UK: Theory Into Action – Calculating Damages Payments And Accounts Of Profits In Patent Cases

Last Updated: 6 December 2006
Article by Leigh Ellis

It is all well and good to be encouraged to apply and obtain for patent protection. The main remedies for patent infringement are a narrow injunction to prevent future instances of the infringement, and either damages or an account of profits. In this article, we examine the measure of monetary compensation that may be awarded by these damages and accounts of profits and the factors taken into account in their calculation.

Claimants who have successfully proved liability in an action for patent infringement, either actual or anticipated, are entitled to elect their remedy. Successful litigants will discover that the measure of the award for compensation may vary widely depending upon their election between damages and an account of profits.

Comparison of the Remedies

The variance between an account of profits and damages exists because the focus is on the affairs of different parties: in one instance that of the claimant and the other on the defendant.

Damages

An award of damages focuses on the losses sustained by the claimant. There is no upper limit on the measure of damages that may be awarded. Relief for patent infringement may overlap with other areas of intellectual property; for instance the copyright of the claimant may have also been infringed (an instance being software). In calculating the sum to be paid in damages, a court will disregard whether the defendant could have avoided infringement by using substitute process and thus avoided a charge of infringement altogether. It is irrelevant. Losses not caused by the infringement are not recoverable.

An Account of Profits

On the other hand an account of profits focuses on the profits made by the defendant, without reference to the damage suffered by the claimant at the hands of the defendant. The purpose of the account is to prevent the unjust enrichment of the defendant by the use of the claimant’s invention. The claimant is treated as if they were conducting the business of the defendant, and made the profits of the defendant. As such, the upper most limit of an award is the sum of profits made by the defendant caused by the infringement. In most cases, an award of damages will equal or exceed the maximum award in an account of profits; however an account of profits may greatly outstrip an award of damages in the right case. When assessing an award, to say that a defendant should have generated higher profits is immaterial: the claimant must take the defendant as he find them.

The profits must have been earned from the use of the claimant’s invention, and if the infringed invention formed only part of the overall product or process, then only that part of the profit attributable to the patented invention is recoverable. This is where most difficulty is experienced in assessing the profits earned by the defendant and a number of approaches may be taken during the assessment. Courts take the view that this would be unfair upon the defendant for the claim to be awarded all of the profits where attribution of profits is possible. Manufacturing processes that use the patent in question as a small step in the manufacturing process provide a typical example, in that it clearly cannot be said that the entire profit of the application of the process is attributable to the infringement. Where it is appropriate to apportion losses, the reference for the assessment will involve splitting the profits between infringing and non-infringing parts of the process.

On the other hand, there are instances where it is appropriate for the claimant to recover all of the profits of an invention, however whether this is so turns on the facts of the case.

Making the Calculations

Damages

It is trite to say that the claimant is entitled to be placed in the position they would have been had the infringement not taken place in the context of damages. The test for the measure of damages in patent cases is seen in the application of the ‘but for’ test, and the damage must be the natural and direct consequence of the defendant’s acts. Although the claimant must prove their loss, they are assessed liberally. Courts recognise that monopoly rights lead to higher prices or licence fees, so this is the peg to which damages are assessed.

A court is generally prepared to imply that inference with the claimant’s monopoly will cause damage in the ordinary course of events, and the absence of a precise means to calculate damages will not necessarily result in an award of nominal damages, but a fair sum of what a reasonable person may expect to have lost, with reference to the general trade that has been interfered with by the defendant.

There are two ways to calculate the damages suffered by a defendant, and the method turns on whether the claimant manufactures the patented invention or whether manufacturing of the invention is licensed to others.

The Reasonable Royalty

Where the patent owner licenses the production or use of the invention to others, the measure of damages is the lost royalty profits.

A court is usually inclined to award a reasonable royalty to the claimant, notionally asking: if the claimant did grant a licence to use the patent, what would they reasonably be expected to obtain in the market?

The damages are limited to the lost licence fees that would have been payable by the defendant. Where previous licensing fees have been agreed, the determination of the price as it has been determined in the free market will be persuasive evidence of the proper sum payable, as that is the sum that the infringer will be presumed to be asked to pay. The sum may be increased where standard licence fees impose restrictions upon the licensee which are not similar to the conduct of the defendant when committing the infringing acts. Thus when a product is usually made available on a usage only basis, and the infringer has manufactured and sold the product with purported licences to further develop the invention to its licensees, an uplift in the award payable is likely.

Where there is no precedent of licensing by the claimant, calculation of a reasonable royalty may take into account:

  1. the patent owners’ previous conduct in pricing and terms
  2. Percentages standard in the trade
  3. cost of designing around the patent monopoly rights

The proper sum for the notional licence fee is the sum that a potential licensee would be willing to pay to enter the market.

Where there is no licensing activity, the court may use this notional licence fee to calculate damages. Evidence of the quantum to be awarded may be a quoted licence fee by the claimant. Where there is no quote for a reference point, the measure will be the rate that a licensee who is not in the market would pay, regardless of whether they might have been able to make non-infringing equivalents.

Manufacturers of Patented Inventions

When the patent owner manufactures the product, the patentee is entitled to lost manufacturing profits.

When the patent owner is a manufacturer rather than a licensor, it has often been said that the appropriate figure cannot be arrived at with mathematical precision. It is the profit that the claimant could have made that sets the baseline for the award. Some allowance may be made for the exertions made by the defendant, as it is presumed that not all sales made by the defendant would have been made by the claimant had there been no infringement.

Heads of Damages

Depending on the type of case, the following heads of damage have been established by previous case law:

  1. Loss of profits
    1. in the form of sales diverted away from the claimant by reason of the infringement;
    2. lost margins on sales not made due to the pressing need to reduce prices due to price depression caused by the infringer.

  2. Loss of goodwill and reputation to the claimant, which arguably has several dimensions;
  3. Sums representing the benefit of the use of the invention by defendant in the market, which is qualified by taking the market value of the use. It is damages for the unauthorised use, which resonates as a licence fee for the use and restitutionary damages (sometimes referred to as ‘gain based damages’), an area of damages law rarely pressed.
  4. Lost profits on sales lost on goods that are commonly sold with the invention
  5. Springboard Damages: damages that are suffered after the infringement by establishing a market presence through infringement and early entry into the market.
  6. Diminution of value in subsidiary companies owned by the patent owner due to the loss of sales by them where the profits flow through to the holding company.
  7. Depending on the nature of the patent, there may be losses sustained by loss of sales on products commonly sold with the patented products, provided it is foreseeable and caused by the infringement.
  8. As a general rule a claimant was entitled to recover for losses and expenses reasonably incurred in mitigation.

Where the patent owner has reduced prices in a competitive market, a court may have regard for the argument that the patent owner could not have maintained their sales at current prices in that environment. This is a matter that goes to causation of damage – the claimant is not entitled to recover losses unless the defendant caused them.

In the case of infringement of a product, a good starting point for assessing damages is to obtain evidence of the number of infringing products made and in the alternatives sold, the sums received and the approximate costs incurred. This creates a reference point for the calculation.

The point needs to be made that the damages recovered in any particular case depends on the facts of the case. The general principle of awarding tortuous damages applies – that any losses caused by the infringement are recoverable, whether or not the particular heads appear in the list above. A defendant is said to take the claimant as they find them, and thus damages outside these heads of damages which are peculiar to the claimant will be recoverable in the appropriate case.

Making an Accounts of Profits

Defendants are not obliged to hand over the gross profit obtained by reason of the infringement. In keeping with the approach that the claimant is said to stand in the shoes of the defendant, a court will make allowances to the defendant for parts of the gross profit that are attributable to proper expenses associated with making sales, such as advertising and marketing; increases in value of goods or services once sold or provided and additional features of the product or service that are outside the infringing invention (such as value added services).

In the event an infringer makes a loss in a manufacturing process, the sum by which the infringing process reduces those losses are recoverable on an account.

Where it is difficult to separate out the different components of a process in order attribute a proportion of the profits, courts may decide to assign a percentage of the profits on the same percentage that the costs and expenses are attributed to them by adopting an accounting approach. A judge will make a reasonable approximation. Account may then be taken of the relative importance of the relative attractions of different parts of an infringing product. In this way the courts reserve a discretion to grant a larger slice of the profits where the infringement can fairly be said to play an important role in the profits obtained by the defendant. This approach takes a ‘base allocated profit’ percentage and then that percentage is weighted for the importance to the profits obtained.

There are cases where the patented invention has readily discernable impact on profits, either positively or negatively. For instance, the patented invention may reduce the costs associated with the manufacturing process, making the process more efficient. In that case a larger share of the profits would be payable to the claimant on an empirical basis. It involves a comparison between the profitability achieved when the patented invention is used and on the other hand when it is not used. This brings consideration of efficiencies introduced by the invention into consideration for the calculation of the slice of the profits to be awarded to the claimant.

Making assessments of damages and accounts of profits frequently require the involvement of forensic accountants with some knowledge of the industry in which the infringement has taken place. As a general rule, an account of profits will probably be preferred in cases where the claimant cannot point to any damage in their own business. This will usually be the case where the margins of the defendant outstrip the profits that of the claimant.

For legal advice on patent rights, infringement, litigation and disputes and other avenues for intellectual property protection and enforcement, contact our patent lawyers online or call us on 020 8965 4266.

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.

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