Sins of Omission: Panduit's Overreach in Patent Model Jury Instructions
| Citation | Vol. 40 No. 1 |
| Publication year | 2015 |
| Author | ROBERT W. PAYNE Hoge, Fenton, Jones & Appel, Inc. |
ROBERT W. PAYNE Hoge, Fenton, Jones & Appel, Inc.
It is generally an article of faith that to obtain an award of lost profits in patent infringement cases, a patentee plaintiff has the burden of proving a double negative. it must prove the non-existence of non-infringing substitutes. This is the teaching gleaned and consistently applied—or misapplied—from the Panduit case.1 This burden effectively "cuts off" entitlement to lost profits awards in many business-to-business patent cases,2 forcing plaintiffs to fall back on smaller reasonable royalty awards.
But that burden does not, or should not, always apply. Major model patent jury instructions contribute to the problem. While their treatment of Panduit leads to only minor concerns, they do not clearly set out the occasions in which the Panduit analysis, including the requirement to prove the double negative, does not apply. These sins of omission have a critical impact on obtaining—or seeking to obtain—lost profits in patent cases. While commentators decry the significant cost of patent litigation brought by patent trolls in obtaining "unwarranted" royalty awards, few focus on the impact of devalued lost profits claims in purely business-to-business disputes.
Case law, policy, and logic mandate that those addressing patent lost profits recognize at the forefront at least three important exceptions. Those exceptions are:
- A patentee plaintiff can avoid the burden of proving the non-existence of non-infringing substitutes in a multi-seller market if it successfully applies the Market Share Rule, obtaining its percentage share of profits from sales previously enjoyed by the infringer.
- A patentee plaintiff can avoid the burden of proving the non-existence of non-infringing substitutes when it and the defendant are in a two-supplier market.
- A patentee plaintiff should be permitted to avoid the initial burden of production of evidence of the non-existence of non-infringing substitutes when it proves willful infringement.
A fourth "exception," if you will, exists that we will not address. That is the holding in several key cases, advising that the Panduit factors are not the exclusive path to proving lost profits.3
Section 284 of the patent statutes tells us clearly that there are two paths toward obtaining damages in patent infringement cases: a plaintiff is entitled to adequate compensation, including lost profits, upon infringement.4 in the alternative, if the former cannot be proved or is shown to be the lower of the two, the patentee may receive at least the reasonable royalty value derived from infringement.5
Most patent awards are based on a reasonable royalty.6 Usually, that is not because plaintiffs prefer that form of award; it is more because proving lost profits is difficult. When recoverable, lost profits awards tend to be significantly greater than reasonable royalty awards. A study by Lex Machina of damage awards gave median royalty awards, year by year, in their study over each of the last four years of $403,000 to S2,715,000.7 The medians for year-by-year lost profit awards, on the other hand, ranged from $2,358,000 to $5,000,000.8
If lost profits awards are generally higher, why are they more difficult to get? One answer is Panduit. Lost profits awards require proof of causation of loss from defendant's conduct; reasonable royalty awards do not. Even if causation of injury cannot be proved, Section 284 says a plaintiff is entitled at least to a reasonable royalty.
The oft-cited case of Panduit Corp. v. Stahlin Bros. Fibre Works, Inc. has served as the standard bearer for decades on the question of lost profits. To prove lost profits in the context of multi-supplier markets, the Panduit test is said to require a plaintiff to prove (1) demand for the patented product; (2) absence of acceptable, non-infringing substitutes; (3) its capacity to meet demand and (4) the amount of profit it would have made.9
It is that second factor—absence of a non-infringing alternative—which usually defeats proof of lost profits.
Damages law seeks to reconstruct the market that would have existed "but for" the infringement, to measure loss. in the influential Grain Processing case on non-infringing substitutes, the court opined
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that a sale to an infringing defendant presumably would not have gone to the plaintiff if a defendant could choose to select a different, available (non-infringing) design, even where it chose instead to continue infringing.
[A] fair and accurate reconstruction of the "but for" market also must take into account, where relevant, alternative actions the in-fringer foreseeably would have undertaken had he not infringed. Without the infringing product, a rational would-be infringer is likely to offer an acceptable non-infringing alternative, if available, to compete with the patent owner rather than leave the market altogether. The competitor in the "but for" marketplace is hardly likely to surrender its complete market share when faced with a patent assuming it can compete in some other lawful manner.10
The Panduit factors are often applied as if proof by plaintiff of this double negative—the non-existence of non-infringing alternative products in the marketplace—is a prerequisite for establishing entitlement to lost profits.11 This burden of production of evidence is, at least, considered generally to be a prima facie hurdle the plaintiff must overcome, to have any shot at all at winning lost profits through carrying out its burden of persuasion.12 In looking at the third proposed exception to Panduit factors—lost profits when willful infringement exists—we will examine that juridical assumption concerning human nature more closely.
Three major model jury instructions significantly overstate Panduit as a necessary first step in analysis and understate exceptions to its application.
The Federal Circuit Bar InstructionThe 2014 version of the Federal Circuit Bar's Model Patent Jury Instructions, Instruction Number B.6.2, entitled "Lost Profits—"But For' Test," reads:
[This instruction should only be given in the event the patent holder is seeking lost profits damages, in whole or in part.]
In this case, [patent holder] seeks to recover lost profits for some of [alleged infringer]'s sales of [infringing product], and a reasonable royalty on the rest of [alleged infringer]'s sales.
To recover lost profits (as opposed to reasonable royalties), [patent holder] must show a causal relationship between the infringement and [patent holder]'s loss of profit. In other words, [patent holder] must show that, but for the infringement, there is a reasonable probability that [patent holder] would have earned higher profits. To show this, [patent holder] must prove that, if there had been no infringement, [it would have made some portion of the sales that [alleged infringer] made of the infringing product,]
[it would have sold more products that are functionally related to those products,] [it would have sold its products at higher prices,] [or it would have had lower costs].
[Patent holder] is entitled to lost profits if it establishes each of the following:
(1) That there was a demand for the patented [product] [method] [product produced by the method].
(2) That there were no available, acceptable, non-infringing substitute products, or, if there were, its market share of the number of the sales made by [alleged infringer] that [patent holder] would have made, despite the availability of other acceptable non-infringing substitutes.
(3) That [patent holder] had the manufacturing and marketing capacity to make any infringing sales actually made by [alleged infringer] and for which [patent holder] seeks an award of lost profits—in other words, that [patent holder] was capable of satisfying the demand.
(4) The amount of profit that [patent holder] would have made if [alleged infringer] had not infringed.
While not inaccurate, this instruction by implication ties the Panduit factors squarely into the requirement for showing "but for" causation, without clarifying that the latter can exist without the former. Coupled with the vagueness of instructions discussing exceptions, noted below, these model instructions are problematic.
The AIPLA InstructionThe American Intellectual Property Law Association (AIPLA) did a slightly better job of decoupling the "but for" test from the Panduit factors by separating them into two instructions. Its 2012 version of the "but for" instruction is Number 11.3:
[The Plaintiff] is seeking lost profits damages in this case. To prove lost profits damages, [the Plaintiff] must show by a preponderance of evidence that, but for [the Defendant]'s infringement, [the Plaintiff] would have made additional profits through the sale of all or a portion of the sales of [the allegedly infringing products] made by [the Defendant]. Thus, part of your job is to determine what the customers who purchased the [allegedly infringing product] [from the Defendant] would have done if the alleged infringement had not occurred. It is important to remember that the profits I have been referring to are the profits allegedly lost by [the Plaintiff], not the profits, if any, made by [the Defendant] on the allegedly infringing sales.
Its Panduit instruction in Number 11.4—like the Federal Circuit Bar's—creates the impression...
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