According to the law, the damage award in a patent infringement action must be “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 as fixed by the court.” The courts created this phrase to allow for compensation of lost profits and other financial damages, where the damages can be proven. When the patent holder cannot prove or chooses not to prove damages, they are still entitled to a “reasonable royalty.” Estimating patent damages is often based primarily on profit losses.
Understanding profit loss
In order to determine if profits have been lost, the plaintiff must prove the following:
- Demand – There must be a demand for the patented product.
- Manufacturing and marketing – The patent holder must have the capacity to manufacture and market the product to meet the consumer demand.
- No acceptable alternatives – There must be an absence of acceptable non-infringement substitutes for the product.
- Profit loss amount – The amount of profit lost by the infringement.
Determining profit loss
In order to determine profit loss one must first estimate how the market would have reacted without the infringement. In other words, deciding how much profit would have been made in the absence of an infringement. Once this amount has been established, it is then compared to the actual profit made. Subtract the actual profit from the estimated profit to determine the amount of profit loss.
This is a simple explanation of patent damages. It is important to note that the burden of proof is on the plaintiff. That is why it is crucial to understand exactly what constitutes infringement and how to determine losses.