Co-authored by: Thomas J. Gorowsky (Financial Advisors).
This is the third and final article in Taft's three-part patent litigation series focusing on the outcomes/objectives of successful patent litigation. Click here to read the previous article in this 3-part series. This article focuses on the damages available to a patent owner after establishing infringement.
Types of Damages
Two main types of damages are awarded in the vast majority of patent infringement cases: reasonable royalties and/or lost profits. Reasonable royalty is the fair market value of purchasing a license from the patent owner to legally use the invention. Lost profits compensate the patent owner for money they would have made "but for" the infringement. Obtaining these damages almost always requires expert testimony.
Reasonable Royalties
Under 35 U.S.C. § 284, where infringement is found, "the court shall award . . . 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." In other words, the fair market value of a license. A reasonable royalty is typically estimated using the "hypothetical negotiation approach," which "attempts to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before the infringement began." VirnetX, v. Cisco Sys., 767 F.3d 1308, 1326 (Fed. Cir. 2014) (quoting Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009)).
Under the well-accepted construct first set forth in Georgia-Pacific Corp. vs. United States Plywood Corp., 318 F. Supp. 1116, 1121 (S.D.N.Y. 1970), a "hypothetical negotiation" is conducted as of the time of first infringement, with both parties accepting that the patent was valid and infringed upon, having a willingness to enter a license for the patent, and having full knowledge of the relevant facts and circumstances.
The Georgia-Pacific Hypothetical Negotiation identifies 15 factors to consider (the "Georgia-Pacific Factors"), including the royalties the patent owner has received from others for licensing and the rates the infringing licensee has paid for the use of other patents comparable to the patent-in-suit.
Lost Profits
While a reasonable royalty is the floor for patent damages, a patent owner also might seek lost profits, which refers to the amount of money the patent holder lost in theoretical sales, past and future, due to the infringement. A patent owner is likely to prefer seeking lost profits, where appropriate, because they are often greater than reasonable royalties.
To be entitled to lost profits, a plaintiff "...must demonstrate that there was reasonable probability that, but for the infringement, it would have made infringer's sales." State Indus., Inc. v. Mor-Flo Indus., Inc. 883 F.2d 1573, 1577 (Fed. Cir. 1989), cert. denied, 493 U.S. 1022 (1990).
One commonly accepted framework to assist in establishing lost profit damages was first detailed in Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., which sets forth the following four factors (the "Panduit Factors") for establishing lost profit damages in a patent case:
- Demand for the patented product;
- Absence of acceptable, non-infringing, alternatives;
- The patent owner possessed the manufacturing and marketing capability to supply the patented product to those who bought the infringing product; and
- The amount of profit the patent owner would have made absent the infringement.
Under the Panduit framework, almost all pertinent issues require testimony by an expert witness. Often, the most hotly debated factor between experts is whether acceptable, non-infringing, alternatives would have been available to the defendant during the relevant period. This issue often encompasses both technical and economic reasoning and often requires a financial expert witness to work with other technical, scientific, or other qualified experts.
Key Damages Considerations
Constructive Notice
The relevant damages period commonly (or typically) ends with the patent's expiration. In addition, under 35 U.S.C. § 286, the patentee cannot recover for any infringement committed more than 6 years prior to the filing of the infringement complaint or counterclaim. This statute of limitations applies only to the recovery of damages, not the ability to bring a lawsuit. The damages period also may be limited if the patent owner or its licensees have not given "constructive notice" of the patent, which could be as simple as having marked their product as patented in some way, according to 35 U.S.C. § 287.
If the product is not marked as patented, "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." Id.
The purpose of constructive notice is "to give patentees the proper incentive to mark their products and thus place the world on notice of the existence of the patent." Laitram Corp. v. Hewlett-Packard Co., 806 F.Supp. 1294, 1296, 25 USPQ2d 1827, 1834-35 (E.D.La.1992). While marking is ordinarily a prerequisite to recover pre-suit damages, it is not required for patents that involve exclusively method claims for the obvious reason that there is nothing to mark. The damages clock may also be started by providing actual notice to the accused infringer. A patent owner typically provides actual notice by sending a cease and desist letter to the accused infringer, identifying the specific patent believed infringed and the accused product.
Apportionment
Also significant is that damages generally are limited to the value of just the patented invention and cannot include the value of other non-patented features or technology.
This issue most commonly arises in cases involving multi-component products where the patented feature is only one of many comprising the end product. In these situations, courts often limit damages to the "smallest salable patent-practicing unit" to ensure damages reflect the value attributable to the actual infringement and no more. This is not always required, and in appropriate circumstances, damages models may be based entirely on the end product. See Commonwealth Scientific and Industrial Research Organisation v. Cisco Systems, Inc., 809 F.3d 1295 (Fed. Cir. 2015) (approving the district court's use of actual prior licensing negotiations based on the entire value of the end product as the basis for calculating a reasonable royalty).
Use of "Comparative" Licenses
The use of comparative licenses can be used as one of the Hypothetical Negotiation factors or on a standalone basis. See VirnetX, 767 F.3d at 1331; ActiveVideo Networks, Inc. v. Verizon Commc'ns, Inc., 694 F.3d 1312, 1333 (Fed. Cir. 2012); Finjan, Inc. v. Secure Computing Corp., 626 F.3d 1197, 1211–12 (Fed. Cir. 2010). This approach takes into account that an established industry price for technology similar to that under consideration is a good indicator to conclude the negotiation and calculate a reasonable royalty.
There is considerable dispute as to what actually constitutes a sufficiently comparable license. And the Federal Circuit has often excluded proffered licenses as insufficiently comparable. See, e.g., LaserDynamics, 694 F.3d at 77–78; ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 870–71 (Fed. Cir. 2010); Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1327–28 (Fed. Cir. 2009).
Using Damages Experts
In a patent infringement suit, the damages expert plays a central role in quantifying financial harm. Their analysis can significantly impact case outcomes, making the selection of and collaboration with a damages expert critical. Here's a brief guide on aspects to take into account when hiring a damages expert:
Determining when to retain said expert involves balancing strategic, procedural, and financial considerations.
- Engaging an expert early in the litigation allows counsel to shape discovery strategy, preserve critical financial evidence, and align damages theories with liability arguments. Early involvement can also facilitate assessments that inform case valuation and settlement posture.
- That said, early retention may incur higher costs, particularly if the case evolves significantly or settles before expert reports are due.
- Waiting until later in the case may conserve resources, but wait too long and you may miss opportunities in discovery or in developing a cohesive narrative.
- Ultimately, the optimal timing depends on case complexity, available information, and litigation strategy.
Other key considerations are the expert's experience representing both plaintiffs and defendants. An expert with a balanced track record can lend credibility and demonstrate objectivity. Additionally, familiarity with the specific judge and jury pool can be an advantage. Ultimately, the ideal expert blends technical competence, economic rigor, likeability, and courtroom credibility tailored to the specifics of your case.
Your expert can provide valuable assistance in identifying the financial and technical discovery necessary to support a robust damages analysis. Coordination between technical experts and counsel can help ensure consistency in positions across liability and damages. Damages experts can assist counsel by drafting deposition questions/topics and identifying the financial documents to be used for witnesses.
Damages reports must be thorough, logically reasoned, and grounded in admissible evidence. Collaborate closely to ensure factual accuracy, clarity of assumptions, and legal consistency. Provide the expert with all relevant documents, deposition transcripts, and interrogatory answers on damages topics.
Identify potential vulnerabilities and ensure the expert is prepared for cross-examination on alternative damages theories, data limitations, and criticisms raised by opposing experts.
To withstand a Rule 702 or Daubert challenge, the expert's opinions must be based on reliable principles and methods, properly applied to the facts. Ensure your expert uses accepted economic models, discloses all data sources, and explains adjustments or assumptions.
A well-qualified and well-prepared damages expert can be a powerful advocate in patent litigation. Early and strategic collaboration enhances the quality and credibility of damages analysis, positioning your case for success at trial or in settlement negotiations.
Originally published in June/July issue of IP Litigator and The Licensing Journal.
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.
