An International Guide to
Patent Case Management for Judges

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10.7.2 Damages

Section 284 of the Patent Act provides:

Upon finding for the claimant the court shall award the claimant 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. When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. Increased damages under this paragraph shall not apply to provisional rights under section 154(d) of this title. The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.

Section 286 establishes a six-year statute of limitations, barring patentees from recovering damages for any infringing acts committed more than six years prior to the filing of the complaint or counterclaim for infringement. Actual damages

Courts apply several approaches for measuring damages “adequate to compensate” for a defendant’s infringement. To recover lost profits, the patentee must prove a causal relation between the infringement and its lost profits.245 Accordingly, the patentee must show “a reasonable probability that ‘but for’ the infringing activity, the patentee would have made the infringer’s sales.”246 An accepted “but nonexclusive” method for establishing “but-for” causation is the four-factor “DAMP” test, under which the patentee must prove:

  1. (1) demand for the patented product,
  2. (2) absence of acceptable noninfringing substitutes,
  3. (3) manufacturing and marketing capability to exploit the demand, and
  4. (4) profit it would have made.247

Additionally, the patentee is required to show that the damages were or should have been reasonably foreseeable by an infringing competitor in the relevant market.248

In addition to lost profits, the patentee may recover convoyed sales and losses due to price erosion:

A “convoyed sale” refers to the relationship between the sale of a patented product and a functionally associated non-patented product. A patentee may recover lost profits on unpatented components sold with a patented item, a convoyed sale, if both the patented and unpatented products “together were considered to be components of a single assembly or parts of a complete machine, or they together constituted a functional unit.”249

To recover for price erosion, the patentee must prove that “but for” the infringement, they would have sold their patented invention at a higher price.250 Furthermore, patentees must prove the number of products they would have sold at this price. Accordingly, “the patentee’s price erosion theory must account for the nature, or definition, of the market, similarities between any benchmark market and the market in which price erosion is alleged, and the effect of the hypothetically increased price on the likely number of sales at that price in that market.”251 Reasonable royalty

Under 35 U.S.C. § 284, the patentee may recover no less than a reasonable royalty on the infringer’s sales for which the patentee has not shown entitlement to lost profits.252 A reasonable royalty may be derived from an established royalty (if one exists) or, more commonly, from a hypothetical negotiation between the patentee and the infringer when the infringement began.253

The hypothetical negotiation (during which the asserted patent claims are assumed to be valid and infringed) tries “to recreate the ex ante licensing negotiation scenario and to describe the resulting agreement.”254 Evidence relevant to calculating the reasonable royalty may include not only factual developments before the date of the hypothetical negotiation but also events occurring after that date.255

Determining the reasonable royalty based on the hypothetical negotiation commonly involves an analysis of the factors set forth in Georgia-Pacific Corp. v. U.S. Plywood Corp.:256

  1. (1) The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.
  2. (2) The rates paid by the licensee for the use of other patents comparable to the patent in suit.
  3. (3) The nature and scope of the license, as exclusive or nonexclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold.
  4. (4) The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.
  5. (5) The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter.
  6. (6) The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.
  7. (7) The duration of the patent and the term of the license.
  8. (8) The established profitability of the product made under the patent; its commercial success; and its current popularity.
  9. (9) The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results.
  10. (10) The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention.
  11. (11) The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use.
  12. (12) The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions.
  13. (13) The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.
  14. (14) The opinion testimony of qualified experts.
  15. (15) The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee – who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention – would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.257

A reasonable royalty calculation will typically require determining the royalty base and the royalty rate. The determination is relatively straightforward where the demand for a final product comprises a single patented technology, such as a drug with a patented active ingredient. The most sensible royalty base would typically be the total sales revenue for the final product – what is often referred to as the entire market value.258 The royalty rate would account for alternative treatments (of which there may be few), marketing costs, and manufacturing costs.

Patent law has long struggled to deal with apportioning patent value where a patent covers only one component of a larger product.259 The problem has become particularly acute in modern patent litigation as a result of the growing use of juries called upon to apportion value based on complex and often widely divergent economic expert analyses.

In general, a patent holder seeking a reasonable royalty must provide substantial evidence supporting both its choice of royalty base and royalty rate. “[W]here multi-component products are involved, the governing rule is that the ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product, and no more.”260 The Federal Circuit has warned, “reliance on the entire market value might mislead the jury, who may be less equipped to understand the extent to which the royalty rate would need to do the work in such instances.”261

To cabin the risk of outsize awards in multicomponent cases, the Federal Circuit has pushed the royalty base toward the smallest salable patent-practicing unit or “SSPPU.”262 The Federal Circuit embraced this framework in LaserDynamics Inc. v. Quanta Computer, Inc.,263 holding that “it is generally required that royalties be based not on the entire product, but instead on the ‘smallest salable patent-practicing unit.’ […] The entire market value rule is a narrow exception to this general rule.”264 Ongoing royalty after denial of a permanent injunction

Where a court determines that a permanent injunction is not warranted, it might determine an appropriate ongoing royalty for the infringer’s continued use of the patented invention (unless the jury explicitly awarded damages for future infringement). In the event the parties are unable to negotiate a mutually agreeable royalty agreement, the court can impose an ongoing royalty.265 There is no Seventh Amendment right to a jury to determine the issue of an ongoing royalty. Indeed, even a jury’s determination of a reasonable royalty does not bind the court in setting an ongoing royalty.266 This is because there is a difference between a reasonable royalty for pre-verdict infringement and damages for post-verdict infringement, given the change in the parties’ legal relationship and other economic factors.267 Where the jury’s royalty damage award is a lump sum that includes a royalty for future sales, however, the jury’s royalty determination precludes any further award.268 In any event, the court should provide a reasoned explanation for any ongoing royalty it imposes. In particular, the court may take additional evidence into account for any additional economic factors relevant to establishing a royalty for ongoing use of the patented invention post-verdict.

In determining the amount of an ongoing royalty, the district court should consider:

the change in the parties’ bargaining positions, and the resulting change in economic circumstances, resulting from the determination of liability – for example, the infringer’s likelihood of success on appeal, the infringer’s ability to immediately comply with the injunction, […] etc. – as well as the evidence and arguments found material to the granting of the injunction and the stay.269

The district courts have approached the determination of ongoing royalty in a variety of ways. Some have used the Georgia-Pacific factors,270 but have modified the factors to assume that the hypothetical negotiation occurred after the determination of the patent’s validity and infringement, when the infringer must consider the possibility that the patent holder could force it off the market absent a license. In doing so, some courts have noted that, since the pre-verdict analysis assumed the patent’s validity and infringement, this change will not alter the pre-judgment running royalty set by the verdict. Other courts, relying on the Federal Circuit’s citation of the “change in the parties’ bargaining positions, and the resulting change in economic circumstances, resulting from the determination of liability,” have inferred that the hypothetical negotiation should be more favorable to the patentee. Finally, while recognizing that the ultimate determination of the ongoing royalty is a legal issue to be determined by the court, some courts nevertheless submit the question to the jury for an advisory verdict, citing the efficiency of doing so. Enhanced damages

Section 284 of the Patent Act authorizes a court to increase the damages award up to three times. In Halo Electronics, Inc. v. Pulse Electronics, Inc.,271 the Supreme Court interpreted this provision to afford district courts broad, although not unbounded, discretion to enhance damage awards up to the treble cap. Halo “eschew[ed] any rigid formula for awarding enhanced damages,” but noted that “such punishment should generally be reserved for egregious cases typified by willful misconduct,” such as “wanton and malicious” piracy, that goes beyond typical infringement.272 The defendant’s willfulness, a factual determination to be made by a jury, is a significant factor in the enhanced damages determination. Courts typically set a briefing schedule for a motion for enhanced damages, as well as other post-trial motions, following the jury’s verdict. Pre-judgment interest

Section 284 authorizes the patentee to recover pre-judgment interest. The Supreme Court has held that pre-judgment interest “should be awarded […] absent some justification for withholding such an award.”273 A court may award pre-judgment interest only on compensatory damages and not on enhanced damages.274 Interest is calculated from the time of infringement until the date judgment is rendered.275 The district court has substantial discretion to determine both the pre-judgment interest rate and the assessment of simple or compound interest to the damages.276