Transcript Roy Epstein AIPLA Presentation Oct. 31, 2003

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
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Roadmap
Growth of Patent Damages
Statutory Guidance
Reasonable Royalty and Lost Profits:
Key Elements
Recent Advances
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Patent 6,469 (May, 1849)
“A new and
improved manner
of combining
adjustable buoyant
air chambers with a
steamboat…”
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Patents Issued, 1836–2003
7,000,000
2003
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
1849 Lincoln
Patent
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Damages and Prior
Statutes
1793: At least three times the
price.
1836: No more than three times
actual damages.
1870: Actual damages plus
defendant’s profits.
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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.
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Role of Economics in
Damages
Help make the injured party
whole.
Quantify the harm as reliably as
possible.
Avoid overcompensation.
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The Reasonable Royalty
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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)
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Georgia-Pacific Factors
Dominant royalty damages
framework.
15 factors of varying relevance to
a given case.
Guidance, but not methodology.
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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.
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Royalty Surveys
Market based, but:
–Problem of comparability.
–Can yield wide range of rates with
no way to choose.
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The 25% and 5% “Rules”
Convenient, low-tech, but:
–Mutually inconsistent.
–Often require extensive and
subjective adjustment.
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Lost Profits
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“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.)
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Panduit Lost Profits Test
1) Demand for the patented
product.
2) No acceptable alternatives.
3) Mfg. and marketing capability.
4) Patent holder’s profit margin.
(Panduit v. Stahlin Bros. Fibre Works)
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Market Share Rule
Emerged to allow lost profits
despite Panduit (2).
(State Industries v. Mor-Flo)
Infringer’s sales awarded to
patent holder in proportion to
market share.
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Market Share Example
Shares: 20% infringer, 40%
patent holder, 40% non-infringing
alternatives.
Patent holder: credited with 50%
of infringing sales.
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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)
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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.
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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)
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Grain Processing Defense
Infringer in but-for market  No
lost profits.
‘Design around’ not allowed postinfringement.
–Delay in non-infringing entry
eliminates defense.
(Micro Chemical v. Lextron)
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Recent Advances
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Royalties: FIRRM
Financial Indicative Running
Royalty Model
–Roy J. Epstein and Alan J. Marcus,
85 Journal of the Patent and
Trademark Office Society (2003).
Infringer’s next-best investment
determines royalty.
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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)
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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%.
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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.
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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.
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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 $1,800  ignores
elasticity.
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PERLS Lost Profits
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PERLS Elasticity Adjustment
Depends on:
– Infringer’s market share
– Patent holder’s revenues
– Patent holder’s profit margin
– Amount of price erosion (in %)
– Magnitude of the price elasticity
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PERLS and Crystal
($ Millions)
PERLS
Lost Profits Range
$7.9
$21.8
Defendant Court
Claim
Award
$49.0
Plaintiff
Claim
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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.
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Slide deck can be downloaded
from www.royepstein.com
To contact Roy Epstein:
email: [email protected]
phone: (617) 489-3818
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