www.lgpatlaw.com -- (831) 649-8800
Patent damages seek to make the patent owner whole for losses caused by infringement. This is accomplished primarily by consideration of two alternative measurements. Title 35, Section 284 allows for damages adequate to compensate for infringement “but in no event less than a reasonable royalty for the use made of the invention.”
In addition to such compensation, there are other monetary items of consequence. One may obtain up to three times the amount of actual damages, upon a finding of willful infringement. Id. Attorneys’ fees and interest may also be included. However, this paper will not address further these latter subjects. Instead, we will present the basic shape and substance of patent damages as compensation for infringement.
LOST PROFITS FOR PATENT INFRINGEMENT
Lost profits, in the form of sales diversion, price erosion, or increased expense, is an appropriate basis for recovery when the patent owner (or an exclusive licensee) exploits the lawful exclusive rights of the patent directly by manufacture, use or sale.
Causation and the “But For” Test. The patentee’s first hurdle is causation. It must generally prove that, but for the infringement by defendant, the patentee would have had greater sales and recovered the commensurate amount of profits. Causation must be proved by reasonable probability. Damages are not presumed by infringement. This proof is relatively straightforward in a two-supplier market, where a sale not going to the infringer can reasonably be assumed to be a sale that would have gone to the patent owner. Causation in a multi-supplier market, however, is another matter, addressed below.
However, there is an understood limitation to the scope of causation. In Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538 (Fed.Cir. 1995), the Federal Circuit recognized a foreseeability requirement, regardless of causation. This judicial limitation rests on a combination of logic, policy, a sense of justice and precedent.
Causation of Lost Sales: The Panduit Test. A sale made by an infringer is not always a sale lost to the patentee. Where the patentee seeks an inference that its lost sales equaled the sales made by the infringer in quantity, courts turn most often to the test set out in Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F.2d 1152 (6th Cir. 1978). The patentee must prove (1) demand for the patented product, (2) absence of an acceptable, non-infringing substitute, (3) patentee’s manufacturing and marketing capacity to exploit the demand, and (4) the amount of profit patentee would have made.
One of the key issues arising in consideration of substitute products concerns its suitability. The case law is not clear in delineating whether all functional advantages of the patent must be present. “Demand” is not a static matter either. One cannot suppose that the demand between the infringing product and the patent is interchangeable, as when the infringer and others sell a cheaper product preferred by customers, using a different process. See BIC Leisure Products v. Windsurfing Int’l, 1 F.3d 1214 (Fed.Cir. 1993). Moreover, the non-infringing alternative need not yet be on the market, if otherwise reasonably available. Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341 (Fed.Cir. 1999).
Meeting the Panduit test establishes the prima facie case of “but for” causation. The burden thereafter shifts to the infringer to show that the inference is unreasonable for some or all of the lost sales. Rite-Hite, supra. Failure to meet the Panduit test does not eliminate the possibility of all lost profits damages, but the burden of proving causation thereby generally becomes more daunting.
Other Approaches to Proving Damages: the Market Share Theory. The Panduit test is not the sole path to prove causation of lost profits and the amount of lost sales. One of the most prominent of alternatives involves the Market Share Theory. Lost profits can be proved by proof of the patentee’s market share, at least as an alternative to proving no non-infringing substitutes available in the marketplace. In State Industries, where patentee had sales of forty percent in the relevant market in comparison with non-infringing competitors, it won lost profits on forty percent of infringer’s sales in that same market, and a royalty of three percent on the remaining sales by infringer. State Industries, Inc. v. Mor-Flo Industries, Inc., 883 F.2d 1573 (Fed.Cir. 1989).
Other approaches to damages are also possible. For example, while diverted or lost sales is the usual concept involved in assessing lost profits, it is not the only allowable form. In TWM Mfg. Co., Inc. v. Dura Corp., 789 F.2d 895 (Fed.Cir. 1986), an award of $100 for each sale by patentee at a discount forced by infringer’s competition and for each sale by infringer that patentee could have made at a higher price was affirmed.
Damages for Plaintiff’s Lost Product Sales -- Not Covered by Patent. One troubling area in the application of damages theory deals with additional damages for lost sales of products caused by infringement, which products were not covered by the patent. Another – seemingly on the flip side -- deals with reduction of the damage claim for lost profits damages based on sales by defendant of devices encompassing both the patented item and non-infringing components. This latter problem of apportionment is dealt with immediately below.
Rite-Hite v. Kelly, supra, confirmed lost profits damages on sales of products patentee sold which were not covered by the patent. Called the Entire Market Value Rule, causation of lost sales caused by defendant’s infringement is not the only requirement. Additionally, the unpatented items must either (a) be physically part of the same machine, or (b) be normally sold with the patented components, provided they are part of a single assembly or together constitute a functional unit. Id. at 1550.
Defendant argued that this extended the reach of patents beyond the scope of the patent, but the Federal Circuit Court reasoned that such damages were compensable in light of causation of damage and its foreseeability.
Lost Profits for Defendant’s Product Sales Where Only a Component Infringes. Apart from the issue of lost profits regarding sales of plaintiff’s products which are not covered by the patent, is there an issue in calculating the lost profits of plaintiff, when the patent in question is for a component that is a small part of the commercial device sold by the defendant? Is there an issue of apportionment between sales of infringing components and sales of the overall product, of which only a portion is infringing? There are few modern cases of apportionment in the lost profits context, and debate remains concerning whether the concept has a place in anything other than reasonable royalty calculations. See Universal Athletic Sales Co. v. American Gym, 480 F.Supp. 408, 414 (WD Pa 1979); Bensen, Apportionment of Lost Profits in Contemporary Patent Damages Cases, 10 Va. J. Law&Tech 1, 3-4 (2005).
One reason for this may be common sense. When the patent is for a component that sells to manufacturers like the infringer for $3 each, the patentee is clearly entitled to lost profits for the number of $3 component sales it would have enjoyed, but for defendant’s infringement. However, this logic does not extend to claiming lost profits on the $100 units sold by defendant, which incorporate the infringing component. The patentee does not sell comparable units, worth $100 or any other figure. Apportioning from defendant’s sales and profits makes little sense; direct accounting of infringing components used and the profits plaintiff would have earned off such sales is more straightforward. If, on the other hand, the patentee also sells the patented component as part of an integrated system or functional unit, there is still no need to consider apportionment. Then, the issue focuses on the Entire Market Value Rule.
Amount of Damages. The amount of lost profits, in its simplest formulation, is a comparison of the additional revenues which could have been earned, less the expenses that would be attributable to such additional revenues, such as the cost of goods.
The issue of proof of the amount of damages reflects a judicial balancing of the equities. Damages are only awardable by virtue of infringement. Thus, when the quantum of proof is inconclusive, courts consider who should bear the consequences. Given the fact that wrongdoing is established, if plaintiff can prove the fact of injury, it will not be penalized if its proof of the amount is vague. “Any doubts regarding the calculatory precision of the damage amount must be resolved against the infringer…[T]he patentee need only show that there was a reasonable probability that the infringing sales caused the loss of profits.” Kaufman Co., Inc. v. Lantech, Inc., 926 F.2d 1136, 1141-42 (Fed.Cir. 1991).
The costs involved are usually deemed to be only the incremental costs caused by increased sales – the sales patentee would have had but for the infringement. This evidence is usually established by expert testimony. Fixed costs are generally thought to already have occurred, whether or not infringement occurred.
ROYALTIES FOR PATENT INFRINGEMENT
Established Royalties. A patent owner may recover damages for a royalty rate established by prior licenses for prior similar infringing acts. An established royalty rate is a generally uniform one freely negotiated with a number of licensees. The royalty does not set the maximum recovery however, particularly if widespread infringing activity affected the prior, established royalty. Such an established royalty generally precludes an award of lost profits, if the means of exploiting the patent was not to rely on sales of products.
Reasonable Royalty Based on Hypothetical License. Even if lost profits cannot be proved, at a minimum a patent owner may recover a reasonable royalty for patent infringement. 35 U.S.C. §284. A reasonable royalty in an infringement context is defined as the amount which would have been set in a hypothetical negotiation between a willing patent owner and a willing potential user in the infringer’s position, when the infringement began and the parties assumed the patent was valid and enforceable.
While prior licenses under the patent would be highly relevant, the profits or benefits which could be anticipated usually defines what a willing user would be willing to pay. While this is a fiction, raising the specter of allowing for speculative damages, the rate must be supported by evidence, often through expert testimony. The relative bargaining strength, market to be exploited, profits the patentee would lose by granting the non-exclusive license and the licensee would gain, the commercial past performance of the invention would all be taken into account. Subsequent events also may provide a basis for determination of the royalty. See Georgia-Pacific v. United States Plywood Corp., 318 F.Supp. 1116 (SDNY 1970). Other factors which could be looked at include the scope in terms of territory or allowed uses, the commercial relationship between parties, the effect on selling related products, the duration of the patent, noninfringing alternatives, customary royalties in the industry and the portion of the profit that would be credited to the invention, as distinguished from non-patented elements, the manufacturing process and business risks.
In sum, the royalty rate would likely be set by some division of the predicted economic benefits under the hypothetical license. It is usually error to award all profits to the patentee, because a licensee would rarely enter into such an arrangement.
Inclusion of Non-Patented Items into the Royalty Base. In TWM Mfg. Co., Inc. v. Dura Corp., supra, the Court upheld the inclusion of unpatented items in the royalty base, where the hypothetical license could anticipate increased sales of such collateral items because of the patented device.
Apportionment and Royalty Rates. If the patented feature is a small, relatively unimportant component of a larger device, there are basically two ways to look at the calculation of the royalty: use as a royalty base the sales of the patented device and figure an appropriate rate to use with that base, or use a royalty base including the entire device, with an appropriately smaller rate. Obviously, a willing licensee in a hypothetical license negotiation would be less disposed to agree to a high royalty rate if the base is that entire product.
From a practical point of view, therefore, issues of apportionment in royalty cases tend to sort themselves out pragmatically. Perhaps for that reason, there is little direct authority relating to apportionment and reasonable royalty calculations. See Bensen, Using Apportionment to Rein in the Georgia-Pacific Factors, 9 Columbia Sci. & Tech. L Rev. 1 (2008). However, one factor for determining reasonable royalties recited in the influential Georgia-Pacific case was “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.” Georgia-Pacific, supra, 318 F.Supp. at 1121.
Apportionment of damages was a significant issue in the proposed Patent Reform Act of 2007, groundbreaking legislation which failed to be enacted by Congress. It was again raised as an issue in the pending Patent Reform Act of 2009 legislation. At present, the Senate bill satisfies itself with some "gatekeeper" language, ensuring the trial court will supervise the appropriate evidentiary methods for proving damages, whereas the House bill is less clear.
Subsequent Events and Royalty Rate. Although logically inconsistent with the knowledge the parties have at the time infringement began, in constructing the hypothetical license, it is not error to admit and consider evidence of subsequent events and profits.
DESIGN PATENT DAMAGES
In addition to reasonable royalties and lost profits, owners of a design patent have an additional remedy, authorized under a specific statute. Section 289 of Title 35 provides that the patentee is entitled the defendant’s wrongful profits. The mandated award, moreover, is the “total profit” of the infringer. This wrongful profits remedy was legislated out of existence by Congress for utility patents in 1946, but survived for design patents.
The recovery for non-patented items as part of the award depends on the measure of damage sought. A patentee may not obtain a wrongful profit recovery for the sale of defendant’s non-infringing goods, but such sales may be taken into account in calculating a reasonable royalty, if relevant. Trans World Mfg. Corp. v. Al Nyman & Sons, Inc., 750 F.2d 1552, 1567 (Fed.Cir. 1984).
About the Author Robert Payne is a partner in the law firm of LaRiviere, Grubman & Payne, LLP, with offices in Monterey and San Jose, California. He practices intellectual property litigation nationally, and is licensed to practice in California, Texas and Washington. He is former Chair of the Intellectual Property Section of the California State Bar and incoming Chair of the Patent Litigation Committee of AIPLA. E-mail: rpayne@lgpatlaw.com