Chapter §20.04 Damages for Past Infringements
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§20.04 Damages for Past Infringements
[A] Statutory Basis: 35 U.S.C. §284
In addition to an injunction, the other key form of relief for patent infringement is monetary, in the amount of the damages that the patentee suffered because of the infringement. Section 284 of the Patent Act, titled "Damages," provides:
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, together with interest and costs as fixed by the court.
When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. Increased damages under this paragraph shall not apply to provisional rights under section 154(d) [35 USC §154(d)].
The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances. 353
The critical language of 35 U.S.C. §284, ¶1, "damages adequate to compensate for the infringement," is the subject of much case law interpretation. The statute does not explain how to determine an "adequate" amount beyond specifying that it must not go below the floor or minimum of a "reasonable royalty" (discussed separately below). Thus, the district courts "have been accorded wide latitude to choose a compensation mode that appears to them to fit the evidence presented."354 The Federal Circuit has not hesitated to correct what it perceives as erroneous economic evaluation, however; since its creation in 1982, the appellate court has developed a detailed jurisprudence on the evaluation of patent infringement damages.
Damage awards may be of two basic types: compensatory and enhanced. Each is discussed below. To summarize, compensatory damages compensate the patentee by trying to approximate the actual monetary loss suffered.355 Enhanced damages are in the nature of punitive damages and are intended to punish the accused infringer for willful conduct. Enhanced damages cannot be awarded for compensatory purposes; rather, they may be awarded "only as a penalty for an infringer's increased culpability, namely willful infringement or bad faith."356
In patent infringement actions, "[d]eciding how much to award as damages is not an exact science, and the methodology of assessing and computing damages is committed to the sound discretion of the district court."357 The Federal Circuit has taken the position that any doubts as to the amount of a damages award are to be resolved against the infringer as the wrongdoer.358
[B] Compensatory Damages
Federal Circuit authority expresses the basic goal of compensatory damages: putting the patentee in as good a position as it would have been had there been no infringement. In the specialized terminology of patent damages, this condition or state is referred to as hypothetically returning the patentee to a "but for world."359 In other words, U.S. patent law attempts to restore the patentee to its financial position but for the infringement.360
Unlike copyright infringement laws, the U.S. patent laws do not provide for an award of "statutory damages" within a specified range of dollars.361 The amount of the patentee's compensatory damages must be determined based on the facts of each case. There are two primary analytical methods of computing the amount of compensatory damages for infringement of a U.S. utility patent: lost profits and reasonable royalty.362 Each is discussed separately below.
[1] Lost Profits
Damages computed on a theory of lost profits are intended to approximate the profits that the patentee lost because of sales diverted by the presence of the infringing product in the marketplace. The key element that a patentee must prove to attain a lost profits recovery is causation—that the infringement was the cause of the patentee's lost sales rather than some other cause such as the marketplace availability of noninfringing alternatives to the patented item. The patentee bears the burden of establishing causation; in other words, the patentee must show that but for the infringement, the patentee would have made the sales for which it seeks lost profits.363
To understand the computation of lost profits, consider the following simple example. Assume that it costs a patentee $5 to manufacture a patented widget and that the patentee sells each widget for $25, thus netting a profit of $20 per widget. Assume further that the defendant sold 100 infringing widgets. If the patentee can prove that but for the infringement, it could and would have made those 100 extra widget sales, then the lost profits to be awarded the patentee are computed as $20 × 100, or $2,000.364
[a] The Panduit Analysis
The foundational case of Panduit Corp. v. Stahlin Bros. Fibre Works, Inc.365 set forth the following factors as the elements that a patentee must prove in order to obtain damages based on lost profits:
To obtain as damages the profits on sales he would have made absent the infringement, i.e., the sales made by the infringer, a patent owner must prove: (1) demand for the patented product, (2) absence of acceptable noninfringing substitutes, (3) his manufacturing and marketing capability to exploit the demand, and (4) the amount of the profit he would have made. . . . 366
Each Panduit factor is separately examined below.
[i] Demand for the Patented Product
Panduit factor (1), demand for the patented product, is usually presumed from the fact of infringement. The Federal Circuit considers "a substantial number of sales" of infringing products containing the patented features to be, itself, "compelling evidence" of the demand for the patented product.367 Under this analysis, the fact of the infringer's sales necessarily means that there were buyers who wanted the product and were willing to pay the infringer's price.368
In Presidio Components, Inc. v. Am. Tech. Ceramic Corp.,369 the Federal Circuit explained that the demand referred to in the first Panduit factor (i.e., "demand for the patented product") is not literally limited to demand for the patented products. Rather, Panduit factor (1) demand may also arise from a product that " 'directly competes with the infringing device.' "370
Presidio's U.S. Patent No. 6,816,356 was directed to a capacitor design for use in broadband applications, the capacitor having a lower frequency portion and a higher frequency portion. The '356 patent disclosed a multilayer integrated network of capacitors electrically connected in series and in parallel. After finding willful infringement by American Technical Ceramic's (ATC) 545L capacitors, a jury awarded Presidio lost profit damages of $1,048,677. Presidio's theory of lost profits was based on lost sales of its Buried Broadband ("BB") capacitors, even though during trial Presidio conceded that that product was not covered by Presidio's '356 patent in suit.
On appeal in Presidio Components, accused infringer ATC sought to overturn the district court's denial of ATC's judgment as a matter of law (JMOL) motion on the lost profits award. Specifically, ATC challenged the determinations made below that demand existed for Presidio's BB capacitors and that ATC's 545L capacitors directly competed with the patentee's BB capacitors.
After reviewing the record, the Federal Circuit in Presidio Components concluded that substantial evidence supported the jury's finding of direct competition. The appellate court rejected ATC's argument that Presidio's BB capacitor and ATC's 545L capacitor had different characteristics and served different markets. Rather, the record reflected they were both one-piece broadband capacitors with a substantially monolithic design (as recited in the claims).371 The Federal Circuit noted the testimony of Presidio's damages expert that the two products competed "head-to-head" in the one-piece capacitor market for the same customers and for the same applications, testimony supported by third-party market studies and ATC's internal documents. Moreover, the record included inventor testimony that the two capacitors were the same type of broadband capacitor used in the same applications, which were different from ATC's other products. Finally, a witness for accused infringer ATC testified that at least some of the customers for ATC's 545L capacitor also purchased BB capacitors.
The Federal Circuit accordingly affirmed the district court's finding that Presidio satisfied the first Panduit factor.
[ii] Absence of Acceptable Noninfringing Substitutes
Panduit factor (2), absence of acceptable noninfringing substitutes, assures causation, that is, that the patentee lost its sales because of the defendant's infringement (i.e., the sales that the patentee would have made, but for the infringement, were diverted to the infringer), not because consumers were buying a third party's noninfringing substitute product. An award of lost profits must not be speculative; rather, the patentee's burden is to show a reasonable probability that, absent the infringement, it would have made the infringer's sales.372 Establishing this under Panduit factor (2), and determining what products do or do not qualify as "acceptable substitutes" for the patented product, constitute major battlegrounds in patent litigation over lost profits damages.
For example, in the long-running Polaroid v. Kodak battle over infringement of Polaroid's patents on instant photography,373 Polaroid sought lost profits damages. The accused infringer Kodak argued that lost profits were not available because conventional (i.e., non-instant) photography represented an acceptable noninfringing substitute. The district court disagreed, finding that instant photography occupied a unique niche in the photography market and that consumers wanted the unique emotional "instant experience" of having the picture developed instantaneously.374 Thus...
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