“Unfortunately, while damages law can be simply articulated and there is rarely a disagreement about what the law actually says, the parties seldom agree with respect to the meaning and application of the statutes and cases interpreting those statutes.”
Calculating damages in patent infringement suits is a high-stakes, complex matter of law and economics that often starts with the Georgia-Pacific factors at the district court and ends with recalculation by the Federal Circuit or an order for a new damages trial.
The fight over damages at the conclusion of a patent infringement trial is always contested, and one issue lost, or one inappropriate calculation, can easily skew the math dramatically. Factor in compounding pre-judgment and post-judgment interest, as well as a potential enhancement multiplier for willful infringement under 35 U.S.C. 285, and it is easy to understand why parties fight over everything relating to damages calculations.
Luckily, U.S. patent laws on damages is straightforward and easy to understand. The primary statute simply says that when there has been a finding of infringement, the patent owner is entitled to “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty”. See 35 U.S.C. 284. And recently, the Supreme Court has reiterated that a victorious patent owner is entitled to recover the difference between its pecuniary condition after the infringement, and what its condition would have been if that infringement had not occurred, regardless of whether the infringement produced domestic and/or foreign lost profits. See WesternGeco LLC v. ION Geophysical Corp., 138 S.Ct. 2129 (2018).
But Wait, There’s More
Unfortunately, while damages law can be simply articulated and there is rarely a disagreement about what the law actually says, the parties seldom agree with respect to the meaning and application of the statutes and cases interpreting those statutes.
For example, the Federal Circuit has recognized that apportionment is the general rule when it comes to patent damages, which seems reasonable given that a patent owner is supposed to be compensated for the value of the patented invention and not the overall whole when the infringer has combined a patented invention with other elements in combination. But there remains — to at least some extent — a viable entire market value rule that will compensate the patent owner based on the entire sale price without apportionment when the patented features were the sole driver of consumer demand. See Power Integrations, Inc. v. Fairchild Semiconductor Int’l, 894 F.3d 1258 (Fed. Cir. 2018). This likewise seems fair, particularly when the infringer has touted the patented invention as providing the buyer the impetus for needing to purchase a new piece of equipment, as was the case when GE aggressively promoted Fonar’s patent protected features that had been incorporated into GE’s new MRI machine. See Fonar Corp. v. General Electric Co., 107 F.3d 1543, 1552 (Fed. Cir. 1997).
So, apportionment is the rule except when it is inappropriate. Well, not really a problem because the entire market value rule requires specific facts that generally are not present. But wait, there is more.
While apportionment for purposes of a reasonable royalty is the general rule, the Federal Circuit has acknowledged that there may be more than one reliable method for estimating the correct reasonable royalty. The potential for more than one reliable methodology is because of the reality that different cases present different facts, and royalty determinations are inextricably intertwined with the facts. See Apple Inc. v. Motorola, Inc., 757 F.3d 1286, 1315 (Fed. Cir. 2014), overruled on other grounds by Williamson v. Citrix Online, LLC, 792 F.3d 1339 (Fed. Cir. 2015); Summit 6, LLC v. Samsung Elecs. Co., 802 F.3d 1283, 1296 (Fed. Cir. 2015).
And don’t forget lost profits as a form of damages instead of a reasonable royalty, which are always possible given the right facts. Of course, lost profits are not always going to be possible, but in the post-pandemic economy, most are predicting a rise in competitor versus competitor patent infringement lawsuits, as C-suite executives green-light attempts to use substantial patent portfolios as a source of revenue. These monetization efforts are precisely the types of disputes that can lead to lost profits, as one competitor engages in activities that captures sales away from the victorious, patent owning competitor. And, as you have probably guessed, there is a multiplicity of ways to prove entitlement to lost profits, apparently. While the Federal Circuit likes to characterize the Panduit test as a non-exclusive method for the patent owner to demonstrate entitlement to lost profits, Panduit is to lost profits what Georgia Pacific is to a reasonable royalty.
The non-exclusive Panduit test, named after the Sixth Circuit opinion authored by Chief Judge Howard Markey, requires establishment of: (1) demand for the patented product; (2) absence of acceptable non-in-fringing substitutes; (3) manufacturing and marketing capability to exploit the demand; and (4) the amount of the profit it would have made. See Rite-Hite Corp. v. Kelley Co., Inc., 56 F. 3d 1538 (Fed. Cir. 1995) (en banc).
So, although the general principles associated with patent damages are definite and the meaning clear, the application of the various tests to unique factual scenarios and disputed evidence make this hotly contested aspect of patent litigation quite unpredictable.
Join Us to Discuss the Road Ahead
Over the past year there have been several billion-dollar patent damages awards. In March 2021, for example, Intel was ordered by a West Texas jury to pay $2.2 billion for infringement. In October 2020, Cisco Systems was ordered to pay $1.9 billion in a non-jury trial in Norfolk, Virginia, which included a 2.5x multiple for “willful and egregious” conduct. It will be interesting to watch these cases move to the Federal Circuit on appeal. The Federal Circuit has shown a dislike for extremely large damage awards. Will these cases be different? At least the Cisco case may be; it was a bench trial with a decision in excess of 100 pages, with many findings of fact to back up the conclusions reached.
How did these and other large verdicts become so large? At IPWatchdog LIVE we will have a panel discussion that will examine current U.S. damages law, the role licensing plays in damage calculations, various economic methods and models for calculating damages, and how to present damages evidence at trial. Join us in Texas from September 12-14, 2021.