How to Calculate Damages in Patent Infringement Cases

In patent infringement cases, damages are intended to compensate the patent holder for unauthorized use of their patented invention. The goal is to place the patent holder in the financial position they would have been in had the infringement not occurred.

Damages in US patent litigation are governed by 35 U.S.C. § 284, which states that the patent holder is entitled to “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty.”

Types of Patent Infringement Damages

1. Reasonable Royalty Damages 2. Lost Profits Damages 3. Enhanced Damages (Treble Damages)

 1. Reasonable Royalty Damages

A reasonable royalty is the minimum amount the infringer would have paid the patent owner in a hypothetical negotiation prior to the infringement. This is the most common form of damages in patent cases.

Hypothetical Negotiation Factors:
The Georgia-Pacific Factors, from Georgia-Pacific Corp. v. U.S. Plywood Corp. (1970), guide the calculation of reasonable royalty damages. Key factors include:

• Existing royalty rates for similar licenses.
• Licensing terms previously agreed upon by the parties.
• Profitability of the patented product to the infringer.
• Value and utility of the patent to the infringer.
• The portion of the infringer’s profits attributable to the patented technology.
• The patent’s contribution to market demand for the infringing product.

Formula for Reasonable Royalty:

Reasonable Royalty=Royalty Rate×Infringing Sales\text{Reasonable Royalty} = \text{Royalty Rate} \times \text{Infringing Sales} 

Example:
If the royalty rate is 5% and the infringer generates $10 million in revenue from infringing sales:

Damages=0.05×10,000,000=500,000\text{Damages} = 0.05 \times 10,000,000 = 500,000 

2. Lost Profits Damages

A patent holder can recover lost profits if they can prove they would have made more sales or earned higher profits but for the infringement. To claim lost profits, the patentee must demonstrate:

• Demand for the patented product.
• Absence of acceptable non-infringing alternatives.
• Their ability to meet the demand.
• The amount of profit lost due to the infringement.

Panduit Test:
Courts often apply the Panduit test from Panduit Corp. v. Stahlin Bros. Fibre Works, Inc. (1978) to determine if lost profits apply. The patentee must show:

1. Demand for the patented product.
2. No non-infringing substitutes were available.
3. The patent owner had the manufacturing and marketing capacity to meet the demand.
4. The amount of profit lost.

Formula for Lost Profits:
Lost Profits=(Lost Sales×Per-Unit Profit)\text{Lost Profits} = (\text{Lost Sales} \times \text{Per-Unit Profit}) 

Example:

• Lost sales: 100,000 units
• Per-unit profit: $10

Damages=100,000×10=1,000,000\text{Damages} = 100,000 \times 10 = 1,000,000 

3. Enhanced Damages (Treble Damages)

In cases of willful infringement, the court may award enhanced damages under 35 U.S.C. § 284, up to three times the actual damages (treble damages).

• Willful infringement occurs when the infringer acted with reckless disregard for the patent holder’s rights.
• Courts evaluate factors of willfulness, such as:
  • Whether the infringer was aware of the patent.
  • Efforts to avoid infringement.
  • Any attempts to obtain legal advice.

Example with Enhanced Damages:

• Reasonable royalty: $500,000
• Treble damages:

500,000×3=1,500,000500,000 \times 3 = 1,500,000 

Additional Considerations

• Apportionment of Damages:
  If the patented invention is only one part of a larger product, damages are based on the contribution of the patent to the overall product value.
• Example: If the patented feature accounts for 30% of the product’s value, damages are based on 30% of the infringer’s profits.
  
  
• Prejudgment and Post-Judgment Interest:
  The court may award interest on the damages, compensating for the time value of money.

Comparing Damages Calculation Methods

Key Takeaway

To calculate patent infringement damages:

1. Reasonable Royalty: The minimum compensation based on a hypothetical licensing negotiation.
2. Lost Profits: If the patentee proves they lost sales or profits due to the infringement.
3. Enhanced Damages: Up to three times the actual damages in cases of willful infringement.

Accurately calculating damages often requires economic experts and detailed financial models to assess the value of the patent and the financial impact of the infringement.