Lost profits

Upon finding for the claimant, the court shall award damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs fixed by the court (35 U.S.C. 284)¹. The statute does not use the words lost profits¹.

The Supreme Court says damages are adequate when they place the patent owner in as good a position as it would have been in had the patent not been infringed. The owner may recover the difference between its pecuniary condition after the infringement and what it would have been without it, and the Court says this recovery can include lost profits². The Federal Circuit describes the goal the same way: to place the patentee in the same position it would have occupied had there been no infringement³.

The Federal Circuit says a patentee seeking lost profits must show a reasonable probability that, but for the infringement, it would have made the sales that were made by the infringer. It may rely on the four-factor test from Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978)^3,4. In Mentor Graphics Corp. v. EVE-USA, Inc. (Fed. Cir. 2017) the court called Panduit a useful but non-exclusive method, and said there is no particular required method to prove but-for causation³.

• Demand for the patented product⁴.
• Absence of acceptable non-infringing substitutes⁴.
• Manufacturing and marketing capacity to exploit the demand⁴.
• The amount of profit the patentee would have made⁴.

Burdens and detail matter. The patentee need only show a reasonable probability that the sales would have been made but for the infringement, and the burden then shifts to the infringer to show that the inference is unreasonable for some or all of the lost sales⁴. In Mentor Graphics, the court called the second factor the one that often proves the most difficult obstacle. If a non-infringing alternative exists that a given purchaser would have found acceptable and bought, the patentee cannot obtain lost profits on that sale, and this is decided customer by customer, so awards often cover some sales and not others³. The same opinion describes an earlier case, Grain Processing, in which a product not even sold on the market was considered an acceptable non-infringing alternative³.

The Mentor Graphics opinion also explains that the first factor looks at demand for the product as a whole, while the second looks at demand for particular claim limitations or features, and together they tie lost profits to the value of the patented features. On the undisputed facts of that record, the court held that satisfying the Panduit factors satisfied principles of apportionment, and it left open whether a different theory of but-for damages would³. It also notes that lost profits are limited to those reasonably foreseeable by an infringing competitor in the relevant market³.

• Market share. The Federal Circuit says that in a complex market with numerous competitors, a patentee may be awarded lost profit damages calculated using its market share among its competitors, citing State Industries, Inc. v. Mor-Flo Industries, Inc. (Fed. Cir. 1989). In Mentor Graphics the theory did not apply, because the jury found a two-supplier market³.
• Mixed awards. For sales on which the patentee cannot prove entitlement to lost profits, the statute guarantees a reasonable royalty. The patentee then obtains lost profits on the sales where it can prove all the Panduit factors and a reasonable royalty on the other infringing sales³.
• Convoyed sales. To recover lost profits on unpatented products sold with the patented one, the Federal Circuit requires proof that the unpatented and patented products together constitute a functional unit. Items with essentially no functional relationship to the invention, sold together only as a matter of convenience or business advantage, do not qualify⁵.

Section 271(f)(2) makes a person liable as an infringer who, without authority, supplies or causes to be supplied in or from the United States a component of a patented invention that is especially made or adapted for the invention and is not a staple article suitable for substantial noninfringing use, knowing that it is so made or adapted and intending that it will be combined outside the United States in a way that would infringe if done inside the United States (35 U.S.C. 271(f)(2))⁶. Unlike direct infringement, this liability turns on the supplier's knowledge and intent.

In WesternGeco LLC v. ION Geophysical Corp. (2018) the Supreme Court held that a lost-profits award was a permissible domestic application of section 284, and that taken together sections 271(f)(2) and 284 allow the patent owner to recover lost foreign profits when it proves infringement under section 271(f)(2)². The Court limited its analysis to section 271(f)(2) and said it did not address the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases².

Other provisions can cut either measure down. No recovery may be had for infringement committed more than six years before the complaint or counterclaim was filed, except as otherwise provided by law (35 U.S.C. 286)⁷. If a patentee fails to mark patented articles as 35 U.S.C. 287(a) provides, no damages may be recovered except on proof that the infringer was notified of the infringement and continued to infringe, and then only for infringement after the notice (see Patent marking)⁸. Separately, the court may increase the damages up to three times the amount found or assessed (35 U.S.C. 284)¹. See Willful infringement.