The following article appears in the journal JOM, 45 (11) (1993), p. 77. JOM is a publication of The Minerals, Metals & Materials Society

Understanding How Damages Are Determined in Patent Litigation

The owner of a U.S. patent has the right to prevent others from making, using, or selling the claimed invention. If the patentee cannot obtain voluntary termination of an infringing activity or settle the dispute by a license agreement, he or she may seek redress by initiating litigation in a federal district court.

One of the remedies generally sought in such litigation is an injunction. The injunction might be a preliminary injunction pending the outcome of litigation and ultimately a permanent injunction prohibiting infringement of the patent. Refusing to obey an injunction opens one to penalties for contempt of court.

As the patentee has no rights until the date the patent is granted, there can be no award of damages for activities prior to issuance. After issuance, the patentee is entitled to collect damages from the date that the patented product is marked with a patent number. Failure to mark the product results in damages not being available until the infringer receives actual notice of the patent.

By statute, the patentee, if successful in the litigation, is awarded "damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court." The court may award interest from a time prior to entry of the judgment and it has the power (regardless of whether damages are found by the court or by a jury) to increase the damages up to three times the amount found. Such action is generally considered when the infringement has been deemed willful. In exceptional cases, the court may award reasonable attorneys' fees to the prevailing party. This means that the losing party would be required to pay the fees of counsel for the other party. However, there can be no financial recovery for infringement committed more than six years prior to the filing of the complaint.

According to the statute, damages must be adequate to compensate the claimant for the infringement; the absolute minimum cannot be less than a reasonable royalty. However, proof of such damages and what constitutes a reasonable royalty can be very difficult. It is common to employ expert testimony by a financial or patent expert to define appropriate compensation.

As a general starting point, one looks at sales that the defendant made from the infringing activity. Specifically, one must determine which profits would have been the plaintiff's profits but for the infringement.

The patentee must prove that there was a demand for the patented product during the period of infringing sales, that there was an absence of acceptable noninfringing substitutes, and that the patent owner had the ability to meet the demand for the products covered by the patent. The patentee must then provide a detailed computation of the amount of profits it would have made had it made the sales made by defendant.

To minimize the likelihood of the infringer going unpenalized, the statute provides for compensation to the patentee of not less than a reasonable royalty. For example, there may be situations where the patent owner is not in the business of marketing the product or the patentee is unable to prove the profitability of his or her business in the patented product if the infringer had not been selling the goods.

A reasonable royalty is generally deemed to be the amount that a licensee would be willing to pay through typical negotiations between a licensor and a licensee. In several recent cases, this standard has been altered to increase the amount in recognition of the infringement context. In determining a reasonable royalty, the amount of profit made by the infringer may be considered. Higher infringer's profits may be a basis for increasing the reasonable royalty. If provable, however, lost profits will generally result in more compensation for the patentee than a reasonable royalty.

There may be situations where split compensation would be awarded. For example, if the patentee is able to prove that but for the infringement the patentee would have made 45 percent of the sales made by the infringer, the patentee would be entitled to the lost profits on that 45 percent of the infringer's sales. The patentee would receive a reasonable royalty on the remaining 65 percent of the infringer's sales.

If the patentee has an existing license with a third party, the royalty rate paid under the existing license would be quite relevant in establishing a "reasonable royalty." Extenuating circumstances would contribute to determining the maximum. For example, the existence of the infringing activity could have reduced the patentee's ability to exact a higher royalty as the licensee would have competition that was not paying a royalty to the licensor. Also, the infringing activity may have resulted in competition that produced price cutting.

Another issue that arises occasionally with respect to patent infringement damages is whether the entire product should form the basis of compensation or merely a component of it. Generally, the basis for compensation will be the entire product only where the patent was granted for the entire product or the patented component gave the article its whole commercial value. Otherwise, the patentee has the burden of proving a basis of proportioning profits between the patented and unpatented portions of the product sold.

The law does not permit recovery of indirect consequential damages resulting from the infringement. For example, the fact that the patentee may have suffered competition and loss of business outside of the patent infringed or been required to borrow money at a higher interest rate is not generally considered a proper ground for compensation.

With respect to design patents, there is a special statutory provision that, in addition to the other remedies available for infringement of a utility patent, provides for relief against one who manufactures an infringing article or sells or offers the same for sale. It states that the infringer shall be liable to the owner to the extent of "his total profit, but not less than $250."

It is important to remember that the amount of damages recovered by the prevailing patentee is directly related to the ability to prove lost profits or a reasonable royalty. Thoroughness in maintaining records, discovering information from the infringer, and having proper guidance by experts will all contribute to enhanced recovery.