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Patent Damage Myths

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Infringer Myth No. 1:

“The patent owner cannot possibly get lost profits – there are too many competitors besides us.”

The notion that lost profits can be awarded only in a two-supplier market is a pervasive myth, as at least three ways support an award of lost profits in a multi-supplier market: (1) the other suppliers are also infringers;1 (2) the other suppliers sell products that are unacceptable to the actual purchasers of the infringing products;2 and (3) the patent owner can demonstrate that despite the existence of acceptable noninfringing substitute products sold by third parties, the patent owner would have sold some amount of additional products, usually proportional to its market share in the relevant market, if the infringer had not infringed.3

Infringer Myth No. 2:

“The patent owner has no hope of recovering lost profits. We had an equally good noninfringing product fully designed that we could have sold instead.”

The burden is on the infringer in this situation to prove the substitute was available.  As the Federal Circuit made clear in Zygo Corp. v. Wyko Corp., 79 F.3d 1563 (Fed. Cir. 1996), an infringer cannot rely on a product as an acceptable noninfringing substitute to defeat a lost profits claim unless that product was being marketed during at least some of the infringement period. The Federal Circuit further addressed this issue in Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341, 1354 (Fed. Cir. 1999).  There, the court held that a noninfringing alternative need not be on the market during the infringement period to factor into a lost profits analysis.  E.g., id. at 1349-55.  However, the court did place constraints on the trial court in such situations, noting that “[W]hen an alleged alternative is not on the market during the accounting period, a trial court may reasonably infer that it was not available as a noninfringing substitute at that time.” Id. at 1353 (citation omitted).  The burden then falls on the infringer to prove availability, and the fact-finder “must proceed with caution” in assessing such proof. Id.

But even if the infringer was selling such a noninfringing product during the relevant time period, it may not help. The key customers are those who purchased the infringing products. If they purchased the infringing product instead of the noninfringing alternative also offered by the infringer, the patent owner may really be a long way from proving the infringing product was purchased for the patented feature – because, if the patented feature did drive the sales of infringing product, then the noninfringing version is an unacceptable substitute for this key group of customers on which the focus lies.

Infringer Myth No. 3:

“The patent owner cannot possibly obtain lost profits. It doesn’t use its own patent, but practices another technology in its products.”

The Federal Circuit in Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1544-49 (Fed Cir. 1995) (en banc), dispelled the notion that patent owners must practice their own patents to be entitled to lost profits. Patent owners that compete with infringers and lose sales because of the infringement can meet the “but for” test even if their own product is not covered by the patent-in-suit, or any patent, for that matter.

Infringer Myth No. 4:

“Lost profits are out of the question for the patent owner. It didn’t even compete for most of the sales we made.”

Again, one must not confuse what the patent owner actually did with what the patent owner would have done, absent infringement. Only the latter is legally relevant. Although on first impression it may seem odd that a patent owner may be entitled to lost profits on sales for which it never competed, the Federal Circuit has approved such an award. See Gyromat Corp. v. Champion Spark Plug Co., 735 F.2d 549, 554 (Fed. Cir. 1984) (holding that the patent owner’s bid against the infringer on only seven of the 152 infringing sales does not show that the patent owner could not and would not have made all 152 sales if the infringer had not infringed).

Infringer Myth No. 5:

“How can the patent owner claim price erosion damages? Our price was higher than the patent owner’s.”

Although in the classic price erosion situation, the infringer undercuts the patent owner’s price, forcing the patent owner to lower its price is not the only way a patent owner may suffer price erosion damages. In Kalman v. Berlyn Corp., 914 F.2d 1473, 1485 (Fed. Cir. 1990), clarified, 22 U.S.P.Q.2d 1303 (Fed. Cir. 1991), the reverse situation existed – the patent owner’s price was lower than the infringer’s. The district court determined that the patent owner was entitled to price erosion damages equal to the difference (15%) between the infringer’s price and the patent owner’s lower price, and the Federal Circuit affirmed. If the infringing product had not been in the marketplace, the patent owner could have raised his price at least to what the infringer had been charging. Hence, the initially higher price of the infringing product was no bar to price erosion damages.

Infringer Myth No. 6:

“Reasonable royalty will be small. There’s never been a patent in this industry that got more than 1%.”

Reasonable royalty determinations can certainly be more subjective and based on many more factors than lost profits determinations, but one proposition is clear from the case law – royalties on other patents in the industry may carry little weight in determining a reasonable royalty on the patent-in-suit. One of the best examples of this is Bio-Rad Laboratories, Inc. v. Nicolet Instrument Corp., 739 F.2d 604, 617 (Fed. Cir. 1984), in which the Federal Circuit affirmed an approximately 33% reasonable royalty in the face of evidence that “the industry royalty rate runs from three to ten percent of sales.”

Infringer Myth No. 7:

“We’ll never have to pay a big royalty. We lost money on this product!”

This, too, is a lingering myth. The Federal Circuit has repeatedly warned that reasonable royalty is determined at the date of the commencement of infringement and that it is the infringer’s anticipated profit at that time that is highly probative in determining the reasonable royalty it would have constructively agreed to pay on that date (instead of the actual reduced profit the infringer later made). See, e.g., TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 898-900 (Fed. Cir. 1986) (affirming 30% royalty based on projection of 52.7% expected gross profit); Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1081 (Fed. Cir. 1983) (“Whether, as events unfurled thereafter, [Alpine Valley] would have made an actual profit, while paying the royalty determined as of [1972, the year infringement began], is irrelevant.”).

Patent Owner Myths About Patent Damages

Patent Owner Myth No. 1:

“Lost profits are guaranteed. None of the other products in the market has the patented advantages.”

Although the Federal Circuit precedent has facilitated obtaining lost profits awards, many areas still exist for patent owners to misstep, and one is to take too facile a view of the concept of acceptable noninfringing substitutes. In Slimfold Manufacturing Co. v. Kinkead Industries, Inc., 932 F.2d 1453, 1458 (Fed. Cir. 1991), the court caught one patent owner up short who believed that a substitute cannot be “acceptable” unless it has the advantages of the patented product. That belief is incorrect unless the patent owner can also show that consumers specifically wanted a device with those advantages. In Slimfold, the patent owner was unable to make that showing, leading the Federal Circuit to affirm the district court’s denial of lost profits.

Patent Owner Myth No. 2:

“The upside for lost profits on lost sales of collateral products is huge. We sold them with the patented products in package deals.”

As stated by the Federal Circuit in its 1995 en banc holding in Rite-Hite (cited above), “package deals” alone will not justify an award of collateral lost profits. A “functional relationship” must also exist between the patented and unpatented items in the package.

Patent Owner Myth No. 3:

“Don’t worry that our real damages are actually pretty small. The court will automatically increase them because of our high legal costs and the infringer’s bad conduct.”

An innate confusion exists between “adequate compensation” under § 284 and increased damages under that same section. A trial court may not manipulate the former to punish an infringer. The Federal Circuit has made this clear in both lost profits and reasonable royalty cases.

In the lost profits case, Beatrice Foods Co. v. New England Printing & Lithographing Co., 899 F.2d 1171, 1175-76 (Fed. Cir. 1990), the district court was angered by the defendant’s deliberate destruction of sales records and had set the infringer’s gross sales as the measure of the patent owner’s lost profits. The district court stated that as a tortfeasor, the infringer had no manufacturing costs. The Federal Circuit en banc vacated this award, ordering a conventional re-determination of lost profits. In the reasonable royalty case, Mahurkar v. C.R. Bard, Inc., 79 F.3d 1572 (Fed. Cir. 1996), the Federal Circuit vacated the district court’s 34.88% reasonable royalty determination, which included a 9% “kicker” apparently awarded to compensate the patent owner for litigation expenses.

In both Beatrice Foods and Mahurkar, the Federal Circuit noted that the concerns the district courts had with respect to the defendant’s conduct or the plaintiff’s legal expenses are properly addressed under the damages enhancement provision of § 284, providing those standards are met.

Patent Owner Myth No. 4:

“We’ll ask for a 60% royalty, the infringer will offer 1%, and the court will split the difference.”

“Split the difference” thinking is pervasive among patent owners (and sometimes infringers) and dangerous. A classic example of the danger is Polaroid Corp. v. Eastman Kodak Co., 16 U.S.P.Q.2d 1481 (D. Mass. 1990), where Polaroid argued for a 72.5% reasonable royalty for cameras and a 63.4% reasonable royalty for film, essentially equating its reasonable royalty claims to its claims for lost profits. Kodak countered with a detailed Georgia-Pacific analysis and contended a reasonable royalty would be 5%. Far from splitting the difference, the district court found Kodak’s analysis persuasive and awarded Polaroid only 10%, which was far closer to Kodak’s number than to Polaroid’s. The hundreds of millions of dollars that Polaroid undoubtedly left on the table by overreaching for 60% to 70% rather than contending for a 25% or 30% reasonable royalty is a stern lesson that reasonable rather than extreme positions are the key to the success of not only the infringer but also the patent owner.

Patent Owner Myth No. 5:

“Well get a huge royalty. The fact that the infringer had a fully designed, acceptable, noninfringing product in the wings is irrelevant, because it never sold it.”

This appears to be the converse of Infringer Myth No. 2, where the unsold noninfringing alternative may not help in defending a lost profits claim. Logically, it might seem that the same fact would not count here, but the “rules” are different with a reasonable royalty. In Zygo Corp. v. Wyko Corp., 79 F.3d 1563 (Fed. Cir. 1996), the Federal Circuit held that the existence of a device not on the market but “in the wings” could be relied upon in a reasonable royalty analysis. The court stated that “Wyko [the infringer] would have been in a stronger position to negotiate for a lower royalty rate knowing it had a competitive noninfringing device ‘in the wings’.”

Patent Owner Myth No. 6:

“We’ll get big dollars because the royalty base will include collateral products, not just the patented device.”

This myth is really just an overstatement. Under the “entire market value” rule, as explained in Rite-Hite (cited above), collateral products may be included in the royalty base if a functional relationship ties them to the patented product. Indeed, in Rite-Hite, the court found lacking the requisite functional relationship between the collateral product, a dock leveler, and the patented product, a docking restraint, and vacated the district court’s decision to include dock levelers in the royalty base.

1Bros. Inc. v. WE. Grace Mfg. Co., 320 F.2d 594, 598 (5th Cir. 1963); TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 901-02 (Fed. Cir. 1986).

2TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 901-02 (Fed. Cir. 1986).

3State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1577-78 (Fed. Cir. 1989).


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