Patent Damages: Compensatory Damages From Sale of a Business with Infringing Products

Lost profits and royalties are not the only way to measure patent damages. In Minco Inc. v. Combustion Eng’g, Inc., 95 F.3d 1109, 1120 (Fed. Cir. 1996), the Federal Circuit recognized that a patent owner might have been entitled to damages resulting from a third parties’ purchase of the infringer’s business, if it had proven that the infringing products were an important factor in the sale.

Patent owner Minco sought damages arising from defendant infringer CE’s sale of its fused silica business to a third party. Minco sought as damages the difference between the sale price of CE’s Business and an expert valuation of CE’s business without the infringing kilns. Minco argued that if CE had not infringed, the third party would have purchased Minco’s business instead of CE’s.

The court recognized that in theory Minco might have been entitled to some recovery from CE’s sale of its business because it included infringing kilns. But, the court determined that Minco did not show that infringing kilns were an important factor in the sale. After the third party acquired CE’s business, the third party switched to its own patented furnace, which undermined Minco’s claim that kilns drove the sale.

Patent Damages: Reasonable Royalty

A reasonable royalty for the infringer’s use of the invention is one way to measure damages for patent infringement (others include lost profits and established royalties).

A reasonable royalty is a amount determined by a court to result from a hypothetical negotiation between the patent owner and the infringer. The hypothetical negotiation attempts to determine the royalty that the reasonable parties would have agreed to had they successfully negotiated an agreement just before infringement began. Wordtech Sys. v. Integrated Networks Sols., Inc., 609 F.3d 1308, 1319 (Fed. Cir. 2010).  This necessarily involves a degree of approximation and uncertainty.

Courts often consider the Georgia-Pacific factors in determining a reasonable royalty. Those factors are:

1. The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.

2. The rates paid by the licensee for the use of other patents comparable to the patent in suit.

3. The nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold.

4. The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.

5. The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promotor.

6. The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.

7. The duration of the patent and the term of the license.

8. The established profitability of the product made under the patent; its commercial success; and its current popularity.

9. The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results.

10. The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention.

11. The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use.

12. The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions.

13. The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.

14. The opinion testimony of qualified experts.

15. The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee — who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention — would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.

[Ga.-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970)].

While the Federal Circuit has approved use of the Georgia-Pacific factors, it has also said that they are a comprehensive list but unprioritized and often overlapping., Inc. v. Lansa, Inc, 594 F.3d 860, 869 (Fed. Cir. 2010). The factors are also not exclusive in that other factors could be considered.

The Georgia-Pacific factors can be grouped in two categories according to Chisum on Patents. 1-20 Chisum on Patents § 20.07 (2017). The first group is directed to general and specific market conditions in the industry. The second group sets a range of feasible rates “since a willing patent owner would demand a greater than minimum rate for a profitable invention and a willing user would concede no more than the expected amount of profit.” Chisum says that “The first group of factors points to the rate that the parties would have adopted within that range.”

Patent Damages: Established Royalty

An established royalty is one way to measure damages for patent infringement (others include lost profits and reasonable royalties).

When the patent owner has licensed its patent for comparable acts to those engaged in by the infringer, those prior licenses may define an established royalty rate. The federal circuit has said “When the patentee has consistently licensed others to engage in conduct comparable to the defendant’s at a uniform royalty, that royalty is taken as established and indicates the terms upon which the patentee would have licensed the defendant’s use of the invention.” Monsanto Co. v. McFarling, 488 F.3d 973, 979 (Fed. Cir. 2007).

For prior negotiated royalties to provide an established royalties they need to be: (1) paid or secured before the present infringement, (2)  paid by a sufficient number of persons/entities as to  indicate a general acquiescence in the  reasonableness of the royalty, (3) uniform at the places where the licenses where issued, (4) not paid under threat of suit, and (5) for similar rights or activities as those at issue in the present infringement. Rude v. Westcott, 130 U.S. 152 (1889).

Therefore, in many cases it will be hard to show there is an established royalty unless the patent owner is engaged in a campaign of licensing outside of litigation. Established royalties are different from reasonable royalties, which I will discuss in a later post.


Patent Damages: Lost Profits

A patent infringer is liable to a patent owner for damages adequate to compensate the patent owner for infringement, but no less than a reasonable royalty for the use made of the invention by the infringer. 35 USC 284.

Traditionally, there are three ways of measuring compensatory damages for patent infringement: (1) lost profits, (2) established royalty, or (3) a reasonable royalty. Today I’m going to discuss lost profit damages.

Lost Profits

In order to recover lost profits, the patent owner must “show ‘causation in fact,’ establishing that ‘but for’ the infringement, he would have made additional profits.” Wechsler v. Macke Int’l Trade, Inc., 486 F.3d 1286, 1293 (Fed. Cir. 2007). The “but for” causation asks, if the infringement had not occurred, would the patent owner made the alleged lost profits? If the patent owner is not selling a product, then usually there is no lost profits, except if the patent owner has the ability to manufacture and market the product, but for some legitimate reason is not. Id. 

Courts have allowed patent owners to present “market reconstruction theories showing all of the ways in which they would have been better off in the ‘but for world,’ [a world without the infringement] and accordingly to recover lost profits in a wide variety of forms.” Grain Processing Corp. v. Am. Maize-Products Co., 185 F.3d 1341, 1350 (Fed. Cir. 1999)

Lost profits can arise from a showing that but for the infringement the patent owner would have (1) made greater sales, (2) charged higher prices, or (3) incurred lower expenses.

Courts sometimes use the Punduit test to determine whether the patent owner proved causation for lost profit damages. The Punduit test requires the patent owner to establish: (1) demand for the patented product; (2) absence of acceptable non-infringing substitutes; (3) manufacturing and marketing capability to exploit the demand; and (4) the amount of the profit it would have made. Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1545 (Fed. Cir. 1995) (citing Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F.2d 1152, 1156 (6th Cir. 1978)). 

If there are only two suppliers for the product at issue in the relevant market, the patent owner and the accused infringer, the first two Punduit test factors collapse into one in the two-supplier test. Under the two-supplier test a patent owner must show: (1) the relevant market contains only two suppliers, (2) its own manufacturing and marketing capability to make the sales that were diverted to the infringer, and (3) the amount of profit it would have made from these diverted sales. Micro Chem., Inc. v. Lextron, Inc., 318 F.3d 1119, 1124 (Fed. Cir. 2003). 

Lost Sales or Diverted Sales

When lost sales are the basis for lost profits, the interaction of the patent owner and the infringer in the market is important. “If the patentee and infringer do not sell their products in the same market segment, “but for” causation cannot be demonstrated.” Crystal Semiconductor Corp. v. Tritech Microelectronics Int’l, Inc., 246 F.3d 1336, 1360 (Fed. Cir. 2001)

Reduction in Prices or “Price Erosion”

A reduction of prices by the patent owner caused by the infringing competition is a proper ground for lost profit damages. The patent owner must show that “but for” infringement, it would have sold its product at a higher price. Id.

In a later post I will discuss royalties damages for patent infringement.

Update: A post on established royalties for patent infringement.

Update: A post on reasonable royalties for patent infringement.

Four Factor Test for Determining the Article for Total Profit Damages in Apple v. Samsung

USD0618677_fig1In a 2016 decision in Samsung v. Apple, the Supreme Court determined that the relevant “article of manufacture” for calculating total profits damages for design patent infringement could be either (1) the product (e.g. the Samsung phone) sold to a customer or (2) a component of that product.

Previously, the “article of manufacture” for calculating total profits damages for design patent infringement was the entire product sold to a customer. The profits to the entire product are usually likely to be greater than profits to a component of the entire product.

The case was sent back to the trial court and a new trial was ordered on damages. In October 2017, the trial court ruled that a four factor test would be used to determine what is the article of manufacture for the purposes of damages under 35 USC 289. The four factors are:

  1. The scope of the design claimed in the plaintiff’s patent, including the drawing and written description;
  2. The relative prominence of the design within the product as a whole;
  3. Whether the design is conceptually distinct from the product as a whole; and
  4. The physical relationship between the patented design and the rest of the product, including whether the design pertains to a component that a user or seller can physically separate from the product as a whole, and whether the design is embodied in a component that is manufactured separately from the rest of the product, or if the component can be sold separately.

Under this test, it is possible that a jury could conclude that the article of manufacture is the entire Samsung phone and not just a component of it. If so, the result could be largely the same as before the Supreme Court decision.

Both Apple and Samsung at certain times in the case supported the four factor test. This means that each saw or sees a way to win under the test. If a jury determines the article is the whole infringing phone, Apple is a winner. If a jury determines the article is less than the whole phone, Samsung may succeed in reducing the damages awarded.

There are three design patents at issue: D593,087 is directed to primarily the front face of the iPhone and the beveled edge, D618,677 is primarily directed to the black “infinity pool” face of the iPhone, and D604,305 is directed to the home screen user interface. Representative figures from the each patent, respectively, is shown below.



Even if Apple can’t show, with respect to each patent, that the “article” is the whole infringing phone, these three patents cover the home screen user interface and the exterior of the device, except for the back. These features are arguably a large part of the visual appeal of the device. But, these patents do not cover the side profile of the device, or as mentioned, the back. We will see how close Apple gets to the original damage award of $399 million, which was the entire profit Samsung made from its sale of the infringing smartphones.

Citation: Apple Inc. v. Samsung Electronics Co., no. 11-CV-01846, 2017 U.S. Dist. LEXIS 177199; 2017 WL 4776443 (N.D.Cal. Oct. 22, 2017).

Total Profit Damages on Entire Product or Component for Design Patent Infringement

USD0593087_Fig1In 2007, Apple released its first generation iPhone. After Apple released its iPhone, Samsung released as series of smartphones “that resembled the iPhone.” In 2011, Apples sued Samsung alleging various infringement claims, including that Samsung’s smartphones infringed Apple’s D593,087, D618,677, and D604,305 design patents. A jury awarded Apple $399 million in damages for design patent infringement, the entire profit Samsung made from its sale of the infringing smartphones.

Samsung appealed arguing “that the profits awarded should have been limited to the infringing ‘article of manufacture’—for example, the screen or case of the smartphone—’not the entire infringing product’—the smartphone.” The court of appeals rejected that argument reasoning that “’limit[ing] the dam- ages’ award was not required because the ‘innards of Samsung’s smartphones were not sold separately from their shells as distinct articles of manufacture to ordinary purchasers.'”

The applicable statute at 35 USC 289 provides that a design patent infringer “…shall be liable to the owner to the extent of his total profit, but not less than $250….”

But the Supreme Court reversed holding that in the case of a multi-component product, the relevant “article of manufacture” for calculating total profits damages could be either (1) the product sold to a customer or (2) a component of that product, whether sold separately or not.

The court did not provide a test for determining whether, in a given case, “article of manufacture” for calculating profits should be the product sold to a customer or a component of that product.

The profits to the entire product will be greater than profits to a component of the entire product. Therefore, this decision has the potential to reduce the profits damages available to design patent holders and therefore to reduce the value of design patents.

Case citation: Samsung Elecs. Co. v. Apple Inc., 137 S. Ct. 429 (2016).

Know When to Stop Wasting Money on Trademark Litigation

MoneyWasteYou need to know when to stop wasting money on trademark litigation. Here is a case where the plaintiff should have stopped on day two of the lawsuit, but didn’t.

Dr. Tartell and Dr. Mandel jointly practiced medicine until 2011, when they split their practice and went separate ways. The break up was contentious.

After the break up, Dr. Mandrel (1) registered six domain names using some variation of Dr. Tartell’s name, redirecting some to Dr. Mandrel new website, and (2) purchased Google AdWords keyword for Dr. Tartell name, which caused Dr. Mandell’s website to appear as an advertisement whenever someone searched with those terms on Google.

Tartell filed suit against Dr. Mandell including claims for cybersquatting, false designation of origin, and unfair competition (all trademark law related claims).

The day after the suit was filed in 2012, Dr. Mandel canceled the domain names. Many trademark related disputes are resolved this way, e.g. with one party stopping or changing their name.

It is unclear whether the Adword purchases stopped. They probably did, but even if they did not, plaintiffs do not fare well in competitive keyword advertising suits.

So, the day after the suit was filed, Dr. Tartell probably got the best he could get, e.g. Dr. Mandell releasing the domain names and (probably) stopping the Google Adword buy. This was a good time to settle.

Litigating on Principle is Expensive and Often Unsatisfying

But the case continued for at least three years. It continued all the way through a four day bench trial and through an appeal in 2015. Why did this case continue? As stated by the trial court:

this action continued all the way through [a four-day bench] trial because Dr. Mandel refused to take responsibility for his antics while Dr. Tartell sought a statutory windfall for a short-lived and largely pointless deceit.

In other words, (1) Dr. Mandel would not apologize and (2) Dr. Tartell wanted statutory damages and attorneys fees as a result of the alleged cybersquating.

Pursuing litigation to achieve an apology or an an acknowledgment of wrong doing (litigating on principle) can be a very expensive undertaking with often unsatisfying results, as Dr. Tartell experienced here. Dr. Tartell won only $6000 at trial, much less than he likely paid his attorneys. But he would not keep even that amount. Dr. Tartell ultimately lost on appeal in Tartell v. South Florida Sinus and Allergy Center, Inc., No. 14-13178 (8th Cir. 2015). And it is a pretty safe bet that Dr. Mandel did not apologize to Dr. Tartell.

Short Use and Quick Turnover Kills Off Statutory Windfall

On the second issue, you need to carefully evaluate your likelihood of success in obtaining money damages, even when the other side’s actions appear willful and to reflect poorly on them. The statistical likelihood of receiving an award of any damages in trademark litigation is low.

Dr. Tartell may have been expecting closer to $600,000 in statutory damages and not the $6,000 that was awarded by the trial court. The Lanham Act provides for statutory damages of between $1,000 and $100,000 per domain name for cybersquatting. 15 U.S.C 1117(d). This case indicates that when the defendant carries on with the offending conduct only a short time and cancels or turns over the domains immediately after suit, the court could see this as a mitigating factor leading to an award of damages at the low end of the range and not the top, e.g 6 domain names * $1,000 = $6,000 and not 6 domain names * $100,000 = $600,000. This is true here even though Dr. Mandrel’s “antics” were in bad taste and, as the court noted, included “deceit.”

Difficulty in Protecting One’s Personal Name in Medicine

Dr. Tartell lost on appeal because he could not establish that his name was protectable. Therefore he could not recover any money damages. This result should have been predicted.

A quick reference to McCarthy on Trademarks reveals that “in professions where use of personal names as identifiers is traditional, a court may require a strong showing of secondary meaning.” McCarthy 13.2. Or as the Eighth Circuit Appeals Court stated, “in professions where use of personal names as identifiers is traditional such as the medical profession, it is more difficult to establish secondary meaning [in such personal names].” In other words, it is known that it is difficult to protect your personal name in the medical profession under trademark law.

In the Eighth Circuit, a plaintiff must prove that his service mark is “distinctive” to establish a claim for cybersquatting, false designation of origin, and unfair competition. So to obtain any relief, Dr. Tartell needed to prove that the consuming public recognized Dr. Tartell as the source of a service and not merely as a person’s name.

For example, “Ford” was a surname of Henry Ford, but overtime through sales and advertising “Ford” became associated in the minds of the consuming public with a car producing company and not merely the individual.

In the Eighth Circuit, a plaintiff can show a name is distinctive through consumer surveys or circumstantial evidence. Circumstantial evidence may include (1) the length and nature of name’s use, (2) the nature and extent of advertising and promotion of the name, (3) the efforts of the proprietor to promote a conscious connection between the name and the business, and (4) the degree of actual recognition by the public that the name designates the proprietor’s product or services.

Dr. Tartell provided no consumer surveys. Dr. Tartell presented evidence of his academic activities and reputation among other medical professionals. But this is not relevant because the target audience for such information was professionals and not the consumers of his medical services.

Dr. Tartell’s name used in advertisements for his business with Dr. Mandell before the split did not show Dr. Tartell’s name was distinctive because his name was not used prominently as a trademark in such advertising.

The appeals court ultimately found that Dr. Tartell did not establish any of the four distinctiveness factors. Therefore, Dr. Tartell lost and received no money damages. Dr. Tartell should have settled on the second day of his lawsuit.

Photo credit to flickr user Mike Poresky under this creative commons license.