What’s the interplay between “but for” causation, the Panduit test, and the concept of reconstructing the market? In a recent patent case, a court sorted out this issue when it reviewed an expert’s lost profits calculation.

The plaintiff owned a patent for a motor used in an electric tarp system. The defendant used these motors in its “Series 3500” tarp system. But when it kept experiencing problems with the motors, the defendant stopped buying them and designed and built a similar motor for its new “Series 4500” tarp system. The plaintiff sued, claiming patent infringement, and the plaintiff’s expert performed a lost profits analysis under the Panduit test.

Cover story: The expert used the Panduit test to reconstruct the market and show causation and determined that the plaintiff had a right to 100% of the defendant's sales of the Series 4500 product. The plaintiff’s past success in selling its motors showed there was demand for its product. Also, the expert said, there were no noninfringing alternatives; the plaintiff sold 100% of its motors, and, absent infringement, the hypothetical sales of the Series 3500 would be equal to the actual sales of the Series 4500.

The defendant challenged the expert’s report under Daubert, claiming that he did not accurately reconstruct the market and failed to establish the Panduit factors that served to show causation. In terms of demand, the plaintiff’s expert did not investigate why customers bought the Series 4500 Series tarp systems, which included many components besides the plaintiff’s motor. Any one of these parts might have prompted the consumer to buy. As for alternatives, the plaintiff’s expert failed to consider the advantages the Series 4500 offered over the Series 3500. Given the defects in the plaintiff’s motors, the defendant “had no choice” but to abandon the plaintiff’s products and develop its own version. Therefore, the expert report was unreliable.

Can’t separate issues: The court disagreed, noting that the defendant “incorrectly separates the question of whether [the expert] reconstructed the hypothetical market from the question of whether the Panduit factors are satisfied.” The Panduit test is itself a method of reconstructing the market. Therefore, the two issues must be addressed together. The court found the plaintiff’s expert’s report met all of the Panduit requirements. The defendant’s “demand” argument had no traction because Panduit does not require an analysis of a consumer’s reasons for purchasing. Moreover, the defendant’s claim that it had to design around the patented technology supported the expert’s conclusion that there were no acceptable substitutes for the plaintiff’s motors. The court admitted the report.

Find an extended discussion of Roll-Rite, LLC v. Shur-Co, LLC, 2014 U.S. Dist. LEXIS 73026 (May 29, 2014), in the September issue of Business Valuation Update; the court’s opinion is available at BVLaw.