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Tips of the Trade: Damages in Intellectual Property Litigation
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Tips of the Trade: Damages in Intellectual Property Litigation


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  • 1. Tips of the Trade: Damages inIntellectual Property Litigation John N. Zarian Idaho State Bar, Litigation Section Nov. 15, 2012 1
  • 2. “Call the patent office. Copyright thename ‘Green Goblin.’ I want a quarter every time somebody says it.” – J. Jonah Jameson 2
  • 3. IPatent Damages 3
  • 4. What is a Patent?  A patent consists of a set of exclusive rights granted to an inventor for a limited period of time, in exchange for public disclosure of the invention.  Gives the owner the U.S. Patent No. 6,469 right to exclude others from making, using, selling, offering for sale or importing the patented invention. 4
  • 5. The Starting Point for Patent Damages is 35 U.S.C. § 284 (August 1, 1946) “Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty, for use made of the invention by the infringer.” 5
  • 6. Aro Manufacturing Co. v. Convertible TopReplacement Co., 377 U.S. 476 (1964) • Supreme Court interpreted “Compensate” to mean “Lost Profits,” holding: Compensation is “the difference between [the patent owner’s] pecuniary condition after the infringement, and what his condition would have been if the infringement had not occurred.” Id. at 507. 6
  • 7. Lost Profits & Panduit Corp. v. StahlinBros. Fibre Works, 375 F. 2d 1152 (6th Cir. 1978) Instructions for calculating lost profits are set forth in Panduit: 1. Demand for patented product 2. Ability of patent owner to make the sales of the infringer 3. Absence of non-infringing substitutes 4. A proof of amount of profit lost per lost sale Factors 1, 4 are relatively easy to meet Factors 2, 3 require analysis 7
  • 8. #2 - Capacity to Make Infringer’s Sales • Is there manufacturing capacity? • Is there distribution capacity? • Are infringer’s sales made to long-time customers? • Does patent owner have the required marketing skills, full line of products, available services and other attributes required to be successful in the market? • Does patent owner have the necessary capital to develop and exploit the invention? 8
  • 9. #3 - No Non-Infringing Substitutes Today, this means an analysis of market share (State Industries, 883 F.2d 1573 (Fed. Cir. 1993)) or “cross elasticity of demand” (BIC Leisure, 1 F.3d 1214 (Fed. Cir. 1993)).  Market Share works where the products are “homogenous”  Cross elasticity of demand test is more economically correct for “heterogeneous” products 9
  • 10. #4 - Lost Profit Calculation Lost Sales (7.5% of sales) x Patent Owners Contribution Margin = Lost Profits• Contribution Margin only subtracts “avoided costs” typically, but not always, “variable costs”• Costs can rise when firms make additional sales 10
  • 11. Lost Profit Calculation (cont.)• Price Erosion – reduction in price recognized as part of damages now.  If you assume price would be higher, then sales must be lower. Yale Lock, 117 U.S. 536 (1886) got this wrong.  In actuality, Elasticity of Demand operates as a check on the erosion of price 11
  • 12. “Reasonable Royalty” Established Royalty: (Railroad Dynamics, 727 F.2d 1506 (Fed. Cir. 1984))• Evidence of prior royalties before alleged infringement• Substantial number of industry participants• Same or like technology• Not secured under threat of litigation The economic view is that all negotiations under some threat of litigation or why negotiate? 12
  • 13. Mahurkar, 79 F.3d 1572 (Fed. Cir. 1996) -Willing Licensor / Willing Licensee Test: Definition: What royalty would have resulted from a voluntary negotiation between the patent owner and the infringer prior to the onset of infringement. •Because this isn’t so simple. . .Georgia Pacific gives FOURTEEN factors, admittedly not a formula. 13
  • 14. Georgia Pacific in a Nutshell • Other, comparable licenses? • Costs to Licensor of granting a license? • Benefits to Licensee of gaining a license/profitability of product? • Relative Bargaining power between Licensor and Licensee? Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp 1116, 6 USPQ 235 (SD NY 1970) 14
  • 15. Recent Developments Concerningthe Entire Market Value Rule1. Lucent Tech. v. Gateway, 580 F. 3d 1301 (Fed. Cir. 2009) : (one feature not basis of demand for Outlook and Windows Mobile sales) a. The royalty base can be based on the value of an entire product only when the patented feature supplies the basis for consumer demand b. The expert must determine what the parties would have agreed to at the time of infringement 15
  • 16. Recent Developments Concerningthe Entire Market Value Rule (cont.) 2. Uniloc U.S.A., Inc. v. Microsoft Corp., 632 F. 3d 1292 (Fed. Cir. 2011) : (Date checker not basis of demand for Outlook) a. Reaffirmed that the royalty base cannot consist of the entire accused product if the patented feature is not the basis of demand b. Also abrogated the 25% rule of thumb 16
  • 17. Recent Developments Concerningthe Entire Market Value Rule (cont.) 3. Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279 (N.D. NY, 2009) (Judge Rader) (parts of the processor not basis of demand for servers) a. The infringing component must be the basis of demand for the entire machine including parts b. Non-infringing system components must be sold as part of a complete machine (not enough that they are just sold together) c. The court suggests that the expert determine the smallest sellable unit and work upward checking that demand is based on the infringing component 17
  • 18. Recent Developments Concerningthe Entire Market Value Rule (cont.) 4. IP Innovation v. Red Hat, 705 F. Supp. 2d 687 (E.D. Tex. 2010) (Excluding expert from a royalty base consisting of all Red Hat sales for infringement of patent involving workspaces switching) 5. Dataquill v. High Tech Comp. Corp., (S.D. CA, 2011) (Not enough that the patented feature is necessary to the system, wheels are necessary for a car but not the basis of demand) 18
  • 19. Recent Developments Concerningthe Entire Market Value Rule (cont.) 6. Some lower courts allow into evidence product sales because it remains a Georgia Pacific Factor: a. OPT Inc. v. Apple, Inc., 2009 WL 4727912 (E.D. Tex. 2009) b. Rembrandt Date Technologies v. AOL, 2009 WL 2242624 (E.D. VA, 2009) c. But see, Inc. v. Lansa, Inc., 2012 WL 396157 (Fed. Cir. 2012) (excluding product sale evidence) 19
  • 20. Other Patent Damages / Remedies • Injunction • Treble Damages (if willfulness is established) & Attorneys’ Fees • Interest + Costs 20
  • 21. IICopyright Damages 21
  • 22. What is a Copyright?  Protects the rights of the creator of an original work that has been fixed in a tangible medium of expression  Gives the owner certain exclusive rights (i.e., to reproduce, prepare derivative works, distribute copies, perform/ display) 22
  • 23. Copyright Statute “In General – Except as otherwise provided by this title, an infringer of copyright is liable for either 1. the copyright owner’s actual damages and any additional profits of the infringer, as provided by subsection (b); or 2. statutory damages, as provided by subsection (c)” ($200 to $150,000 per work) 17 U.S.C § 504 23
  • 24. Copyright Statute (cont.) “The copyright owner is entitled to recover the actual damages suffered by him or her as a result of the infringement, and any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages. In establishing the infringers profits, the copyright owner is required to present proof only of the infringers gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work.” (also consider apportionment)15 U.S.C § 35a 24
  • 25. Comparison With Patent DamagesPatent Copyright• lost profits • lost profits• no infringer profits • infringer’s profits• reasonable royalty  (but no double counting)• 3x for willfulness • no reasonable royalty• attorney fees  But see Deltak (lost licensing fees as the value of use – available when actual• injunction damages or lost profits not provable?) • BUT, statutory damages (if registered) • willfulness inquiry only for statutory • attorney fees (if registered) • injunction 25
  • 26. IIITrademark Damages 26
  • 27. What is a Trademark? Any word, name, symbol, or device, or any combination thereof, used by a person to identify and distinguish his or her goods or services from those of others. 27
  • 28. Trademark Statute “When a violation of any right of the registrant of a mark registered in the Patent and Trademark Office, a violation under section 43(a), (c), or (d) or a willful violation under section 43(c), shall have been established in any civil action arising under this Act, the plaintiff shall be entitled, subject to the provisions of sections 29 and 32 and subject to the principles of equity, to recover (1) defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.” 28
  • 29. Trademark Statute (cont.) “In assessing profits the plaintiff shall be required to prove defendant’s sale only; defendant must prove all elements of cost or deduction claimed.” “In assessing damages the court may enter judgment, according to the circumstances of the case, for any sum above the amount found as actual damages, not exceeding three times such amount.” 15 U.S.C § 35a 29
  • 30. Differences With Patent DamagesPatent Trademark• lost profits • lost profits• no infringer profits • defendant’s profits• reasonable royalty  revenue / profit / apportionment• 3x for willfulness • reasonable royalty• attorney fees • corrective advertising• injunction • 3x in court’s discretion • attorney fees in exceptional cases • statutory damages for counterfeit marks • injunction 30
  • 31. IVTrade Secret Damages 31
  • 32. What is a Trade Secret? Information not generally known or readily ascertainable, conferring economic benefit on holder, and secrecy protected by reasonable efforts. Can include manufacturing processes, customer lists, proprietary recipes and formulas, business plans, R&D information. 32
  • 33. Trade Secret Damages “[A] complainant is entitled to recover damages for misappropriation. Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation not taken into account in computing actual loss.” Uniform Trade Secrets Act, sec. 3. 33
  • 34. Trade Secret Damages (cont.) “In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret.” Uniform Trade Secrets Act, sec. 3. 34
  • 35. Differences With Patent DamagesPatent Trade Secret• lost profits • lost profits• no infringer profits • infringer profits• reasonable royalty  Restatement says larger of two• 3x for willfulness  state law usually says both minus any double counting• attorney fees • reasonable royalty• injunction  Where plaintiff unable to prove specific injury • 2x for willful and malicious • attorney fees for bad faith or willful and malicious • injunction 35
  • 36. VIConclusion 36