United States: Early Assessment Of IP Damages Can Prove Beneficial

Last Updated: January 11 2008
Article by Charles F. Kuyk and Glenn W. Perdue

"As originally published in Expert Perspective, a Crowe Chizek and Company LLC publication, Summer 2006. All rights reserved."

In litigation associated with intellectual property (IP) — patents, trademarks, copyrights, and trade secrets — management's and counsel's attention may be directed more to the liability dimension of a case than to the issue of damages. Authors Charlie Kuyk and Glenn Perdue, however, advise the careful and early assessment of potential damages to better inform case strategy and decisions.

One of the fundamental purposes of intellectual property law is to provide economic protection to a company's or an inventor's intellectual property rights. While the ultimate resolution of a case may occur through an injunction or an economic award, it is important for counsel and management to consider the subject of damages in the early stages.

With this in mind, a basic understanding of the primary measures of recovery for infringement within each category of intellectual property is important. Familiarity with the nature and proof of damages in each category can be beneficial in several ways.

First, it will help management and counsel make an informed judgment concerning the size of the ultimate award that may result from an infringement action. This, in turn, will influence the type and magnitude of resources that are devoted to the case. Second, an understanding of the approach to determining damages will influence the type and number of witnesses, both fact and expert, who will be required to prosecute or defend the case.

In addition, knowing the measure of damages for a particular infringement action will influence the scope and focus of discovery. For example, knowing in advance that disgorgement of the defendant's profits is a possible remedy in a trademark infringement case, plaintiff's counsel will seek discovery of the defendant's sales, costs, and operating expenses — information that would be unnecessary under a lost profits approach.

Economic remedies for the different types of IP infringement have some measures of recovery in common, but they also have distinctive elements that must be considered. The chart shown below illustrates these similarities and differences.

Intellectual Property Damages Matrix





Trade Secrets

Reasonable Royalty

Explicit Floor Value


Future Use Provision in Uniform Trade Secrets Act

Plaintiff's Lost Profits





Defendant's Gained Profits





Statutory Damages


Generally $500-$100,000 per ... special section for domain names

Generally $250-$50,000 per ... can be trebled




Corrective Advertising
Goodwill Injury


Head Start

Patent Infringement Damages

The starting point for measuring damages in a patent infringement case is Section 284 (the Patent Statute) of Title 35 of the U. S. Code (U.S.C.). This section states that:

Upon finding for the claimant 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.

The measure of damages in a patent infringement case generally is:

  1. An amount derived from the difference between the claimant's profits after the infringement and the profits the claimant would have made absent the infringement (e.g., lost profits);
  2. A reasonable royalty; or
  3. A combination of lost profits and a reasonable royalty.1

In a typical lost profits scenario, the claimant/patentee asserts it has the capacity to exploit the patented invention and can demonstrate that it would have gained additional incremental profits absent the infringement.

In other cases where the claimant lacks this capacity — such as with an inventor who lacks the manufacturing, distribution, or marketing capabilities needed to exploit his or her invention — the measure of damages is based on a reasonable royalty. In most cases, when a claimant has the capacity to profitably manufacture, distribute, and market an invention rather than simply license it, damages measured by lost profits will lead to a larger damage amount than a royalty-based damage conclusion.

Lost Profits

Gaining an award of lost profits requires the patent owner to offer proof that it could have made sales that the infringer made had the infringement not occurred. The standards for this proof have evolved during many years through a series of cases emanating (in recent times) from the landmark case Panduit Corp. v. Stahlin Brothers Fibre Works, Inc.2

To recover damages for patent infringement based on a lost profits methodology, the patent owner must show that it would have received the additional profits "but for" the infringement. The patent owner bears the burden of presenting evidence to demonstrate a reasonable probability that it would have made the asserted profits without the infringement.3

To recover damages based on profits from sales the claimant would have made without the infringement, specifically the sales made by the infringer, the so-called Panduit test required the patent owner to prove:

  • A demand for the patented product;
  • An absence of acceptable noninfringing substitutes;
  • The manufacturing and marketing capability to exploit the demand; and
  • The amount of the profit the claimant would have made.

Since the Panduit court's opinion in 1978, federal circuit case law concerning patent infringement damages has advanced significantly, particularly with respect to the second Panduit factor. Today, a more expansive view of acceptable noninfringing alternatives exists that may require reconstructing the market in which the patented technology would have been available in order to assess lost sales. A complete discussion of this evolution, however, is beyond the scope of this article.4

Once the amount of lost sales from the infringement has been determined, the damage expert will deduct the incremental costs associated with those sales to arrive at incremental lost profits. This can sometimes be a challenge because of the difficulties inherent in estimating incremental costs. These costs can bear different relationships to changes in sales. For example, some costs vary directly with changes in sales whereas others are relatively fixed. Various accounting and econometric techniques can be used to facilitate this analytic process.

Price erosion — the reduction in the price of a product caused by the marketplace impact of the infringing products — is another aspect of lost profits that may also be considered. In this case, the sensitivity of demand for a product resulting from changes in price, or "price elasticity," is an important consideration. Price elasticity is a measure of how much consumers modify their buying decisions based on changes in price. The existence of substitute products, of course, influences the consumers' buying decisions.

Reasonable Royalties

The Patent Statute, 35 U.S.C. Section 284, provides that the court shall award not "less than a reasonable royalty." A reasonable royalty represents a "floor" for the measure of damages in a patent infringement case. In determining a reasonable royalty, the economics of the patented technology, the accused product(s), and relevant markets are all considered.

To establish a reasonable royalty amount, the damages expert generally will consider 15 factors set forth in Georgia-Pacific Corporation v. U.S. Plywood-Champion Papers Inc. in forming his or her opinion.5

Depending on the particular facts of a case, reasonable royalties, such as royalty provisions in actual license agreements, may be structured in many ways including:

  • A lump-sum royalty (paid in a single installment or in stages);
  • A fixed recurring royalty (for example, monthly or annual fees paid regardless of use);
  • A per-unit royalty (continuous royalty based on the licensee's use of the technology calculated on a per-unit rate times the number of units); or
  • A percent royalty (continuous royalty based on a percentage of revenue realized or costs saved through the use of the subject technology).

Reasonable royalties provide an alternative measure of damages for any portion of the infringing sales for which the plaintiff could not justify a claim for lost profits. Reasonable royalties are based on the proposition of a hypothetical negotiation between the patent owner (plaintiff/licensor) and infringer (defendant/licensee) on the eve of the alleged infringement.

In this hypothetical scenario, the plaintiff and defendant willingly agree to a royalty value in a hypothetical license agreement, the intent being to simulate what would have happened if the parties had negotiated a deal on their own prior to the infringement.

Trademark Infringement Damages

Trademarks are protected from infringement under common law as well as statute through the Lanham Act.6 This act permits registration of four types of marks: trademarks, service marks, certification marks, and collective marks.7 Infringement of a trademark is essentially the unauthorized use of the mark in the same market in which the owner of the trademark operates.

A fundamental issue addressed in trademark infringement cases is whether the use of the infringing mark resulted in confusion in the minds of consumers located in the relevant marketplace. Once the infringement of a trademark has been established, injunctive relief to prevent further infringement is a crucial remedy.

When it can be established that the infringement contributed to actual confusion in the market or was willful, a plaintiff may be entitled to monetary recovery based on:

  • Actual damages suffered by the plaintiff and measured by lost profits, price erosion, and reputational damage (compensation for reputational damage may include the expense of corrective advertising to remediate the harm);
  • The defendant/infringer's ill-gotten gains (for example, profits);
  • The costs of the action;8
  • A reasonable royalty;9 and
  • Statutory damages of $500 to $100,000 per counterfeit trademark (up to $1 million per mark for willful violations) and $1,000 to $100,000 per unlawful domain name.10

Calculating lost profits and reasonable royalty damages in trademark cases is consistent in approach with the methods described for patent infringement cases. With trademark infringement, however, more forms of damage recovery are available since the plaintiff may also pursue the defendant's profits and statutory damages.

With statutory damages (amounts that are pre-established by law because of the difficulty in determining actual damages), a plaintiff may seek recovery for each infringement (as in copyright cases) or for each counterfeit mark per type of good or service sold (as in trademark counterfeit cases).11

In contrast to the relatively straightforward approach to calculate statutory damages, determining damages based on the defendant's illegally obtained profits may prove more challenging. In part, this is due to the relative paucity of court decisions on this topic compared to the more abundant guidance on the calculation of a plaintiff's lost profits and the determination of a reasonable royalty.

The accounting for a defendant's ill-gotten gains starts with the determination of the defendant's infringing revenue, responsibility for which falls to the plaintiff through discovery of the defendant's financial records. The burden for completing the accounting for profits then shifts to the defendant who first must apportion revenue between infringing and non-infringing sales, and then apply deductions to recognize incremental costs associated with the infringing sales.

Consistent with the calculus of measuring lost profits, only those sales made through the use of the infringing mark should be included along with deductions for incremental costs associated with these revenues. Apportionment and incremental cost information may, in some cases, be difficult to isolate with precision.

The apportionment process seeks to quantify the contribution of the protected rights to the products or services of the defendant infringer who improperly exploited those rights.12 Consequently, courts may grant some latitude in evaluating these factors compared to assessing lost profits under the "incremental profits" standard for determining a plaintiff's lost profits.

Finally, courts may increase an award by up to three times the actual damages under circumstances of willfulness or trademark dilution if the increase represents compensation rather than a penalty.13

Copyright Infringement Damages

Calculating damages in copyright infringement matters is similar to that of trademark infringement and includes the following types of potential recovery methods by the plaintiff:

  1. Actual damages of the plaintiff;
  2. The defendant/infringer's illicitly gained profits; and
  3. Statutory damages.

Statutory damages of between $200 and $150,000 for any single infringed work may be awarded by the court in copyright infringement matters. Additionally, back license fees from the prior infringing use of copyrighted materials may be doubled in certain circumstances.14

Theft Of Trade Secrets

The recovery of damages from the infringement of patents, trademarks, and copyrights is governed by federal law. Both federal and state laws govern domestic trade secret protection and damages.15 State-level trade secret laws have been substantially harmonized by virtue of the Uniform Trade Secrets Act, model legislation that has been adopted by 45 states to date.

The means of damage recovery in trade secret cases are comparable to those available in trademark cases. Specifically, damages may be recovered based on the plaintiff's lost profits or the defendant's gained profits. A reasonable royalty may provide an acceptable alternative measure of damages. Unlike trademark infringement, there is no provision for statutory damages in trade secret cases.

One nuance presented in trade secret matters is the notion of a "head start" period that represents the time it would have taken the defendant to develop the trade secrets legally. The head start period may be a consideration in determining the appropriate damage period and amount.

Intellectual Property Infringement

Damages based on the plaintiff's lost profits are the only damage remedy common to all forms of intellectual property infringement. Reasonable royalty damages, while playing a prominent role in patent infringement damage awards as an explicit "floor value," provide an alternate measure of damages for other forms of infringement.

The defendant's illegally gained profits serve as a measure of damages only in nonpatent cases. Finally, statutory damage provisions only exist for trademark and copyright cases.

Attorneys and company management involved in IP litigation may benefit from considering economic damage issues early in their case for several reasons. Different claims for infringement will have unusual implications for damages because of the varying methods of recovery.

Similarly, different claims for infringement will have an impact on tactical plans for discovery and witness selection. Finally, gaining a good understanding of the potential financial exposure early in a case will be of value in settlement negotiations and discussions with insurers.


1. For an example of a case involving recovery of both lost profits and reasonable royalties, albeit on different product parts, patented and non-patented, see King Instruments, Inc. v. Perego, 65 F. 3d 941 (Fed. Cir. 1995).

2. Panduit Corp. v. Stahlin Brothers Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978).

3. See, for example, Del Mar Avionics, Inc. v. Quinton Instr. Co., 836 F.2d 1320, 1326, 5 USPQ2d 1255, 1260 (Fed.Cir.1987)

4. Among the more prominent cases shaping the evolution of the market reconstruction theory for proving lost profits in patent infringement cases are the following: State Industries, Inc. v. Mor-Flo Industries, Inc. 883 F.2d 1573 (Fed. Cir. 1989), BIC Leisure Products, Inc. v. Windsurfing Int'l, Inc., 1 F.3d. 1214 (Fed. Cir. 1993), and Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341 (Fed. Cir. 1999)

5. Georgia-Pacific Corporation v. U.S. Plywood-Champion Papers Inc , 318 F. Supp. 1116 (S.D.N.Y. 1970).

6. Title 15 of the U.S. Code

7. 15 U.S.C. § 45.

8. 15 U.S.C. § 35 addresses recovery for violation of rights and states: "the plaintiff shall be entitled . . . to recover (1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action. The court shall assess such profits and damages or cause the same to be assessed under its direction. In assessing profits the plaintiff shall be required to prove defendant's sales only; defendant must prove all elements of cost or deduction claimed."

9. Unlike the preceding forms of recovery for trademark infringement, this form arises from case law, not statute. See, for instance, Sands, Taylor & Wood v. Quaker Oats Co., 34 F.3d 1340 (7th Cir. 1994). In Sands, the court noted that the royalty provided a "form of restitution designed to prevent unjust enrichment." In general, a royalty-based approach can be considered when calculating the plaintiff's lost profits is not feasible.

10. 15 USC § 1117, see sections (c) and (d)

11. Ibid.

12. It should be noted that apportionment can also be a factor in determining reasonable royalties for infringement actions. Factor 13 of the Georgia-Pacific case indicates consideration of: "The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer." And, the House Bill H.R. 2795, regarding the Patent Act of 2005, contains a proposed amendment to Section 284 with the following: `In determining a reasonable royalty in the case of a combination, the court shall consider, if relevant and among other factors, the portion of the realizable profit that should be credited to the inventive contribution as distinguished from other features of the combination, the manufacturing process, business risks, or significant features or improvements added by the infringer."

13. 15 U.S.C. § 35: "In assessing damages the court may enter judgment, according to the circumstances of the case, for any sum above the amount found as actual damages, not exceeding three times such amount. If the court shall find that the amount of the recovery based on profits is either inadequate or excessive the court may in its discretion enter judgment for such sum as the court shall find to be just, according to the circumstances of the case. Such sum in either of the above circumstances shall constitute compensation and not a penalty. The court in exceptional cases may award reasonable attorney fees to the prevailing party."

14. USC 17 § 504 / Release date: 2005-08-01 (http://www4.law.cornell.edu/uscode/html/uscode17/usc_sec_17_00000504----000-.html).

15. If foreign parties are involved in trade secret misappropriation, the Economic Espionage Act of 1996 may govern remedies, including damages.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions