Jury Rules against Kinetic Concepts’ Patent Infringement Claim

In a verdict that surprised many industry analysts, a U.S. district court jury ruled earlier this month that BlueSky Medical Group Inc. (Carlsbad, CA) did not infringe on patents covering a wound-care system manufactured by Kinetic Concepts Inc. (KCI; San Antonio, TX). In its suit, KCI alleged that BlueSky’s Versatile 1 system violated patents covering its vacuum-assisted closure (VAC) technology.

KCI’s suit claimed that BlueSky’s patent infringement had cost the company more than $30 million in lost profits and $8.5 million in unrealized royalties for the system’s two inventors from Wake Forest University (Winston-Salem, NC). BlueSky filed a countersuit, claiming that its Versatile 1 was based on vacuum pressure wound care methods established before KCI’s patents were granted. BlueSky not only denied infringement, but also challenged the validity of KCI’s patents.

Following a six-week trial, the nine-member jury deliberated for eight days. Although the verdict ultimately rejected KCI’s claims of infringement, it explicitly upheld the validity of KCI’s patents.

However, confirmation of the validity of KCI’s patents was apparently little comfort to the investor community, which viewed the company’s loss on the infringement issue as a potentially serious blow. Following the ruling, KCI’s stock price dropped by more than 40% to an all-time low. Analysts noted that the VAC wound-care system accounted for 78% of the company’s second-quarter revenues of $330 million.

KCI’s Ware: Planning to appeal.

“ The jury verdict confirms our belief that the fundamental intellectual property covering our revolutionary VAC technology is valid and enforceable, although we plan to challenge the finding of noninfringement,” said Dennert O. Ware, KCI president and CEO.

KCI plans to appeal the decision, and the company reports that it expects there will be a number of posttrial motions and hearings that could still affect the final outcome. In a conference call with industry analysts, KCI’s Ware noted the company’s ongoing relationships with 3300 hospitals, 6200 long-term care centers, and 6500 home health agencies. “ BlueSky’s Versatile 1 is significantly less effective at healing wounds than the VAC,” he said. “We feel very good about our product, and we are more than ready to successfully compete.”

BlueSky’s Weston: Validated by verdict.

Richard Weston, president of BlueSky Medical, said he was not particularly surprised by the verdict. “We were confident, based on the extensive consultations with our legal team,” he said. “They reviewed the patents in question and the historical evidence of previous applications of negative pressure therapy in wound-care treatment long before it was patented. This documented prior art was a significant factor in our case that there was no infringement—a position that was validated by the jury’s decision. A great deal of the credit goes to the outstanding work of our legal firm. This was a very complex case, and our counsel worked diligently and tirelessly in preparing and presenting it.”

Weston formed BlueSky in 2002 shortly after he left Medela AG (Baar, Switzerland). Medela was also named in the KCI suit, because it had previously agreed to cease marketing its Vario suction pumps for wound therapy. KCI asserted that there was collusion between Medela and Weston to set up BlueSky in the United States for the express purpose of introducing a competitive wound-care product. KCI claimed that product was predicated on its patented technology.

McClanahan: Prior art prevails.

BlueSky attorney Randy McClanahan of McClanahan & Clearman LLP (Houston) said that his firm’s extensive patent review had discovered numerous examples of prior art regarding negative (vacuum) pressure therapy. “Based on our research, I thought we had a good case,” he said. “I was initially concerned about going into a courtroom in KCI’s hometown of San Antonio, but the jury simply warmed to the facts on the extensive prior art here. They also dismissed KCI’s claim that Medela set up Richard Weston and BlueSky Medical. The facts made the case that using vacuum pressure for wound therapy had a documented history prior to any KCI patent.”

Citing pending court actions and an expected appeal, KCI’s attorney, Laurence Macon of Akin, Grump, Strauss, Hauer & Feld (San Antonio), declined to comment.

Although the jury verdict surprised many analysts, intellectual property consultancy Perception Partners (Atlanta, GA) wasn’t among them. In December 2005, the firm bucked the opinion of most industry analysts and predicted that KCI would likely not prevail in its lawsuit against BlueSky. The firm’s conclusion was presented in a client briefing report (available at www.perceptionpartners.com/reports.html) that noted the extensive history of vacuum-assisted wound care that went beyond published research from any single known source. Managing partner Barry Brager said, “The Kinetic Concepts case was an unusually high-stakes litigation that put a majority of the company’s revenues at risk.”

As a result of the jury verdict, says McClanahan, BlueSky is in an excellent position to further develop its Versatile 1 line. “Whereas KCI may readily mount legal challenges to other companies that decide to enter this market, a court has already determined noninfringement on the part of BlueSky—giving the company a green light to proceed on related product development initiatives.”

Indeed, many analysts believe that other medtech manufacturers will decide to pursue the advanced wound-care market by introducing devices similar to KCI’s VAC system. Likely contenders are thought to be Johnson & Johnson Inc. (New Brunswick, NJ), C. R. Bard Inc. (Murray Hill, NJ), and Hospira Inc. (Lake Forest, IL).

Aside from potential competition from other companies, KCI is expected to come under increasing price pressure, particularly from the Centers for Medicare and Medicaid Services (CMS; Baltimore). Currently, KCI leases its VAC system to hospitals for $2000 per month per patient. BlueSky is currently being reimbursed at the same rate, but the company has advised CMS that it could provide the devices for as little as $1000 per month.

Following an order by District Judge Royal Furgeson, KCI and BlueSky will have to wait until September to gain insights into why jurors ruled the way they did. In the meantime, both sides are gearing up for what is expected to be a long and protracted battle. According to many industry analysts, the dispute will not likely be resolved before the end of 2007.

Founded in 1976, KCI has more than 7000 employees. In addition to its wound-care devices, the company manufactures various hospital beds and therapeutic surfaces. Its 2005 revenues totaled $1.21 billion, up 21.8% from year-earlier sales of $993 million. BlueSky Medical is privately held.

© 2006 Canon Communications LLC

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