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					Damages and Remedies
for Patent Infringement
      In The U.S.

TAC v. The Big Three

                          1
Remedies for Patent Infringement

• Injunctive Relief

• Damages for Past Harm

• Enhanced Damages – Willful Infringement

• Attorney Fees & Costs – In Extraordinary
  Cases

                                             2
Injunctions

• Can be preliminary or permanent

• In general, Courts grant permanent
  injunctions once infringement of a valid patent
  is established.

• Alternatively, Courts may refuse an injunction
  but impose a compulsory license


                                                    3
Permanent Injunctions - Exceptions
• Courts have not entered permanent injunctions
  when they would cause “irreparable hardship” to the
  infringing party without a countervailing benefit to
  the patentee.

• For example, irreparable hardship has been found
  where an injunction would terminate defendant’s
  business and the plaintiff was not producing the
  patented device.

• Public policy reasons may exist for refusing an
  injunction.                                            4
Likelihood of Injunction – In TAC v. The
Big Three
• Low because of January 2000 change in the
  law requiring some percentage of fleet to be
  hydrogen based:
     • unknown percentage
     • unknown penalty

• More likely to see forced license

• Royalty to be calculated on a going-forward
  basis
                                                 5
Damages – Driven by Economic Theory;
Not by a “Law of Damages”
• Limited Statutory Guidance
  – “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.” 35 U.S.C. §284
  – Though proposed statutory changes are being
    considered
• Limited Directions in Case Law
• Limited Appellate Review
  – Methodology Chosen – Abuse of discretion
  – Calculations – Clear error                         6
Types of Damages

•   Profits lost due to infringing sales
•   Price erosion damages
•   Consequential damages – e.g., convoyed sales
•   Reasonable royalty from infringing sales
•   Some combination of lost profits and a
    reasonable royalty

• All based on assumptions regarding
  hypothetical scenarios
                                                   7
Lost Profits – Proof – Scope of U.S.
Discovery is Key
•   To claim lost profits, the patentee must
    prove:

    a) causation in fact, and

    b) the measure of profits lost because of
       defendant’s infringement.


                                                8
Lost Profits – Causation

• The patent owner must prove with a
  reasonable probability that, but for the
  infringement, the patent owner would have
  made the infringer’s sales.
  – i.e., What part of the Market could the patent
    owner have captured?

• Various methods of proving causation have
  been accepted by the Courts
                                                     9
Causation – The Panduit Test
•   One acceptable method was first announced
    in the Panduit case, where the Court set
    forth three factors to consider:

    a) demand for the patented device;

    b) absence of acceptable non-infringing
       substitutes; and

    c) capacity to meet demand – manufacturing
       and marketing capabilities
                                                 10
The Panduit Factors in Operation

• Does demand for patent owner’s product
  exist in absence of infringer?
  – Products must be interchangeable


• Will all demand not met by infringer be
  transferred to patent owner?
  – Are there others in the market who will capture
    some demand?
  – Can patent owner satisfy the demand?
                                                      11
Interchangeability of Products
• Lost profits may not be awarded if the patent
  owner and infringer sell products in different
  market segments – Consider BIC Leisure

• Must take into account price elasticity of
  demand – Some purchases may simply
  disappear

• Must also consider other factors which may
  make infringer’s product unique in consumer’s
  mind                                             12
BIC Leisure
Sales Price for Similar Products

600

500

400

300

200

100

  0
      Party1   Patentee   Party2   Party3   Infringer   Party4


                                                                 13
BIC Leisure
Sales Price for Similar Products

600

500
      Market Segment 1
400

300

200

100

  0
      Party1   Patentee   Party2   Party3   Infringer   Party4


                                                                 14
BIC Leisure
Sales Price for Similar Products

600

500

400   Market Segment 1
300

200
                                    Market Segment 2
100

  0
      Party1   Patentee   Party2   Party3   Infringer   Party4


                                                                 15
Transfer of Demand to Patent Owner –
Two Suppliers
• If the patent owner can show that he and the
  infringer are the only two suppliers in a single
  market, the Court may infer “but for”
  causation.




                                                     16
 Two Supplier Market

                        Infringer
Patentee
                       (25 Units)
(75 Units)




                                    17
   Two Supplier Market
                                         Patentee
                                         (Lost profits
                                         on 25 units)
     Patentee




Patentee entitled to lost profits based on all
25 of the units sold by the infringer.                   18
Transfer of Demand – Multiple Suppliers

• In a market with multiple suppliers, the
  patentee may receive lost profits for infringing
  sales based on its market share.

• Of course, this assumes all remaining parties
  in the market have the capacity to absorb the
  transferred demand.




                                                     19
  Multiple Supplier Market

  Patentee                              Infringer
  (50 Units)                           (30 Units)




                                 3rd Party
                                (20 Units)
Patentee has 50% market share with the infringer in it.
                                                     20
 Multiple Supplier Market
                                       Patentee
 Patentee                              (21 units)
 (71 Units)

                                                     3rd Party
                                                     (9 units)


                                       3rd Party
                                       (29 Units)

Patentee has 71% of market without infringer. Patentee
entitled to lost profits based on 21 units (71% of 30) sold
by infringer.                                                    21
Transfer of Demand – Absence of Non-
Infringing Alternatives
• Product must possess the beneficial
  characteristics of the patented product

• Must be “available”, but not necessarily on
  the market

• Burden is on patentee

• Very fact-specific inquiry
                                                22
Transfer of Demand – Capacity to Meet
The Demand
• Must have manufacturing capacity

• Must have marketing capability

• Again, burden is on patentee to show
  capacity to a “reasonable probability”



                                           23
Panduit Factors Applied to TAC v. The Big
Three
• Products sold in single market segment

• Product is likely unique enough that PTC
  represents the only non-infringing alternative

• While some purchases may have been driven
  by brand loyalty, TAC’s quick success makes
  it fair to assume that was not a critical factor

                                                     24
Panduit Factors Applied to TAC v. The Big
Three (continued)
• Absent evidence of a lack of capacity on
  PTC’s part, may assume PTC will absorb its
  proportionate share of the Big Three’s sales

• Evidence of TAC’s ability to meet the huge
  increase in demand, i.e., to “capture” all or
  most of the Big Three’s sales is limited
   – Manufacturing expansion not easy
   – Marketing not addressed at all
                                                  25
Measure of Lost Profits –
    Incremental Income Approach
• The incremental income approach recognizes that
  it does not cost as much to produce unit N+1 if the
  first N units already have paid the fixed costs.

• Thus, fixed costs, such as salaries, research and
  development, etc., are ignored when calculating
  the per unit profit the patentee would have earned.

• Only the truly variable costs are deducted from
  sales price under this scenario to determine lost
  profits.
                                                        26
Limits on Incremental Income Approach

• Economic theory teaches us that what is a
  “variable” cost changes dramatically with large
  increases in production volume

• Need to reinvest regularly in manufacturing
  facilities must be taken into account

• Thus, incremental income approach only
  works for small transfers of demand over a
  limited period of time
                                                    27
Measure of Lost Profits
    TAC v. The Big Three
• TAC’s $9,000 profit per vehicle figure is way
  too high

• Does not factor in cost changes due to huge
  increases in manufacturing and distribution

• Does not factor in costs necessitated by
  proposed expansions in or conversions of
  manufacturing facilities

• Does not factor in royalty to Renault           28
Measure of Lost Profits
    TAC v. The Big Three
• Historical profits to Big Three were in $3,000
  per vehicle range

• TAC’s historical profits were not much higher

• Likely need to choose a more reasonable
  figure
      (e.g., 3-4,000 dollar range)

                                                   29
Price Erosion Damages

• A patentee is entitled to recover losses for
  price erosion if infringement prevented the
  patentee from raising prices or forced prices
  to be lowered.

• No evidence of it in TAC v. The Big Three




                                                  30
      Price Erosion

             500
             450   Patent
(Sales Price
             400   Holder
in Dollars) 350    Price -
             300
             250
             200
                      No
             150   Infringer
             100
              50
               0
                    1997       1998   1999

                                             31
     Price Erosion

             500
             450   Patent
             400   Holder
(Sales Price
in Dollars) 350    Price -
             300
             250               Infringer
             200
                      No        Enters
             150   Infringer    Market
             100
              50
               0
                    1997        1998       1999

                                                  32
     Price Erosion

             500
             450   Patent
(Sales Price 400   Holder
in Dollars) 350    Price -
             300
             250               Infringer   Infringer
             200
                      No       Enters       Forces
             150   Infringer   Market       Lower
             100
                                            Prices
              50
               0
                    1997       1998        1999

                                                       33
Consequential Damages –
    Increased Expenses
• Increased expenses due to the infringement,
  such as promotional fees incurred to compete
  with the infringer, can also be recovered as
  part of lost profits.




                                                 34
Consequential Damages –
    Sales of Unpatented Components
• A patentee is entitled to lost profits on
  unpatented components which accompany
  the sale of patented components where, in
  reasonable probability, the patentee would
  have made the sales which the infringer
  made.




                                               35
Consequential Damages –
    Sales of Unpatented Components
    Sold with Patented Device
•   Lost profits on unpatented articles sold with
    patented articles may be recovered provided
    that:
    a) they have a functional relationship to the
       patented article, and
    b) are not sold solely as a matter of
       convenience or business advantage.

•   Also referred to as “convoyed” sales
                                                    36
Other Consequential Damages

• What these might be are only limited by the
  flexibility of the economic theories one
  employs




                                                37
Reasonable Royalty for Past Sales

• At a Minimum, the patentee is entitled to a
  reasonable royalty. 35 U.S.C. §284.

• This may be in lieu of lost profits or for that
  portion of the market that patent owner could
  not capture.

• The royalty to which the patentee is entitled
  should be calculated as of the date
  infringement began.                               38
Calculating Royalty Base

• Turns on scope of claim

• “The entire-market value rule”– allows royalty
  base to be expanded beyond the patented
  invention to an entire system or apparatus
  where “the patented feature is the basis for
  customer demand” Rite Hite v. Kelley Co

• Burden is on patentee
                                                   39
Calculating Royalty Base (cont’d)

• “Apportionment” – a concept which allows
  reduction in royalty base in the face of a
  systems patent claim, where a portion of the
  entire product or process is attributable to the
  infringer, not the patentee

• Burden is on the infringer




                                                     40
Reasonable Royalty – Two Methods

•   There are two accepted methods for
    determining a reasonable royalty rate:
    1) the analytical method, or
    2) a hypothetical license




                                             41
Analytical Method

• The analytical method for determining a
  reasonable royalty looks at the profits made
  by the infringer on a patented device to arrive
  at a reasonable royalty

• The assumption is that an infringer is entitled
  only to a standard industry profit margin and
  the patentee is entitled to any additional
  profits.
                                                    42
Analytical Method - Procedure

• Determine profits of infringer

• Determine average industry profit margin

• Permit infringer only to receive average
  industry profit margin

• Award remainder of the infringer’s profits to
  patentee as reasonable royalty
                                                  43
Analytical Method – Calculation

 $50   Infringer’s Profit Per Device
-$20   Standard Industry Profit Margin

$30    Remaining Profit Awarded as
       Reasonable Royalty

• In TAC v. The Big Three, could lead to a high
  royalty payment

                                                  44
Hypothetical License

• A reasonable royalty can be determined by
  determining the outcome of a hypothetical
  licensing negotiation between the patentee
  and a willing licensee at the time infringement
  began.

• In Georgia Pacific, the Court set forth 15
  factors to help determine a reasonable royalty
  resulting from a hypothetical negotiation.
                                                    45
Georgia Pacific Factors
• To serve as guides only
  1) royalties received by the patentee for prior
     existing license, if any, under the patent;

  2) rates paid by the licensee for the use of
     comparable patents;

  3) the scope of the license: exclusive vs. non-
     exclusive, restricted, etc.;

  4) the patent owner’s established licensing policy;
                                                        46
Georgia Pacific Factors
  5) the commercial relation between the parties;

  6) collateral benefits and convoyed sales;

  7) the duration of the patent and term of the license;

  8) the established profitability of the product;

  9) the utility and advantages of the patent over
     conventional devices;

  10)the nature and benefits of the invention to users;
                                                           47
Georgia Pacific Factors
  11) the extent by which the infringer has made use of the
      invention;

  12) the customary percentage profit in the industry for use
      of analogous inventions;

  13) the portion of the profits attibutable to the novel
      (versus conventional) features of the patented device;

  14) opinion of experts;

  15) the amount that a prudent licensee would have paid a
      prudent licensor while reserving a reasonable profit
                                                               48
Georgia Pacific Factors
    TAC vs. The Big Three
Relevant Considerations
• Cross-license with PTC
• PTC’s 3% license to the Big Three
• Questions regarding strength of TAC’s patent
  claims
• Relatively untested nature of product and
  demand for it
• Need to adapt technology to make use of
  patented device
• Profits for industry generally
                                                 49
Georgia Pacific Factors
    TAC vs. The Big Three
Irrelevant Considerations
• TAC’s original demands
• Change in law requiring production of
   hydrogen-based vehicles
• Success of sales/increase in demand for
   vehicles after 1999

Note: How the considerations would change
 for a post judgment forced license
                                            50
Post- Judgment Interest

• A patentee is entitled to post-judgment
  interest calculated from the date of judgment
  at a rate based on the 52-week T-bill.




                                                  51
Enhanced Damages/Willful Infringement

• Where the defendant has willfully infringed a
  patent, the Court may increase the damages
  up to three times the amount awarded.

• Willful infringement is determined based on
  the totality of the circumstances.

• Willful infringement occurs when an infringer
  acts “in wanton disregard of the patentee’s
  patent rights.” Read v. Portec.

                                                  52
Willful Infringement Factors

• Deliberate copying of patented invention;

• Failure to investigate after notice of a patent;
   – Opinions of Counsel


• Infringer’s behavior as a party to the litigation;

• Infringer’s size and financial condition

• Closeness of the case;

                                                       53
Willful Infringement Factors

• Duration of the infringer’s misconduct

• Remedial action by the infringer;

• Infringer’s motivation for harm; and

• Whether the defendant attempted to conceal
  its misconduct.

                                               54
Attorney Fees and Costs

• Reasonable Attorney Fees and Costs may be
  awarded to a prevailing party in a patent
  infringement suit in “exceptional cases.”
  35 U.S.C. §286
Exception to the Standard “American Rule”




                                              55
Exceptional Cases

• The bases for an exceptional case resulting
  in an award of attorney fees and costs
  include:
   – unjustified litigation;
   – bad faith conduct by counsel or a party
     during litigation; or
   – willful infringement


                                                56
The End


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