Keyword

Economic models, intellectual property, lost profits, patent damages, patent lost profits, patent valuation

Abstract

Patents are valuable only when they are enforced in court. The purpose of this paper is to measure a patent owner’s profits that are lost when a competing firm unlawfully makes infringing sales. Our microeconomic methodology computes a two-firm duopoly equilibrium with an infringer present and compares it with the same market but with the infringer removed. The second equilibrium represents a legally sanctioned single-firm patent monopoly. We derive a single equation representing the lost profits damage percent to be paid to the patent owner by the infringer. We incorporate product demand, both firms’ marginal costs, output, market shares, and prices in our equation. There are three contributions of this paper. 
One, we derive the simplest duopoly/monopoly damage equation we have seen that captures all the economic effects into a single percentage damage number.
Second, that damage percent multiplied times the patent owner’s actual profits (with infringement ongoing) equals the dollar damages the infringer should pay in court for the patent owner’s lost profits. 
Third, we apply our formula to a small pilot study of classic US patent lost profit cases and find that our equation’s damage predictions had a correlation of .71 with the actual Federal court damage outcomes. 
We also illustrate the use of the formula. For example, if a patent owner’s actual profits on its patented product was $10 million with infringing sales present, then lost profits damages due to the patent owner would be $12.5 million if the two firms’ sales were equal. Patent damages increase to over $40 million if the infringer’s market share increased to triple that of the patent owner in the two-firm market. 
 


Full Text : PDF

References
  1. Anton, J. J. and Yao, D. A. (2007) ‘Finding “lost” profits: An equilibrium analysis of patent infringement damages’, Journal of Law, Economics, and Organization, 23(1), pp. 186–207. doi: 10.1093/jleo/ewm008.
  2. Bohrer, D., Lynde, M. and Morris, E. M. N. (2009) ‘The Shifting Sands of Price Erosion: Price Erosion Damages Shift by Tens of Millions of Dolalrs Depending Upon the Admissibility of Pre-Notice Eroded Prices’, Santa Clara Computer and High - Technology Law Journal, 25(4), pp. 723–763.
  3. Broadview Chemical Corporation v. Loctite Corporation, 311 F. Supp. 447, 1970 U.S. Dist. Lexis 13387, 164 U.S.P.Q. (BNA) 419 (United States District Court for the District of Connecticut January 2, 1970 
  4. Choi, J. P. (2009) ‘Alternative damage rules and probabilistic intellectual property rights: Unjust enrichment, lost profits, and reasonable royalty remedies’, Information Economics and Policy. Elsevier B.V., 21(2), pp. 145–157. doi: 10.1016/j.infoecopol.2008.11.001.
  5. Policy, 21(2), 145–157. https://doi.org/10.1016/j.infoecopol.2008.11.001
  6. Crystal Semiconductor Corporation, Plaintiff-Appellant, v. Tritech Microelectronics International, Inc. and Tritech Microelectronics International Pte Ltd., Defendants-Cross Appellants, and Opti, Inc., Defendant., 246 F.3D 1336, 2001 U.S. App. Lexis 3553, 57 U.S.P.Q.2D (BNA) 1953 (United States Court of Appeals for the Federal Circuit March 7, 2001, Decided). 
  7. Epstein, R. J. (2003) ‘The Market Share Rule with Price Erosion: Patent Infringement Lost Profits Damages After Crystal’, AIPLA Quarterly Journal, 31(1), pp. 1–46. doi: 10.3366/ajicl.2011.0005.
  8. Gaff, B. M. (2015) Patent Infringement Damages, Computer. doi: 10.1109/MC.2015.330.
  9. Gould, D. M. and Gruben, W. C. (1996) ‘The role of intellectual property rights in economic growth’, Journal of Development Economics, 48(2), pp. 323–350. doi: 10.1016/0304-3878(95)00039-9.
  10. Henry, M. D. and Turner, J. L. (2010) ‘Patent Damages and Spatial Competition’, The Journal of Industrial Economics, 58(2), pp. 279–305. Available at: http://www.jstor.org/stable/40662184.
  11. Janicke, P. M. and Ren, L. (2006) ‘Who Wins Patent Infringement Cases?’, AIPLA Quarterly Journal, 34(1), pp. 1–43. doi: 10.3366/ajicl.2011.0005.
  12. Lex Machina (2014) Lex Machina Patent Litigation Damages Reference Sheet. doi: https://lexmachina.com/wp-content/uploads/2014/12/Damages-Reference-Sheet.pdf.
  13. Lex Machina (2018) Lex Machina’s Fifth Annual Patent Litigation Year in Review Report Quantifies the Impact of the Landmark TC Heartland v. Kraft Supreme Court Case. doi: https://lexmachina.com/media/press/lex-machinas-fifth-annual-patent-litigation-year-review-report-quantifies-impact-landmark-tc-heartland-v-kraft-supreme-court-case/.
  14. Micro Motion, Incorporated, Plaintiff, v. Exac Corporation, Defendant, 761 F. Supp. 1420, 1991 U.S. Dist. Lexis 4843, 91 Daily Journal DAR 4595, 19 U.S.P.Q.2D (BNA) 1001 (United States District Court for the Northern District of California February 27, 1991, Filed). 
  15. Minco, Inc. v. Combustion Engineering, Inc., 903 F. Supp. 1204, 1995 U.S. Dist. Lexis 19653 (United States District Court for the Eastern District of Tennessee June 22, 1995, Filed).
  16. Modine Manufacturing Co., Plaintiff, v. The Allen Group, Inc. D/B/A/ The G & O Manufacturing Co., Defendant, 1989 U.S. Dist. Lexis 16413, 14 U.S.P.Q.2D (BNA) 1210 (United States District Court for the Northern District of California November 30, 1989, filed; December 4, 1989, Entered). 
  17. Nicholson, W. and Snyder, C. (2008) Microeconomic Theory: Basic Principles and Extensions. 10th edn. Mason, Ohio: Thomson/South-Western.
  18. Nieberding, J. F. (2003) ‘Lost Profits and Price Erosion in Patent Infringement Cases: Implications of " Crystal Semiconductor "’, Journal of Forensic Economics, 16(1), pp. 37–49. Available at: 
  19. http://www.jstor.org/stable/42755931.
  20. Panduit Corp., Plaintiff-Appellant, v. Stahlin Bros. Fibre Works, Inc., Defendant-Appellee, 575 F.2d 1152, 1978 U.S. App. Lexis 11500, 197 U.S.P.Q. (BNA) 726 (United States Court of Appeals for the Sixth Circuit April 25, 1978, Decided and Filed). 
  21. Pfizer, Inc., Plaintiff-Appellee, v. International Rectifier Corporation, Rachelle Laboratories Italia, S.P.A., Rachelle Laboratories, Inc., Rachelle Pharmaceuticals International, S.A., Defendants-Appellants, 685 F.2d 357, 1982 U.S. App. Lexis 16320, 217 U.S.P.Q. (BNA) 39 (United States Court of Appeals for the Ninth Circuit August 26, 1982). 
  22. Pridham, D. (2017) ‘The Patent Litigation Lie’, Forbes. doi: 
  23. https://www.forbes.com/sites/davidpridham/2017/04/13/the-patent-litigation-lie/#3678a157ea99.
  24. Schankerman, M. and Scotchmer, S. (2001) ‘Damages and Injunctions in Protecting Intellectual Property’, The RAND Journal of Economics, 32(1), pp. 199–220. Available at: http://www.jstor.org/stable/2696404 Accessed:
  25. Schankerman, M. and Scotchmer, S. (2005) ‘Still Looking for Lost Profits: The Case of Horizontal Competition’, UC Berkeley: Department of Economics, UCB. doi: 10.2139/ssrn.896165.
  26. Tirole, J. (1988) The Theory of Industrial Organization. Cambridge, Massachusetts: The MIT Press.
  27. W.R. Grace & Co.-Conn., Plaintiff, v. Intercat, Inc. And Conoco, Inc., Defendants., 60 F. Supp. 2d 316, 1999 U.S. Dist. Lexis 12449, 52 U.S.P.Q.2D (BNA) 1331 (United States District Court for the District of Delaware August 9, 1999, Decided). 
  28. Werden, G. J., Froeb, L. and Langenfeld, J. (2000) ‘Lost Profits from Patent Infringement: The Simulation Approach’, International Journal of the Economics of Business, 7(2), pp. 213–227. doi: 10.1080/13571510050084541.