Lost Profits

  • BASICS: Patent owner must establish by a preponderance of the evidence that “but for the infringement” he would have earned the profits he asserts were lost. The patent owner need not sell patented products in order to lose profits from infringing competition. Can include virtually any type of lost profits so long as the but-for test is met and the loss was reasonably foreseeable. Some examples include: past and future lost sales, lost profits on made sales due to price erosion, reduced royalties from licenses, diminution of business goodwill, and impairment of growth. See Akamai Tech. V (Fed. Cir. 11/16/15) (reinstating jury verdict of approximately $40 million in lost profits, $1.4 million in reasonable royalty damages, and $4 million in price erosion damages.); Presidio (Fed. Cir. 11/21/17) (rev’g lost profits award; “a patentee can recover lost profits even if its product does not practice the claimed invention, where the product directly competes with the infringing device.”) Patent owner also has burden to prove amount of the lost profits. Promega II (Fed. Cir. 11/13/17) (aff’g trial court that patent owner’s “all-or-nothing damages strategy” had waived any damages theory based on a subset of the infringer’s worldwide sales, leaving patent owner with no damages, despite finding of infringement).
  • Can Recover For Unpatented Components That Function Together With Patented Components: If the patent claims cover only a smaller component or feature of an overall product, the patent owner may still be able to base lost profits on the overall product—including unpatented components—under the “entire market value rule.” But this can only be done if (1) the patent-related feature is the basis for customer demand and (2) the unpatented components/features function together with the patented components/features. Good case for patent owners, denying JMOL to defendant: “Denso argues that the jury could not have reasonably found that (1) the patented and unpatented components comprised a single functional unit and (2) the basis for the customer demand was the method of balancing the fan inside the assembly. Denso’s damage expert testified that the motors used with the radiator and condenser assemblies required fans. Denso did not sell these assemblies without fans. Denso’s internal documents stress, moreover, that the performance and price of the entire system were paramount to its customers. This evidence amply supports the finding that the assemblies were a single functional unit. In addition, the evidence shows that customers wanted fans that were balanced to a certain specification and once Denso abandoned the patented method, it could not meet the 2.0 gm-cm balance specification. Denso argues that its customers did not care how the fans in the assemblies were balanced. However, after Denso changed its specification, one customer complained and required Denso to rebalance the fans. From this evidence, the jury could have reasonably concluded that the demand for the entire assembly depended on the patented invention.” Tec Air (Fed. Cir. 09/30/99); cf. Depuy Spine (Fed. Cir. 06/01/09) (rev’g jury award of lost profits on functionally unrelated, unpatented products sold by patent owner); Funai (Fed. Cir. 09/01/10) (aff’g lost profits award, based on evidence that benefits of the invention were basis for customer demand); Ferguson (Fed. Cir. 12/04/03) (vacating trial court lost profits award where one patent was found to be infringed but not a second asserted patent, because the court “failed to distinguish the allocation of profits that would have been made ‘but for’ the infringement … with the profits that could fairly be allocated to customer demand related to the features embodying the [non-infringed] patent.”)
  • Can Recover For Lost Convoyed Or Derivative Sales: The patentee may even recover for lost sales of unpatented collateral products typically sold with its product competing with the infringer’s product, and “derivative” sales, or unpatented products typically sold after sale of competing products. See generally Beatrice Foods (Fed. Cir. 02/27/90) (en banc) (aff’g award of lost profits where defendant destroyed evidence of sales). “To be entitled to lost profits for convoyed sales, the related products … must be functionally related to the patented product and losses must be reasonably foreseeable. Being sold together merely for ‘convenience or business advantage” is not enough. If the convoyed sale has a use independent of the patented device, that suggests a non-functional relationship.” Warsaw I (Fed. Cir. 03/02/15) (no evidence that rods and screws for holding the implant and vertebrae in place “had no independent function—that is, that they would not work as well in other surgeries not involving the patented technologies.”); Seating (Fed. Cir. 01/29/08): aff’g JMOL overturning award of lost profits on collateral sales of bus/train passenger seats, for infringement of patent on wheelchair restraint system.
  • “But For” World May Account For Different Actions By Infringer As Well As Customers: “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 (Fed. Cir. 08/04/99); cf. AstraZeneca (Fed. Cir. 04/07/15) (aff’g reasonable royalty of 50% of infringer’s gross margins, based in part on finding that had infringer obtained a license “it would have had ‘a golden opportunity to take significant market share away from both other generic manufacturers and perhaps even branded PPIs by launching at a lower price,’” and patent owner had good reason to fear that would greatly harm its business (even though infringer did not lower prices ivo its risk of being held to infringe.)) See Brief of U.S. As Amicus, in WesternGeco (12/06/17) (“A patentee’s right to recover lost profits may be further limited by consideration of how an infringer might have adjusted its own conduct to mitigate its liability—including, as relevant here, by shifting all of its operations abroad.”)
  • Cannot Claim Somebody Else’s Lost Profits: The plaintiff can only recover its own lost profits, not the lost profits of a related corporation that would not have inexorably flowed to it. In Poly-Am. (Fed. Cir. 09/14/04), the court did not allow the patentee to recover lost profits of a non-exclusive licensee sister corporation (but can recover lost royalties); accord Warsaw I (Fed. Cir. 03/02/15) (patent owner denied recovery of royalties it would have earned from related companies had they not lost sales to the infringer); Spine Solutions (Fed. Cir. 09/09/10) (seller of product lacked standing). Same for wholly-owned subsidiary. Mars (Fed. Cir. 06/02/08).

a) lost sales

  • BASICS: “To collect lost profits [from lost sales], a ‘patentee must show ‘a reasonable probability that ‘but for’ the infringing activity, the patentee would have made the infringer’s sales.’ This is done by determining what profits the patentee would have made absent the infringing product. This analysis must be supported by ‘sound economic proof of the nature of the market and likely outcomes with infringement factored out of the economic picture.’” Akamai Tech. V (Fed. Cir. 11/16/15); see Rite-Hite (Fed. Cir. 06/15/95) (en banc) (aff’g award of lost profits from lost sales of non-patented device competing with infringing device (but not non-competitive convoyed items): “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.”) Most commonly use either the two-supplier market test, or the Panduit but-for test.
  • Panduit Test For Lost Profits From Lost Sales: Under the Panduit test (Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978)), the patentee must show: (1) demand for the patented product; (2) absence of an acceptable; non-infringing substitute; (3) the patentee’s manufacturing and marketing capability to exploit the demand; and (4) the amount of profits the patentee would have made. “Damages under Panduit are not easy to prove…. A patentee cannot obtain lost profits unless it and only it could have made the sale—there are no non-infringing alternatives or, put differently, the customer would not have purchased the product without the infringing feature.” Mentor Graphics (Fed. Cir. 03/16/17) (aff’g award of $36.4 MM in lost profits), rehearing denied (Fed. Cir. 09/01/17) (10-2), CVSG (U.S. 04/23/2018); Georgetown Rail (Fed. Cir. 08/01/17) (aff’g lost profits under Panduit).
    • Demanded Product Need Not Be Patented If It Competes With Infringing Product: First factor may be met by showing demand for patentee’s non-patented product that “directly competes” with the infringing product, and need not tie that demand to any particular limitation in the claims. Presidio (Fed. Cir 12/19/12); Georgetown Rail (Fed. Cir. 08/01/17) (aff’g infringement and damages; “the proper inquiry asks whether demand existed in the marketplace for the patented product, i.e., a product ‘covered by the patent in suit or that directly competes with the infringing device.’”).
    • Don’t Conflate First Panduit Factor With Second: First Panduit factor does not require showing demand for a particular feature recited in claim; rather, all need show is demand for product covered by the claim. Depuy Spine (Fed. Cir. 06/01/09).
    • Patent Owner Establishing Panduit Factors Need Not Further Apportion Its Lost Profits To The Patented Features: While apportionment “is necessary in both reasonable royalty and lost profits analysis,” “when the Panduit factors are met, they incorporate into their very analysis the value properly attributed to the patented feature.” Panduit factors one and two (“demand for the product as a whole and the absence of non-infringing alternatives”) “together, requiring patentees to prove demand for the product as a whole and the absence of non-infringing alternatives ties lost profit damages to specific claim limitations and ensures that damages are commensurate with the value of the patented features.” Mentor Graphics (Fed. Cir. 03/16/17) (aff’g award of $36.4 MM in lost profits in two-supplier market for sales to single customer (Intel)), rehearing denied (Fed. Cir. 09/01/17) (10-2) (Stoll, J., concurring op. (6 judges) (“because the Panduit factors are satisfied”: “Whether one views this in terms of what imbues value to the ultimate combination of features or what is a driver of demand for those combined features, the result is the same: the apportionment required by Garretson is satisfied.”); (Dyk, J., dissenting op. (2 judges) (consumer demand and but-for causation is not apportionment and is not enough to satisfy the entire market value rule.)), CVSG (U.S. 04/23/2018).
  • Must Show Demand For The Patented Product (A Good Reason For An Early Re-Design): The patentee must show that the patented feature is a motivation for purchase. Calico Brand (Fed. Cir. 07/18/13) (non-precedential) (rev’g jury award of last profits; no showing of “demand for the patented safety mechanism” as distinct from demand for lighter product as a whole (note: claims recite “a lighter comprising ….”), and no showing, in view of non-infringing alternatives, that patentee would have made sales but for infringement). The patentee might use the defendant’s advertising and continued use of the accused features (in the face of liability risk) to show this.
  • Must Show Absence Of Acceptable, Non-Infringing Substitute (Another Good Reason For An Early Re-Design): “The correct inquiry under Panduit is whether a non-infringing alternative would be acceptable compared to the patent owner’s product, not whether it is a substitute for the infringing product.” Presidio (Fed. Cir. 11/21/17) (rev’g lost profits award where infringer’s non-accused product was lower cost than patent owner’s product and under some circumstances performed better, even though non-accused product not as good as infringing product). Turns on purchaser motivation: “‘if purchasers are motivated to purchase because of particular features available . . . from the patented product, products without such features—even if otherwise competing in the marketplace—would not be acceptable noninfringing substitutes.’” Smith & Nephew (Fed. Cir. 03/18/15) (non-precedential) (2-1 on this issue). Object “is to identify what products those [customers] who actually [decided to buy] [the infringing products] would have bought if” infringer had not sold that product. Id. Typically excludes alternatives to the patented product “with disparately different prices or significantly different characteristics.” An infringer can rebut a request for lost profits by showing that an acceptable alternative was readily designable given current technology, even though the alternative had never been made before. This suggests that where an accused infringer can show an easy design-around using current technology, lost profits could be foreclosed. A convincing way to show this would be to quickly implement the redesign with current technology and then sell it to show it is acceptable. Often easier said than done.
  • Non-Infringing Substitute Need Not Have Been On Market: An infringer may rebut a request for lost profits by showing that an acceptable alternative readily designable given current technology, even though the alternative had never been made before. Grain Processing (Fed. Cir. 08/04/99) (affirmed the district court’s denial of lost profits based on the infringer’s argument and evidence that all of the materials to make the alternative were available and that the infringer possessed all of the necessary equipment, know-how, and experience to make the alternative with only a few weeks of design work.) Alleged Infringer has the burden of proof. Depuy Spine (Fed. Cir. 06/01/09) (applying second Panduit factor, citing Grain Processing); SynQor (Fed. Cir. 03/13/13) (no abuse of discretion excluding belatedly produced evidence of alleged non-infringing alternative that was not on market during damages period); Presidio (Fed. Cir. 11/21/17) (non-accused product of infringer was available even though sold (in substantial volume) to only one customer and not listed on Website).
  • Lost Profits Are Lost Incremental Income: The amount of lost profits is revenue minus incremental costs. Courts don’t consider “fixed” costs, but courts should consider large capital expenditures if they are needed to ramp up production.
  • Market-Share Approach For Determining Lost Profits From Lost Sales: Appropriate to reconstruct “but for” “by segmenting the market and determining [patent owner’s] lost profits based on its market share” in each market. Ericsson (Fed. Cir. 12/09/03). Accord Smith & Nephew (Fed. Cir. 03/18/15).
  • Two Supplier Market Is Specific Example Of Market-Share Approach: It is typically considered reasonable to infer that the patentee would have made the infringer’s sales but for infringement when the patentee and infringer are the only market suppliers.
  • Patent Owner Need Not Have Sold Any Units During Damages Period: Where patent owner had success selling product before damages period and tried but failed to sell product during the damages window, due to the infringer’s destroying its market, that satisfies “demand for the patented product” element. Versata I (Fed. Cir. 05/01/13) (aff’g $260 MM lost profits and $85 MM reasonable royalty).
  • Patent Owner May Be Entitled To Lost Profits From Lost Sales Even When Infringer’s Price Half Of Patent Owner’s Price: The infringer’s price being half of the patent owner’s price does not necessarily put the competitors into different market segments. Akamai Tech. V (Fed. Cir. 11/16/15) (aff’g trial court’s allowance of damages expert testimony that patent owner would have made about 75% of the infringer’s sales).

b) reduced prices/price erosion

  • BASICS: “The enforced reduction of price on the locks which the plaintiff [patent owner] sold, caused by the infringement … is a proper item of damages …. It is a pecuniary injury caused by the infringement, and is the subject of an award of damages, although the defendant may have made no profits and the plaintiff may have had no established license fee.” Yale Lock (U.S. 04/05/1886). This is often referred to as “price erosion,” and the patentee must show that but for the infringement the patentee would have been able to charge higher prices. Put another way, the patentee must show that the infringement caused an erosion of the prices it was able to charge. Crystal Semiconductor (Fed. Cir. 03/07/01) (aff’g denial of “price erosion” damages for lack of sufficient evidence: “the patentee’s price erosion theory must account for the nature, or definition, of the market, similarities between any benchmark market and the market in which price erosion is alleged, and the effect of the hypothetically increased price on the likely number of sales at that price in that market.”)
  • TIPS:

Lost Profits On Collateral Sales: Am. Seating (Fed. Cir. 01/29/08): aff’g JMOL overturning award of lost profits on collateral sales of bus/train passenger seats, for infringement of patent on wheelchair restraint system.

Entire Market Value Rule: good case for patent owners, denying JMOL to defendant: “Denso argues that the jury could not have reasonably found that (1) the patented and unpatented components comprised a single functional unit and (2) the basis for the customer demand was the method of balancing the fan inside the assembly. Denso’s damage expert testified that the motors used with the radiator and condenser assemblies required fans. Denso did not sell these assemblies without fans. Denso’s internal documents stress, moreover, that the performance and price of the entire system were paramount to its customers. This evidence amply supports the finding that the assemblies were a single functional unit. In addition, the evidence shows that customers wanted fans that were balanced to a certain specification and once Denso abandoned the patented method, it could not meet the 2.0 gm-cm balance specification. Denso argues that its customers did not care how the fans in the assemblies were balanced. However, after Denso changed its specification, one customer complained and required Denso to rebalance the fans. From this evidence, the jury could have reasonably concluded that the demand for the entire assembly depended on the patented invention.” Tec Air (Fed. Cir. 09/30/99); cf. Depuy Spine (Fed. Cir. 06/01/09) (rev’g jury award of lost profits on functionally unrelated, unpatented products sold by patent owner); Funai (Fed. Cir. 09/01/10) (aff’g lost profits award, based on evidence that benefits of the invention were basis for customer demand); Ferguson (Fed. Cir. 12/04/03) (vacating trial court lost profits award where one patent was found to be infringed but not a second asserted patent, because the court “failed to distinguish the allocation of profits that would have been made ‘but for’ the infringement … with the profits that could fairly be allocated to customer demand related to the features embodying the [non-infringed] patent.”)

Don’t Conflate First Panduit Factor With Second: First Panduit factor does not require showing demand for a particular feature recited in claim; rather, all need show is demand for product covered by the claim. Depuy Spine (Fed. Cir. 06/01/09).

Grain Processing: Grain Processing (Fed. Cir. 08/04/99): an infringer may rebut a request for lost profits by showing that an acceptable alternative was readily designable given current technology, even though the alternative had never been made before. Whereas past cases had involved alternatives that were either on the market or else had been made sometime in the past and could be revived, the Court in Grain Processing affirmed the district court’s denial of lost profits based on the infringer’s argument and evidence that all of the materials to make the alternative were available and that the infringer possessed all of the necessary equipment, know-how, and experience to make the alternative with only a few weeks of design work.

–     Alleged Infringer’s Burden To Show Alternative Not On Market Was Available: Depuy Spine (Fed. Cir. 06/01/09) (applying second Panduit factor, citing Grain Processing); SynQor (Fed. Cir. 03/13/13) (no abuse of discretion excluding belatedly produced evidence of alleged non-infringing alternative that was not on market during damages period).

–     Affiliate’s Lost Profits: A patent owner may not recover profits lost by its non-exclusive licensee sister corporation. Poly-Am. (Fed. Cir. 09/14/04).