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Modeling Patent Damages: Rigorous and Defensible Calculations

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... 'but-for' and actual financial position of the patent holder. ... Roy J. Epstein and Alan J. Marcus, 85 Journal of the Patent and Trademark Office Society (2003) ... – PowerPoint PPT presentation

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Title: Modeling Patent Damages: Rigorous and Defensible Calculations


1
Modeling Patent Damages Rigorous and Defensible
Calculations
  • Roy J. Epstein, PhD
  • www.royepstein.com
  • American Intellectual Property Law Association
  • Annual Meeting, Washington, D.C.
  • October 31, 2003

2
Roadmap
  • Growth of Patent Damages
  • Statutory Guidance
  • Reasonable Royalty and Lost Profits Key Elements
  • Recent Advances

3
Patent 6,469 (May, 1849)
  • A new and improved manner of combining
    adjustable buoyant air chambers with a steamboat…

4
Patents Issued, 18362003
2003
1849 Lincoln Patent
5
Damages and Prior Statutes
  • 1793 At least three times the price.
  • 1836 No more than three times actual damages.
  • 1870 Actual damages plus defendants profits.

6
35 U.S.C. 284 (1952)
  • …damages adequate to compensate for the
    infringement, but in no event less than a
    reasonable royalty.
  • Expert testimony to aid the court.

7
Role of Economics in Damages
  • Help make the injured party whole.
  • Quantify the harm as reliably as possible.
  • Avoid overcompensation.

8
The Reasonable Royalty
9
Hypothetical Negotiation
  • Allow infringer a reasonable profit.
  • (Georgia Pacific v. U.S. Plywood)
  • Use only information available prior to first
    infringement no hindsight.
  • (Integra Lifesciences v. Merck KgaA)

10
Georgia-Pacific Factors
  • Dominant royalty damages framework.
  • 15 factors of varying relevance to a given case.
  • Guidance, but not methodology.

11
Limitations of G-P
  • Range of outcomes too often is too wide.
  • No procedure to quantify factors for a
    bottom-line royalty.
  • Growing dissatisfaction among practitioners.

12
Royalty Surveys
  • Market based, but
  • Problem of comparability.
  • Can yield wide range of rates with no way to
    choose.

13
The 25 and 5 Rules
  • Convenient, low-tech, but
  • Mutually inconsistent.
  • Often require extensive and subjective adjustment.

14
Lost Profits
15
But-For Causation
  • Damages difference between but-for and actual
    financial position of the patent holder.
  • (Aro Mfg. v. Conv. Top Replacement)
  • Requires sound economic proof.
  • (Grain Processing v. Am. Maize Prods.)

16
Panduit Lost Profits Test
  • Demand for the patented product.
  • No acceptable alternatives.
  • Mfg. and marketing capability.
  • Patent holders profit margin.
  • (Panduit v. Stahlin Bros. Fibre Works)

17
Market Share Rule
  • Emerged to allow lost profits despite Panduit
    (2).
  • (State Industries v. Mor-Flo)
  • Infringers sales awarded to patent holder in
    proportion to market share.

18
Market Share Example
  • Shares 20 infringer, 40 patent holder, 40
    non-infringing alternatives.
  • Patent holder credited with 50 of infringing
    sales.

19
Price Erosion
  • Occurs when infringement lowers price received by
    patent holder.
  • Stands on same ground as damages caused by lost
    sales.
  • (Panduit Crystal Semiconductor v. TriTech)

20
Price Erosion Two Issues
  • Proof of amount of price erosion.
  • (Brooktree Lam 3M v. JJO)
  • Federal Circuit need credible economic
    evidence on decrease in sales at higher but-for
    price.
  • Price elasticity effect.

21
Damages and Unpatented Products
  • Entire market value rule.
  • Damages increasingly permitted on other sales
    that do not embody the infringed patent.
  • (Rite-Hite v. Kelley King Instruments v. Perego)

22
Grain Processing Defense
  • Infringer in but-for market ? No lost profits.
  • Design around not allowed post-infringement.
  • Delay in non-infringing entry eliminates defense.
  • (Micro Chemical v. Lextron)

23
Recent Advances
24
Royalties FIRRM
  • Financial Indicative Running Royalty Model
  • Roy J. Epstein and Alan J. Marcus, 85 Journal of
    the Patent and Trademark Office Society (2003).
  • Infringers next-best investment determines
    royalty.

25
SmithKline Diag. v. Helena 926 F.2d 1161
  • Defendant 3 royalty.
  • Plaintiff 48.
  • Court may reject the extreme figures proffered
    by the litigants as incredible. (Federal Circuit)

26
FIRRM Analysis
  • Indicates royalty from 23.7 to 36.5.
  • Defendant and plaintiff royalties possible but
    extreme.
  • Clarifies assumptions needed for extreme
    outcomes.
  • Court awarded 25.

27
Lost Profits PERLS
  • Price Erosion and Lost Sales
  • Roy J. Epstein, 31 AIPLA Quarterly Journal
    (2003).
  • Integrated analysis.
  • Key idea market share logic compatible with
    price elasticity.

28
Crystal Semiconductor 246 F.3d 1336
  • Involved audio chips used in personal computers.
  • Crystal sought
  • 35 million price erosion
  • 14 million lost sales under market share rule.

29
The Elasticity No-No
  • Actual Units Profit/unit
  • Patent holder 800 4
  • Infringer 200
  • 1,000
  • But-for market 1 price erosion
  • Lost profits NOT 1,800 ? ignores elasticity.

30
PERLS Lost Profits
31
PERLS Elasticity Adjustment
  • Depends on
  • Infringers market share
  • Patent holders revenues
  • Patent holders profit margin
  • Amount of price erosion (in )
  • Magnitude of the price elasticity

32
PERLS and Crystal
( Millions)
PERLS Lost Profits Range
49.0
7.9
21.8
Defendant Claim
Plaintiff Claim
Court Award
33
Damages The Road Ahead
  • Need for increasingly sophisticated economic
    analysis.
  • Federal Circuit receptive to new analyses for
    market reconstruction.
  • Academic research applies directly to lost
    profits and reasonable royalty.

34
  • Slide deck can be downloaded from
    www.royepstein.com
  • To contact Roy Epstein
  • email rje_at_royepstein.com
  • phone (617) 489-3818
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