Courts’ Recent Perspectives
on IP Damages Theories
By:
David A. Haas
Vice President
CRA International, Inc.
Presented to:
Law Seminars International
Calculating & Proving Patent Damages
October 31, 2006
Philadelphia, PA
Overview
Patent – Lost profits
Patent – Reasonable royalty
Foreign Sales
Price erosion
Future lost profits
Antitrust / IP Issues
Trademark – Dilution
Copyright
Trade secret misappropriation
1
Lost profits:
Demand
Grain Processing v. American Maize Products
“… the district court stated the dispositive question as
‘whether there is economically significant demand for a
product having all… attributes [of the claim in suit],’ i.e. ,
whether consumers demand every claimed feature. Id. The
court found no such demand in this case because ‘[t]wo of
the essential elements of the claim – that the starch be waxy
and that the descriptive ratio [be] greater than about 2 – are
irrelevant to consumers.’ ”
Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341, 51 U.S.P.Q.2d 1556 (Fed.Cir. 1999)
2
Lost profits:
Availability of substitutes
Zygo v. Wyko
“If a device is not available for purchase, a
defendant cannot argue that the device is an
acceptable noninfringing alternative for the
purposes of avoiding a lost profits award. A lost
profits award reflects the realities of sales
actually lost, not the possibilities of a
hypothetical market which the infringer might
have created.”
Zygo Corp. v. Wyko Corp., 79 F.3d 1563, 38 U.S.P.Q.2d 1281 (Fed.Cir. 1996), Reh’g denied, 1996 U.S. App. LEXIS
12587 (Fed.Cir. May 15, 1996)
3
Lost profits:
Availability of substitutes
Grain Processing v. American Maize Products
“… an alleged substitute not ‘on the market’ or ‘for sale’
during the infringement can figure prominently in
determining whether a patentee would have made
additional profits ‘but for’ the infringement.”
“… a fair and accurate reconstruction of the ‘but for’ market
also must take into account, where relevant, alternative
actions the infringer foreseeably would have undertaken
had he not infringed.”
Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341, 51 U.S.P.Q.2d 1556 (Fed.Cir. 1999)
4
Lost profits:
Availability of substitutes
Grain Processing v. American Maize Products
“The competitor in the ‘but for’ marketplace is hardly
likely to surrender its complete market share when faced
with a patent, if it can compete in some other lawful
manner.”
“American Maize had all of the necessary equipment,
know-how, and experience to use Process IV to make
Lo-Dex 10, whenever it chose to do so…”
Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341, 51 U.S.P.Q.2d 1556 (Fed.Cir. 1999)
5
Lost profits:
Availability of substitutes
Micro Chemical, Inc. v. Lextron, Inc.
“Grain Processing did not erect a rigid test for determining
availability. Rather, it provided guidelines for when an
alternative not actually ‘on sale’ during the infringement period
may have been readily ‘available’ and thus part of the
economic calculation of lost profits.”
“…this court noted that the finding that an infringer had to
design or invent around the patented technology to develop an
alleged substitute weighs against a finding of availability.”
Micro Chemical, Inc. v. Lextron, Inc., 318 F.3d 1119, 65 U.S.P.Q.2d 1695 (Fed.Cir. 2003)
6
Lost profits:
Availability of substitutes
Micro Chemical, Inc. v. Lextron, Inc.
“The record shows that Lextron did not have the
necessary equipment, know-how, and experience to
make the Type 5 machine at the time of infringement.”
 Design, testing time required
 Effects of changes not known or available
 Materials not readily available
“To the contrary, the record shows that Lextron
designed around the patented technology after Micro
established infringement.”
Micro Chemical, Inc. v. Lextron, Inc., 318 F.3d 1119, 65 U.S.P.Q.2d 1695 (Fed.Cir. 2003)
7
Lost profits:
Products not embodying the patent
Rite-Hite v. Kelley Co.
“Rite-Hite was entitled to lost profits for lost sales of its devices that were
in direct competition with the infringing devices, but which themselves
were not covered by the patent in suit.”
“… if a particular injury was or should have been reasonably foreseeable
by an infringing competitor in the relevant market, broadly defined, that
injury is generally compensable absent a persuasive reason to the
contrary.”
Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 35 U.S.P.Q.2d 1065 (Fed.Cir. 1995)
King Instruments v. Perego & Tapematic
“To adequately compensate for infringement of the right to exclude, as
Section 284 requires, ‘damages’ includes lost profits on competing
products not covered by the infringed claims.”
King Instruments Corp. v. Perego, 65 F.3d 941, 36 U.S.P.Q.2d 1129 (Fed.Cir. 1995)
8
Lost profits:
Convoyed sales
Rite-Hite v. Kelley Co.
“The facts of past cases clearly imply a limitation on
damages, when recovery is sought on sales of unpatented
components sold with patented components, to the effect
that the unpatented components must function together with
the patented component in some manner so as to produce a
desired end product or result … Our precedent has not
extended liability to include items that have essentially no
functional relationship to the patented invention and that may
have been sold with an infringing device only as a matter of
convenience or business advantage.”
Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 35 U.S.P.Q.2d 1065 (Fed.Cir. 1995)
9
Lost profits:
Market definition
Micro Chemical, Inc. v. Lextron, Inc.
“The proper starting point to identify the relevant market is the patented
invention. The relevant market also includes other devices or substitutes
similar in physical and functional characteristics to the patented invention.
It excludes, however, alternatives ‘with disparately different prices or
significantly different characteristics.’ Once the market is defined, it
generally becomes an easier task to determine how many suppliers operate
in the defined relevant market. That inquiry focuses on the number of
companies involved, not the number of alternatives in the relevant market.”
“If the patentee shows two suppliers in the relevant market, capability to
make the diverted sales, and its profit margin, that showing erects a
presumption of ‘but for’ causation. Although the burden of persuasion
remains with the patentee, the burden of going forward then shifts to the
infringer.”
Micro Chemical, Inc. v. Lextron, Inc., 318 F.3d 1119, 65 U.S.P.Q.2d 1695 (Fed.Cir. 2003)
10
Lost profits:
Profits of non-party sister corporation
Poly-America L.P. v. GSE Lining Technology, Inc.
“Poly-America and Poly-Flex may not enjoy the advantages of their separate
corporate structure and, at the same time, avoid the consequential
limitations of that structure – in this case, the inability of the patent holder to
claim lost profits of its non-exclusive licensee. While Poly-America may
have the right to sue under its patents, both as an owner and a backlicensee, it can recover only its own lost profits, not Poly-Flex’s.”
“Although parties to a lawsuit may allocate the disposition of infringement
damages between themselves, as they appear to have done here, they
cannot create lost profits for a patentee if there are none, Awarding lost
profits to Poly-America on the basis of its private arrangement with PolyFlex would synthetically create lost profits for Poly-America, when it may not
have suffered any, to the detriment of GSE.”
Poly-America, L.P. v. GSE Lining Technology, Inc., 383 F.3d 1303, 72 U.S.P.Q.2d 1685 (Fed. Cir. 2004)
11
Reasonable royalty:
Parties to the hypothetical negotiation
Smith Engineering Company, Inc. v. Eisenmann Corp.
“To the extent that the jury instruction referred to
Mr. Edgerton exclusively, it did not refer to the
literal Mr. Edgerton as he existed in 1994. Rather,
it referred to a mythical Mr. Edgerton for whom
the future was as clear as the fish in a pellucid
stream. That the actual Mr. Edgerton had not
even heard of Smith in 1994 is irrelevant.”
Smith Engineering Company, Inc. v. Eisenmann Corp., 28 Fed. Appx. 958, 2000 U.S. Dist. LEXIS 21803 (C.D. Cal
Oct. 25, 2000)
12
Reasonable royalty:
Use of projected vs. actual data
Interactive Pictures Corp. v. Infinite Pictures, Inc.
“In this case, the 1996 business plan and its projections for future sales were prepared by
Infinite two months before infringement began. Thus, rather than being outdated for
purposes of the hypothetical negotiation, those projections would have been available to
Infinite at the time of the hypothetical negotiation. The fact that Infinite did not
subsequently meet those projections is irrelevant to Infinite’s state of mind at the time of
the hypothetical negotiation. Nor does Infinite’s subsequent failure to meet its projections
imply that they were grossly excessive or based only on speculation and guesswork.
Instead, Infinite’s subsequent failure to meet its projections may simply illustrate the
‘element of approximation and uncertainty’ inherent in future projections.”
“Lindemann does not require that estimates of sales revenues, as referenced in a
hypothetical negotiation at the time infringement began, must later bear a close relation to
actual sales revenue. Such a proposition would essentially eviscerate the rule that
recognizes sales expectations at the time when infringement begins as a basis for a royalty
base as opposed to an after-the-fact counting of actual sales.”
Interactive Pictures Corporation v. Infinite Pictures, Inc., 274 F.3d 1371, 2001 U.S. App. LEXIS 36936; 61
U.S.P.Q.2d (BNA) 1152
13
Reasonable royalty:
Date of hypothetical negotiation
Applied Medical Resources Corporation v. United States Surgical Corporation
“[R]easonable royalty damages are not calculated in a vacuum without
consideration of the infringement being redressed… We are required to
identify the infringement requiring compensation, and evaluate damages
based on a hypothetical negotiation at the time infringement began, not an
earlier one.”
“[T]he evidence supporting damages in [the second case] was entirely
different from the evidence offered in [the first case]… the [second case] jury
heard evidence regarding the market conditions in 1997 for Versaport II, the
license agreements entered into by Applied in 1998 and 1999, and the ability
of Versaport II to compete with Applied’s products in 1997, none of which
was available to the [first case] jury.”
Applied Medical Resources Corporation v. United States Surgical Corporation 435 F.3d 1356, 77 U.S.P.Q.2d
1666 (Fed. Cir. 2006)
14
Reasonable royalty:
Comparable transactions
Integra Lifesciences v. Merck
“The record is not clear on the hypothetical negotiation date.”
The Federal Circuit found that Integra’s expert relied on Merck’s 1995 expectations
and that “if the hypothetical negotiation occurred in 1994, Merck did not have that
expectation…an earlier date will change the risks and expectations of the parties.”
“The value of a hypothetical license negotiated in 1994 could be drastically different
from one undertaken in 1995 due to the more recent state of the…research in 1994.”
“…comparisons to other licenses are inherently suspect because economic and
scientific risks vary greatly…”
The Federal Circuit found that “a $15 million award figure to compensate for
infringement of only some of Telios’ patents before Integra’s acquisition seems
unbalanced in view of the overall acquisition price.” [$20 million for all of Telios’
products, patents, and know-how]
Integra Lifesciences I, Ltd. et al. v. Merck KGaA et al., 331 F.3d 860, 66 U.S.P.Q.2d 1865 (Fed. Cir. 2003),
Reh’g and Reh’g en Banc denied (Dec 03, 2003)
15
Reasonable royalty:
Royalty stacking
Integra Lifesciences v. Merck
“…the number of patent licenses needed to develop a drug may also affect
the value placed on any single technology used in the development
process. The cumulative effect of such stacking royalties can be
substantial, particularly when reach through royalties come into play.”
“While this court does not opine on the applicability of a reach-through
royalty in this case, the presence or absence of stacking royalties for
research tools may color the character of a hypothetical negotiation
between Merck and Integra for access to the RGD…technology.”
“…both the point in time at which Merck utilized RGD peptides in its drug
development process and the effect, if any, of stacking royalties may…play
a role in crafting the hypothetical license between Integra and Merck.”
Integra Lifesciences I, Ltd. et al. v. Merck KGaA et al., 331 F.3d 860, 66 U.S.P.Q.2d 1865 (Fed. Cir. 2003),
Reh’g and Reh’g en Banc denied (Dec 03, 2003)
16
Reasonable royalty and infringer’s profits:
Design and utility patents
Catalina Lighting, Inc. v. Lamps Plus, Inc.
“Lamps Plus is entitled to damages for each infringement,
but once it receives profits under §289 for each sale, Lamps
Plus is not entitled to a further recovery from the same sale
because the award of infringer profits under §289 also
constitutes ‘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’.”
Court concluded that a patentee may not recover both an infringer’s
profits and a reasonable royalty on the same sales of products which
infringe both a utility and a design patent.
Catalina Lighting Inc. v. Lamps Plus Inc., 295 F.3d 1277, 63 U.S.P.Q.2d 1545 (Fed.Cir. 2002)
17
Patent damages:
Damages on foreign sales
Eolas v. Microsoft
Federal Circuit affirmed district court opinion that copies from a “golden
master” disk constituted “components” under 35 U.S.C. § 271(f)(1) and
therefore infringed.
“Exact duplicates of the software code on the golden master disk are
incorporated as an operating element of the ultimate device. This part of the
software code is much more than a prototype, mold, or detailed set of
instructions. This operating element in effect drives the ‘functional nucleus
of the finished computer product.’ ”
“Thus, the software code on the golden master disk is not only a component,
it is probably the key part of this patented invention. Therefore, the
language of section 271(f) in the context of Title 35 shows that this part of
the claimed computer product is a ‘component of a patented invention.’ ”
Eolas Technologies Incorporated v. Microsoft Corporation, 04-1234
18
Price erosion:
Inadequate benchmark market
Crystal Semiconductor v. TriTech & OPTi
“[C]ourt reaffirms the trial court’s judgment that [Crystal’s]
methodology used an inappropriate benchmark, resulting in an
inadequate foundation for Crystal’s entire price erosion theory.”
Market structure and competition in the benchmark market
differed significantly from the infringed market.
Court concluded that Crystal’s argument that neither Tritech nor OPTi
was able to identify a better benchmark for comparison as insufficient
evidence to show likely reaction of the infringed market “but for”
infringement.
Crystal Semiconductor Corp. v. TriTech Microelectronics Intern., Inc., 246 F.3d 1336, 57 U.S.P.Q.2d 1953
(Fed.Cir. 2001)
19
Future lost profits:
Inadequate grounding
Shockley & Excalibur v. Arcan, Telesis, & Sunex
“Because the jury’s…future lost profit award was based on
evidence derived from speculative assumptions, it runs counter to
the great weight of record evidence and cannot stand.”
The jury award of future lost profits assumes continued
demand and growth rates, profit margins, and other market
factors against the clear weight of the evidence.
Shockley v. Arcan, Inc., 248 F.3d 1349, 58 U.S.P.Q.2d 1692 (Fed.Cir. 2001)
Lam, Inc. v. Johns-Manville Corp.
“an award based on projected lost sales is neither remote nor
speculative when there is evidence of actual pre-infringement
and post-infringement growth rates.”
Lam, Inc. v. Johns-Manville Corp., 718 F.2d 1056, 219 U.S.P.Q. 670 (Fed.Cir. 1983)
20
Antitrust:
Evidence of market power
Augustine Medical v. Mallinckrodt
“Instead of facts, [Mallinckrodt’s expert] stacks assumption upon assumption to come to his
conclusion. The first assumption is that there was a perception by customers of the risks
related to Mallinckrodt’s patent infringement liability. There is no evidence, however, that any
actual customer had that perception during the critical time period…The second assumption
is that Mallinckrodt’s ability to compete was hampered by this perception. There is no
evidence of record of any actual lost sales or other specific obstacles to Mallinckrodt’s ability
to compete related to Augustine Medical’s alleged anticompetitive activities. Mallinckrodt
continued to compete in the market…Finally, there is no evidence that Augustine had the
ability to exert market power (generally described in terms of market price)…Indeed, the
objective market data of record indicates otherwise: (1) the average price in the…market
steadily declined over the period…; (2) the market steadily grew during this same period; (3)
…Mallinckrodt’s average selling price was higher than that of Augustine Medical; (4) although
Mallinckrodt’s market share dropped in 1997, it has remained at the same level since that time
while other competitors’ shares have increased…Although Mallinckrodt points out that there
are a limited number of competitors in this market, [its expert] made no effort to segregate the
effects of legitimate activities (e.g., the need for FDA approval) from whatever effects there
might be in the market from the alleged anticompetitive activities.”
Augustine Medical, Inc. v. Mallinckrodt, Inc. et al., 2003 WL 1873836, 2003 U.S. Dist. LEXIS 6079 (D. Del Apr 9
2003)
21
Antitrust:
Technological vs. economic substitutability
Unitherm Food Systems, Inc. v. Swift-Eckrich Inc.
“He also, however, concluded that pre-cooked turkeys prepared using the patented
process competed with pre-cooked turkeys not prepared by the patented process at the
retail level, but somehow not at the wholesale level. He never explained this seeming
anomaly. [He] did not explain the relationship between technological substitution and
economic substitution. Nothing in the record addresses whether potential customers of
the patented process faced with a price increase would shift to other processes offering
different combinations of benefits. This determination, however, lies at the heart of
market definition in antitrust analysis.”
“[His] testimony specifically described the market in terms of technological
substitutability, not economic substitutability. The scant economic evidence in the
record suggests strongly that his market definition is incorrect. ConAgra’s inability to
attract any licensees is indicative of a lack of pricing power – the single most important
element in defining a relevant antitrust market.”
Unitherm Food Systems, Inc. v. Swift-Eckrich, Inc. 375 F.3d 1341; 2004 U.S. App. LEXIS 14274; 71 U.S.P.Q.2D
(BNA) 1705
22
Trademark:
Dilution
Moseley v. V Secret
U.S. Supreme Court found that in order to prevail on a claim under the
Federal Trademark Dilution Act (FTDA), a trademark owner must prove
actual dilution of its trademark, not merely likelihood of dilution.
Court found “a complete absence of evidence” of dilution of the Victoria’s
Secret trademark.
Court stated that proof that consumers associate two marks is, in most
cases, not enough for establishing dilution: “At least where marks at issue
are not identical, the mere fact that consumers mentally associate the
junior user’s mark with a famous mark is not sufficient to establish
actionable dilution…such mental association will not necessarily reduce
the capacity of the famous mark to identify the goods of its owner, the
statutory requirement for dilution under the FTDA.”
Victor Moseley, et al. v. V Secret Catalogue, Inc., et al., 537 U.S. 418, 123 S. Ct. 1115, 155 L.Ed.2d 1, (2003)
23
Copyright:
Royalty as actual damages
On Davis v. The Gap
“If a copier of protected work, instead of obtaining
permission and paying a fee, proceeds without
permission and without compensating the owner, it
seems entirely reasonable to conclude that the owner has
suffered damages to the extent of the infringer’s taking
without paying what the owner was legally entitled to
exact a fee for. We can see no reason why, as an abstract
matter, the statutory term ‘actual damages’ should not
cover the owner’s failure to obtain the market value of the
fee the owner was entitled to charge for such use.”
On Davis v. The Gap, Inc., 246 F.3d 152, 58 U.S.P.Q.2d 1481 (2nd Cir. N.Y. 2001)
24
Copyright:
Apportionment of profits
Danielson v. Winchester-Conant Properties
Copyright infringement damages include “any profits of the infringer that
are attributable to the infringement.” Copyright owner needs only to
present evidence of infringer’s gross revenues. Defendant must show
how much of its revenues are profits and what “elements of profit [are]
attributable to factors other than the copyrighted work.” 1
There must be a rational apportionment of profits.
The jury “apportioned, at most, a negligible amount of the profits and
awarded all or almost all of WCP’s profits to Danielson.”
At trial, WCP had presented evidence concerning many contributing
factors besides the infringed site plans.
John G. Danielson, Inc. v. Winchester-Conant Properties, Inc., 322 F.3d 26, 66 U.S.P.Q.2d 1065 (1st Cir. Mass. 2003)1
17 U.S.C. §504(b)
25
Copyright:
Causal link for indirect damages
Polar Bear Productions, Inc. v. Timex Corporation
“[A] copyright owner is required to do more
initially than toss up an undifferentiated gross
revenue number; the revenue stream must bear a
legally significant relationship to the
infringement,” so that “a plaintiff seeking to
recover indirect profits must ‘formulate the initial
evidence of gross revenue duly apportioned to
relate to the infringement.’ ”
Polar Bear Productions, Inc. V. Timex Corporation, 384 F.3d 700, 72 U.S.P.Q.2d 1289, (9th Cir. Wash. 2004)
26
Copyright:
Allowed relicensing
NY Times v. Tasini
“On writ of certiorari, the Supreme Court, Judge Ginsburg, held
that electronic and CD-Rom databases containing individual
articles from multiple editions of periodicals were not
reproduced and distributed ‘as part of’ ‘revisions’ of individual
periodical issues from which articles were taken, and therefore
publishers of periodicals could not relicense individual articles
to databases under Copyright Act section governing collective
works, absent transfer of copyright or any rights thereunder from
authors of individual articles.”
“… they, and if necessary the courts and Congress, may draw on
numerous models for distributing copyrighted works and
remunerating authors for their distribution.”
New York Times Co., Inc. v. Tasini, 533 v.s 483, 121 S.Ct. 2381, 150 L.Ed.2d 500, (2001)
27
Trade secret misappropriation:
Reasonable royalty
LinkCo v. Fujitsu
In cases where plaintiff’s losses and defendant’s unjust enrichment provide inadequate
compensation to the plaintiff, courts have developed a reasonable royalty remedy, which
“attempts to measure a hypothetically agreed value of what the defendant wrongly obtained
from the plaintiff.” The court noted that a reasonable royalty is ideal when the commercial
context in which the misappropriation occurred requires consideration of multiple factors in
order to compensate the plaintiff adequately.
Factors to consider when determining a reasonable royalty: “(1) [T]he resulting and
foreseeable changes in the parties’ competitive posture; (2) the prices past purchasers or
licensees may have paid; (3) the total value of the secret to the plaintiff, including plaintiff’s
development costs and the importance of the secret to the plaintiff’s business; (4) the
nature and extent of the use the defendant intended for the secret; (5) whatever other
unique factors in the particular case might have affected the parties’ agreement, such as
the ready availability of alternative processes.”
“…sales projections are only relevant in a reasonable royalty calculation when they are
available before the time of the misappropriation and would have been considered by the
parties.”
LinkCo, Inc. v. Fujitsu Ltd., 232 F.Supp. 2d 182, 2002 U.S. Dist. LEXIS 22200 (SD NY 2002)
28
David A. Haas
CRA International
101 N. Wacker Dr.
Suite 1600
Chicago, IL 60606
(312) 377 - 2280
dhaas@crai.com
29