Though it is no surprise hear, the number of patent infringement actions filed in 2011 hit an all-time record (4,015), according to a recently released report from PWC. PWC partner in Forensic Services Chris Berry pointed out the importance of trends in damage awards to valuation analysts: “With the courts paying more attention to damages methodologies and calculations, patent litigation counsel and damages experts should monitor ongoing rulings that could affect damages opinions.”
The report points out of the three kinds of damages, lost profits, price erosion and reasonable royalty, reasonable royalty is far and away the most common award. PWC offers an explanation for this:
- NPEs (non-practicing entities) are generally not eligible for lost profits (removing NPEs from the equation still leaves reasonable royalty as the most favored method to calculate damages);
- “The complexity and costs of the analysis for determining lost profits is usually greater than it is for reasonable royalties.” (Analysts reviewing the lost profits option should refer to the expert commentary in Nancy Fannon’s Calculating Lost Profits in IP and Patent Infringement Cases.)
- Lost profits may be more difficult to establish than a reasonable royalty. The greater the number of competitors in a market, the more alternatives to substitute products, the more difficult it is to prove the effect of infringement on sales and profits.
- Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 1978, established four questions that need to be answered in order for a patent holder to receive damages in the form of lost profits. These questions are commonly referred to as the Panduit factors:
ii. Are there substitute products available?
iii. Did the patent holder have the wherewithal to exploit the demand?
iv. Despite answers to i – iii, can lost profits be quantified?