant "was never designed for [an inventor's] exclusive profit or advantage." Kendall v. Winsor, 62 U.S. (21 How.) 322, 328, 16 L.Ed. 165 (1858).

D. Injury to a Patentee's Market in Unprotected Goods is not a Patent Infringement Injury

The question of recovery of lost profits to compensate a patentee for injury to its business in competitive products not protected by the patent in suit (hereinafter "unprotected goods") is not a new theory of damages. Over a hundred years ago, the Supreme Court expressed its view that damages in the form of lost profits must be based upon injury to the patentee's trade in products embodying the patented invention. As stated in Crosby Steam Gage & Valve Co. v. Consolidated Safety Valve Co., 141 U.S. 441, 452-53, 12 S.Ct. 49, 53, 35 L.Ed. 809 (1891) (emphasis added):

If there had been an award of damages, and the loss of trade by the plaintiff, in consequence of the competition by the defendant, had been an element entering into those damages, it would have been a material fact to be shown by the plaintiff that it was putting on the market goods embodying the [patented] invention.

Faced with that statement by the Supreme Court, few patentees have had the temerity to seek damages for loss of trade in competitive unprotected devices and none have been successful in any other circuit.

Since Seymour v. McCormick, 57 U.S. (16 How.) 480, 487, 14 L.Ed. 1024 (1853), it had been an accepted tenet that actual "damages" depended on the infringer's interference with the patentee's commercial use of its invention either by exploiting the monopoly himself (that is, satisfying demand with his own patented goods) or by licensing the patent. Yale Lock Mfg. Co. v. Sargent, another frequently cited damages case, rests on the tenet that the infringement interfered with the patentee's marketing of the patented goods:

As the plaintiff, at the time of the infringement, availed himself of his exclusive right by keeping his patent a monopoly, and granting no licenses, the difference between his pecuniary condition after the infringement, and what his condition would have been if the infringement had not occurred, is to be measured, so far as his own sales of locks are concerned, by the difference between the money he would have realized from such sales if the infringement had not interfered with such monopoly, and the money he did realize from such sales.

117 U.S. at 552-53, 6 S.Ct. at 942-43 (emphasis added). Absent a patentee's use of its invention or proof of an established license fee, infringement of a patent resulted in nominal damages. Rude v. Westcott, 130 U.S. 152, 165-67, 9 S.Ct. 463, 468-69, 32 L.Ed. 888 (1889); 3 William C. Robinson, The Law of Patents Sec. 1052 (1890)