Damages in One (Fairly)
Easy Lesson
Patent Law 4.21.08
Prof. Merges
Relief
Prospective Effect
Issuance
Complaint filed
in District Court
Damages assessed for
this period if marking
(or actual notice)
Preliminary
injunction
hearing
Final
injunction
issues
35 U.S.C. § 284
“[T]he court shall award [the
patentee] 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.”
35 U.S.C. § 285
“The court in exceptional cases
may award reasonable attorney
fees to the prevailing party.”
35 U.S.C. § 287(a)
Patentees ... making, offering for sale, or selling ... any
patented article ... may give notice to the public that the
same is patented, either by fixing thereon the word
"patent" or the abbreviation "pat.", together with the
number of the patent, or when, from the character of
the article, this cannot be done, by fixing to it, or to the
package wherein one or more of them is contained, a
label containing a like notice. In the event of failure to
so mark, no damages shall be recovered by the patentee
in any action for infringement, except on proof that the
infringer was notified of the infringement and
continued to infringe thereafter, in which event
damages may be recovered only for infringement
occurring after such notice. Filing of an action for
infringement shall constitute such notice.
Damages
• Two measures:
– Actual damages: “Lost Profits”
– Reasonable royalty
• Actual damages & the problem of proof
– Panduit Corp. v. Stahlin Bros. Fibre Works,
Inc. – P. 1069
Compensation principle
• “But for” the defendant’s infringing
sales, what would the patentee’s profits
have been?
• NOT a disgorgement remedy: patentee’s
loss, NOT infringer’s gain
Holding Below
• Special Master
• 2.5% royalty on all sales by defendant
Stahlin during the infringement period
– 3/6/62  8/7/70
• Injunction too, of course
Panduit’s damage claim
• Lost Profits: Stahlin’s sales
OR
• Reasonable Royalty
• Lost Profits on Panduit’s own sales
– “Price erosion” profits
Patentee Damages Theory
• Monopoly price is the
inventor’s reward
• Competition lowers price;
measure “harm from
competition”
Lost Profits
• In 2-firm market, where infringer is
second firm, may be easy to calculate
– All sales of infringer would have been made
by patentee
– Always true?
Panduit
• What does the patentee have to show to
prove it would have made sales actually
made by infringer?
Panduit
• What does the patentee have to show to
prove it would have made sales actually
made by infringer?
• “Absence of acceptable noninfringing
substitutes”
Problem Here
• Panduit factor 4, not 2
• Accounting method inadequate
“DAMP” test
• “Whether lost profits are legally
compensable in a particular situation is a
question of law that we review de novo.”
Poly-Am., L.P. v. GSE Lining Tech., Inc., 383
F.3d 1303, 1311 (Fed.Cir.2004)
Ability to manufacture
“Normally, if the patentee is not selling a product,
by definition there can be no lost profits.” RiteHite, 56 F.3d at 1548. The only exception is
where the patentee has the ability to
manufacture and market a product, but for
some legitimate reason does not. Even in these
situations, though, “the burden on a patentee
who has not begun to manufacture the patented
product is commensurately heavy.” Hebert v.
Lisle Corp., 99 F.3d 1109, 1120 (Fed.Cir.1996).
“[T]he record demonstrates that,
despite his later success
manufacturing and marketing a
product, Wechsler lacked the
capability to manufacture his device
during the period of infringement.”
Wechsler v. Macke Intern. Trade,
Inc., 486 F.3d 1286, 1293 (Fed. Cir.
2007)
Reasonable royalty: the
fallback
• Timing
– Date infringement began
• Hypothetical bargain procedure – pp.
1072-1073
Reasonable royalty (cont’d)
• Relevance of competitive situation facing
firms
– Including substitutes
• In the background: cross-elasticity of
demand
Cross-elasticity
• How much demand would be lost
from the patented product for
every dollar increase in its price
above the “perfect competition”
level?
Damages
Two approaches to substitution:
1.Patentable = unique,
therefore, no substitutes.
2.Antitrust, substitution is a
function of cross-elasticity of
demand. Therefore, there will
usually be substitutes.
Elasticity
• If price rises by 10% - what happens to
demand?
• We know demand will fall
• By more than 10%?
• By less than 10%?
• Elasticity measures the extent to which
demand will change
Elasticity (cont’d)
• Price Elasticity of Demand
– The responsiveness of demand to changes in
price
– Where % change in demand is greater than
% change in price – elastic
– Where % change in demand is less than %
change in price - inelastic
Elasticity
The Formula:
PED =
% Change in Quantity Demanded
___________________________
% Change in Price
If answer is between 0 and -1: the relationship is inelastic
If the answer is between -1 and - infinity: the relationship is elastic
Note: PED has – sign in front of it; because as price rises
demand falls and vice-versa (inverse relationship between
price and demand)
Elasticity in this example
• - 29% / 66% = - .43
• NB: If the decision had been to raise the
price, the firm would have lost revenue (so
“inelastic demand” can still mean net loss
in revenue due to price rise)
Elasticity
• Cross Elasticity:
• The responsiveness of demand of one
good to changes in the price of a related
good – either a substitute or a
complement
% Δ Q of good x
__________________
XED =
% Δ Price of good y
Cross elasticity - example
• Increase price of good Y from $1.00 to
$1.10
• Demand for good X increases from 100 to
120.
• Cross-elasticity: 20%/10% = + 2.
Elasticity
• Goods which are complements:
– Cross Elasticity will have negative sign (inverse
relationship between the two)
• Hot dogs and mustard
• Goods which are substitutes:
– Cross Elasticity will have a positive sign (positive
relationship between the two) : e.g., public transit and
car sales
– These are the ones we are usually interested in in
patent cases
Cross-elasticity and substitutes
• Number and closeness of substitutes – the
greater the number of substitutes the more
elastic the demand for a given product will
be
The Fallback – Reasonable
Royalties
• “Hypothetical Bargain” principle
• When? – Date infringement began
• Factors
– Do not reward infringement !!
– Available noninfringing substitutes?
– Does infringer get a profit?
Principle/Goal of Patent Damages
Doctrine
Goal: find "the difference between
[patentee’s] pecuniary condition after the
infringement, and what his condition would
have been if the infringement had not
occurred." Yale Lock Mfg. Co. v. Sargent,
117 U.S. 536, 552.
Goals/Principles II
The question to be asked in determining
damages is "how much had the Patent
Holder and Licensee suffered by the
infringement. And that question [is]
primarily: had the Infringer not infringed,
what would Patent Holder-Licensee have
made?" Livesay Window Co. v. Livesay
Industries, Inc., 51 F. 2d at 471.
Numerous cases approach this
from the patentee’s perspective
• How much would the patentee have been
able to charge in the absence of
infringement?
• How many units would it have sold?
Growing Sophistication
• Crystal Semiconductor Corp. v. Tritech
Microelectronics Int'l, Inc., 246 F3rd 1336, 1356
(FC 2001)
• "[T]o determine a patentee's market share, the
record must accurately identify the market.
This requires an analysis which excludes
alternatives to the patented product with
disparately different prices or significantly
different characteristics."
Grain Processing Corp. v. Am.
Maize Products
• Major step in development of balanced
counterfactual infringement analysis
• How would infringer respond to presence
of valid patent in the market space?
History matters!
• Following trial on damages, the District Court,
Easterbrook, Circuit Judge, sitting by designation,
awarded patent holder reasonable royalty, 893
F.Supp. 1386, and holder appealed. The Court of
Appeals, 108 F.3d 1392, remanded for reconsideration
of lost profits issue. On remand, the District Court,
Easterbrook, Circuit Judge, 979 F.Supp. 1233, again
held that holder was not entitled to lost profit damages
and awarded royalty instead.
Grain Processing
When basing alleged lost profits on lost sales,
patent owner has an initial burden to show a
reasonable probability that he would have
made the asserted sales but for the
infringement; once the patent owner establishes
a reasonable probability of "but for" causation,
the burden then shifts to the accused infringer
to show that the patent owner's "but for"
causation claim is unreasonable for some or all
of the lost sales.
Key holding
Fact that competitor's product, as made by
alternative, noninfringing process, was
not sold on the market during period that
patent was infringed by product as it was
made by infringing processes did not
render product as made by noninfringing
process unavailable, for purpose of
patent holder's claim for lost profits.
Easterbrook: 979 F.Supp. 1233,
1236
• “A product that is within a firm's existing
production abilities but not on the market--in
this case, Lo-Dex 10 made by Process IV (see
893 F.Supp. at 1389-90)--effectively constrains
the patent holder's profits. Potential
competition can be as powerful as actual
competition in constraining price. William J.
Baumol, John C. Panzar & Robert D. Willig,
Contestable Markets and the Theory of Industry
Structure (1982).”
Grain Processing
• 4 production processes; one (# 4) noninfringing
• “Practically instantaneous” transition from
infringing process to noninfringing one
– See why this is important?
• Process 4 was not actually used . . . But it easily
could have been!
Lesson:
• “There is nothing quite so useful as a
good theory.”
• !!
Note dictum, at p.
• Patentees have “significant
latitude
to prove and recover lost profits
for a wide variety of foreseeable
economic effects of the
infringement.”
Examples
• Rite Hite v. Kelly, 56 F.3d 1538, 1550
(Fed.Cir.1998).
• Infringer’s sale of “generation 1.0” model
took sales away from patentee’s
“generation 2.0” product; lost profits
damages awarded even though patentee
no longer selling generation 1.0 product
Examples
• American Seating Co. v. USSC Group, Inc.
514 F.3d 1262, 1270 (Fed. Cir. 2008)
“Although the evidence in this case was relatively
sparse, it sufficed for the jury to assume that
USSC offered the VPRo I for sale and then
substituted the non-infringing VPRo II -- a baitand-switch -- and to find that absent USSC's
offer to sell the VPRo I, the sales would have
gone to American Seating.”
Other damage theories
• Price erosion
• Market share rule
• Lost sales of related
but unpatented
products
• Post-expiration sales
Relative
market share
of patentee
relative to
noninfringers
would remain
the same
without the
infringer.
Other damage theories
• Price erosion
• Market share rule
• Lost sales of related
but unpatented
products
• Post-expiration sales
Components
and other
related
products
which are
normally sold
with the
patented
product.
Other damage theories
• Price erosion
• Market share rule
• Lost sales of related
but unpatented
products
• Post-expiration sales
Head-start
theory.
Competitor
cannot enter
market
immediately
postexpiration.
Other damage theories
• Price erosion
• Market share rule
• Lost sales of related
but unpatented
products
• Post-expiration sales
Relative
market share
of patentee
relative to
noninfringers
would remain
the same
without the
infringer.
Market Share Rule
• State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d
1573, 1577, 12 U.S.P.Q.2d 1026, 1028 (Fed. Cir.
1989), cert. denied, 493 U.S. 1022 (1990):
– Apportion infringer’s sales across (1) patentee and
(2) all noninfringing substitute sellers in the market
– “pro rata” share rule
Important assumptions
• (1) Everyone knows of and respects
patent
• (2) No
enforcement/assertion/infringement costs
for patentee that would reduce available
funds or encourage rival entry
State Industries v. Mor-Flo
• Allocate infringer’s market share among
(1) patentee and (2) non-infringing
substitutes
• “Pro rata” allocation rule
– Assume infringer’s share would be split
among other competitors according to
existing (actual) market shares
More Mor-Flo
• District court acted within its discretion by
awarding damages based on patent owner's share
of insulated water heater market;
• District court properly concluded that royalty of
three percent of infringer's net sales was
reasonable royalty – sales of infringing products
that patentee would not have made
Mor-Flo Applied
• WMS Gaming, Inc. v. International Game
Technology (184 F3rd 1339 (FC 1999))
– Plaintiff held a 75% market share. The Federal Circuit
affirmed the district court's award of lost profits of
$2413 per unit on sales of 75% of the infringing
machines, and a reasonable royalty of $550 per unit
on sales of the remaining 25% of the infringing
machines.
Other damage theories
• Price erosion
• Market share rule
• Lost sales of related
but unpatented
products
• Post-expiration sales
Components
and other
related
products
which are
normally sold
with the
patented
product.
Entire Mkt value/ “convoyed”
sales
• Beatrice Foods Co. v. New England
Printing and Lithographing Co., 899 F.2d
1171, 1175, 14 U.S.P.Q.2d 1020, 1023
(Fed. Cir. 1990):
– Sales of products normally sold with patented
product may be affected by infringement
Patent reform efforts
• “Apportionment of damages” provisions
• End over-compensation for patents on
one small component of larger product
Willful infringement
• Knorr-Bremse Sys. Fuer Nutzfahrzeuge
Gmbh v. Dana Corp., 383 F.3d 1337, 1343
(Fed. Cir. 2004)
– overturned the adverse inference created by an
accused infringer’s failure to obtain and
produce advice of counsel
– Does not direct innovators how to demonstrate
“due care” in the absence of an exculpatory
legal opinion
Willful Infringement II
• Seagate Standard: