Experts in Patent Infringement Damages

Patents

A patent is the grant of a property right to an inventor, issued by the United States Patent and Trademark Office.  The term of a patent is 20 years from the date on which the application for the patent was filed in the United States or, in special cases, from the date an earlier related application was filed.¹

Infringement of a patent is the unauthorized making, using, offering for sale, or selling products that incorporate patented inventions within the United States or U.S. Territories.

Infringement also includes importing into the United States any product that includes a patented invention during the term of the patent. If a patent is infringed, the patentee may sue for relief in the appropriate federal court.² In the event that a defendant is found liable of infringement, the patent owner is entitled to request various remedies, including: lost profits, reasonable royalties, and prejudgment interest.

Patent Damages

Title 35, Section 284 of the United States Code, often referred to as the patent statute, governs the award of damages in patent infringement cases. The statute calls for “damages in an amount adequate to compensate for the infringement.” The statute also sets a floor for what constitutes adequate damages in the form of a reasonable royalty. The prevailing party can also recover prejudgment interest and costs from the infringer. In addition, courts can treble damage awards found by the jury or assessed by the court.

Section 284 of Title 35 of the US Code reads:

“Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs fixed by the court.”

Lost Profits

Courts award patent infringement damages adequate to compensate for the infringement.³ Often, this compensation includes “lost profits,” which are profits on sales the patent owner would have made absent the infringement. In many instances, lost profit calculations include a four-part test as outlined in the celebrated Panduit v. Stahlin Brothers case.

To obtain lost profit damages using the Panduit test, the patent owner must prove (1) demand for the patented product, (2) the absence of acceptable non-infringing substitutes, (3) the capacity to exploit demand for the patented product, and (4) the amount of profit the owner would have made but for the infringement.

Proof of demand for the patented product, or in some instances proof of demand for the patented feature, is sometimes established by product sales, customer surveys, and past advertising and promotion of the patented feature. Heavy promotion of the patented feature provides some indication that the patent drives sales. Sales demand is an important element of the Entire Market Value Rule, which allows the patent owner to be compensated for lost sales of non-patent components of the patented product.  

The original Panduit decision denied lost profit damages if non-infringing substitutes were available. Courts have modified the second Panduit test by allowing lost profit awards when non-infringing substitutes compete with the patented product. Even though non-infringing substitutes exist, courts have allowed patent owners to calculate lost profit damages based on their historic market-share. Using the market-share approach, the patent owner receives lost profit damages on accused sales in proportion to its historic share to the market.

Capacity to exploit demand for the patented product is inclusive of manufacturing, assembly, warehousing, promotion, distribution and the financing of the additional volume comprising sales the patent owner would have made but for the infringement.

The amount of profit the owner would have made but for the infringement is typically calculated as incremental profit—revenue less variable costs. Many companies do not have financial accounting systems that report profit by individual product. Therefore, a product specific profit margin must be calculated using source documents (invoices), cost accounting, and managerial accounting records. If the price of the infringing product varies significantly from that of the patent owner’s product, the lost profit calculation may need to be adjusted for the price elasticity of demand.

Successful patent infringement damage calculations closely follow prior case law, and use established methods of measuring lost profit and reasonable royalty damages. Our consultants understand and apply methodologies found in seminal cases such as Panduit v. Stahlin Brothers, Georgia-Pacific v. U.S. Plywood Corp., Grain Processing v. American Maize, States Industries v. Mor-Flo, Rite-Hite v. Kelly Co., Lucent v. Microsoft, and Uniloc USA v. Microsoft.

Resonable Royalty

When lost profit damages cannot be proved, or are not relevant because the patent owner does not sell a competing product, damages adequate to compensate for the infringement are most often calculated as a floor of damage that is “in no event less than a reasonable royalty for the use made of the invention by the infringer.” A reasonable royalty is often determined through the use of a hypothetical license negotiation, and consideration of fifteen factors described in the seminal case titled Georgia-Pacific v. US Plywood.

Upon a finding of infringement, the patent owner is entitled to damages adequate to fully compensate it for the infringement of the patent, but in no event less than a reasonable royalty for the use of the invention. If an established royalty does not exist for the patented technology, a reasonable royalty is often established through use of the hypothetical license negotiation approach. This approach assumes a hypothetical license between the patent owner and the alleged infringer. The hypothetical license negotiation is often conducted assuming a willing licensee and a willing licensor both with full knowledge of all relevant facts.

The negotiating parties recognize the patent is valid, enforceable, and infringed by the defendant at the time of the negotiation. Practitioners often structure their damage calculation to include consideration of fifteen (15) licensing factors outlined in the seminal Georgia-Pacific v. United States Plywood Corporation case, in order to establish the amount that compensates the patent owner for the infringer’s use of the patent.

In evaluating the hypothetical negotiation, practitioners take into consideration the infringer’s willingness to pay, as well as patent owner’s willingness to accept a license. Practitioners often consider prior licensing by both parties; the economic, financial, and marketing issues that would have influenced the parties; as well as each party’s strengths, weaknesses, and expectations at the time of the hypothetical negotiation. Each patent litigation is unique—therefore some Georgia-Pacific factors are more relevant than others and tend to impact the negotiated royalty differently.

Hypothetical license negotiations often assume the following: (1) the patent is presumed by all parties to be valid, enforceable and infringed, and the parties have this knowledge at the time of the negotiations; and (2) although the infringer is a “willing licensee,” it comes to the hypothetical license negotiation as having been found to infringe the patent.

In evaluating the business and economic factors that the parties-in-suit would have considered in the hypothetical negotiation, practitioners often consider facts and documents available as of the date of first infringement, as well as relevant subsequent events. A rather recent addition that has come into common usage is the so-called “Book of Wisdom.” Under the Book of Wisdom approach, courts, for purposes of determining patent infringement damages, consider facts and evidence after the date of the hypothetical negotiation. The Book of Wisdom construct is consistent with commentators’ understanding that many of the Georgia-Pacific factors consider the infringer’s use of the infringed technology and benefits derived by the infringer after the date of first infringement.

As noted, the celebrated Georgia-Pacific Corporation v. U.S. Plywood Corporation case identified 15 economic factors relevant to determining a reasonable royalty damage award. The 15 factors take into consideration prior licensing by both parties, as well as economic, financial, and marketing issues that would have influenced the parties at the time of the hypothetical negotiation:

1. The royalties received by the patentee for the licensing of the patent-in-suit, proving or tending to prove an established royalty.
2. The rates paid by the licensee for the use of other patents comparable to the patent-in-suit.
3. The nature and scope of the license, as exclusive or nonexclusive; or restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold.
4. The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.
5. The commercial relationship between the licensor and licensee, such as whether they are competitors in the same territory in the same line of business, or whether they are inventor and promoter.
6. The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.
7. The duration of the patent and the term of the license.
8. The established profitability of the product made under the patent; its commercial success; and its current popularity.
9. The utility and advantages of the patented property over old modes or devices, if any, that had been used for working out similar results.
10. The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and benefits to those who have used the invention.
11. The extent to which the infringer has made use of the invention; and any evidence determinative of the value of that use.
12. The portion of the profit or the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions.
13. The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.
14. The testimony of qualified experts.
15. The royalty that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee — who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention — would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.

Each party’s strengths, weaknesses, and expectations are considered in light of this hypothetical negotiation. Factor 15, in effect, synthesizes the prior fourteen Georgia-Pacific factors.

In many cases, an award of prejudgment interest is necessary to ensure that the plaintiff is placed in the same position as he would have been if the defendant had not infringed. Although interest calculations do not usually take prominence in a plaintiff’s legal strategy, prejudgment interest can be sizable.

Notes

1. www.uspto.gov/web/offices/pac/doc/general/whatis.htm
2. www.uspto.gov/web/offices/pac/doc/general/infringe.htm
3. U.S. Code, Title 35, Section 284