FAQ

Below are some of the most common questions that I hear from clients. Please feel free to contact me to further discuss any of these topics or for any questions that I have not addressed.

Is my intellectual property valuable?

Intellectual property (patents, copyrights, trademarks, and trade secrets) derive their value a few possible ways. First, they can exclude others from practicing them, thereby resulting in price premiums, reduced costs, increased customer goodwill, or even establishing a technological standard. Second, they can provide value when licensing to others (or for cross licensing), starting new businesses, or for selling the IP itself. Third, IP often has defensive value, which can discourage lawsuits from competitors thereby keeping the product(s) in the market.

In addition to identifying the mechanism of value as discussed above, a number of steps are generally taken to quantify the value of IP. These include some generally-accepted approaches to determining value that are conducted by valuation experts such as VLF Consulting. The steps are discussed further in the accompanying FAQ.

What steps are taken to value intellectual property?

Outside of infringement litigation, valuation of IP typically starts with first identifying the premise of value. The premise of value may be fair market value, liquidation value (for example, a bankruptcy), or strategic value (meaning the value for a particular buyer). At this point, the exact IP assets should be identified, and if appropriate, the assets can be connected to particular businesses/products and/or grouped into bundles. For each asset or bundle of assets, the commercial significance is evaluated by considering numerous factors (size of market, availability of alternatives, etc.). At this point, the valuation expert can identify the appropriate methods (e.g. the cost, market, or income approaches) and craft the analyses for each asset or bundle.

In the context of litigation, the premise of value is often a matter of law, while other factors such as the particular IP assets and relevant products have been clarified in the litigation process. For example, the expert may be valuing the right to use a particular technology in certain products based upon a hypothetical negotiation for those rights between a willing buyer and willing seller as of a certain date. But from there, the process generally resembles the non-litigation valuation process, subject of course to a number of different conditions resulting from historical court cases. For in-depth discussions of the impact of court cases on IP damages, see the IP Value Blog.

How do you determine economic damages in commercial litigation cases?

In commercial litigation, damages are generally assessed using the “but for” concept, which is shorthand for “what would the plaintiff’s financial position be, but for the actions that caused the damage?” Monetary damages may include compensable, consequential, and punitive elements depending on the case facts and relevant legal standards. In proving damages, courts may consider such issues as causation, mitigation, reasonable certainty, speculation, and whether or not the damages are foreseeable. Generally, damages will take the form of lost profits, out-of-pocket costs, or lost business value. The determination of damages is a lengthy subject, and indeed a number of books have been written on the subject.

Can I get lost profits damages?

In general commercial litigation, the courts may consider a number of factors before awarding lost profits, such as causation, mitigation, reasonable certainty, speculation, and whether or not the damages are foreseeable. In intellectual property infringement cases, the courts follow the “but for” approach as described above, and typically apply the so-called Panduit factors. In Panduit, the court stated: “To obtain as damages the profits on sales he would have made absent the infringement, i. e., the sales made by the infringer, a patent owner must prove: (1) demand for the patented product, (2) absence of acceptable noninfringing substitutes, (3) his manufacturing and marketing capability to exploit the demand, and (4) the amount of the profit he would have made.”

Please feel free to contact VLF Consulting with any questions about entitlement to lost profits damages.

Can I get reasonable royalty damages?

In patent infringement cases, the law requires that the patent owner receive from the infringer “damages adequate to compensate for the infringement,” but in no event less than a reasonable royalty. In short, a “reasonable royalty” is an approximation of what defendant would have paid plaintiff after a hypothetical negotiation for the rights at issue.

In trademark infringement cases, courts have occasionally awarded damages based upon a reasonable royalty. Although the set of rules for determining trademark reasonable royalties is much less developed than for patent infringements, the framework is generally consistent and emphasizes past licenses (or negotiations) for the subject trademark, customary rates, the nature and scope of the infringing use, the profitability of the defendant’s infringement, and available non-infringing alternatives. For more information about reasonable royalties in trademark cases, see for example Sands, Taylor & Wood v. Quaker Oats Co., 34 F.3d 1344 (7th Cir. 1994).

How will the Patent Reform Act affect damages?

Early drafts, such as the Patent Reform Act of 2007, attempted to respond to some large reasonable royalty awards by requiring that the “reasonable royalty … is applied only to that economic value properly attributable to the patent’s specific contribution.” The bill also allowed that if a “patent’s specific contribution over the prior art is the predominant basis for market demand for an infringing product or process, damages may be based upon the entire market value of the products.” These provisions were controversial, and the Patent Reform Act stalled in Congress for years. In the meantime, the Court of Appeals for the Federal Circuit carried the torch and essentially adopted these two ideas starting in 2009. As a result, the damages issues were pulled from the bill, and the Patent Reform Act is expected to pass in 2011.

What is the appropriate reasonable royalty base, and is the Entire Market Value Rule an issue?

Upon the March 2009 decision in Cornell University v. Hewlett Packard Company, the federal circuit substantially changed how a royalty base is determined. Although licensing practitioners, damages experts, and courts had generally focused on (a) what the parties to the hypothetical negotiation would use as the royalty base, and (b) what constitutes the smallest salable unit, the courts presently seem to put less emphasis on those factors. Instead, the entire market value rule, as the courts are now applying it to reasonable royalty cases, instructs that a patentee may “assess damages based on the entire market value of the accused product only where the patented feature creates the ‘basis for customer demand’ or ‘substantially create[s] the value of the component parts.”

It is unlikely that this issue is now completely resolved, as the issues still seem to be evolving and district courts still must attempt to apply this guidance. Keep checking the IP Value Blog for regular updates.

Do you offer pre-litigation services, such as a damages assessment?

Sometimes, developing even a ballpark understanding of the magnitude of potential damages in early litigation stages can be a daunting task. For plaintiffs, complicated products and industries quite often call for specialized research to identify the relevant products, their position in the marketplace, and the extent of sales. And defendants (like plaintiffs) find substantial value in identifying a range of likely positions that the opposing party may take. VLC Consulting develops clear answers to these questions through targeted research combined with expert analysis and adherence to the broad set of legal cases surrounding damages. We would love to discuss with you the unique circumstances of your case.

What types of trademark infringement damages are available?

In trademark damages, as in patent damages, plaintiff’s damages are calculated using the “but for” standard; i.e. the difference in profits that the plaintiff would have earned but for the infringement. Courts have awarded damages in trademark cases in the form of lost profits from lost sales or increased costs, price erosion, harm to reputation, corrective advertising, reasonable royalties, prejudgment interest, and attorneys’ fees (in exceptional cases). A plaintiff claiming lost profits will generally need to show that (a) its claimed lost sales were causally related to the trademark infringement, and (b) factors identified by the defendant as causing the lost sales (e.g. non-infringing features, the economy, or competitors) have been either accounted for or were not relevant. Courts have also awarded trademark infringement damages based upon a reasonable royalty rate, an approximation of what defendant would have paid plaintiff after a hypothetical negotiation for the trademark rights at issue. Although the set of rules for determining trademark reasonable royalties is much less developed than for patent infringements, the framework is generally consistent and emphasizes past licenses (or negotiations) for the subject trademark, customary rates, the nature and scope of the infringing use, the profitability of the defendant’s infringement, and available non-infringing alternatives. For more information about reasonable royalties in trademark cases, see for example Sands, Taylor & Wood v. Quaker Oats Co., 34 F.3d 1344 (7th Cir. 1994)

What types of copyright infringement damages are available?

In general, an infringer of copyright is liable for either the copyright owner’s actual damages and any additional profits of the infringer; or statutory damages.

In determining damages/profits, the copyright owner is entitled to recover the actual damages suffered by him or her as a result of the infringement, and any profits of the infringer that are attributable to the infringement as long as they do not double-count the damages calculation. In establishing the infringer’s profits, the copyright owner is required to present proof only of the infringer’s gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work.

The calculation of statutory damages, as an alternative to the above, is detailed in the relevant statutes and considers a number of factors.

Also keep in mind that damages are just one remedy available to copyright owners. Other available remedies include injunctions, impounding infringing articles, and costs and attorney’s fees. Refer to Title 17, chapter 5 of the U.S. code.

When should we hire an expert witness?

There are a number of reasons why you should hire an expert witness as early as possible in the litigation process. In particular, completing the discovery process without input from the experts can be problematic. First, if the expert has insufficient time or lacks key information, then he may have to limit the scope of his opinion. Second, completing discovery without your expert will put your expert at a distinct disadvantage when the opposing expert has a better deck of evidence. And third, remember that the information desired by the expert is often quite different from what the attorney is focused on.