A jury cuts Home Depot down to size for (supposedly) jerking around a supplier

A recent patent infringement lawsuit against Home Depot illustrates (yet again) that it can be very expensive for a big company to give the im­pres­sion that it bullied a business partner. In that lawsuit, the jury verdict will likely end up costing Home Depot more than 10 times the money it thought it would save by its actions. See Powell v. The Home Depot U.S.A., Inc., Nos. 2010-1409, -1416 (Fed. Cir. Nov. 14, 2011) (affirming judgment against Home Depot after jury verdict of willful infringement).

Home Depot’s problem: Saws were cutting off fingers

If you’ve ever shopped at a Home Depot, chances are that you’ve seen staff members using a radial-arm saw to cut up lumber for customers. In 2002 and 2003, Home Depot spotted a troubling trend: Employees who operated the saws were getting hurt, sometimes even losing fingers. Claims from those injuries were costing Home Depot upwards of $1 million per year.

Home Depot needed a solution. It didn’t want to remove the radial-arm saws entirely, because it regarded the ability to custom-cut lumber for customers as a competitive advantage. But it didn’t want to keep having its employees get injured.

A contractor cut through the problem

Home Depot turned to Michael Powell, who was the company’s point of contact for installing and repairing radial arm saws. Powell knew he had to come up with a fix, otherwise Home Depot might yank the saws out entirely, which would hurt his business.

Powell developed a saw guard to protect users; he made a prototype and presented it to Home Depot, which ordered eight of the saw guards — at $2,000 each — for use in a pilot project. Powell also filed a patent application for the saw guard.

But then Home Depot cut out the contractor

Unbeknownst to Powell, Home Depot asked another manufacturer to take a look at Powell’s saw guard and to bid on providing the guards at a lower price. Home Depot eventually bought nearly 2,000 of almost-identical saw guards from the other manufacturer — at around $1,295 each, representing a $700 savings from the $2,000 each it had paid Powell.

Powell tried to make a deal with Home Depot to sell them saw guards himself. The company, though, wouldn’t offer him more than $1,200 each, including installation.

Powell requested accelerated examination of his patent application (which raised issues of its own; I won’t address them here, but you can read about them in the appellate court’s opinion). Eventually he received a patent.

The jury cut Home Depot no slack

Powell sued Home Depot for patent infringement. The lawsuit did not go well for Home Depot. The jury awarded Powell $15 million as a reasonable royalty for using the saw guards that Home Depot had bought from the other vendor before the patent had even been issued.

(Under U.S. patent law, you can infringe a patent by making, using, selling, offering for sale, or importing a patented invention in the United States during the term of the patent.)

The $15 million number amounted to some $7,736 per saw guard, according to the appellate court, or more than 10 times Home Depot’s $700-each savings from having the guards made by the other manufacturer.

Some readers might be interested in the appeals court’s explanation why the jury’s damage award wasn’t unreasonable.

The trial judge then “enhanced” the damage award by tacking on an additional $3 million, and also awarded Powell attorney fees totaling $2.8 million. The judge had the authority to do this because of the jury’s finding that Home Depot had been not just an infringer, but a willful infringer, and because the judge found that Home Depot had engaged in litigation misconduct.

The appeals court affirmed the judgment.

Home Depot probably can’t pass the buck to its manufacturer

By the way, the odds are that Home Depot will not be able to sue the other manufacturer via an indemnity claim, as often happens in this kind of case.

That’s because Home Depot appears to have “furnished specifications” to the other manufacturer, telling it exactly what to build. Under section 2-312(2) of the Uniform Commercial Code, that makes Home Depot responsible for the infringement, not the manufacturer.

Lesson: Look ahead on the chess board

Arguably, Home Depot’s managers behaved in a completely “rational” way. They didn’t like the price they were paying Powell. So they sought another, lower-cost supplier. Isn’t that exactly what we expect big-box stores to do, so that we’ll have lower prices?

But Home Depot’s managers apparently didn’t realize how this particular chess game might play out. It seems they didn’t realize —

• that Powell might someday get a patent for his saw-guard invention; and
• that Home Depot might be liable merely for using the patented invention, even though the patent didn’t exist when they bought saw guards from the other manufacturer.