Calculating Damages Involves   Identifying Lost Profits

Lost profits are the central focus when calculating damages in cases involving infringement or other violation of intellectual property, such as copyrights.

A four-part test to prove lost profits was laid out in the landmark case of Panduit Corp. v Stahlin Bros. Fibre Works. Meeting these four parts let the plaintiff prove that it would have sold its products if the infringing invention hadn't been on the market:

When lost profits can't be established, plaintiffs can try to determine reasonable royalty. Another case, Georgia Pacific Corp. v. U.S. Plywood Corp., sets out fifteen factors that are relevant to determining reasonable royalty (see box below). Each factor must be considered and together, they establish the minimum for damages when there is no demonstration of lost profits.

But a little knowledge is a dangerous thing. Some financial experts, aware of the Panduit and Georgia Pacific cases, rush in to calculate damages using reasonable royalty. But it's critical to be aware that in some cases, both lost profits and reasonable royalty can be awarded (Standard Indus., Inc. v. Mor-Flo Indus. Inc.).

In other words, a financial expert who casually applies established or reasonable royalty as a measure of damages without a thorough investigation to determine if lost profits can be identified has just undervalued - perhaps significantly - your client's claim. A thorough investigation needs to be done to determine if lost profits can be identified.

Reasonable Royalty The economic factors that determine the value of a patent - and thus determine lost profit damages - also influence the determination of a reasonable royalty. The following factors laid out in the Georgia-Pacific case provide a starting point for determining a reasonable royalty: Existence of an established royalty. Rate paid by licensee for comparable patents. Nature and scope of the license. Licensing policy. Business relationship of licensor and licensee. Effect of selling the product to promote other products of licensee. Duration of the patent and term of the license. Established profitability, commercial success and current popularity. The utility and advantages of the product over older ones. Nature of the patented invention and benefits to those who used it. The extent the licensee used the product and the value of that use. The customary industry portion of the profit or selling price. How much profit should be credited to the invention. Hypothetical license negotiation when the infringement began. Testimony of qualified experts.