It comes as a surprise to nobody that adversaries in litigation disagree over nearly everything they can come up with contrary positions for. Along with infringement and invalidity, the determination of damages is one of the most crucial determinations made in the course of a patent infringement suit. As such, when it is time for damages to be addressed, much time and effort is expended by both parties in conjuring up a monetary figure that represents the damage done to the patent holder in the case. The methods used by each party can result in drastically different figures being reached by each of the parties. The two main methods of calculating damages are lost profits and reasonable royalties.
Lost profits are a very patentee-friendly damage calculation that attempts to determine how many sales were diverted from the patentee by the infringement, and how much profit was “lost” as a result of the diversion. Practitioners use the Panduit factors to inform their calculation, which include: 1. the demand for the patented product; 2. the absence of accepted non-infringing substitutes, meaning there is nothing on the market or that could be on the market that would essentially similarly divert the sales from the patented product without infringing the patent; 3. the manufacturing and marketing capability of the patentee to exploit their patent; and 4. the amount of profit made from each diverted sale, essentially revenue minus cost.
In contrast, the reasonable royalty school of thought uses a hypothetical negotiation between the patentee and the infringer, wherein the court does its own conjuring in determining what royalty the infringer would have paid the patentee before any infringing activity. Among the presumptions made by this method are that the negotiation takes place as the infringing activity begins, that both parties are willing to come to an agreement, and that the activity will indeed infringe the patent. This method results in substantially lower damages, and hence is favored by infringers, whereas lost profits is favored by patent holders. One interesting and sensible concept should be kept in mind when using the reasonable royalty method, which is that the infringer can, and indeed likely should, make a profit. Even a court is unlikely to engage in a thought experiment where a purveyor of goods would enter into a deal where they would not profit.
Recently, Bernard Chao posted an article at patentlyo.com that discussed the Dr. Evil-like award of
damages in the Monsanto v. DuPont patent infringement case where DuPont was determined to have practiced the RoundUp Ready soy bean patent without a license. No fireworks there. However, DuPont never sold any soy beans produced by such infringing activity. Nonetheless, the jury arrived at damages of one billion dollars. As Dr. Chao’s article points out, because the relevant court documents are under seal, nobody outside that courtroom has the foggiest idea as to what damages theory led to such an award. Unsurprisingly, DuPont is appealing this decision, and time will tell what the ultimate damages will be. However, it is clear that as long as money in sums of this magnitude are at stake (or, perhaps more precisely, can be put at stake), damage theories are a critical element in end-phase patent litigation.