Navigating Patent Damages

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Your company has been sued for patent infringement. It is a stressful moment, with swirling questions: What is the patent? Who are the plaintiffs? What product? How could that product infringe that patent? What do we do next?  

The often overlooked question: What does the plaintiff seek as a remedy?  

Understanding the remedies available for patent infringement and identification of the monetary and business risks to the company should be addressed early, which allows for a plan as to what your company should do to minimize the risks arising from remedies when a patent infringement suit is brought against your company. 

What remedies are available in patent cases? 

A patent represents the government’s grant of the right to stop others from using an invention for a finite period in exchange for disclosure of the useful invention to the world. Consequently, remedies for patent infringement arise in two general forms: injunctive relief to stop the use, or, more commonly, monetary compensation for any “unauthorized” use of the invention.  

The first form of remedy — injunctive relief — is less common. A plaintiff seeking injunctive relief usually must be in the same industry, offering a directly competing product covered by the patent, and demonstrate special circumstances wherein monetary relief is insufficient to compensate for any loss. Many patent lawsuits are brought by parties not directly competing in the relevant market, i.e., do not make a competing product, and injunctive relief is not available for such plaintiffs. See Stanford NPE Litigation Database, Stanford Law School (available at https://npe.law.stanford.edu/) 

The more common form of relief is monetary compensation; therefore, the body of case law for patent remedies is focused on the calculation — and minimization — of such compensation. Within monetary compensation are two forms: “reasonable royalties” and lost profits. The less common form, lost profits, arise from direct competition; a plaintiff sells a directly competing product wherein they claim they could have made the infringer’s sales (and reaped the profits of said sales) but for the infringement. Considering the specific circumstances required to establish such lost profits, this remedy is not commonly sought by plaintiffs. 

The more common form, reasonable royalty, is the default remedy under the relevant statute:  

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 the use made of the invention by the infringer . . .  

35 U.S.C. § 284.

What is a reasonable royalty? 

A “reasonable royalty” represents a calculation of the fair market value of a license an alleged infringer could have obtained at the time of first infringement. In other words, if the alleged infringer and the patent holder sat down for a hypothetical negotiation at the time the alleged infringer first used the invention, the royalty represents the price the parties would have agreed to for permission to use the invention.  

The relevant case law revolves around this “hypothetical negotiation.” Following the seminal decision in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), federal courts at all levels have grappled with the issue of how to define this negotiation. For example, if the negotiation is to take place “at the time of first infringement,” what information can be said to be reasonably available to the parties when they “meet,” such as actual success of a product allegedly infringing a patent; other licenses entered into by the patent owner even if those licenses are after the date of “first infringement;” and other future input.  

Courts have also had to address the heavy role of experts in determining the reasonable royalty. Parties in litigation typically hire experts to explain the hypothetical negotiation to juries, determine which inputs the expert believes are relevant to the negotiation (or not relevant), and to assign the weight to those inputs to reach a “royalty rate,” typically a $/per unit amount that in turn is multiplied against the number of products or uses of the patented invention. 

The hypothetical negotiation inputs 

The Georgia-Pacific case identified 15 factors for consideration in defining the outcome of this hypothetical negotiation. The first set of factors seek to identify an appropriate “comparable” in the market for value of the patent — think of this as the housing market where one would look at the prices for houses sold in the same area and of a similar style and size. For a patent, the parties look to licenses already entered into for the patent in question, licenses for patents similar to the patent in question, or other economic indicators for value of the patent.  

Upon identification of a comparable (or a competing comparable), the question turns to various factors that would increase or decrease the patent’s value. For example, if the licensee could achieve the same result without infringing the patent (a “non-infringing alternative”), the license fee is lower. On the other hand, if the alleged infringer’s product has had tremendous success in the market, such success would point to a higher value for the patent. The Georgia-Pacific factors guide courts, experts, and juries in defining the value of the asserted patent.  

After all, monetary damages are fact issues  generally resolved by a jury. 

Other considerations for the hypothetical negotiation 

Beyond the 15 factors, there other key considerations applicable to the hypothetical negotiation.  

First, the parties are presumed by law as willing to negotiate — the patent holder is willing to allow use of their patented invention, and the alleged infringer is willing to pay for the privilege of use. Coextensive with that presumption of willingness is the presumption the product or use in question does infringe a valid patent. These presumptions can create a quandary for an accused infringer — while simultaneously arguing to a jury  the patent in question is either not infringed, invalid, or both, the party must also present evidence of what it thinks the patent is worth and what it would have been willing to pay within the structure of the hypothetical negotiation. 

Second, the parties are presumed to reach agreement. There can be no “hold outs” or “hold ups” that prevent an agreement in the hypothetical structure. As with above, the accused infringer is again placed in a potentially awkward situation of presenting a definitive statement that “this dollar amount” is what we would have paid for the patent, while saying “we should not have to pay since we do not infringe.” 

Third, there is an expectation of “reasonable knowledge and expectations.” This expectation allows for consideration of events that happen in the future (such as the commercial success or failure of a product, the comparable licenses, and other evidence) to help define the patent’s value. 

Finally, there is a requirement that the value be apportioned, which means that if the patent is directed to a small feature of an overall product (such as the sensor that triggers deployment of the air bag in a passenger car), the value is attributed to the specific value of the sensor, not the overall car. This principle avoids overcompensating the patent holder for an invention that contributes only a portion of the overall value of a final product.  

Applying the fifteen factors outlined in Georgia-Pacific, in view of the need for two willing parties to reach agreement on the value of a valid and infringed patent, properly apportioned to reflect the specific value of the patented feature, allows the parties, the courts, and juries to arrive at a “reasonable royalty.”  

But what about those profits? 

In the less common circumstances where the patent holder and alleged infringer’s products compete in a market, lost profits can be awarded. The patent holder carries the burden to show that “but for” the infringement, the patent holder would have made the same sales that the alleged infringer did, and thus should be compensated for the profits the patent holder would have made. 

In establishing “but for” the infringement, courts look to a four-factor test, outlined by another 1970s era case: Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F.2d 1152 (6th Cir. 1978). 

These factors are: 

For each, the patent holder carries the burden of proof — in other words, the patent must show the demand, the lack of alternatives, and their own capabilities to make the products. They also must establish their profit margins, because lost profits is about compensation, not disgorgement of an alleged infringers profits. 

There is one sub-category of damages where that is flipped and a patent holder can seek disgorgement of an alleged infringers profits made from infringement: design patents. A specific provision of the patent law (35 U.S.C § 289) allows a holder of a design patent to seek “total profits” made by the alleged infringer for copying the patented design.  

What should corporate counsel consider in assessing patent remedies? 

Returning to the first moment, when your company has been sued for patent infringement — what should corporate counsel consider in understanding the remedies sought and the risks associated with those remedies.  

First, understand and evaluate the party suing your company and what they are suing over.  

Second, begin to understand what alternatives there are for the company.  

Finally, if the case proceeds to litigation, budget early for the costs related to an expert.