Lost profits represent the upper estimate of damages in patent-infringement cases. The lost profits that a patent owner can obtain represent the profits that the patent owner would have obtained if the infringing product was not sold in the relevant market. Thus, the lost profits represent the patent owner’s lost profits. The infringer’s profits are essentially irrelevant.
The patent owner must show that he or she would have obtained those profits “but for” the infringing activity in a two-product market. Courts will consider four factors in deciding whether to award damages and, if so, how much to award in lost profits. These factors are commonly referred to as the Panduit factors for Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978).
The Panduit factors include: (1) the demand for the patented product or method; (2) the absence of acceptable non-infringing substitutes; (3) the patent owner’s manufacturing capacity and marketing ability; and (4) the amount of profit the patent owner would have made had the infringement not occurred.
The first and fourth factors can be dependent upon complex economic calculations. The second and third factors can be dependent upon economic issues and technical issues.
A considerable body of case law has been developed to determine what constitutes an acceptable substitute. It cannot infringe the patent or patents-at-issue. It must also have been “available” at the time of the infringement but need not actually have been sold.
In markets in which more than two products are sold, a patent owner can obtain lost profits based upon the infringer’s share of that market.
Patent owners can also obtain lost profits for price erosion, when the introduction of the infringing product causes the patent owner to lower his or her price or to accept an artificially lower price.
Other factors that can be considered in lost-profit damage calculations are cost escalation due to the infringing activity and convoyed sales. Cost escalation can be caused by a need to engage in additional marketing activity to compete with the infringing product. Convoyed sales are the sales of products that are sold with the patented product.