Lost Profits

• Author: Russell L. Parr
• Profession: President of Intellectual Property Research Associates
• Pages: 403-433

CHAPTER 26

LOST PROFITS

The central question in lost-prot calculations was succinctly put by Justice Brennan: “Had

the Infringer not infringed, what would Patent Holder …have made?” [Aro Manufacturing

Co. v. Convertible Top Replacement Co., 377 U.S. 476, 507, 141 USPQ 681, 694 (1964)].

The question is answered by identifying and then quantifying the amount of sales that were

lost due to infringement, and the amount of prots that the patent holder would have made

on those lost sales.

Lost-prot calculations are a function of incremental sales volume, price, and costs.

Calculating lost prots requires identifying the volume of sales lost to an evil infringer and

multiplying the units times the price that the harmed party would have achievedto calculate

lost revenues. Incremental costs associated with making the lost units is subtracted from the

lost revenues and lost prots are revealed. Seems easy? Well, not really. Read on to learn

about the complexity of determining lost prots.

The determination of the lost sales or volume, the price at which the patent holder would

have made those lost sales, and the characterization of the costs necessary to make the lost

sales are the central questions in the calculation of lost prots. This chapter discusses the

framework and underlying analysis necessary for determining lost sales, issues surrounding

pricing and the nature of costs (including a detailed analysis of the difference in xed and

variable costs), and the determination of incremental protability. This chapter will also

provide an overview of some of the major cases that constitute the analytical framework

used to determine lost prots, particularly in patent infringement matters. A list of some

of the cases that have had a signicant impact on lost-prot damage theory in the eld of

intellectual property is provided at the end of this chapter.

DEFINITION OF DAMAGES

The denitions of infringement damages differ slightly for patents, trademarks, copyrights,

and trade secrets.

PATENTINFRINGEMENT. Title 35, § 284 of the United States Code (1970), states: “Upon

nding for the claimant the court shall award the claimant damages adequate to compen-

sate for the infringement, but in no event less than a reasonable royalty for the use of the

invention by the infringer, together with interest and costs as xed by the court.”

The focus of damages in the form of lost prots in a patent infringement matter is on

the lost prots of the plaintiff (the patent holder), and not on the prots of the defendant

(the infringer). In some cases, the prots of the infringer are considered as an indication of

403

404 Ch.26 Lost Profits

the prots that the patent holder would have earned had there been no infringement. Note

that the prots of the defendant are available as a measure of damages for the infringement

of design patents.

Title 35, § 289 of the code states that:

Whoever during the term of a patent for a design, without license of the owner, (1) applies

the patented design, or any colorable imitation thereof, to any article of manufacture for the

purpose of sale, or (2) sells or exposes for sale any article of manufacture to which such design

or colorable imitation has been applied shall be liable to the owner to the extent of his total

prot, but no less than $250, recoverable in any United States district court having jurisdiction

of the parties.

Nothing in this section shall prevent, lessen, or impeach any other remedy which an owner

of an infringed patent has under the provisions of this title, but he shall not twice recover the

prot made from the infringement.

Lost-prot damages are based on an analysis of the additional amount of prots that

the patent holder would have made but for the infringement. If the patent holder can show

that absent the infringement it would have made the sales made by the infringer, then it is

entitled to the prots that it would have made on those additional sales.

If in all reasonable protability, the Patent Owner would have made the sales, which the

Infringer has made, what the Patent Owner in reasonable probability would have netted from

the sales denied to him is the measure of his loss, and the Infringer is liable for that. [Livesay

WindowCo. v. Livesay Industries, Inc., 251 F.2d 469, 471–72, 116 USPQ 167, 168–70 (5th Cir.

1958)]

TRADEMARK INFRINGEMENT. Title 17 of the United States Code, § 1117, states: “(a) the

plaintiff shall be entitled to recover (1) defendant’s prots, (2) any damages sustained by

theplaintiff,andthecostsoftheaction....Inassessingprotstheplaintiffshallberequired

to prove the defendant’ssales only; defendant must prove all elements of costs or deduction

claimed.”

Trademark infringement has traditionally been satised by injunction without monetary

award. When monetary damages are awarded, the amount can be based on:

• Defendant’s prots

• Plaintiff’s damages

• Compensation for corrective advertising

• Punitive damages

• Attorney’s fees

•Costs

Unlike a claimant for patent damages, the plaintiff in a trademark action can receive

the prots earned by the infringer from infringing activities. Plaintiffs in a patent case are

limited to recovering only the prots that they failed to earn due to the infringement. In both

cases, the initial focus of damages is on prots.

COPYRIGHT INFRINGEMENT. Title 17 of the United States Code, § 504, states:

In General …an infringer of copyright is liable for either the copyright owner’sactual damages

and any additional prots of the infringer,as provided for by sub-section; or statutory damages,

as provided by a sub-section.