Patent Infringement Damages. Lost profits or reasonable royalties are damages available for patent infringement. Interest on the damages can often be as much as the damages. Lost profits assumes that the patent owner is selling the patented item, that he could have met the demand in the lost market, and that the patent owner can determine with reasonable probability how much profit would probably have been made if there was no infringement. Reasonable royalties are available when that amount would be more than lost profits or if lost profits cannot be proved. Enhanced or punitive damages of three times the award are available for willful infringement, see below.

The Law.  Damages for patent infringement are governed by the United States Code.  Section 284 of title 35 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.”

“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.”

The statutory law is based on traditional tort (civil wrong) remedies where a patentee who wins in court would usually be entitled to be returned to the status quo ante—in other words, a right to monetary compensation that existed prior to when the infringement occurred. For money damages, this means that company-owners producing a patented product are entitled to profits that were lost because of sales of the infringing product, and patent owners who are not producing a product are entitled to “reasonable royalties” for lost licensing revenue, which would likely be less than the sum calculated for lost profits.

Judicial Interpretation. The United States Supreme Court interpreted the law as follows:

“[T]he present statutory rule is that only ‘damages’ may be recovered. These have been defined by this Court as ‘compensation for the pecuniary loss he [the patentee] has suffered from the infringement ….’ They have been said to constitute “the difference between his pecuniary condition after the infringement, and what his condition would have been if the infringement had not occurred.” Aro Mfg. Co. v. Convertible Top Co., 377 U.S. 476, 507 [141 USPQ 681] (1964) (citations omitted).

Damages are not the Infringer’s Profits. The Aro decision further made clear that infringement damages are not determined by the infringer’s profits, but by the loss to the patent owner.

“But the present statutory rule is that only ‘damages’ may be recovered. These have been defined by this Court as ‘compensation for the pecuniary loss he [the patentee] has suffered from the infringement, without regard to the question whether the defendant has gained or lost by his unlawful acts.” Aro at 506 (citations omitted).

However, the district court’s use of an infringer’s profit margin for comparison purposes in determining the reasonableness of a patent owner’s estimate of lost profits did not constitute an abuse of discretion. Kori Corp. v. Wilco Marsh Buggies and Draglines, Inc., 761 F.2d 649 (Fed.Cir.1985). .

Damages are Lost Profits or Reasonable Royalty. In the relatively famous instant-camera infringement case of Polaroid Corp. v. Eastman Kodak Co., the United States District Court for the District of Massachusetts explained that there are two ways to calculate damages. The first and preferred method is lost profits. The second is reasonable royalty. 16 USPQ 2d 1481, 1484 (1990).

“The general rule for determining the actual damages to a patentee that is itself producing the patented item, is to determine the sales and profits lost to the patentee because of the infringement. Although the statute states that the damage award shall not be ‘less than a reasonable royalty,’ 35 U.S.C. § 284, the purpose of this alternative is not to provide a simple accounting method, but to set a floor below which the courts are not authorized to go.” (citation omitted).

The Court of Appeals for the Federal Circuit recently stated that the royalty base used to calculate a reasonable royalty should be the “smallest salable patent-practicing unit.” Further, the entire market value of a product may only be used when the “the demand for the entire product is attributable to the patented feature.”

  • “Where small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product. Thus, it is generally required that royalties be based not on the entire product, but instead on the “smallest salable patent-practicing unit. . . . [t]he entire market value rule allows for the recovery of damages based on the value of an entire apparatus containing several features, when the feature patented constitutes the basis for customer demand.” Citations omitted. Laserdynamics v. Quanta Computer, Slip Opinion, pp 22-23, (Fed. Cir. 2012), case 2011-1440, -1470, decided 30-AUG-2012.

In Finjan, Inc. v. Blue Coat Systems, Inc., Case No. 16-2520 (Fed. Cir., Jan. 10, 2018), the US Court of Appeals for the Federal Circuit clarified that proper apportionment requires both establishing a royalty base from the “smallest, identifiable technical component” and basing the award “on the incremental value that the patented invention adds to the end product.” Citation omitted.

Even when the component “is essential” for use of an infringing product, it can be very difficult to collect a royalty on the entire value of that infringing product. This was made frustratingly clear to the patent holder in the Laserdynamics decision, where the Federal Circuit also held–

  • “It is not enough to merely show that the disc discrimination method is viewed as valuable, important, or even essential to the use of the laptop computer. Nor is it enough to show that a laptop computer without an ODD practicing the disc discrimination method would be commercially unviable. Were this sufficient, a plethora of features of a laptop computer could be deemed to drive demand for the entire product . . . . [P]roof that consumers would not want a laptop computer without such features is not tantamount to proof that any one of those features alone drives the market for laptop computers.” Emphasis added. Laserdynamics at pp 25, 26.

Enhanced Damages.  The law (35 U.S.C. 284) permits “increased damages up to three times the damage amount found or assessed.”  The U.S. Supremene Court overruled In re Seagate, 497 F. 3d 1360 (Fed. Cir. 2007) and threw out restrictive tests requiring objective recklessness by clear and convincing evidence to award enhanced damages. In Halo Electronics, Inc. v. Pulse Electronics, Inc. and Stryker Corp. v. Zimmer, Inc. (13-JUN-2016), the Supreme Court placed far greater discretion to the District Court to decide when circumstances warrant enhanced damages. The District Court must now weigh the “subjective willfulness of a patent infringer, [such that] intentional or knowing [infringement], may warrant enhanced damages, without regard to whether his infringement was objectively reckless.” At the same time, the Supreme Court emphasized that enhanced damages should not be “meted out in the typical infringement case” but should be available only for “egregious infringement behavior,” such as when the infringement is “willful, wanton, malicious, [in] bad-faith, deliberate, consciously wrongful, flagrant, or — indeed — characteristic of a pirate”). Halo, 579 U.S.___, ___ ­­­(2016) (slip op. at 8). The Supreme Court cited approvingly a prior decision holding that such punitive damages are not warranted by infringement undertaken in “ignorance or good faith.”

Similarly, attorney fees may also be awarded in “exceptional” cases pursuant to section 285 of title 35 of the United States Code.  Attorney fees are most often awarded when the degree of culpability of an  infringer is very clear from the start or if it was obvious the defendant wasn’t an infringer from the start, or where litigation behavior on the part of a party stretches the rules.  However, exceptional circumstances often require a finding of gross unfairness, or bad faith on the part of a party. If the patent owner loses the suit because of inequitable conduct in acquiring the patent, the patentee could be liable for attorney fees and lose his patent. Inequitable conduct involves lying to the Patent Office or concealing prior art, or not telling the Patent Office of some event that would have precluded issuance of the patent.   In most cases, proving exceptional circumstances is difficult and a very high hurdle. So, attorney fees are not usually awarded. When interpreting § 285, the Supreme Court in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U. S. ___, ___.and Highmark Inc. v. Allcare Health Management System, Inc.,, 572 _, noted that there is no statutory support for a restrictive test that takes discretion away from the district court with respect to determining when to award attorneys’ fees to a prevailing part in patent infringement litigation.

Amount of Damages.  The Court of Appeals for the Federal Circuit has altered the landscape of the law on infringement damages and is generally considered to have made damages more rational and related to the loss sustained and limited windfalls to the patent owner.

  • A first example is Uniloc USA, Inc. v. Microsoft Corp., decided 04-JAN-2011 (2010-1035, -1055), wherein the Federal Circuit held that there is no rule of thumb that 25% of the expected profit rate would be an assumed baseline license rate when calculating patent infringement damages. Citing others, the Federal Circuit observed: “([The 25 percent rule] takes no account of the importance of the patent to the profits of the product sold, the potential availability of close substitutes or equally noninfringing alternatives, or any of the other idiosyncrasies of the patent at issue that would have affected a real-world negotiation. . . it fails to ‘distinguish between monopoly and normal profit. . . .” The court held: “This court now holds as a matter of Federal Circuit law that the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.”
  • A second example is Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir. 2009), wherein the Federal Circuit reiterated that “The second Georgia-Pacific factor is ‘[t]he rates paid by the licensee for the use of other patents comparable to the patent in suit.’ 318 F. Supp. at 1120.” The court stated that the claimant must “prove that the licenses relied on were sufficiently comparable” to what would prevail in the hypothetical royalty negotiation in order to be usable for purposes of damages calculation in an infringement damages calculation.

Kodak Case Damages.  The court in the Polaroid v. Kodak case awarded $454 million in lost profits and $455 million in interest for a total of $909 million.  No punitive damages, costs or counsel fees were awarded.  Correction of calculational  errors and post judgment interest later raised the total amount received by Polaroid to $924.5 million.

Other related pages that may be of interest are patent infringement opinions and pharmaceutical importation and infringement.

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