Federal Circuit rejects ‘pseudo’ lost profits argument

BVWireIssue #173-2
February 8, 2017

How much attention, if any, may a damages expert pay to the patent holder’s profit margin when calculating a reasonable royalty before the analysis becomes a lost profits calculation in disguise? The Federal Circuit recently answered this question in an infringement case centering on two patents covering a cooling system for computer processing units. The plaintiff’s damages expert calculated a reasonable royalty using the Georgia-Pacific framework. In constructing a hypothetical negotiation to determine what kind of agreement the parties would have entered into just before infringement began, the expert took account of the plaintiff’s profit on its cooling units under a licensing agreement with a third party.

Post-trial, the defendants unsuccessfully challenged the royalty award, claiming the expert had performed a “pseudo” lost profits analysis. Integrating profits into the reasonable royalty calculation enabled the expert to circumvent the “but for” requirement applicable to lost profits damages, they claimed.

No ‘predominance’ principle: In their later appeal with the Federal Circuit, the defendants conceded “that profits may be considered as a factor in the reasonable royalty calculation.” However, they said, here the profit factor “predominated and virtually subsumed [the plaintiff’s] entire damages case.” They added that the expert’s type of analysis would make lost profits damages no longer worth pursuing by patent owners.

The Federal Circuit said the defendants failed to show there was a “legal principle about predominance that would somehow bar a damages analysis that takes reasonable account of all the evidence relevant to a hypothetical negotiation.” This was all the plaintiff’s expert had done.

The Federal Circuit found “obvious reasons” why some patent holders would seek lost profits. A reasonable royalty analysis has to consider the interests of both sides of the negotiation table, whereas a lost profits analysis has a singular focus: to make the patent holder whole. There is no discounting for the rational interests of the infringer. Therefore, a lost profits award can be higher, the Federal Circuit pointed out.

Here, there was no evidence that the royalty determination was based on an improper methodology, the court concluded.

The case is Danmark v. CMI USA, Inc., 2016 U.S. App. LEXIS 21672 (Dec. 6, 2016). A digest of the decision and the court’s opinion will be available at BVLaw soon.

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