.. 11

Modeling Patent Modeling Patent Damages: Rigorous Damages: Rigorous

and Defensible and Defensible CalculationsCalculationsRoy J. Epstein, PhDRoy J. Epstein, PhDwww.royepstein.comwww.royepstein.com

American Intellectual Property Law AssociationAmerican Intellectual Property Law AssociationAnnual Meeting, Washington, D.C.Annual Meeting, Washington, D.C.

October 31, 2003October 31, 2003

.. 22

RoadmapRoadmapGrowth of Patent DamagesGrowth of Patent Damages

Statutory GuidanceStatutory Guidance

Reasonable Royalty and Lost Profits: Reasonable Royalty and Lost Profits: Key ElementsKey Elements

Recent AdvancesRecent Advances

.. 33

Patent 6,469 (May, Patent 6,469 (May, 1849)1849)

““A new and A new and improved manner improved manner of combining of combining adjustable buoyant adjustable buoyant air chambers with a air chambers with a steamboat…”steamboat…”

4

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

`

1849 Lincoln Patent

2003

Patents Issued, Patents Issued, 1836–20031836–2003

.. 55

Damages and Prior Damages and Prior StatutesStatutes

1793: 1793: At leastAt least three times the three times the price.price.

1836: 1836: No more thanNo more than three times three times actual damages.actual damages.

1870: Actual damages 1870: Actual damages plusplus defendant’s profits.defendant’s profits.

.. 66

35 U.S.C. 284 (1952) 35 U.S.C. 284 (1952)

“…“…damages damages adequate to adequate to compensatecompensate for the infringement, for the infringement, but in no event less than a but in no event less than a reasonablereasonable royalty.” royalty.”

““Expert testimony” to aid the Expert testimony” to aid the court.court.

.. 77

Role of Economics Role of Economics in Damages in Damages

Help make the injured party Help make the injured party whole. whole.

Quantify the harm as reliably as Quantify the harm as reliably as possible.possible.

Avoid overcompensation.Avoid overcompensation.

88

The Reasonable The Reasonable RoyaltyRoyalty

.. 99

Hypothetical Hypothetical NegotiationNegotiation

Allow infringer a Allow infringer a reasonablereasonable profit. profit.((Georgia Pacific v. U.S. Plywood)Georgia Pacific v. U.S. Plywood)

Use only information available Use only information available prior to first infringement — prior to first infringement — no no hindsighthindsight..

((Integra Lifesciences v. Merck KgaA)Integra Lifesciences v. Merck KgaA)

.. 1010

Georgia-Pacific Georgia-Pacific FactorsFactors

Dominant royalty damages Dominant royalty damages framework.framework.

15 factors of varying relevance to 15 factors of varying relevance to a given case.a given case.

Guidance, but not methodology.Guidance, but not methodology.

.. 1111

Limitations of G-PLimitations of G-P

Range of outcomes too often is Range of outcomes too often is too wide.too wide.

No procedure to quantify factors No procedure to quantify factors for a bottom-line royalty.for a bottom-line royalty.

Growing dissatisfaction among Growing dissatisfaction among practitioners.practitioners.

.. 1212

Royalty SurveysRoyalty Surveys

Market based, but:Market based, but:–Problem of comparability.Problem of comparability.–Can yield wide range of rates with Can yield wide range of rates with

no way to choose.no way to choose.

.. 1313

The 25% and 5% The 25% and 5% “Rules”“Rules”

Convenient, low-tech, but:Convenient, low-tech, but:–Mutually inconsistent.Mutually inconsistent.–Often require extensive and Often require extensive and

subjective adjustment.subjective adjustment.

1414

Lost ProfitsLost Profits

.. 1515

““But-For” CausationBut-For” Causation

Damages: difference between Damages: difference between “but-for” and actual financial “but-for” and actual financial position of the patent holder.position of the patent holder.

((Aro Mfg. v. Conv. Top ReplacementAro Mfg. v. Conv. Top Replacement))

Requires “sound economic proof.”Requires “sound economic proof.”((Grain Processing v. Am. Maize Prods.Grain Processing v. Am. Maize Prods.))

.. 1616

Panduit Lost Profits Panduit Lost Profits TestTest

1)1) Demand for the patented Demand for the patented product.product.

2)2) No acceptable alternatives.No acceptable alternatives.3)3) Mfg. and marketing capability.Mfg. and marketing capability.4)4) Patent holder’s profit margin.Patent holder’s profit margin.

((Panduit v. Stahlin Bros. Fibre WorksPanduit v. Stahlin Bros. Fibre Works))

.. 1717

Market Share RuleMarket Share Rule

Emerged to allow lost profits Emerged to allow lost profits despite Panduit (2).despite Panduit (2).

((State Industries v. Mor-FloState Industries v. Mor-Flo))

Infringer’s sales awarded to Infringer’s sales awarded to patent holder in proportion to patent holder in proportion to market share. market share.

.. 1818

Market Share Market Share ExampleExample

Shares: 20% infringer, 40% patent Shares: 20% infringer, 40% patent holder, 40% non-infringing holder, 40% non-infringing alternatives.alternatives.

Patent holder: credited with 50% Patent holder: credited with 50% of infringing sales.of infringing sales.

.. 1919

Price ErosionPrice Erosion

Occurs when infringement lowers Occurs when infringement lowers price received by patent holder.price received by patent holder.

Stands on same ground as Stands on same ground as damages caused by lost sales.damages caused by lost sales.

((PanduitPanduit; ; Crystal Semiconductor v. Crystal Semiconductor v. TriTechTriTech))

.. 2020

Price Erosion: Two Price Erosion: Two IssuesIssues

Proof of amount of price erosion.Proof of amount of price erosion.((BrooktreeBrooktree; ; LamLam; ; 3M v. JJO3M v. JJO))

Federal Circuit: need “credible Federal Circuit: need “credible economic evidence” on decrease economic evidence” on decrease in sales at higher but-for price.in sales at higher but-for price.–““Price elasticityPrice elasticity” effect.” effect.

.. 2121

Damages and Damages and Unpatented Unpatented

ProductsProducts““Entire market value” rule.Entire market value” rule.

Damages increasingly permitted Damages increasingly permitted on other sales that do not embody on other sales that do not embody the infringed patent.the infringed patent.

((Rite-Hite v. Kelley; King Instruments v. Rite-Hite v. Kelley; King Instruments v. PeregoPerego))

.. 2222

Grain ProcessingGrain Processing DefenseDefense

Infringer in but-for market Infringer in but-for market No No lost profitslost profits. .

‘‘Design around’ not allowed post-Design around’ not allowed post-infringement.infringement.

–Delay in non-infringing entry Delay in non-infringing entry eliminates defense.eliminates defense.((Micro Chemical v. LextronMicro Chemical v. Lextron))

2323

Recent AdvancesRecent Advances

.. 2424

Royalties: FIRRMRoyalties: FIRRM

FFinancial inancial IIndicative ndicative RRunning unning RRoyalty oyalty MModelodel–Roy J. Epstein and Alan J. Marcus, Roy J. Epstein and Alan J. Marcus,

85 85 Journal of the Patent and Journal of the Patent and Trademark Office SocietyTrademark Office Society (2003). (2003).

Infringer’s Infringer’s next-bestnext-best investment investment determines royalty.determines royalty.

.. 2525

SmithKline Diag. v. SmithKline Diag. v. HelenaHelena

926 F.2d 1161926 F.2d 1161Defendant: 3% royalty.Defendant: 3% royalty.

Plaintiff: 48%.Plaintiff: 48%.

Court “may reject the extreme Court “may reject the extreme figures proffered by the litigants figures proffered by the litigants as as incredibleincredible.” (Federal Circuit).” (Federal Circuit)

.. 2626

FIRRM AnalysisFIRRM Analysis

Indicates royalty from 23.7% to Indicates royalty from 23.7% to 36.5%. 36.5%. –Defendant and plaintiff royalties Defendant and plaintiff royalties

possible but extreme.possible but extreme.

–Clarifies assumptions needed for Clarifies assumptions needed for extreme outcomes.extreme outcomes.

Court awarded 25%. Court awarded 25%.

.. 2727

Lost Profits: PERLSLost Profits: PERLS

PPrice rice ErErosion and osion and LLost ost SSalesales–Roy J. Epstein, 31 Roy J. Epstein, 31 AIPLA Quarterly AIPLA Quarterly

JournalJournal (2003). (2003).

Integrated analysis.Integrated analysis.

Key idea: market share logic Key idea: market share logic compatible with price elasticity.compatible with price elasticity.

.. 2828

Crystal Crystal Semiconductor Semiconductor 246 F.3d 1336246 F.3d 1336

Involved audio chips used in Involved audio chips used in personal computers.personal computers.

Crystal sought:Crystal sought:–$35+ million price erosion;$35+ million price erosion;–$14 million lost sales under market $14 million lost sales under market

share rule.share rule.

.. 2929

The Elasticity “No-The Elasticity “No-No”No”

Actual:Actual: Units Units Profit/unitProfit/unitPatent holderPatent holder 800 800 $4 $4InfringerInfringer 200 200

1,0001,000

But-for market: $1 price erosionBut-for market: $1 price erosion

Lost profits Lost profits NOTNOT $1,800 $1,800 ignores ignores elasticityelasticity..

.. 3030

PERLS Lost ProfitsPERLS Lost Profits

.. 3131

PERLS Elasticity PERLS Elasticity AdjustmentAdjustment

Depends on:Depends on:– Infringer’s market shareInfringer’s market share

– Patent holder’s revenuesPatent holder’s revenues

– Patent holder’s profit marginPatent holder’s profit margin

– Amount of price erosion (in %)Amount of price erosion (in %)

– Magnitude of the price elasticityMagnitude of the price elasticity

32

PERLS and PERLS and CrystalCrystal

$49.0Defendant

Claim

$7.9

($ Millions)

PlaintiffClaim

CourtAward

$21.8

PERLSLost Profits Range

.. 3333

Damages: The Road Damages: The Road AheadAhead

Need for increasingly sophisticated Need for increasingly sophisticated economic analysis.economic analysis.

Federal Circuit receptive to new Federal Circuit receptive to new analyses for “market reconstruction.” analyses for “market reconstruction.”

Academic research applies directly to Academic research applies directly to lost profits and reasonable royalty. lost profits and reasonable royalty.

.. 3434

Slide deck can be downloaded Slide deck can be downloaded from from www.royepstein.comwww.royepstein.com

To contact Roy Epstein:To contact Roy Epstein:email: email: rje@royepstein.comrje@royepstein.comphone: (617) 489-3818phone: (617) 489-3818