EXECUTIVE
SUMMARY |
IN PATENT
DISPUTES, CPA LITIGATION CONSULTANTS
help patent holders demonstrate
that but for an infringement they could
have sold more of their product.
Quantifying damages in patent infringement
cases can be the focus of a forensic and
litigation services practice.
THE
PANDUIT
CASE
PROVIDED FOUR QUESTIONS CPA
litigation consultants had to address:
Is there demand for the patented
product? Are there acceptable
noninfringing alternatives to the
infringing product? Does the patent
holder have the manufacturing and
marketing capacity to make and sell more
of the product? Can the damages
consultant quantify the lost profits to
a reasonable degree of certainty?
THE BREAD
AND BUTTER FOR CPA
litigation consultants is the ability to
quantify the actual lost sales and the
lost profits related to those sales. In
damages consulting CPAs must begin the
analyses by assessing the revenues lost
because of the infringement.
THE LAW HAS
CHANGED SINCE THE
PANDUIT
CASE. It now is
possible to receive an award of lost
profits based on a patentees market
sharedespite the presence of acceptable
noninfringing alternatives in the
marketplacefor related products not
actually covered by the patent in
question. LITIGATION
CONSULTANTS SHOULD CONSIDER
other damages that may have resulted
from the alleged infringement, such as
collateral sales or erosion of prices.
| GLENN NEWMAN, CPA, CFE, is a
principal at Parente Randolph, LLC,
Philadelphia, where he heads the forensic
accounting and litigation services group.
He is a member of the firms executive
committee and serves on the AICPA Forensic
and Litigation Services Committee. His
e-mail address is
gnewman@parentenet.com . RICHARD J.
GERING, PhD, principal at Parente
Randolph, provides consulting assistance
including economic and statistical
analyses related to commercial disputes.
He teaches litigation strategy at
Villanova University School of Law. His
e-mail address is
rgering@parentenet.com . |
he jury finds the
plaintiffs patent to be valid and infringed and
awards damages in the amount of
. In
recent years juries increasingly have delivered
some variation of this message. A spike in
lawsuits alleging infringements of intellectual
property (IP) rights, usually in the area of
patents, has created a niche for CPA litigation
consultants who provide in-depth detailed
financial analyses to calculate economic damages
and give testimony as expert witnesses. Often the
disputes are bet-the-company matters that can
force an infringer to stop manufacturing or
selling its top products. A finding of
infringement also may open up an exclusive market
for a patent holders products without fear of
violating antitrust laws. Those are very high
stakes.
Patent holders may be
entitled to lost profits if they can
demonstrate that but for an
infringement they would have sold more
of a product than they did during the
affected time frame. |
Specifically, federal law (USC title 35, section
284) provides for the recovery of damages
resulting from a patent infringement. It says, in
part, that upon finding for the claimant, the
Court shall award the claimant damages adequate to
compensate for the infringement, but in no event
less than a reasonable royalty. Over time an
extensive case law road map has developed to
clarify the code and its relationship to changing
technology and business practices. In most patent
disputes the lead attorney hires a CPA and/or
other experts to analyze, quantify and report on
the potential damages suffered by the patent
holder. This article will address relevant issues
for CPA litigation consultants when evaluating
lost profits from patent infringements (for more
information see
20 Steps for Pricing a Patent ).
Guidelines From Georgia-Pacific
| The
court used these 15 factorsparaphrased
hereto determine the type of monetary
payments that would compensate for a
patent infringement in
Georgia-Pacific Corp. v.
United States Plywood Corp., 318
FSupp 1116, 6 USPQ 235 (SD NY 1970):
The royalties
received by Georgia-Pacific for
licensing the patent, proving or tending
to prove an established royalty.
The rates
paid by the licensee for the use of
other similar patents. The nature
and scope of the license, such as
whether it is exclusive or nonexclusive,
restricted or nonrestricted in terms of
territory or customers.
Georgia-Pacifics policy of maintaining
its patent monopoly by licensing the use
of the invention only under special
conditions designed to preserve the
monopoly. The
commercial relationship between
Georgia-Pacific and licensees, such as
whether they are competitors in the same
territory in the same line of business
or whether they are inventor and
promoter. The effect of
selling the patented specialty in
promoting sales of other Georgia-Pacific
products; the existing value of the
invention to Georgia-Pacific as a
generator of sales of nonpatented items;
and the extent of such derivative or
convoyed sales. The duration
of the patent and the term of the
license. | The established
profitability of the patented product, its
commercial success and its current
popularity. The utility
and advantages of the patent property
over any old modes or devices that had
been used. The nature of
the patented invention, its character in
the commercial embodiment owned and
produced by the licensor, and the
benefits to those who used it.
The extent to
which the infringer used the invention
and any evidence probative of the value
of that use. The portion
of the profit or selling price that is
customary in the particular business or
in comparable businesses.
The portion
of the realizable profit that should be
credited to the invention as
distinguished from any nonpatented
elements, manufacturing process,
business risks or significant features
or improvements added by the infringer.
The opinion
testimony of qualified experts.
The amount
that Georgia-Pacific and a licensee
would have agreed upon at the time the
infringement began if they had
reasonably and voluntarily tried to
reach an agreement. |
Source:
Georgia-Pacific Corp. v.
United States Plywood Corp., 318
FSupp 1116, 6 USPQ 235 (SD NY 1970).
|
CASE LAW GUIDELINES
Patent
holders may be entitled to lost profits if they
can demonstrate that but for an infringement
they would have sold more of a product than they
did during the affected time frame. The 1978
Panduit case provided a four-factor
approach that has been widely accepted as
identifying the key issues necessary for a
recovery of lost-profits damages (see Case Citations ). CPA
litigation consultants assessing lost profits
should discuss with counsel both Panduit
and subsequent case law.
Case Citations
Panduit
Corp. v. Stahlin Bros.
Fibre Works, Inc., 575 F2d 1152
(6th Cir. 1978). Rite-Hite
Corp. v. Kelley Company,
Inc., 56 F3d 1538 (Fed. Cir.
1995). King
Instruments v. Perego,
65 F3d 941 (Fed. Cir. 1995).
Georgia-Pacific Corp. v.
United States Plywood Corp., 318
FSupp 1116, 6 USPQ 235 (SD NY 1970).
State
Industries, Inc. v. Mor-Flo
Industries, Inc. 883 F2d 1573
(Fed. Cir. 1989). Lam, Inc.
v. Johns-Manville Corp.
718 F2d 1056, 1065 (Fed. Cir. 1983).
Grain
Processing Corp. v.
American Maize-Products, Co., 185
F3d 1341 (Fed. Cir. 1999). BIC
Leisure Prods., Inc. v.
Windsurfing Intl, Inc., 687
FSupp 134, 138 (SD NY 1998), revd in
part, 1 F3d 1214 (Fed. Cir. 1993). |
The four
( Panduit ) questions CPA litigation
consultants address are: Is there demand for the
patented product? Are there acceptable
noninfringing alternatives to the infringing
product? Does the patent holder have the
manufacturing and marketing capacity to make and
sell more of the product? Can the damages
consultant quantify the lost profits to a
reasonable degree of certainty? To perform patent
infringement lost-profits analyses, practitioners
need to research the following: Is there
demand for the patented product?
Practitioners will analyze sales data,
contemporaneous business records and plans related
to the products launch, marketing and promotion
to help the team (lead attorney, CPA and/or other
experts) demonstrate a demand for the patented
product. Depending on the specific facts and
circumstances, demand may apply to a feature
within the product or to the product itself. If it
is merely a feature, then the damages specialist
for that case (who may be the CPA, a marketing
analyst or another type of expert) needs to
consider whether there is a link between the
patented feature and customer demand and, if so,
demonstrate that it is an important factor in the
purchase of the product. Are
there acceptable noninfringing alternatives to
the infringing product? At
one time a damages consultants infringement
analysis by and large consisted of verifying
whether there were noninfringing product
alternatives in the marketplace. If there were
noninfringing substitutes, the law held that the
patent holder wasnt entitled to damages in the
form of lost profits. However, this point has
evolved as the marketplace has become more
complex, and under some circumstances the law
allows for lost profits when there are
alternatives or substitutes. Does the
patent holder have the manufacturing and
marketing capacity to make and sell more of
the product? Assuming theres
demand for the patented product and there are no
acceptable noninfringing alternatives, CPA damages
consultants need to demonstrate the patent holder
can both manufacture and market the product.
(Thats the basis for asserting profits have been
lost.) Typically, the damages specialist should
consider current production levels, past
manufacturing expansions and any plans for future
growth to demonstrate manufacturing capacity. In
some industries, such as pharmaceuticals,
understanding the sectors regulatory framework is
an important factor. For example, a business with
the plant capacity to make a product that it
doesnt have regulatory approval to sell does not
meet the but for test necessary to obtain
lost-profits damages. After addressing
manufacturing capacity, damages specialists also
must look at whether the patent holder could have
sold the additional product it would have
manufactured. This typically is done by assessing
the channels of distribution, geographic markets,
common customers, and the size and nature of the
patent holders and the infringers sales forces.
Analysis of working capital and interviews with
key personnel also will help show whether the
patent holder had the financial and management
capacity to generate the additional sales.
Can the
lost profits be quantified to a reasonable
degree of certainty? This is
the bread and butter for the CPA litigation
consultant: the ability to quantify the actual
lost sales and the related lost profits. To
quantify lost profits, damages specialists must
subtract from the projected lost sales all the
incremental costs necessary to manufacture, market
and sell the additional products that could have
been produced but for the infringement.
Typically, this means performing an analysis to
arrive at the incremental marginthe difference
between the top-line and bottom-line figures (see
Innovator v. Copycat
).
WHAT'S THE LAW NOW?
The first two factors in the
Panduit case have evolved over the
years, and it now is possible to obtain lost
profits Based on a patentees
market share, despite the presence of acceptable
noninfringing alternatives in the marketplace.
For related products
not actually covered by the patent in question.
But lost profits are not appropriate if a
noninfringing alternative would have been
available to market with minimal effort.
How does market sharerelate?
Based on the 1989 Mor-Flo
case, a patent holder is entitled to lost
profits, even though acceptable noninfringing
alternatives are available in the market at the
time of infringement. Under Mor-Flo
guidelines patent holders may claim lost profits
based on market share. That is, if three
companies products each have a one-third share of
the market and a patents validity and
infringement are established, the infringement
posits that both the patent holder and the company
with the noninfringing alternative would have
generated 50% of the infringing sales. The patent
holders damages would be lost profits on half of
the infringing units and a reasonable royalty on
the remaining half.
RESOURCES |
AICPA Resources
|
Publications
AICPA Code of Professional
Conduct,
www.aicpa.org/about/code/index.htm
.
AICPA Statement on Standards
for Consulting Services no. 1,
Consulting Services:
Definitions and Standards
(# 055015JA).
Communicating in
Litigation Services:
Reports, A Nonauthoritative
Guide Consulting
Services Practice Aid 96-3 (#
055000JA).
Conflicts of Interest
in Litigation Services
Engagements Special
Report 93-2 (# 055141JA).
Engagement Letters for
Litigation Services
Business Valuation and
Forensic and Litigation
Services Practice Aid 04-1 (#
055298JA).
Litigation Services and
Applicable Professional
Standards Special
Report 03-1 (# 055297JA).
Litigation Services
Handbook: The Role of the
Financial Damages Consultant
by Roman L. Weil,
Michael J. Wagner and Peter B.
Frank, John Wiley & Sons,
New Jersey, 200l (#
WI403091P0100DJA).
CPE
AICPA ABV E-valuation
Alert
CPA Consultant
CPA Expert
BV/FLS Membership
Section Newsletter
Web site
AICPA
Business Valuation and
Forensic and Litigation
Services Community,
bvfls.aicpa.org .
Conference
2004 Business
Valuation Conference
November 79, 2004 JW
Marriott Orlando Grande Lakes
Orlando, Florida
For more information, to
make a purchase or to
register, go to
www.cpa2biz.com or
call the Institute at
888-777-7077.
Credential
To find out
more about the AICPAs
Accredited in Business
Valuation (ABV) credential,
send an e-mail to
abv@aipca.org , call
the ABV Hotline at
212-596-6211 or download a
copy of the ABV Handbook at
www.aicpa.org/download/abv/abv_handbook.pdf
. |
|
What
is an acceptable alternative?
A refinement through case law addresses
which noninfringing alternatives are acceptable.
In Bic Windsurfing, the court said an
alternative is not acceptable if the product is in
a completely different price range or category.
For example, if a product is intended for an
introductory user rather than an advanced user, a
lost-profits claim still may be appropriate. Thus,
a product has to be not only noninfringing from a
technical perspective, but also acceptable from an
economic and consumer perspective.
Do the patentees products have to
be covered by the patent? Is
a patent holder entitled to lost profits if the
infringing product competes with a product made by
the patent holder but not covered by the patent?
The 1995 Rite-Hite and King
Instruments cases dealt with this issue.
If it is reasonably foreseeable that but for the
infringement the patent holder would have sold
more of its product, it is entitled to lost
profits on those lost sales regardless of whether
the patent holders product is covered by the
patent at issue. What is
an available alternative?
Does a product have to be on the market to be
considered available? In the 1999 Grain
Processing case, the alleged infringer
could have designed around the patent in a couple
of weeks using readily available technology that
was more expensive than the patented process. The
court held that because the design-around option
was available at the time of infringement, the
patent holder had no basis for claiming it would
have made more sales but for the infringement
and was not entitled to lost profits. The court
explained that a but for analysis is
hypothetical. Damages consultants must effectively
reconstruct what could reasonably be expected to
have happened in the marketplace, including
alternative actions the infringer could have taken
had it not infringed. That is, what steps would a
reasonable businessperson have employed had the
favored method not been available?
| PRACTICAL
TIPS TO REMEMBER
|
|
Ask
counsel to identify any recent
case law that has bearing on the
damages youre being engaged to
compute.
Remember, as the damages
specialist, you havent been
retained to assess the
validity of a patent or its
alleged infringementfor your
working purposes, those key
liability points are assumed.
Dont forget that incremental
profits do not necessarily
equal gross profits.
Identify all the collateral
products that may be tied to
the patented product at issue
(razors with razor blades, for
example).
When evaluating potential
alternatives, look to the
market.
Assess whether the patent
holder will have the ability
to raise prices when the
infringer is removed from the
scene.
Understand what options the
defendant could have employed
other than infringing, such as
a design-around. |
|
OTHER DAMAGES-RELATED
ISSUES CPA
litigation consultants should consider other
available damages that may have resulted from the
alleged infringement, including lost profits on
collateral sales and erosion of prices, for
example. Damages for both collateral salessales
of accessories to go with the productand price
erosion may exceed damages for lost profits.
However, damages consultants must understand the
relevant case law and perform thorough analyses to
prevent opposing counsel from calling their
numbers speculative. Understanding
the reasonable royalty approach will enable
damages consultants to present balanced
alternative-damages computations. Because federal
law provides that patent damages can be no less
than a reasonable royalty, this calculation
generally is viewed as the damages floor
(minimum) in a patent infringement dispute.
COMMITMENT IS ESSENTIAL
Quantifying
damages in patent infringement cases can be a key
part of a forensic and litigation services
practice. The cases are complex and challenging,
and the damages awards can be quite large.
However, one should not dabble in this field; it
is neither a sideline business nor for the faint
of heart given the stakes involved. It requires an
investment in time to understand the issues, the
relevant cases and in many instances a particular
industry or technology. |