Convoyed Sales

Convoyed sales (also called 'collateral sales') refer to sales of unpatented products that accompany or are driven by sales of a patented product — and which the patent owner argues it also lost as a result of the infringement: CONCEPT: when an infringer takes a patented product sale, it may also take the associated sale of accessories, replacement parts, supplies, service contracts, or complementary products that the patent owner would have sold alongside the patented product; the patent owner can seek lost profits on BOTH the patented product AND these accompanying unpatented sales; LEGAL BASIS: Rite-Hite Corp. v. Kelley Co., Inc. (Fed. Cir. 1995, en banc): the seminal Federal Circuit case establishing the scope of convoyed sales damages; the court held that a patent owner can recover lost profits on convoyed items if the items form a FUNCTIONAL UNIT with the patented device — where the patented and unpatented items are sold together and function together as a unit; RATIONALE: 'but for' the infringement, the patent owner would have made both the patented product sale AND the convoyed sales; the infringer's taking of the patented sale necessarily deprived the patent owner of the convoyed sales too; LIMIT: the unpatented items must be functionally related to the patented invention — not merely sold to the same customers (market proximity is insufficient); the connection must be a functional unit, not coincidental co-purchase.

Rite-Hite established that convoyed sales must satisfy the 'functional unit' requirement: RITE-HITE FACTS: Rite-Hite had patented a device that secured loading dock trailers (ADL-100); it also sold a separate dock leveler product that customers routinely bought alongside the ADL-100 system; when Kelley infringed the ADL-100 patent, Rite-Hite sought lost profits not only on ADL-100 sales lost to Kelley, but also on dock leveler sales it lost because customers who bought from Kelley didn't need to buy Rite-Hite's levelers; HOLDING: (1) FUNCTIONAL UNIT SATISFIED: lost profits available for unpatented items that form a functional unit with the patented item — where the items work together and are sold as a unit; (2) MARKET PROXIMITY NOT ENOUGH: recovery is NOT available merely because unpatented items are sold in the same market to the same customers as the patented product, without a functional relationship; APPLYING THE TEST: FUNCTIONAL UNIT examples: (a) patented medical device + unpatented single-use cartridges or reagents that only work with that device; (b) patented printer + patented or unpatented ink cartridges sold as part of the system; (c) patented industrial machine + accessories or parts integral to its operation; NOT FUNCTIONAL UNIT examples: (a) patented tool + other tools sold to the same customers in the same trade; (b) patented component + other components in the same product line but not functionally dependent; (c) patented product + service agreements that are separately priced and purchased.

Calculating convoyed sales lost profits involves applying the lost profits framework to unpatented items: PROOF REQUIRED: (1) BUT FOR CAUSATION: the patent owner must show that but for the infringement, it would have made the convoyed sales; causation must be established for EACH type of convoyed item separately; (2) PANDUIT FACTORS (Applied to Convoyed Items): demand for the convoyed items is proven by historical sales data showing that customers who buy the patented product also buy the convoyed items at a high rate (e.g., 90% of patented product buyers also bought the convoyed accessory); absence of non-infringing alternatives for the convoyed item (or establishment of market share); manufacturing capacity for the convoyed items; profit per unit on the convoyed items; (3) CONTRIBUTION MARGIN: the profit margin on the unpatented items must be calculated — the incremental revenue minus the incremental cost of producing those units; RATIO APPROACH: if a patented product and convoyed items are always sold as a bundle, the patent owner can present evidence of the total bundle profit as the appropriate measure of lost profits per lost sale; APPORTIONMENT WITHIN CONVOYED SALES: if the convoyed product is itself a complex product (not just a simple accessory), the patent owner may need to apportion damages to avoid recovering for unrelated features within the convoyed product; TYPICAL EXPERT TESTIMONY: a patent damages expert typically analyzes historical sales data from the patent owner showing the attach rate (percentage of patented product sales accompanied by convoyed sales) and the profit per convoyed unit.

Convoyed sales are frequently contested by defendants, who argue the convoyed items do not meet the functional unit test or that causation is too speculative: DEFENDANT ARGUMENTS AGAINST CONVOYED SALES: (1) NO FUNCTIONAL UNIT: the unpatented items are not functionally necessary to the patented product — they are just accessories that customers sometimes buy, not integral components; defendant argues customers could buy the unpatented items from other sources; (2) INSUFFICIENT CAUSATION: even if the patented sale was lost, the convoyed sale may not have been lost — the customer might have bought the convoyed item from Rite-Hite or another supplier regardless; (3) CUSTOMER CHOICE: some customers bought only the patented product and never purchased the convoyed items — statistical evidence may show the attach rate is well below 100%, undermining the but-for causation argument; (4) SPECULATIVE LOST PROFITS: if the market for the unpatented items is competitive with many alternatives, proving the patent owner specifically would have made those sales is too speculative; PLAINTIFF RESPONSES: (1) Historical sales data showing consistent co-purchase of patented + unpatented items; (2) Customer testimony or surveys showing they would have purchased the bundle from the patent owner; (3) Evidence that the unpatented items only work with (or only make sense with) the patented product; REPLACEMENT PARTS AND CONSUMABLES: particularly strong convoyed sales arguments involve replacement parts or consumables that ONLY work with the patented system — these have the clearest functional relationship.

Convoyed sales fit within the broader framework of patent damages and must be understood alongside related concepts: CONVOYED SALES vs. REASONABLE ROYALTY: convoyed sales are a type of LOST PROFITS (actual profits the patent owner would have made); reasonable royalty is a different measure (what a willing licensee would pay); the patent owner elects one or the other per infringed patent/product — typically seeks lost profits where available and reasonable royalty as a floor; CONVOYED SALES vs. ENTIRE MARKET VALUE RULE (EMVR): EMVR addresses using the VALUE OF THE WHOLE PRODUCT as the royalty base (including non-patented features); convoyed sales addresses recovery for SEPARATE PRODUCTS sold alongside the patented product; these are different issues — EMVR focuses on royalty base apportionment, convoyed sales focuses on which products are included in lost profit calculations; CONVOYED SALES vs. PATENT EXHAUSTION: patent exhaustion says an authorized sale of a patented product exhausts the patent owner's rights in the sold article — cannot sue downstream customers; but exhaustion doesn't limit which ITEMS can be included in lost profits calculations against the infringer; CONVOYED SALES AND DOWNSTREAM PRODUCTS: some courts have allowed recovery for downstream products (e.g., a patented component that enables subsequent sales in another market) under the 'but for' causation analysis, extending the convoyed sales concept further — though courts apply these broader theories cautiously; APPORTIONMENT: for complex convoyed products (not just simple accessories), the Federal Circuit may require apportionment of damages within the convoyed product itself to reflect only the value attributable to the lost sale, not other features.