Federal Circuit reacts coolly to ‘pseudo’ lost profits argument; royalty analysis may consider profits

Danmark v. CMI USA, Inc


The Federal Circuit recently found a reasonable royalty calculation that took into account the plaintiff’s profit margin was not a lost profits analysis in disguise. The plaintiff’s expert did not try to circumvent the “but for” causation requirement that applied to a lost profits claim.

The plaintiff sued the defendants over the infringement of two patents covering a cooling system for computer processing units.

At trial, the plaintiff’s damages expert calculated a reasonable royalty based on the Georgia-Pacific framework. As a starting point, she used a patent license agreement the plaintiff had made with a third party. She explained that the plaintiff’s per-unit profit on its cooling units was an important, though not the only, factor for her analysis. She also considered the “nature and scope of the license” at issue, the plaintiff’s “established policy and marketing program,” as well as the difference in relationship between the plaintiff and the third party and the plaintiff and defendants. Ultimately, she found a reasonable royalty between the parties in dispute would be 16%.

The defendants’ expert accused the opposing expert of performing a "pseudo" lost profits analysis. His own Georgia-Pacific analysis resulted in a 4.5% reasonable royalty.

The jury found the defendants were liable, and it awarded the plaintiff damages in the amount of almost $405,000 based on a 14.5% royalty.

The defendants challenged the award with the Federal Circuit, claiming the plaintiff expert’s analysis relied too much on the patent holder’s per-unit profit. Although “profits may be considered as a factor in the reasonable royalty calculation,” in this case, the profit factor “predominated and virtually subsumed [the plaintiff’s] entire damages case,” the defendants stated. They suggested this was a way for the plaintiff to avoid meeting the higher standard of proof applicable to a lost profits calculation.

The Federal Circuit found no evidence that the expert had used an improper legal methodology, noting there was “no legal principle about predominance” that prohibited a damages analysis from taking “reasonable” account of all the evidence relevant to a hypothetical negotiation, as the plaintiff expert’s analysis did.

Considering profits to the patent holder in a reasonable royalty analysis did not take away the incentive to pursue lost profits damages, the Federal Circuit also found.

An extended analysis of Danmark v. CMI USA, Inc., 2016 U.S. App. LEXIS 21672 (Dec. 6, 2016), appears at BVLaw.