Presented to:

Courts’ Recent Perspectives on IP Damages Theories

Law Seminars International

Calculating & Proving Patent Damages

October 31, 2006

Philadelphia, PA

By: David A. HaasVice President

CRA International, Inc.

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Overview

Patent – Lost profits

Patent – Reasonable royalty

Foreign Sales

Price erosion

Future lost profits

Antitrust / IP Issues

Trademark – Dilution

Copyright

Trade secret misappropriation

Patent – Lost profits

Patent – Reasonable royalty

Foreign Sales

Price erosion

Future lost profits

Antitrust / IP Issues

Trademark – Dilution

Copyright

Trade secret misappropriation

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Lost profits:Demand

“… the district court stated the dispositive question as ‘whether there is economically significant demand for a product having all… attributes [of the claim in suit],’ i.e. , whether consumers demand every claimed feature. Id. The court found no such demand in this case because ‘[t]wo of the essential elements of the claim – that the starch be waxy and that the descriptive ratio [be] greater than about 2 – are irrelevant to consumers.’ ”

Grain Processing v. American Maize ProductsGrain Processing v. American Maize Products

Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341, 51 U.S.P.Q.2d 1556 (Fed.Cir. 1999)

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Lost profits:Availability of substitutes

“If a device is not available for purchase, a defendant cannot argue that the device is an acceptable noninfringing alternative for the purposes of avoiding a lost profits award. A lost profits award reflects the realities of sales actually lost, not the possibilities of a hypothetical market which the infringer might have created.”

Zygo Corp. v. Wyko Corp., 79 F.3d 1563, 38 U.S.P.Q.2d 1281 (Fed.Cir. 1996), Reh’g denied, 1996 U.S. App. LEXIS 12587 (Fed.Cir. May 15, 1996)

Zygo v. WykoZygo v. Wyko

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Lost profits:Availability of substitutes

“… an alleged substitute not ‘on the market’ or ‘for sale’during the infringement can figure prominently indetermining whether a patentee would have made additional profits ‘but for’ the infringement.”

“… 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 v. American Maize Products

Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341, 51 U.S.P.Q.2d 1556 (Fed.Cir. 1999)

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Lost profits:Availability of substitutes

“The competitor in the ‘but for’ marketplace is hardly likely to surrender its complete market share when faced with a patent, if it can compete in some other lawful manner.”

“American Maize had all of the necessary equipment, know-how, and experience to use Process IV to make Lo-Dex 10, whenever it chose to do so…”

Grain Processing v. American Maize Products

Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341, 51 U.S.P.Q.2d 1556 (Fed.Cir. 1999)

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Lost profits:Availability of substitutes

“Grain Processing did not erect a rigid test for determining availability. Rather, it provided guidelines for when an alternative not actually ‘on sale’ during the infringement period may have been readily ‘available’ and thus part of the economic calculation of lost profits.”

“…this court noted that the finding that an infringer had to design or invent around the patented technology to develop an alleged substitute weighs against a finding of availability.”

Micro Chemical, Inc. v. Lextron, Inc.

Micro Chemical, Inc. v. Lextron, Inc., 318 F.3d 1119, 65 U.S.P.Q.2d 1695 (Fed.Cir. 2003)

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Lost profits:Availability of substitutes

“The record shows that Lextron did not have the necessary equipment, know-how, and experience to make the Type 5 machine at the time of infringement.”

Design, testing time required Effects of changes not known or available Materials not readily available

“To the contrary, the record shows that Lextron designed around the patented technology after Micro established infringement.”

Micro Chemical, Inc. v. Lextron, Inc.

Micro Chemical, Inc. v. Lextron, Inc., 318 F.3d 1119, 65 U.S.P.Q.2d 1695 (Fed.Cir. 2003)

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Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 35 U.S.P.Q.2d 1065 (Fed.Cir. 1995)

Lost profits:Products not embodying the patent

Rite-Hite v. Kelley Co.

“Rite-Hite was entitled to lost profits for lost sales of its devices that were in direct competition with the infringing devices, but which themselves were not covered by the patent in suit.”

“… 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.”

King Instruments v. Perego & Tapematic

“To adequately compensate for infringement of the right to exclude, as Section 284 requires, ‘damages’ includes lost profits on competing products not covered by the infringed claims.”

King Instruments Corp. v. Perego, 65 F.3d 941, 36 U.S.P.Q.2d 1129 (Fed.Cir. 1995)

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Lost profits:Convoyed sales

“The facts of past cases clearly imply a limitation on damages, when recovery is sought on sales of unpatented components sold with patented components, to the effect that the unpatented components must function together with the patented component in some manner so as to produce a desired end product or result … Our precedent has not extended liability to include items that have essentially no functional relationship to the patented invention and that may have been sold with an infringing device only as a matter of convenience or business advantage.”

Rite-Hite v. Kelley Co.

Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 35 U.S.P.Q.2d 1065 (Fed.Cir. 1995)

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Lost profits:Market definition

“The proper starting point to identify the relevant market is the patented invention. The relevant market also includes other devices or substitutes similar in physical and functional characteristics to the patented invention. It excludes, however, alternatives ‘with disparately different prices or significantly different characteristics.’ Once the market is defined, it generally becomes an easier task to determine how many suppliers operate in the defined relevant market. That inquiry focuses on the number of companies involved, not the number of alternatives in the relevant market.”

“If the patentee shows two suppliers in the relevant market, capability to make the diverted sales, and its profit margin, that showing erects a presumption of ‘but for’ causation. Although the burden of persuasion remains with the patentee, the burden of going forward then shifts to the infringer.”

Micro Chemical, Inc. v. Lextron, Inc.

Micro Chemical, Inc. v. Lextron, Inc., 318 F.3d 1119, 65 U.S.P.Q.2d 1695 (Fed.Cir. 2003)

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Lost profits:Profits of non-party sister corporation

“Poly-America and Poly-Flex may not enjoy the advantages of their separate corporate structure and, at the same time, avoid the consequential limitations of that structure – in this case, the inability of the patent holder to claim lost profits of its non-exclusive licensee. While Poly-America may have the right to sue under its patents, both as an owner and a back-licensee, it can recover only its own lost profits, not Poly-Flex’s.”

“Although parties to a lawsuit may allocate the disposition of infringement damages between themselves, as they appear to have done here, they cannot create lost profits for a patentee if there are none, Awarding lost profits to Poly-America on the basis of its private arrangement with Poly-Flex would synthetically create lost profits for Poly-America, when it may not have suffered any, to the detriment of GSE.”

Poly-America, L.P. v. GSE Lining Technology, Inc., 383 F.3d 1303, 72 U.S.P.Q.2d 1685 (Fed. Cir. 2004)

Poly-America L.P. v. GSE Lining Technology, Inc.Poly-America L.P. v. GSE Lining Technology, Inc.

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Reasonable royalty:Parties to the hypothetical negotiation

“To the extent that the jury instruction referred to Mr. Edgerton exclusively, it did not refer to the literal Mr. Edgerton as he existed in 1994. Rather, it referred to a mythical Mr. Edgerton for whom the future was as clear as the fish in a pellucid stream. That the actual Mr. Edgerton had not even heard of Smith in 1994 is irrelevant.”

Smith Engineering Company, Inc. v. Eisenmann Corp.

Smith Engineering Company, Inc. v. Eisenmann Corp., 28 Fed. Appx. 958, 2000 U.S. Dist. LEXIS 21803 (C.D. Cal Oct. 25, 2000)

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Reasonable royalty:Use of projected vs. actual data

“In this case, the 1996 business plan and its projections for future sales were prepared by Infinite two months before infringement began. Thus, rather than being outdated for purposes of the hypothetical negotiation, those projections would have been available to Infinite at the time of the hypothetical negotiation. The fact that Infinite did not subsequently meet those projections is irrelevant to Infinite’s state of mind at the time of the hypothetical negotiation. Nor does Infinite’s subsequent failure to meet its projections imply that they were grossly excessive or based only on speculation and guesswork. Instead, Infinite’s subsequent failure to meet its projections may simply illustrate the ‘element of approximation and uncertainty’ inherent in future projections.”

“Lindemann does not require that estimates of sales revenues, as referenced in a hypothetical negotiation at the time infringement began, must later bear a close relation to actual sales revenue. Such a proposition would essentially eviscerate the rule that recognizes sales expectations at the time when infringement begins as a basis for a royalty base as opposed to an after-the-fact counting of actual sales.”

Interactive Pictures Corp. v. Infinite Pictures, Inc.

Interactive Pictures Corporation v. Infinite Pictures, Inc., 274 F.3d 1371, 2001 U.S. App. LEXIS 36936; 61 U.S.P.Q.2d (BNA) 1152

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Reasonable royalty:Date of hypothetical negotiation

“[R]easonable royalty damages are not calculated in a vacuum without consideration of the infringement being redressed… We are required to identify the infringement requiring compensation, and evaluate damages based on a hypothetical negotiation at the time infringement began, not an earlier one.”

“[T]he evidence supporting damages in [the second case] was entirely different from the evidence offered in [the first case]… the [second case] jury heard evidence regarding the market conditions in 1997 for Versaport II, the license agreements entered into by Applied in 1998 and 1999, and the ability of Versaport II to compete with Applied’s products in 1997, none of which was available to the [first case] jury.”

Applied Medical Resources Corporation v. United States Surgical Corporation 435 F.3d 1356, 77 U.S.P.Q.2d 1666 (Fed. Cir. 2006)

Applied Medical Resources Corporation v. United States Surgical CorporationApplied Medical Resources Corporation v. United States Surgical Corporation

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Reasonable royalty:Comparable transactions

“The record is not clear on the hypothetical negotiation date.”

The Federal Circuit found that Integra’s expert relied on Merck’s 1995 expectations and that “if the hypothetical negotiation occurred in 1994, Merck did not have that expectation…an earlier date will change the risks and expectations of the parties.”

“The value of a hypothetical license negotiated in 1994 could be drastically different from one undertaken in 1995 due to the more recent state of the…research in 1994.”

“…comparisons to other licenses are inherently suspect because economic and scientific risks vary greatly…”

The Federal Circuit found that “a $15 million award figure to compensate for infringement of only some of Telios’ patents before Integra’s acquisition seems unbalanced in view of the overall acquisition price.” [$20 million for all of Telios’ products, patents, and know-how]

Integra Lifesciences v. Merck

Integra Lifesciences I, Ltd. et al. v. Merck KGaA et al., 331 F.3d 860, 66 U.S.P.Q.2d 1865 (Fed. Cir. 2003),

Reh’g and Reh’g en Banc denied (Dec 03, 2003)

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Reasonable royalty:Royalty stacking

“…the number of patent licenses needed to develop a drug may also affect the value placed on any single technology used in the development process. The cumulative effect of such stacking royalties can be substantial, particularly when reach through royalties come into play.”

“While this court does not opine on the applicability of a reach-through royalty in this case, the presence or absence of stacking royalties for research tools may color the character of a hypothetical negotiation between Merck and Integra for access to the RGD…technology.”

“…both the point in time at which Merck utilized RGD peptides in its drug development process and the effect, if any, of stacking royalties may…play a role in crafting the hypothetical license between Integra and Merck.”

Integra Lifesciences v. Merck

Integra Lifesciences I, Ltd. et al. v. Merck KGaA et al., 331 F.3d 860, 66 U.S.P.Q.2d 1865 (Fed. Cir. 2003),

Reh’g and Reh’g en Banc denied (Dec 03, 2003)

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Reasonable royalty and infringer’s profits:Design and utility patents

Court concluded that a patentee may not recover both an infringer’s profits and a reasonable royalty on the same sales of products which infringe both a utility and a design patent.

Catalina Lighting, Inc. v. Lamps Plus, Inc.

“Lamps Plus is entitled to damages for each infringement, but once it receives profits under §289 for each sale, Lamps Plus is not entitled to a further recovery from the same sale because the award of infringer profits under §289 also constitutes ‘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’.”

Catalina Lighting Inc. v. Lamps Plus Inc., 295 F.3d 1277, 63 U.S.P.Q.2d 1545 (Fed.Cir. 2002)

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“Exact duplicates of the software code on the golden master disk are incorporated as an operating element of the ultimate device. This part of the software code is much more than a prototype, mold, or detailed set of instructions. This operating element in effect drives the ‘functional nucleus of the finished computer product.’ ”

“Thus, the software code on the golden master disk is not only a component, it is probably the key part of this patented invention. Therefore, the language of section 271(f) in the context of Title 35 shows that this part of the claimed computer product is a ‘component of a patented invention.’ ”

Patent damages:Damages on foreign sales

Eolas Technologies Incorporated v. Microsoft Corporation, 04-1234

Federal Circuit affirmed district court opinion that copies from a “golden master” disk constituted “components” under 35 U.S.C. § 271(f)(1) and therefore infringed.

Eolas v. Microsoft

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Price erosion:Inadequate benchmark market

Court concluded that Crystal’s argument that neither Tritech nor OPTi was able to identify a better benchmark for comparison as insufficient evidence to show likely reaction of the infringed market “but for” infringement.

Crystal Semiconductor v. TriTech & OPTi

“[C]ourt reaffirms the trial court’s judgment that [Crystal’s] methodology used an inappropriate benchmark, resulting in an inadequate foundation for Crystal’s entire price erosion theory.”

Market structure and competition in the benchmark market differed significantly from the infringed market.

Crystal Semiconductor Corp. v. TriTech Microelectronics Intern., Inc., 246 F.3d 1336, 57 U.S.P.Q.2d 1953 (Fed.Cir. 2001)

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Shockley v. Arcan, Inc., 248 F.3d 1349, 58 U.S.P.Q.2d 1692 (Fed.Cir. 2001)

Future lost profits:Inadequate grounding

Shockley & Excalibur v. Arcan, Telesis, & Sunex

“Because the jury’s…future lost profit award was based on evidence derived from speculative assumptions, it runs counter to the great weight of record evidence and cannot stand.”

The jury award of future lost profits assumes continued demand and growth rates, profit margins, and other market factors against the clear weight of the evidence.

Lam, Inc. v. Johns-Manville Corp.

“an award based on projected lost sales is neither remote nor speculative when there is evidence of actual pre-infringement and post-infringement growth rates.”

Lam, Inc. v. Johns-Manville Corp., 718 F.2d 1056, 219 U.S.P.Q. 670 (Fed.Cir. 1983)

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Antitrust:Evidence of market power

“Instead of facts, [Mallinckrodt’s expert] stacks assumption upon assumption to come to his conclusion. The first assumption is that there was a perception by customers of the risks related to Mallinckrodt’s patent infringement liability. There is no evidence, however, that any actual customer had that perception during the critical time period…The second assumption is that Mallinckrodt’s ability to compete was hampered by this perception. There is no evidence of record of any actual lost sales or other specific obstacles to Mallinckrodt’s ability to compete related to Augustine Medical’s alleged anticompetitive activities. Mallinckrodt continued to compete in the market…Finally, there is no evidence that Augustine had the ability to exert market power (generally described in terms of market price)…Indeed, the objective market data of record indicates otherwise: (1) the average price in the…market steadily declined over the period…; (2) the market steadily grew during this same period; (3) …Mallinckrodt’s average selling price was higher than that of Augustine Medical; (4) although Mallinckrodt’s market share dropped in 1997, it has remained at the same level since that time while other competitors’ shares have increased…Although Mallinckrodt points out that there are a limited number of competitors in this market, [its expert] made no effort to segregate the effects of legitimate activities (e.g., the need for FDA approval) from whatever effects there might be in the market from the alleged anticompetitive activities.”

Augustine Medical v. Mallinckrodt

Augustine Medical, Inc. v. Mallinckrodt, Inc. et al., 2003 WL 1873836, 2003 U.S. Dist. LEXIS 6079 (D. Del Apr 9 2003)

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Antitrust:Technological vs. economic substitutability

“He also, however, concluded that pre-cooked turkeys prepared using the patented process competed with pre-cooked turkeys not prepared by the patented process at the retail level, but somehow not at the wholesale level. He never explained this seeming anomaly. [He] did not explain the relationship between technological substitution and economic substitution. Nothing in the record addresses whether potential customers of the patented process faced with a price increase would shift to other processes offering different combinations of benefits. This determination, however, lies at the heart of market definition in antitrust analysis.”

“[His] testimony specifically described the market in terms of technological substitutability, not economic substitutability. The scant economic evidence in the record suggests strongly that his market definition is incorrect. ConAgra’s inability to attract any licensees is indicative of a lack of pricing power – the single most important element in defining a relevant antitrust market.”

Unitherm Food Systems, Inc. v. Swift-Eckrich Inc.

Unitherm Food Systems, Inc. v. Swift-Eckrich, Inc. 375 F.3d 1341; 2004 U.S. App. LEXIS 14274; 71 U.S.P.Q.2D (BNA) 1705

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Trademark:Dilution

U.S. Supreme Court found that in order to prevail on a claim under the Federal Trademark Dilution Act (FTDA), a trademark owner must prove actual dilution of its trademark, not merely likelihood of dilution.

Court found “a complete absence of evidence” of dilution of the Victoria’s Secret trademark.

Court stated that proof that consumers associate two marks is, in most cases, not enough for establishing dilution: “At least where marks at issue are not identical, the mere fact that consumers mentally associate the junior user’s mark with a famous mark is not sufficient to establish actionable dilution…such mental association will not necessarily reduce the capacity of the famous mark to identify the goods of its owner, the statutory requirement for dilution under the FTDA.”

Moseley v. V Secret

Victor Moseley, et al. v. V Secret Catalogue, Inc., et al., 537 U.S. 418, 123 S. Ct. 1115, 155 L.Ed.2d 1, (2003)

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Copyright:Royalty as actual damages

On Davis v. The Gap

On Davis v. The Gap, Inc., 246 F.3d 152, 58 U.S.P.Q.2d 1481 (2nd Cir. N.Y. 2001)

“If a copier of protected work, instead of obtaining permission and paying a fee, proceeds without permission and without compensating the owner, it seems entirely reasonable to conclude that the owner has suffered damages to the extent of the infringer’s taking without paying what the owner was legally entitled to exact a fee for. We can see no reason why, as an abstract matter, the statutory term ‘actual damages’ should not cover the owner’s failure to obtain the market value of the fee the owner was entitled to charge for such use.”

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Copyright:Apportionment of profits

Copyright infringement damages include “any profits of the infringer that are attributable to the infringement.” Copyright owner needs only to present evidence of infringer’s gross revenues. Defendant must show how much of its revenues are profits and what “elements of profit [are] attributable to factors other than the copyrighted work.” 1

There must be a rational apportionment of profits.

The jury “apportioned, at most, a negligible amount of the profits and awarded all or almost all of WCP’s profits to Danielson.”

At trial, WCP had presented evidence concerning many contributing factors besides the infringed site plans.

Danielson v. Winchester-Conant Properties

John G. Danielson, Inc. v. Winchester-Conant Properties, Inc., 322 F.3d 26, 66 U.S.P.Q.2d 1065 (1st Cir. Mass.

2003)1 17 U.S.C. §504(b)

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Copyright:Causal link for indirect damages

“[A] copyright owner is required to do more initially than toss up an undifferentiated gross revenue number; the revenue stream must bear a legally significant relationship to the infringement,” so that “a plaintiff seeking to recover indirect profits must ‘formulate the initial evidence of gross revenue duly apportioned to relate to the infringement.’ ”

Polar Bear Productions, Inc. v. Timex Corporation

Polar Bear Productions, Inc. V. Timex Corporation, 384 F.3d 700, 72 U.S.P.Q.2d 1289, (9th Cir. Wash. 2004)

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Copyright:Allowed relicensing

New York Times Co., Inc. v. Tasini, 533 v.s 483, 121 S.Ct. 2381, 150 L.Ed.2d 500, (2001)

“On writ of certiorari, the Supreme Court, Judge Ginsburg, held that electronic and CD-Rom databases containing individual articles from multiple editions of periodicals were not reproduced and distributed ‘as part of’ ‘revisions’ of individual periodical issues from which articles were taken, and therefore publishers of periodicals could not relicense individual articles to databases under Copyright Act section governing collective works, absent transfer of copyright or any rights thereunder from authors of individual articles.”

“… they, and if necessary the courts and Congress, may draw on numerous models for distributing copyrighted works and remunerating authors for their distribution.”

NY Times v. Tasini

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Trade secret misappropriation:Reasonable royalty

In cases where plaintiff’s losses and defendant’s unjust enrichment provide inadequate compensation to the plaintiff, courts have developed a reasonable royalty remedy, which “attempts to measure a hypothetically agreed value of what the defendant wrongly obtained from the plaintiff.” The court noted that a reasonable royalty is ideal when the commercial context in which the misappropriation occurred requires consideration of multiple factors in order to compensate the plaintiff adequately.

Factors to consider when determining a reasonable royalty: “(1) [T]he resulting and foreseeable changes in the parties’ competitive posture; (2) the prices past purchasers or licensees may have paid; (3) the total value of the secret to the plaintiff, including plaintiff’s development costs and the importance of the secret to the plaintiff’s business; (4) the nature and extent of the use the defendant intended for the secret; (5) whatever other unique factors in the particular case might have affected the parties’ agreement, such as the ready availability of alternative processes.”

“…sales projections are only relevant in a reasonable royalty calculation when they are available before the time of the misappropriation and would have been considered by the parties.”

LinkCo v. Fujitsu

LinkCo, Inc. v. Fujitsu Ltd., 232 F.Supp. 2d 182, 2002 U.S. Dist. LEXIS 22200 (SD NY 2002)

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David A. Haas

CRA International

101 N. Wacker Dr.

Suite 1600

Chicago, IL 60606

(312) 377 - 2280

dhaas@crai.com