OUR THOUGHTS ON:

Determining Lost Profits Damages in Patent Infringement Cases

Business Advisors

By Stephen Thimons

As technology and innovation increase, patents protecting innovations increase as well.  And of course, as multiple companies continue to file for new patents, disputes regarding patent infringement become increasingly common.   As an example, Carnegie Mellon University was recently awarded a $1.17 billion verdict when Marvell Technology Group was found to have infringed the University’s patented technology for semiconductors.  While this verdict is under appeal, it demonstrates the high dollar values that can be at stake in patent infringement cases.

So, how are these damages quantified: science, art, voodoo?  All of the above?  Well, on a high level, the answer is simple.  There are two methods for quantifying patent infringement damages: lost-profits or a reasonable royalty.

U.S. law allows patent owners to be compensated if their rights are infringed; and the compensation is to be no less than reasonable royalty.  However, a patent owner instead may be entitled to the “lost profits” that it would have made, had there been no infringement, but only if certain criteria are met.   

In general, in order to prove lost profits, patent owners must show a reasonable probability that, “but-for” the infringement, they would have made the identified lost profits and that the losses were reasonably foreseeable.[1] The most common way to demonstrate this is to meet the four “Panduit” factors which are based upon a Sixth Circuit case Panduit Corp. v. Stahlin Bros. Fiber Works, Inc. 

  1. Demand for the Patented Product - First, it must be established that there is demand for the patented product.  This is usually a straight forward exercise because if there is infringement, normally the product is being sold in the marketplace, which indicates that demand exists.
  2. Absence of Acceptable Non-infringing Substitutes - This factor requires proof that there are no other (non-infringing) substitutes for the product at issue available in the marketplace.  If there are non-infringing substitutes, it is an indication that customers in the marketplace have an alternative to the patented product and therefore the patent owner would not have necessarily been able to make sales of the patented product.  However, this factor is not always easy to apply.  Just because a competing, non-infringing product exists does not mean that it is an “acceptable” non-infringing substitute.  For example, if there are particular features of a patented product that entice customers to purchase it and the non-infringing competing products do not have those features, the competing products may not be “acceptable.”
  3. Marketing and Manufacturing Capacity - The patent owner has to prove that it had the capacity to both manufacture and sell each unit for which it is claiming lost profits.This is particularly true of smaller companies that may not have adequate manufacturing facilities or do not have a sales force able to reach certain areas or customer types.
  4. Amount of Lost Profits - The patent owner then has to be able to reasonably quantify the amount of lost profits.  While the quantification does not necessarily have to be perfectly precise, the evidence must provide reasonable support for the claim made.

While the theory seems simple, there are many detailed nuances and issues that are outside the scope of this article.  The quantification of patent infringement damages requires a significant amount of effort, experience and knowledge.  The professionals at Schneider Downs have been involved in numerous cases quantifying damages, including damages in patent infringement cases.  If you have any questions, please contact Steve Thimons at sthimons@schneiderdowns.com or 412-697-5281.    

[1] Crystal Semiconductor Corp. v. TriTech Microelectronics Int’l, Inc., 246 F.3d 1336.

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