Forms of Lost Profit

Diverted Sales

Diverted sales, also known as lost sales, are a common form of lost profits that may be recoverable. Diverted sales may result from a number of infringing activities, including an infringer’s offer to sell.

Although the evidence in this case was relatively sparse, it sufficed for the jury to assume that USSC offered the VPRo I for sale and then substituted the non-infringing VPRo II — a bait-and-switch — and to find that absent USSC's offer to sell the VPRo I, the sales would have gone to American Seating.

— American Seating Co. v. USSC Group, Inc., 514 F. 3d 1262, 1270 (Fed. Cir. 2008).

When a patentee sells several products that are similar to the infringing product, it may be necessary to make a determination as to which product lost sales.

Mega argues, the lost profits … should have been based on the sales of Ferguson's LiquiLift device, which embodies only the '376 patent. … The district court therefore failed to distinguish the allocation of profits that would have been made but for the infringement of the '376 patent with the profits that could fairly be allocated to customer demand related to the features embodying the '991 patent.

— Ferguson Beauregard/Logic v. Mega Systems, 350 F. 3d 1327, 1345-46 (Fed. Cir. 2003).

Lost profits on unpatented goods may be recoverable under the patent statute.

The district court also took into account that King's competing product did not embody the invention of the '461 patent asserted against Tapematic. The district court, however, found reason to redress King's injury notwithstanding King's election to refrain from making or selling the patented invention.

— King Instruments Corp. v. Perego, 65 F. 3d 941, 947 (Fed. Cir. 1995).

They may be recoverable, for example, when an unpatented good competes directly with an infringing good, and when the patentee lost sales due to the infringement.

Kelley has thus not provided, nor do we find, any justification in the statute, precedent, policy, or logic to limit the compensability of lost sales of a patentee's device that directly competes with the infringing device if it is proven that those lost sales were caused in fact by the infringement.

— Rite-Hite Corp. v. Kelley Co., Inc., 56 F. 3d 1538, 1548-49 (Fed. Cir. 1995).

Functionally-Related Components

Lost profit from sales of unpatented components may be recoverable when a functional relationship exists between the patented and unpatented components.

[T]he facts of past cases clearly imply a limitation on damages, when recovery is sought on sales of unpatented components sold with patented components, to the effect that the unpatented components must function together with the patented component in some manner so as to produce a desired end product or result.

— Rite-Hite Corp. v. Kelley Co., Inc., 56 F. 3d 1538, 1550 (Fed. Cir. 1995).

It is not enough that components are sold or packaged together for marketing purposes.

A functional relationship does not exist when independently operating patented and unpatented products are purchased as a package solely because of customer demand.

— American Seating Co. v. USSC Group, Inc., 514 F. 3d 1262, 1268 (Fed. Cir. 2008).

For example, lost collateral sales may be recoverable when the collateral products have no useful purpose independent of the patented product.

lost profit damages are properly granted for collateral products that have no useful purpose or market value independent of the patented product

— American Seating Co. v. USSC Group, Inc., 514 F. 3d 1262, 1269 (Fed. Cir. 2008).

Future Sales

Damages sustained from future lost sales may be recoverable.

Where, as here, a two-supplier market existed, an award based on projected lost sales is neither remote nor speculative when there is evidence of actual pre-infringement and post-infringement growth rates. Such evidence illustrates the proven detriments suffered by the patent owner.

— Lam, Inc. v. Johns-Manville Corp., 718 F. 2d 1056, 1068 (Fed. Cir. 1983).

The burden for proving future lost profits is commensurately greater than the burden for proving damages already incurred.

[T]his court acknowledges that a patentee may produce sufficient evidence to recover projected future losses[.] … The burden of proving future injury is commensurately greater than that for damages already incurred, for the future always harbors unknowns.

— Oiness v. Walgreen Co., 88 F. 3d 1025, 1031 (Fed. Cir. 1996).

Faulty assumptions and lack of reliable economic testimony may preclude recovery for future lost profits.

MacLachlan's projections of lost profits in the retail rest on faulty assumptions and a lack of reliable economic testimony … Therefore, this court reverses the jury's award of projected lost profits in the retail market.

— Oiness v. Walgreen Co., 88 F. 3d 1025, 1032 (Fed. Cir. 1996).

Furthermore, evidence must not be derived from speculation.

Because the jury's $3,000,000 future lost profit award was based on evidence derived from speculative assumptions, it runs counter to the great weight of record evidence and cannot stand.

— Shockley v. Arcan, Inc., 248 F. 3d 1349, 1364 (Fed. Cir. 2001).

Price Erosion

The Supreme Court first recognized damages from price erosion over 100 years ago in Yale Lock Mfg. Co. V. Sargent. Price erosion occurs when the infringing activity leads to reduction in price.

Reduction of prices, and consequent loss of profits, enforced by infringing competition, is a proper ground for awarding damages. The only question is as to the character and sufficiency of the evidence, in the particular case.

— Yale Lock Mfg. Co. v. Sargent, 117 US 536, 551 (S. Ct. 1886).

The patentee has the burden to show its entitlement to lost profits from price erosion.

[T]he question as to the character and sufficiency of the evidence places the burden on the patentee to show that but for infringement, it would have sold its product at higher prices.

— Crystal Semiconductor v. Tritech Microelectronics, 246 F. 3d 1336, 1357 (Fed. Cir. 2001).

In particular, damages from price erosion are available only when patentee and infringer compete in the same marketplace.

In BIC, this court held that the infringer's product and the patentee's product had to compete in the same market in order to establish but for causation for lost profits due to lost sales. 1 F.3d at 1220. Price erosion requires an analogous showing.

— Crystal Semiconductor v. Tritech Microelectronics, 246 F. 3d 1336, 1359 (Fed. Cir. 2001).

Showing a price decrease may not be enough to establish damages for price erosion.

This evidence permits the inference that market forces other than infringement influenced the price of fused silica. Furthermore, the record suggests that Minco was the market leader in cutting prices. Although the trial court might have found that Minco cut prices in response to CE's infringement, the record allows other inferences as well.

— Minco, Inc. v. Combustion Engineering, Inc., 95 F. 3d 1109, 1120 (Fed. Cir. 1996).

Damages from price erosion may accrue in cases where the patentee was unaware of infringement.

For price erosion damages the patentee must show that, but for the infringement, it would have been able to charge and receive a higher price. … It is not required that the patentee knew that the competing system infringed the patent[.]

— Vulcan Engineering Co. v. Fata Aluminium, Inc., 278 F. 3d 1366, 1377 (Fed. Cir. 2002).

Damages from price erosion may result from marketing activities rather than actual sales.

We conclude that there was a legally sufficient evidentiary basis in the record from which a reasonable jury could have concluded that Brooktree's price reductions were made as a result of AMD's actual and announced marketing of the infringing chips, and, accordingly, included these price reductions in the calculation of damages.

— Brooktree Corp. v. Advanced Micro Devices, Inc., 977 F. 2d 1555, 1580-81 (Fed. Cir. 1992).

The law of demand states that an increase in price is generally accompanied by a decrease in quantity sold (and vice-versa).

All markets must respect the law of demand. See Paul A. Samuelson, Economics 53-55 (11th ed.1980). According to the law of demand, consumers will almost always purchase fewer units of a product at a higher price than at a lower price, possibly substituting other products.

— Crystal Semiconductor v. Tritech Microelectronics, 246 F. 3d 1336, 1359 (Fed. Cir. 2001).

Accordingly, diverted sales and price erosion damages are generally linked.

Lost sales and price erosion damages are inextricably linked. … To prevent inconsistent results, this court will not venture to evaluate price erosion and lost profits damages separately.

— Crystal Semiconductor v. Tritech Microelectronics, 246 F. 3d 1336, 1360 (Fed. Cir. 2001).

Price erosion damages must account for the relationship between price and quantity in the relevant marketplace.

[to] show entitlement to a higher price [the patentee must show] evidence of the (presumably reduced) amount of product the patentee would have sold.

— Crystal Semiconductor v. Tritech Microelectronics, 246 F. 3d 1336, 1357 (Fed. Cir. 2001).

There may be cases where a higher price would not lead to an increase in the quantity sold.

Despite Harris's contention, we cannot say that Ericsson's theory of an inelastic market [e.g., that a higher price would not be accompanied by a decrease in demand] precludes it from recovering price erosion damages.

— Ericsson, Inc. v. Harris Corp., 352 F. 3d 1369, 1379 (Fed. Cir. 2003).

In some cases benchmark methodologies may be probative. However, a benchmark product and marketplace should be sufficiently comparable to the relevant product and marketplace.

Moreover, Harris has not shown that the 3762 SLIC was an inappropriate benchmark for the 3764 SLIC. On the contrary, Ericsson offered substantial evidence of the similarities between the two products and their markets.

— Ericsson, Inc. v. Harris Corp., 352 F. 3d 1369, 1379 (Fed. Cir. 2003).

Economic modeling may be a useful tool in evaluating both the extent of price erosion and the relationship between price and quantity in the relevant marketplace.

Economists can define hypothetical markets, derive a demand curve, and make price erosion approximations without relying on inapposite benchmarks.

— Crystal Semiconductor v. Tritech Microelectronics, 246 F. 3d 1336, 1359 (Fed. Cir. 2001).