When patent infringement is proven, determining the appropriate financial remedy becomes critical. Patent damages compensate the patent owner for the unauthorized use of their invention. Understanding how damages are calculated can significantly impact both settlement negotiations and trial outcomes.
Types of Patent Damages
Patent law provides for damages "adequate to compensate for the infringement, but in no event less than a reasonable royalty." In practice, this means patent owners can recover lost profits, reasonable royalties, or sometimes both. The type of damages available depends on whether the patent owner competes in the market.
Patent owners who manufacture and sell products covered by their patent may recover lost profits—the actual money they would have made but for the infringement. Lost profits typically result in higher damages than royalties because they capture the full value of lost sales rather than a percentage.
Lost Profits Requirements
To recover lost profits, patent owners must prove the Panduit factors: demand for the patented product existed, acceptable non-infringing substitutes were absent, the patent owner had manufacturing and marketing capability to meet demand, and the amount of profit can be calculated. Failing any factor typically limits recovery to reasonable royalties.
The "but for" test asks what would have happened in a world without infringement. If customers would have bought the patent owner's product instead of the infringing one, lost profits are appropriate. If customers would have chosen a different non-infringing alternative, the patent owner cannot claim those sales.
Reasonable Royalty Calculation
A reasonable royalty is the amount a willing licensor and willing licensee would have agreed to in a hypothetical negotiation at the time infringement began. Courts use the 15 Georgia-Pacific factors to guide this analysis, examining comparable licenses, the nature of the invention, the parties' relationship, and many other considerations.
The royalty base is the revenue subject to the royalty calculation. Recent case law requires the royalty base to be the smallest salable patent-practicing unit rather than the entire product, unless the patented feature drives demand for the whole product. This "apportionment" requirement has significantly reduced damages in many technology cases.
The royalty rate is the percentage applied to the base. Rates vary enormously depending on the technology, from fractions of a percent for minor component patents to double digits for breakthrough inventions. Comparable license agreements are the best evidence of appropriate royalty rates.
Enhanced Damages
Courts may award up to three times actual damages for willful infringement—cases where the infringer knew about the patent and acted despite an objectively high likelihood of infringement. Enhanced damages are discretionary and reserved for egregious cases, not every instance where the infringer had notice.
Factors courts consider include the closeness of the case, the infringer's behavior, the infringer's size and resources, the duration of misconduct, any remedial action taken, and the motivation for harm. A good-faith belief in invalidity or non-infringement can defeat willfulness claims.
Pre-Suit and Post-Verdict Damages
Damages typically begin from the date the infringer received actual notice of infringement, often through a cease-and-desist letter or the lawsuit itself. Proper patent marking (putting patent numbers on products) can establish constructive notice and enable recovery of damages from an earlier date.
After a verdict or injunction, ongoing royalties may be awarded for continued use of the patented technology. Post-verdict royalty rates are often higher than pre-verdict rates because the infringer now knows the patent is valid and infringed.
Damages Expert Testimony
Patent damages almost always require expert testimony from economists or accountants. Damages experts must base their opinions on reliable methodologies or courts will exclude their testimony under the Daubert standard. Common grounds for exclusion include using the entire market value rule improperly, failing to apportion value to the patented feature, and relying on incomparable license agreements.
Both sides typically retain damages experts who, unsurprisingly, reach dramatically different conclusions. Juries often split the difference between competing expert opinions, making the range of expert estimates critically important.
Settlement Considerations
Most patent cases settle before trial. Understanding potential damages informs settlement negotiations. Settlements typically fall between the defendant's best-case and plaintiff's worst-case damages scenarios, adjusted for litigation costs and risk.
Ongoing royalty licenses are common settlement terms, allowing the defendant to continue using the technology for an agreed fee. Lump-sum payments, cross-licenses, and business arrangements also feature in patent settlements.
Getting Legal Help
Patent damages calculations involve complex economic analysis and specialized legal rules. Experienced patent litigation counsel can maximize damages recovery or minimize exposure depending on which side you're on. Early case assessment of damages helps shape litigation strategy and settlement positioning.