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Patent damages calculations are more important than ever

The number of patent infringement lawsuits continues to soar, making the proper calculation of damages more important than ever. With the different types of damages available and significant case law on the issue, attorneys involved in patent litigation should take the time to understand how patent infringement damages are assessed.

What’s reasonable?

Federal patent law allows courts to award damages “adequate to compensate for the infringement but in no event less than a reasonable royalty” for an infringer’s use of the patented invention. Reasonable royalties are the statutory minimum, but plaintiffs often seek to recover greater amounts in the form of lost profits.

A reasonable royalty generally is defined as the amount that a hypothetical willing buyer and willing seller would agree is an appropriate payment at the time of the infringement. It’s important to remember, though, that postinfringement royalty rates aren’t the result of ordinary arm’s-length negotiations among willing parties. Therefore, the rates must account for the fact that infringement brought the parties to the point of litigation. If infringers can obtain the same rates as licensees, reasonable royalty damages won’t serve as an infringement deterrent.

Courts often apply the 15 Georgia-Pacific factors (from Georgia-Pacific Corp. v. United States Plywood Corp.) to determine a reasonable royalty. In the 2011 case Uniloc USA Inc. v. Microsoft Corp., the Federal Circuit Court of Appeals (which hears all patent case appeals) cited three of the 15 factors as being particularly important:

1. Actual royalties received by the patent owner for licensing the patent at issue,
2. Royalties paid by licensees of comparable patents, and
3. The portion of profit that may customarily be allowed in the specific business for the use of the invention or similar inventions.

According to the Federal Circuit, these three factors “properly tie the reasonable royalty calculation to the facts of the hypothetical negotiation at issue.”

How are lost profits recovered?

Damages for lost profits represent the amount of sales the patent owner would have reaped but for the infringement, less variable costs it would have incurred if it had earned those sales (such as the cost of goods sold). To recover such damages, a plaintiff generally must show:

• A demand for the patented product,
• An absence of acceptable noninfringing substitutes,
• The patent owner’s manufacturing and marketing capability to exploit the demand (with such assets as production facilities, marketing expertise and budget, and brand loyalty), and
• The amount of profits the patent owner would have earned but for the infringement.

Note that some of these factors have evolved since they were first established in 1978 in Panduit Corp. v. Stahlin Bros. For example, the Federal Circuit has allowed plaintiffs to recover damages based on market share if acceptable noninfringing substitutes are available.

Once the patent owner establishes causation, the true amount of the lost sales could be further reduced. Damages experts consider whether the infringer had the ability to market a noninfringing competitive product that would have cut into the patent owner’s sales. Reductions could also be claimed if a substantial portion of the infringer’s sales were due to its superior manufacturing, marketing or distribution capacities. An infringer’s location or branding could have boosted its sales, too.

Plaintiffs may also seek damages for diminished sales of items related to a patent product — so-called lost collateral sales. The classic example is the manufacturer of a patented razor suffering lost sales of razor blades. Apple’s patent litigation against Samsung — in which Apple sought damages for lost collateral sales of iOS devices to lost iPhone purchasers — provides a more recent example.

The best strategy
With patents playing an increasingly critical role for many businesses, the wave of patent litigation is unlikely to subside. Qualified damages experts can help you determine the best strategy for pursuing or combating damages claims.

Sidebar: How to prove price erosion
Price erosion can account for a significant part of the damages in a patent infringement action. It’s based on the premise that but for the infringer’s presence in the market the patent owners could have charged a higher price for its patented products.

Extensive financial and economic analyses are required to prove price erosion damages. For example, a comprehensive market analysis is necessary to determine the market’s competitive factors, such as market shares, price elasticity and the patent owner’s cost structures.

Once the state of the market is established, damages experts apply the financial and economic models set out in patent infringement case law. For example, the Federal Circuit in its 2013 SynQor, Inc. v. Artesyn Technologies, Inc. decision held that a credible but-for analysis must factor in the effect of a higher price on product demand and the effect of any available noninfringing alternatives on the market.