Damage verdict of $27.9 millionin SRI patent lawsuit stuns ATL

Ultrasound vendor says it will fight award

Ultrasound vendor Advanced Technology Laboratories is crying foulafter a U.S. District Court in San Francisco assessed the company$27.9 million in damages for allegedly violating a patent heldby SRI International of Menlo Park, CA. The verdict is particularlygalling for the Bothell, WA, company because the firm never receiveda trial on the merits of the case, as a result of a judge's summaryjudgment ruling.

SRI filed the suit in 1991, charging ATL with violating a patentSRI received in 1977 for tracking filter circuits used in ATL'sUltramark 4, Ultramark 5, and ADR 4000 ultrasound scanners (SCAN2/24/93). All three products have since been discontinued, andthe circuit is not used in ATL's newer scanners, such as Ultramark9 HDI and HDI 3000.

ATL suffered a major setback in October 1992, when U.S. DistrictCourt Judge Stanley Weigel granted SRI's motion for summary judgment,effectively ruling that ATL infringed on the patent without givingthe vendor a chance to present its case to a jury. ATL subsequentlyappealed the verdict and lost.

Despite the setbacks, ATL had hoped to limit its losses to$5 million, a figure SRI had asked for early on in the dispute.ATL took a $5 million charge in the fourth quarter of 1994.

That changed after last month's ruling, in which U.S. DistrictCourt Judge William Orrick awarded SRI $27.9 million. Orrick grantedSRI's most recent request for damages, $9.3 million, and thentrebled the award, ruling that ATL was guilty of "willfullyinfringing" SRI's patent. SRI was also awarded $4.5 millionin interest and legal fees.

The willful infringement verdict is based on a legal principledesigned to punish companies that continue to violate valid patents.A company can protect itself, however, by having legal counselinvestigate the patent holder's claims. If legal counsel determinesthat those claims are invalid or that the company does not infringe,the company should be able to continue its operations withoutfear of violating the clause, according to Brinton Yorks, ATLgeneral counsel.

ATL and its parent at the time the dispute began, Squibb Corp.,were diligent in researching the patent claims and in determiningthat the company's scanners did not infringe, according to chairmanand CEO Dennis Fill.

"As we were perfectly assured in our own mind and by outsidepatent counsel that we were not infringing any patents, we tookthe course we've taken," Fill said. "And that shouldnot be regarded under any circumstances as willful."

In Orrick's decision, however, the judge found that ATL's infringementwas willful for three reasons: its legal opinions were "inadequate,"it sought the legal opinions "long after ATL's infringingactivities began," and it "engaged in a series of delaytactics designed to fend off SRI as long as possible and allowthe infringement to continue."

ATL plans to appeal the decision to the U.S. Circuit Courtof Appeals to reduce the size of the damages, and plans to emphasizeits belief that the trebled damages are unfair. ATL will takea one-time charge of $29 million in its second quarter, whichwill hurt the company's profitability just as it is emerging froma series of one-time charges related to its acquisition and consolidationof Interspec.

On the positive side, the news of the ruling did not have adamaging effect on ATL's stock, which has been on an upward curvein the past several weeks and reached a 52-week high of just over$38 a share not long after the ruling.