Cochlear facing earnings hit after losing US courts appeal

The hearing implant maker is facing a $438m hit to earnings after losing a patent infringement appeal in the US.

Cochlear chief executive Dig Howitt said he was disappointed and maintained the two patents in question were “long expired”. Picture: Ryan Osland

Hearing implant maker Cochlear is facing a $US268m ($438m) hit to earnings - a day after it abandoned its full-year profit guidance - after losing a patent infringement appeal in the US.

The US Courts of Appeals upheld a US District Court ruling that Cochlear had wilfully infringed the patents of two competitors Alfred E. Mann Foundation for Scientific Research (AMF) and Advance Bionics (AB).

While AMF chief executive John Petrovich hailed the decision as a “great outcome”, Cochlear chief executive Dig Howitt said he was disappointed and maintained the two patents in question were “long expired”.

The company has been hit hard from the coronavirus with the delay of elective and non-essential surgery, including cochlear implants. Mr Howitt said Cochlear would borrow money to fund the judgment and would seek a further appeal.

“This case relates to two patents that are long expired. The Court invalidated the first patent and the remaining patent was much narrower in scope,” Mr Howitt said.

“We believe the amount of damages awarded is out of proportion with the limited application of the patented feature. We are very disappointed with this decision, but inflated damages awards are a risk of patent disputes in the US.

“Cochlear will seek an en banc review by the full Court of Appeals in a petition for a rehearing. If the petition is unsuccessful and the Judgment amount and post judgment interest is paid, the insurance bond of $US335m to secure the judgment will be returned to Cochlear.”

Last month, Cochlear warned COVID-19 would wipe up to $30m of its full-year profit, but the rapidly evolving nature of the virus had now made the extent of the earnings hit too difficult to gauge.

Despite his disappointment, Mr Howitt said Cochlear had factored an adverse ruling into its cash flow.

“Cochlear remains confident it can meet future cash requirements. In determining the cash needs for the business over the coming months, Cochlear had factored in this adverse judgment.”

A decision in the US District Court is still pending on AMF and AB’s application for prejudgement interest of $US123m and attorney’s fees of $US15m.

Cochlear has opposed both applications and the calculation methodology.

“There is significant uncertainty on whether pre-judgment interest and/or costs will be awarded and the amount of any award and therefore this exposure is being treated as a contingent liability,” Mr Howitt said.

Mr Petrovich said he was “gratified for the speedy disposition” of the court.

“We felt confident in our position going into the appeal, and now we see that this confidence was justified,” he said.

“We will be working with our legal team over the next several days to determine next steps. I would like to thank the teams at AMF and Advanced Bionics for their support throughout this litigation, as well as a big thanks to our legal counsel, Morgan Lewis, led by Michael Lyons and Tom Petersen, who guided us to this great outcome.”