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Patent Damages Primer

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Damages under the Patent Statute

Since 1952, 35 U.S.C. § 284 has governed the award of damages in patent cases:

Upon finding for the claimant [patent holder] 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 as fixed by the court.

When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed.

The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.

Section 284 provides no guidance as to what constitutes “adequate” damages or how they are to be determined. Nevertheless, two basic theories of damages have derived from § 284: “lost profits” and “reasonable royalty.” Reasonable royalty represents the floor that the patent owner may receive in compensation for infringement of its patent; the damage award may not fall below this floor. The patent owner may attempt to rise above the floor by seeking its lost profits. Because courts have a fair degree of discretion in determining patent damages, the methodology of assessing and computing damages under § 284 is within the sound discretion of the district court.

Despite the many methods of computing damages, the judicial system has placed a sanity check on damages awards: A “maximum recovery rule” restricts an excessive jury award to the highest amount the jury could “properly have awarded based on the relevant evidence.” Shockley v. Arcan, Inc., 248 F.3d 1349, 1362 (Fed. Cir. 2001). Furthermore, “a damages award must be set aside if the verdict is against ‘the clear or great weight of the evidence.’” Id. (quoting Unisplay, S.A. v. American Electronic Sign Co., 69 F.3d 512, 517 (Fed. Cir. 1995)).

The following subsections summarize some of the types of patent damages that have been awarded in the past, and addresses other general areas relating to patent damages, including enhancement of damages and limitations on damages. (For a more detailed explanation of damages law, see Skenyon, Marchese & Land, “Patent Damages Law & Practice,” (West Group 2007).)

Overview of Lost Profits Damages

Lost profits means the amount of money the patent owner lost due to the infringement. Thus, the patent owner must prove that the infringement caused the lost profits. If the patent owner cannot make such proof, it is entitled to reasonable royalty damages. A patent owner may recover a mixed or split award, in which lost profits are used as a measure for some infringing sales, while a reasonable royalty is used as a measure for the remaining sales. (Note that the patent owner cannot recover the infringer’s profits. Such recovery was abolished by the 1946 Patent Act – though in design patent cases, the infringer’s profits are still recoverable. 35 U.S.C. § 289.)

The patent owner may recover its lost profits rather than a reasonable royalty if the patent owner can prove that the infringement caused the patent owner to lose profits that it otherwise would have made. Courts frequently refer to this causation element as “but for” causation; that is, the patent owner bears the burden of proving to a reasonable probability that it would have made additional profit but for the infringement. The patent owner also bears the burden of proving the amount of lost profits.

Due to the causation requirement, the general rule is that to be entitled to lost profits, the patent owner must demonstrate that it actually competes with the infringer in the relevant market for the patented product or method. This general rule forecloses owners of paper patents (i.e., patent owners who do not manufacture or sell at all) from obtaining lost profits. Such patent owners must settle for a reasonable royalty.

In some circumstances, however, the patent owner may be able to obtain lost profits even where the patent owner does not sell the patented product or where there is only potential competition between the patent owner and the infringer. For example, if the patent owner does not manufacture or sell the patented product but does sell an unpatented product, the patent owner may be able to demonstrate that the infringement caused the patent owner to lose profits on the unpatented product. Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538 (Fed. Cir.), cert. denied, 516 U.S. 867 (1995). In addition, patent owners with only a small share of the relevant market may nevertheless be awarded lost profits, at least in proportion to their market share. And in some cases where the patent owner does not have a competing product at all, it may still obtain lost profits damages if it can prove it “would have made” a competing product absent the infringement. See Wechsler v. Macke Int’l Trade, Inc., 486 F.3d 1286 (Fed. Circ. 2007). The only limitations are that the infringement must cause the loss and that the loss must have been reasonably foreseeable.

Lost profits damages frequently bring the patent owner much more than royalty awards. This has caused patent owners to seek lost profits in nearly every case in which the patent owner manufactures or sells something that could reasonably be interpreted as competing with the infringer’s product. However, lost profits can be difficult to prove. For example, the patent owner must prove an absence of noninfringing substitutes, which in some cases can be a difficult and expensive proposition. On the other hand, the patent owner need only provide a reasonable approximation of the amount of lost profits, meaning that the amount of lost profits need not be proven with unerring precision. Any reasonable doubt concerning the amount of lost profits is resolved against the infringer.

Lost Profits Theories

Too often in litigation, the damages analysis is pushed aside to the very end, even in the largest of damages cases. But a patent owner needs to be aware at the outset of what is under the “lost profits” umbrella, in order to properly direct its discovery. On the other hand, the accused infringer has to be aware of all this to properly assess its exposure and to formulate a proper response for trial.  

Lost Sales: Lost profits from sales are the classic and most common type of lost profits damages. Lost sales constitute sales that the patent owner failed to make due to the infringement, as well as sales the infringer made that the patent owner would have made but for the infringement. Such awards are based on a finding that the patent owner, absent the infringement, would have made all or a portion of the infringer’s sales. Basically, the test for determining lost sales examines what the infringer’s customers would have done if the infringing product never existed. The test is subjective.

 

Price Erosion: Price erosion damages arise where the patent owner was forced to lower its prices or offer discounts to meet the infringer’s competition and where the patent owner was unable to raise its prices due to the infringement. Generally, lost sales and price erosion damages both depend on how the patent owner and infringer interact in the market. The strength of this link is evidenced by the many cases awarding the patent owner both lost sales and price erosion damages. Thus, while lost sales and price erosion are normally evaluated separately, one should avoid analyzing them in isolation to prevent inconsistent results.


Unpatented Items: 
A patent owner may seek lost profits on unpatented items. For example, if the accused product is a multi-function device of which the patent covers only one feature, the patent owner may seek lost profits for the entire device. Collateral sales include any sales of unpatented items made concurrently with the sale of the patented product (“convoyed sales”), as well as sales of unpatented items made after the initial sale of the patented product (“derivative sales”).

The “entire market value rule” is used to determine if a patent owner can recover lost profits where the patent covers only a feature of a multi-faceted device – the patent owner must prove that the patented feature drives demand for the overall device. To recover on collateral, unpatented items sold with or after the patented device, the patent owner must show that the unpatented item forms a functional unit with the patented product; the two must function together in some manner so as to produce a desired end product or result. Otherwise, the patent owner is not entitled to lost profits on the collateral, unpatented item.

Future Lost Profits: Projected (or future) lost profits are losses that the patent owner expects to incur in the future due to the infringement. The importance of future lost profits is demonstrated by its potential for large awards, as the patent owner may be able to project substantial losses far into the future. On the other hand, future lost profits can be highly speculative. As a result, the courts are circumspect about awarding future lost profits and do so only in compelling cases. Thus, the patent owner must consider the unpredictability of the future when presenting its case, and the infringer should use this to its advantage in defending.

Damage to Reputation and Goodwill: Another lost profits theory that patent owners have advanced, albeit infrequently, is damage to the reputation and goodwill of the patent owner and/or patented product. The patent owner argues that the infringer’s product is inferior to the patent owner’s patented product and, as a result, has caused damage to the reputation of the patented product or the patent owner. In other words, the patent owner claims it has suffered damage because of the inferiority of the infringing product. Although discussed here as a separate “theory” of lost profits damages, proof of reputational harm generally leads to the conclusion that the patent owner lost sales or suffered reduced prices. Accordingly, in most cases, this theory will actually be an argument on which to base a claim for additional price erosion or lost-sales damages. See Minco, Inc. v. Combustion Eng’g, Inc., 95 F.3d 1109, 1120-21 (Fed. Cir. 1996).


Miscellaneous Business Losses:
 The patent owner can attempt to demonstrate that the infringement caused it to suffer business losses, for example, a reduction in stock prices of the patent owner’s business, or an increase in the value of the infringer’s business. In the right circumstances, and with adequate proof, the patent owner may be able to recover such losses. Yet one should bear in mind that business losses are difficult to prove; many extraneous factors – such as inflation, taxes, or recessionary forces – may be found to have caused the loss or gain, and it is difficult to quantify these losses and gains. See Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1544-46 (Fed. Cir.) (en banc), cert. denied, 516 U.S. 867 (1995) (ruling that an infringer cannot be held responsible for every conceivable harm that can be traced to an alleged wrongdoing, citing as examples remote consequences, such as a heart attack or loss in value of shares of common stock of a patent owner corporation caused by infringement).

Overview of Reasonable Royalty Damages

The term “reasonable royalty” is susceptible of two definitions. The first is an actual licensing rate, to which the patent owner and a licensee would have negotiated and agreed entirely apart from any litigation or damages question. This can be thought of as the “reasonable royalty” used in § 284. This negotiated reasonable royalty is the minimum amount of patent damages the patent owner can recover, equal to what the patent owner would have negotiated as a royalty in the first place. The second meaning of “reasonable royalty” applies whenever the patent owner is unable to prove actual damages (i.e., its lost profits). The money awarded to the patent owner (however it is computed) is usually called a “reasonable royalty.” This is also precisely where the danger lies – in taking the name for this catch-all category of patent damages too literally – because in most damages cases today, the reasonable royalty damages awarded are rarely the “floor” represented by a negotiated royalty. Although couched in terms of a “reasonable royalty,” damages awarded under § 284 are designed to compensate a patent owner for infringement of patent rights and are not royalty payments at all.

Many overly optimistic infringers assume that the maximum amount of damages they face will be equivalent to the statutory minimum royalty they would have negotiated in the first place for use of the patented item. Reasonable royalty damages have historically been higher than a royalty on which the parties would have agreed, even in the most fanciful licensing negotiation. In the proper case, reasonable royalty damages can exceed what could be obtained by a lost profits analysis.

Importantly, no single accepted method exists for how a court must determine “reasonable royalty” damages. (See companion web page on methodologies for computing reasonable royalties.) In contrast to lost profits damages, the existence of infringement establishes the fact of reasonable royalty damages. For lost profits damages, the patent owner has the burden to prove the fact and amount of damages. In contrast, for reasonable royalty damages, § 284 obviates the patent owner’s burden to prove the fact of damage when infringement is admitted or proven.

Although the fact of reasonable royalty damages is established by proof or admission of infringement, the patent owner must nevertheless prove the amount of reasonable royalty damages by relevant evidence in the record, not by pure conjecture. However, the courts have recognized that a reasonable royalty analysis necessarily involves an element of approximation and uncertainty. The infringer must bear the burden and the entire risk where it is impossible to make a mathematical or estimated apportionment between infringing and noninfringing items. In other words, uncertainty is resolved against the infringer where the infringer’s actions have caused the evidentiary imprecision.

The Federal Circuit has held that the trial court’s reasonable royalty rate need not be the specific figures advanced by either the patent owner or the infringer. The trial court is free to reject royalty rates offered by the parties and set a different rate, where the record supports the trial court’s rate.

The Georgia-Pacific Case and Reasonable Royalties

The seminal case of Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1121 (S.D.N.Y. 1970), mod. and aff’d, 446 F.2d 295 (2d Cir.), cert. denied, 404 U.S. 870 (1971), announced the most commonly used approach for determining reasonable royalty damages. The approach, or methodology, is to conduct a hypothetical license negotiation between a “willing licensor” and “willing licensee.” In the pre-Federal Circuit days, this approach sometimes resulted in damages being set at the statutory minimum – the actual royalty rate on which the patent owner and the infringer would have mutually agreed had they negotiated a patent license at the outset of the infringement. Today that is less likely, although certain exceptions exist. In fact, the Federal Circuit has characterized the “willing licensor” fiction as an absurd characterization of the determination when the parties were previously unable to come to an agreement. Rite-Hite, 56 F.3d at 1554 (en banc).

A danger in the “willing licensor – willing licensee” approach, particularly for the infringer, is taking the name too literally and building a damages defense around a very low actual royalty rate the parties might have negotiated in the real world. Reasonable royalty damages can be different from any pre-infringement, real-world royalty the parties would have actually negotiated. Indeed, the Federal Circuit has routinely affirmed “reasonable royalty” awards in excess of what the parties would have actually agreed to as a result of licensing negotiations prior to infringement.

The Georgia-Pacific case and the hypothetical negotiation methodology are described in more detail on the companion web page titled “Reasonable Royalty Methodologies.”

Interest and Enhancement of Damages

A patent owner may also obtain relief in the form of collateral assessments, which include prejudgment interest and discretionary enhancement of damages up to three times the amount found or assessed – enhancement may be based on willful infringement or litigation misconduct. (A separate sub-page in this damages website addresses prejudgment interest and post-judgment interest.) In exceptional cases, the court may award reasonable attorney fees to the prevailing party under 35 U.S.C. § 285. Post-judgment interest and most costs are awarded in accordance with non-patent law.

Limitations on Damages

Patent damages may be limited in a variety of ways. 35 U.S.C. § 286 provides for a “running” period limiting recovery of damages to no more than six years before commencement of a cause of action for infringement. 35 U.S.C. § 287(a) acts as a limitation on recovery of past damages by providing for alternative marking and notice requirements. 35 U.S.C. § 287(b) includes certain complex provisions relating to the Process Patent Amendments Act of 1988 that basically creates a mechanism by which importers, resellers, and users can seek to determine from a patent owner, before being accused of infringement, whether an unpatented product is made in accordance with a patented process. 35 U.S.C. § 287(c) bars damages (and other remedies) with respect to a medical practitioner’s performance of a medical activity that would otherwise constitute direct patent infringement or inducement of infringement. By case law, multiple recoveries for related infringement events are limited – that is, case law has evolved that bars double recovery. Finally, past damages can be barred under the equitable doctrine of laches, and past and future damages can be barred under the equitable doctrine of estoppel.


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Patent Damages Primer

Patent Damages Primer Team