At its core, lost profit damages are an evaluation of the additional profit the plaintiff would have made had the defendant not committed the alleged wrongful act. Lost profit damages can take many forms including lost profits related to lost sales, price erosion, increased expenses, or injury to a company’s goodwill/reputation. Lost profit damages may even extend into the future.
Quantifying lost profit damages in disputes that involve claims pertaining to IP assets can range from relatively straightforward to extremely complex for a host of case-specific reasons. To assist in establishing lost profit damages there are various recognized frameworks with one such accepted standard detailed in Panduit Corp. v. Stahlin Bros. Fibre Works, Inc. In particular, the case described the following four factors (the “Panduit Factors”) that can be used to establish lost profit damages in a patent infringement dispute:
- Demand for the patented product;
- Absence of acceptable non-infringing alternatives;
- Manufacturing and marketing capability to exploit the demand; and
- The amount of profit that the claimant would have made absent the infringement.
It, therefore, follows that within the above Panduit framework that many, if not all, of the pertinent issues for establishing lost profit damages in patent infringement disputes, are argued by financial expert witnesses. Indeed, the analysis of each Panduit Factor can entail an extensive discussion citing business documents, financials, emails, witness testimony, interviews of company personnel, and opinions of other technical, scientific or other qualified experts, among other evidence.
Even in seemingly straightforward cases challenges are often levied against the conclusions reached by a financial expert witness under each Panduit Factor. One of the factors most hotly debated between experts tends to be whether acceptable non-infringing alternatives would have been available to the defendant during the relevant period. This is somewhat unsurprising since the factor can encompass both technical and economic reasoning and, depending on the specific dispute, involves a relatively wide-ranging analysis. As one example, a multi-player market may contain numerous third-party, non-infringing products that compete at some level with those offered by the plaintiff and defendant. Moreover, if properly supported, non-infringing alternatives can even be theoretical. However, there may exist technical and/or economic reasons why such “alternatives” were not implemented by the defendant in the real world and/or would not be acceptable to its customers (or at least not all of them).
Overall, while it is generally accepted that there is an element of estimation involved in quantifying lost profit damages claims, the analysis needs to be rooted in logic and be well-reasoned. Knowledge of the key issues under each Pandiuit Factor and a lost profit damages claim more broadly, gives attorneys an opportunity to build a more complete record of evidence in an effort to better support their arguments. From document production to legal filings to depositions to expert opinion to trial – all phases of a case can be managed to support the recoverability (or lack thereof) of lost profit damages.
Finally, the remedy of lost profit damages is not unique to IP litigation. However, while the form of remedy may be the same between different litigation types, the specific methods and evidence investigated to quantify that remedy may vary. Additional insight into lost profit damages outside the context of IP litigation, particularly with respect to quantifying lost business revenues, can be explored in Mike Cordova’s article “Lost Business Profit Damages Claims: Calculating Lost Revenues.” Mr. Cordova is an Assistant Vice President in J.S. Held’s Forensic Accounting / Economics / Corporate Finance practice with more than 15 years of experience.
Garrett Glover is a Director in the Intellectual Property Disputes Financial Expert Testimony practice of Ocean Tomo, a part of J.S. Held. He works in the firm’s Chicago headquarters, where he is responsible for quantifying economic damages arising from intellectual property disputes and providing general litigation support.
To explore this topic and how it could impact your business, please contact Garrett Glover at email@example.com or +1 312 327 8160.
 Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978).