Fonar and Siemens reach accord in MRI patent infringement case

October 23, 1996

Federal panel hears appeal of judgment against GEAnother chapter closed last week in the continuing saga of Fonarversus the multinational corporate world of MRI manufacturing.The Melville, NY, MRI scanner company and Siemens Medical Systemsof

Federal panel hears appeal of judgment against GE

Another chapter closed last week in the continuing saga of Fonarversus the multinational corporate world of MRI manufacturing.The Melville, NY, MRI scanner company and Siemens Medical Systemsof Iselin, NJ, agreed to an out-of-court settlement that extinguishedtheir dueling patent-infringement lawsuits.

Fonar was also in court Oct. 8, when a three-judge federalcircuit court panel in Washington, DC, heard appeals in the $62million judgment rendered in a patent case against GE MedicalSystems in May 1995 (SCAN 6/7/95).

Siemens joins Hitachi and Philips among MRI vendors who havechosen to settle with Fonar rather than fight. Fonar dropped itscomplaint against Siemens in exchange for a lump-sum monetarypayment and ongoing royalties. The settlement also involved across-licensing agreement for the contested patents, accordingto Ronald Schutz, Fonar's Minneapolis-based attorney. Specificsettlement terms were not disclosed.

Fonar founder Dr. Raymond Damadian considers the terms a victoryfor his company.

"It represents an acknowledgement of the intellectualproperty that Fonar has contributed to MRI," he said.

Siemens began the litigation in May 1995 in U.S. District Courtin Wilmington, DE, in what was seen as a move to preempt Fonarlitigation. Siemens sought to invalidate selected Fonar patentsand to secure damages from Fonar for allegedly violating patentsthat the German company holds. Philips filed a motion to jointhe suit several months later (SCAN 7/19/95 and 5/10/95).

Fonar filed complaints against Siemens and Philips in June1995. The Philips case was resolved out-of-court in March whenthe Dutch company, like Siemens, paid Fonar a lump-sum settlementand agreed to pay ongoing royalties (SCAN 4/10/96).

The Siemens settlement cuts the number of remaining Fonar targetsto two: Toshiba and the appeal relating to the GE case. The Toshibadispute is still in early litigation, according to Schutz. Patentsinvolved in that conflict include two associated with open MRIdesign, he said.

Both sides predicted victory after appeals were heard in Fonar'scase against GE. Representing the Milwaukee-based vendor, appellatespecialist Donald Dunner cited technical grounds for reversingthe multimillion-dollar verdict. He argued that Fonar failed asrequired by law to disclose the best mode of using the multiple-angleoblique (MAO) sequence covered by one of the patents. He questionedwhether actual infringement occurred, asked for relief for aneight-month period when Fonar failed to pay patent-maintenancefees, and challenged the way in which damages were tallied.

Schutz, a partner in the law firm of Robins, Kaplan, Miller& Ciresi, appealed the district court judge's reversal ofthe jury's verdict against GE for another patent at stake, theso-called Damadian patent invented by the Fonar chief executive.

A ruling on the appeal is expected in anywhere from four to10 months, according to the attorneys. The judgment on appealis now valued at $68.4 million and is accruing interest at $10,000per day, Schutz noted.

While the appellate court considers the appeal, the effectsof the Siemens settlement should appear soon on Fonar's balancesheet.

"Payment in these kinds of cases is made in a very shorttime after their resolution,'' Schutz said.

Fonar's fiscal 1996 results, announced Oct. 11, suggest thepublicly traded company could use the cash. It reported a lossof $3.4 million on revenues of $13.1 million for the year (end-June).In fiscal 1995, Fonar had revenues of $14.1 million and a netloss of $1.8 million.

Declines in both revenues and profitability surprised someobservers, considering that Fonar secured regulatory clearancesfor its open-style 0.35-tesla Quad 7000 and 0.6-tesla Quad 12000in April and November 1995, respectively. In July 1996, Fonarannounced the fourth-quarter sales of 10 Quad 12000 scanners,valued at $12 million (SCAN 8/28/96).

Damadian clarified that report when he updated SCAN on thestatus of orders and shipments last week. Fiscal 1996 ended beforerevenue and income growth from the Quad platforms could show upon the company's financial report, he said. Although Fonar gearedup manufacturing, no installations were completed in fiscal 1996.

"A lot of our sales are not booked yet," he said."We should see nice results in fiscal 1997," he said.

As of Oct. 17, three Quad systems were in various stages ofinstallation, Damadian said. As of June 30, the company reporteda backlog of orders valued at $6.8 million, which was about eightsystems, he said. The value of that backlog is 70% larger thanon the same date in 1995.

Fonar officials attributed the year-end loss to increases inthe company's bad-debt provision, increased R&D costs, andsales, marketing, manufacturing, and overhead costs associatedwith expanding production capacity.