Damages in One (Fairly) Easy Lesson Patent Law Prof. Merges

Relief Issuance Complaint filed in District Court Preliminary injunction hearing Damages assessed for this period if marking (or actual notice) Prospective Effect 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

Panduit Technology

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”

U of R econ dept

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?

4-factor test 1.Demand for patented product 2.Absence of non-infringing substitutes 3.Manufacturing and marketing capability 4.Amount of profits that would have been made (accounting evidence) 15

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)

1. Ability to manufacture “Normally, if the patentee is not selling a product, by definition there can be no lost profits.” Rite-Hite, 56 F.3d at 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

Reasonable royalty (cont’d) Relevance of competitive situation facing firms – Including substitutes In the background: cross- elasticity of demand

Elasticity How much demand would be lost from the patented product for every dollar increase in its price above the “perfect competition” level?

Acceptable Substitutes 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

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 Price Quantity Demanded D If the firm decides to decrease price to (say) $ 3, the degree of price elasticity of the demand curve would determine the extent of the increase in demand and the change in total revenue. $5 100 $3 140 Total Revenue

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 )--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).”

Baumol, “Contestable Markets” Microtheory: Applications and Origins, 1986

Grain Processing 4 production processes; one (# 4) non- infringing “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 bait-and-switch -- and to find that absent USSC's offer to sell the VPRo I, the sales would have gone to American Seating.”

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

49 Lucent v. Microsoft Reasonable royalty determination One feature in complex product Relevance of “entire market value” of overall complex product 49

Basic Principles When a patent is for an improvement, and not for an entirely new machine or contrivance, the patentee must show in what particulars his improvement has added to the usefulness of the machine or contrivance. He must separate its results distinctly from those of the other parts, so that the benefits derived from it may be distinctly seen and appreciated Garretson v. Clark, 111 U.S. 120, 121 (1884

From Lucent: “Translating the Court's early stylistic description into a precise, contemporary, economic paradigm presents a challenge.” F.3d 1301 (Fed. Cir. 2009)

Post-Lucent developments Courts are beginning to exercise the “gatekeeper” function of Lucent: - ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir. 2010) (“The majority of the licenses on which ResQNet relied in this case are problematic for the same reasons that doomed the damage award in Lucent.”). - See also Wordtech Sys., Inc. v. Integrated Network Solutions, Inc., 609 F.3d 1308 (Fed. Cir. 2010).

At the district court level … Cornell Univ. v. Hewlett-Packard Corp., 609 F.Supp.2d 279 (N.D.N.Y. 2009) (Rader, Circuit Judge, sitting by designation) ($184 million damage award, calculated as.8% of total sales of $23 billion of defendant’s computer workstations and systems, was not based on a viable economic theory of damages)

IP Innovation, L.L.C. v. Red Hat, Inc., 2010 WL (E.D. Tex., Mar. 2, 2010) (Rader, Circuit Judge, sitting by designation) (rejecting plaintiff’s reasonable royalty evidence, where its “methodology... does not show a sound economic connection between the claimed invention and [a] broad proffered royalty base”).

Now what? We are beginning to understand what evidence will NOT suffice But what evidence will do the trick? What theories/evidence will suffice to meet the standard? And how can courts guide litigants in the right direction?

56 Federal Circuit Opinion Lucent v. Gateway and Microsoft, 2009 WL (Sept. 11, 2009) “[T]he [royalty] base used in a running royalty can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence)....” 56

57 Lucent (cont’d) Here, Federal Circuit remands for determination based on more accurate and comparable evidence. Some of the license agreements entered into evidence were “radically different” form the hypothetical bargain in this case Others - unclear what they covered 57

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 (1990): – Apportion infringer’s sales across (1) patentee and (2) all noninfringing substitute sellers in the market – “pro rata” share rule

Market space Patentee Market Share Infringer Market Share

Market space Patentee Market Share Lost Profits/Dam- ages Area

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

Market space Patentee Market Share Infringer Market Share Non- Infringing Market Share

Market space Patentee Market Share Infringer Market Share Non- Infringing Market Share

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

Market space Patentee Market Share Non- Infringing Market Share Beginning of counterfactual analysis from infringer’s point of view

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.

Market space Patentee Market Share Non- Infringing Market Share Infringer Market Share

Market space Patentee Market Share Non- Infringing Market Share Patentee gets lost profits Patentee gets reasonable royalty