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Medical device company Varian Medical Systems, Inc. (VAR - Analyst Report) reported that it has settled a patent infringement lawsuit with the University of Pittsburg by agreeing to pay a lump sum of approximately $35 million. Shares of VAR dropped approximately 1.3% in the last trading session to close at $80.06 on April 11.

In 2007, the University of Pittsburgh had initiated the patent litigation against VAR alleging the company of infringement on two patents pertaining to the university’s image-guided radiology technology. One patent deals with equipment that responds to patient movement during diagnosis and treatment, while the other allows the matching of X-ray images with previous images.

In April 2012, a U.S. district court in Pennsylvania ruled against VAR and initially awarded $37 million in damages to the university. It later increased the amount to more than $100 million on discovery of the infringement being willful, among other factors. The court also awarded $9.2 million in legal fees.

Subsequently, VAR challenged the ruling in the United States Court of Appeals for the Federal Circuit. In its ruling issued last week, the Federal Appeals Court disagreed with the lower court's decision on the multimillion-dollar damages, thus giving VAR a partial victory in its patent lawsuit against the University of Pittsburgh.

Earlier in the ongoing second quarter of fiscal 2014, VAR and the University of Pittsburgh had reached a settlement agreement that was contingent upon last week’s ruling from the Appeals Court. Under the pre-negotiated settlement agreement, henceforth, VAR will not owe any future royalty payments associated with the sale of its products that incorporate the patent at issue. Customers of VAR will continue to have full use of the products.

VAR is currently reviewing the accounting treatment of this settlement.  Per the company, part of the settlement will be expensed in the financial results of the second quarter while the balance will be recorded as a prepaid royalty in the third quarter of fiscal 2014.

Currently, VAR has a Zacks Rank #2 (Buy). Other stocks performing well in the medical instruments industry include Syneron Medical Ltd. (ELOS - Snapshot Report), Delcath Systems, Inc. and ArthroCare Corporation . While Syneron Medical and Delcath Systems sport a Zacks Rank #1 (Strong Buy), ArthroCare carries a Zacks Rank #2 (Buy).

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