“Not everything that counts can be counted and not everything that can be counted, counts.” - Albert Einstein (on a blackboard)
A patent grants the owner the exclusive right to prevent others from using, manufacturing, offering, or selling the claimed innovation. If the innovation is monetized by others without obtaining a license from the patent owner, the patentee can choose to sue for damages in a federal court for further redress. If successful, the law under 35 U.S.C. § 284 governs the awards against the damages in patent litigation. Under section 284, “Upon finding for the claimant [patent holder] 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, together with interest and costs as fixed by the court.” The statute itself however provides no teachings about “adequate damages” and how they are to be calculated. Since there is no attached price tag with various forms of intellectual property, the valuation of these assets becomes subsequently difficult. Because each piece of this intellectual property differs from one another, the value estimation is highly circumstantial and factually specific. Still, two theories for damages have derived from Section 284 viz. lost profits and reasonable damages. “Lost profits” cover the amount of money that the patent owner lost because of the infringement. While the “reasonable royalty” covers the minimum monetary amount that the patentee could have recovered which is equal to the amount the patent owner could have negotiated as royalty in the first place as a license before the litigation.
Reliability and rigor have vital importance in patent litigation to justify the potential business destroying damage awards. Thus it requires a deep analysis of the situations and market governing the product and the infringing claims. The following section summarizes conventional approaches of patent damages calculations that have been employed in the past and have become the de facto standards for judicating damages during patent trials. Method 1: Lost Profits As a general initiation point, one looks at the sales that the infringer made the infringing activity. More specifically, the profits are determined which would have been the patentee’s profits. However, the patent owner has to prove that the claim infringement by the infringer caused lost profits. The lost profits analysis method to calculate damages in patent litigation also poses evidence-based problems for the patentee. Under this method, the patentee has to provide: • The demand for the patented product. • An absence of any acceptable non-infringing substitutes. • The marketing and manufacturing potential to profit from the demand for the product. • The amount of profit the plaintiff would have made. Where the plaintiff is the non-practicing entity and the lost profits method is by definition is not applicable, because the plaintiff did not engage in its own production and thus cannot lose manufacturing profits. Since the reasonable royalty is the minimum patent damages amount that a patentee could recover, the lost profits approach further increase the award for the damages in the patent litigation. The awards for lost profits resulting from patent infringements depends on various grounds including but not limited to diverted sales, eroded price, increased expenses and future profits loss. Both the patent owner and the alleged infringer needs to know what exactly is beneath the “lost profits” umbrella so that both can assess the exposure and plan the responses for the trial. The section ahead contains details on which one can calculate the profits for damages in the patent litigation. Lost Sales: The classical and the most common type of lost profits are those because of the lost sales. The lost sales constitute the sales that the patentee couldn’t make because of the infringement and those sales which the infringer made because of infringement. The assessment in the determination of these lost sales is what the consumers of the infringer’s product would have done if the product never existed. Price Erosion: The plaintiff can claim the award for these damages when he or she can safely establish that its sales were low in the infringing period because of the infringing product present in the market. Further to add, these damages arise when the owner of the patent had to lower the prices of its own products or failing to realize great profits because of the infringing competitor’s products. Future Loss: The award claims for these damages in litigation are highly speculative. The awards for future-loss directly compensate the patentee for future loss sale, future price erosions, and future increases expenses. Under this theory, the patentee establishes that it will lose several future sales because of previous infringements. To prove these facts, the patentee will look into its history of sales which shows a diversion because of infringing activity. Further, the patentee can project the same diversion as a valid explanation Miscellaneous Losses: The patent owner can show that the infringing activity was a cause of severe business loss including but limited to a downfall in stock prices, damage to the reputation of product and company, or an increase in the valuation of infringer’s products. Yet, a patentee can recover monetary benefits only with the support of adequate proofs. Several markets and economical facts like inflation and taxation contribute to the difficulty to prove the claims. If the patent owner cannot establish such similar evidence, he or she is still in a race to achieve reasonable royalty damages. A patent owner may recover a mixed award where lost profits contribute to measures of infringing sales while reasonable royalty makes up a statute for remaining sale. Method 2: Reasonable Royalties To minimize the likelihood of the infringer going un-penalized, the law provides compensation for the patent owner of no less than a reasonable royalty. A reasonable royalty is a negotiable scenario between the patent owner and the infringer. The approach tries to take into account the positions of both sides before the initiation of the litigation. Reasonable royalty damages have been on a higher scale than a royalty on which the parties could have negotiated before.
The influential case of Georgia-Pacific Corp. vs. United States Plywood Corp., 318 F. Supp. 1116, 1121 (S.D.N.Y. 1970), mod. and aff’d, 446 F.2d 295 (2d Cir.), cert. denied, 404 U.S. 870 (1971), reported the most commonly used method for determining reasonable royalty damages. The method is to conduct a hypothetical license agreement between a “willing licensor” and “willing licensee.” Under this method, both the patentee and the infringer agrees that the patent is valid and infringed.
The fifteen Georgia-Pacific Hypothetical Negotiation factors are as follows.
The royalties received by the patent owner for the licensing of the patent-in-suit, proving or tending to prove an established royalty;
The rates paid by the licensee for the use of other patents comparable to the patent-in-suit;
The nature and scope of the license, as exclusive or non-exclusive, or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold;
The licensor’s established policy and marketing program to maintain its patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly;
The commercial relationship between the licensor and the licensee, such as whether they are competitors in the same territory in the same line of business, or whether they are inventor and promoter;
The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of its non-patented items; and the extent of such derivative or convoyed sales;
The duration of the patent and the term of the license;
The established profitability of the product made under the patent; its commercial success; and its current popularity;
The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results;
The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention;
The extent to which the infringer has made use of the invention, and any evidence probative of the value of that use;
The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions;
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;
The opinion testimony of qualified experts; and
The amount that a licensor (such as the patent owner) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount that a prudent license–who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention would have been willing to pay as a royalty and yet be able to make a reasonable profit, and which amount would have been acceptable by a prudent patent owner who was willing to grant a license.
Current Emphasis within Reasonable Royalty Framework The Georgia-Pacific factors highlight important economic areas for inquiry and the evidence that should be considered into account for the analysis of the reasonable royalty to compensate for the infringement. However, there is a need to address the relative issue of bargaining power between the patent owner (willing licensor) and the infringer (willing licensee). Several methods and rules to calculate the likelihood of mutually acceptable royalty rates by both parties are employed.
Considerations such as the risk borne by the licensee in the development of a stable product and the value of resources that the licensee brings to the process can aid to narrow down the approach in deciding a mutual royalty rate. Some additional theories incorporated with the Georgia-Pacific Hypothetical Negotiation method are: Analytical Approach: The method involves calculating the damages because of the infringer’s projections of the internal profits from the infringed products. From this projected profit, a proportionate percentage of sales determines the rate for a reasonable royalty between both parties. This proportionate rate after all standard deductions when multiplied with the actual infringing sales in dollars gives reasonable royalty damages. Comparable Licenses: These provide a rigid analysis for calculating the reasonable royalty for the use of an invention. The approach takes into account that an established industry price for the technology similar to the technology under consideration is a good indicator to conclude the negotiation and calculate the damages in litigation. Entire Market Value Rule: In particular cases when no comparable licenses are available and it might be clear to establish that the sales by the infringer party on the infringed product are primarily attributed to the company brand name or marketing strategies. The damage calculations for a reasonable royalty turn out to be significantly higher because of high volumes on sales. In such cases, a proportionate analysis to reach a fair royalty rate involves consideration of various market factors like product timing, business risks, significant features added by infringer and other product management strategies. The reasonable royalty interpretation is more of a last resort in calculating the damages. However, it has the inherent problem that; it creates a loop between the damage awards and negotiated license agreements. The higher the awards for damages rise, more the patent owners will ask as a licensing fee, which will reflect in an increased amount of damage awards further. This entire loop will lead to overcompensation to the patentee. On a similar note, a reverse loop will lead to under-compensation for the patent owners. Willful Infringement Direct infringement of a patent requires no negligence because it is a strict liability offense. Therefore, the infringer’s knowledge of the patent and the intent are not of much significance. However, these are primarily relevant to willful infringement. The Federal Circuit may award a patent holder with increased damages for willful infringements if an infringer’s actions establish at least “objective recklessness”. In 2007, the Federal Circuits decision in Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007) lawsuit set the standards for enhanced damages based on willful patent infringement using a two-part test. The test comprises an objective prong and a subject prong which the plaintiff proves with clear, established and convincing evidence. The two-prong test for willful infringement:
Objective Prong: The plaintiff must prove that the infringer acted despite an objectively high likelihood that its acts made up the infringement of a valid patent.
Subjective Prong: The plaintiff must prove that the infringer either knew about the risk of infringement or the risk was so obvious that the infringer should have known.
In 2016, the Federal Circuit made significant changes and removed the objective prong during Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct, 1923, 1926 (2016). The court reasoned that the test was unduly rigid and might insulate patent infringers from the liability for enhanced damages under willful infringement. According to the court, the “objective” prong of the Seagate test was shielding patent infringers from enhanced punishment. While the Seagate’s test experienced criticism on grounds of setting the most malicious patent infringers free because of difficulty in proving in the test, the Halo’s decision made substantial impacts and further reducing the bar to prove the willful infringement.
The litigation trends on willful infringements after Halo have taken significant leaps. An accused infringer cannot completely rely on the existence of objectively reasonable defences to defend the plaintiff’s willful infringement claims. If the plaintiff is able to establish that the accused infringer had knowledge about the patented invention at the time of the challenged conduct, the court can still consider it as the willful infringement. Further, the final decision of willfulness lies in the jury’s hand which has very less knowledge and experiences with patent litigations, this, in turn, becomes more problematic on the defendant’s side.
Conclusion
The calculation for patent damages in litigation requires a body of knowledge well beyond simple method and mathematics. Though a comprehensive evaluation of the market value, economics, finance, valuations, statistics, accounting, and technical features is at least in theory conducted by both the patentee and the infringer, the eventual damages awarded in a case remains uncertain and highly dependent on the pedigree, thoroughness and articulation of the parties’ damages experts and attorneys.
References
[1] 35 U.S. Code § Section 284, Legal Information Institute: https://www.law.cornell.edu/uscode/text/35/284
[2] Intellectual Property: Economic and Legal Dimensions of Rights and Remedies by Roger D. Blair, Thomas F. Cotter: https://books.google.co.in/books?id=PqZV8V5fktAC
[3] Copyright Infringement: How Are Damages Determined: https://www.nolo.com/legal-encyclopedia/copyright-infringement-how-damages-determined.html
[4] The Unpredictability of Patent Litigation Damage Awards: Causes and Comparative Notes: https://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?&httpsredir=1&article=1048&context=ipbrief
[5] Georgia-Pacific Factors: http://www.ipglossary.com/glossary/georgia-pacific-factors/#.XHyvnogzYdW
[6] Selection of a Reasonable Royalty Rate to Measure Economic Damages for Trademark and Patent Infringement: http://www.willamette.com/insights_journal/16/spring_2016_3.pdf
[7] The Use and Misuse of Patent Licenses: https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=2421&context=law_and_economics
[8] Litigating Willful Patent Infringement in a Post-Halo World: https://www.ipwatchdog.com/2016/12/08/litigating-willful-patent-infringement-post-halo/id=75456/
[9] Jury Verdict Alone Enough For Willfulness Post-Halo: https://www.law360.com/articles/816514/jury-verdict-alone-enough-for-willfulness-post-halo-judge
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