It’s Law & Business Episode 30: The Costs of Litigating.
Wil Jacques, patent agent to Verna Law, P.C., and Anthony Verna, managing partner of Verna Law, P.C. talk about the costs of litigating and the benefits of litigating. They talk about damages in patent infringement, copyright infringement, and trademark infringement cases.
In patent infringement lawsuits, there are two overall theories: Lost Profits and a Reasonable Royalty for infringement.
Since 1952, 35 U.S.C. § 284 has governed the award of damages in patent cases:
Upon finding for the claimant [patent holder] the court shall award the claimant damages 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.
- Lost Sales: Lost profits from sales are the classic and most common type of lost profits damages. Lost sales constitute sales that the patent owner failed to make due to the infringement, as well as sales the infringer made that the patent owner would have made but for the infringement.
- Price Erosion: Price erosion damages arise where the patent owner was forced to lower its prices or offer discounts to meet the infringer’s competition and where the patent owner was unable to raise its prices due to the infringement.
- Unpatented Items: A patent owner may seek lost profits on unpatented items. For example, if the accused product is a multi-function device of which the patent covers only one feature, the patent owner may seek lost profits for the entire device.
- Entire Market Value Rule: The “entire market value rule” is used to determine if a patent owner can recover lost profits where the patent covers only a feature of a multi-faceted device – the patent owner must prove that the patented feature drives demand for the overall device.
- Future Lost Profits: Projected (or future) lost profits are losses that the patent owner expects to incur in the future due to the infringement. The importance of future lost profits is demonstrated by its potential for large awards, as the patent owner may be able to project substantial losses far into the future.
- Damage to Reputation and Goodwill: Another lost profits theory that patent owners have advanced, albeit infrequently, is damage to the reputation and goodwill of the patent owner and/or patented product. The patent owner argues that the infringer’s product is inferior to the patent owner’s patented product and, as a result, has caused damage to the reputation of the patented product or the patent owner. In other words, the patent owner claims it has suffered damage because of the inferiority of the infringing product.
Reasonable Royalty Damages
The term “reasonable royalty” is susceptible of two definitions. The first is an actual licensing rate, to which the patent owner and a licensee would have negotiated and agreed entirely apart from any litigation or damages question. This can be thought of as the “reasonable royalty” used in § 284. This negotiated reasonable royalty is the minimum amount of patent damages the patent owner can recover, equal to what the patent owner would have negotiated as a royalty in the first place. The second meaning of “reasonable royalty” applies whenever the patent owner is unable to prove actual damages (i.e., its lost profits). The money awarded to the patent owner (however it is computed) is usually called a “reasonable royalty.”
Interest and Enhancement of Damages
A patent owner may also obtain relief in the form of collateral assessments, which include prejudgment interest and discretionary enhancement of damages up to three times the amount found or assessed – enhancement may be based on willful infringement or litigation misconduct. (A separate sub-page in this damages website addresses prejudgment interest and post-judgment interest.) In exceptional cases, the court may award reasonable attorney fees to the prevailing party under 35 U.S.C. § 285. Post-judgment interest and most costs are awarded in accordance with non-patent law.
Patent Infringement and Attorney’s Fees: the Conduct Must be Exceptional
A case to review is Edwin Lyda v. CBS Interactive, Inc., No. 16-cv-06592-JSW (N.D. Cal., Jan. 24, 2018). In this situation, Lyda sued CBS for indirectly infringing two patents relating to the voting system used on the show “Big Brother.” In 2015, Lyda sued CBS for direct infringement on the same patents in the Southern District of New York; that case was dismissed with prejudice and the Federal Circuit affirmed. See Lyda v. CBS Interactive, Inc., 838 F.3d 1331, 1339 (Fed. Cir. 2016). Shortly after the Federal Circuit’s decision, Lyda (through counsel) sent CBS a congratulatory letter, noting that the case had taught him what was necessary to avoid a motion to dismiss and asking if CBS was interested in a license under the two patents. Lyda asked CBS to reply by November 18, 2018 but then filed his new complaint in California on November 14. CBS wrote back on November 22, explaining its position that Lyda’s indirect infringement claim was barred by res judicata; Lyda replied that he did not assert and could not have asserted indirect infringement earlier as CBS was not aware the patents at issue before the first suit.
CBS moved to dismiss the claims and the court granted the motion with prejudice. In doing so, the court noted that there was at least a colorable argument Lyda could have argued indirect infringement at the earlier case, citing an unresolved circuit split on whether indirect infringement requires a defendant’s pre-suit knowledge of a patent. The court also noted that Lyda’s position contradicted the record in his first suit against CBS, where he alleged CBS admitted knowledge of the patents as of July 28, 2011 (Lyda filed his first complaint on August 20, 2014).
In concluding that Lyda’s conduct was sufficiently exceptional to merit attorney’s fees, the court focused on two factors. First, it held that the strength of Lyda’s litigating position was “exceptionally weak.” In support of its holding, the court reiterated that Lyda’s indirect infringement claim was clearly barred by res judicata, and that Lyda’s argument to the contrary was contradicted by the record in the earlier litigation. Second, the court held that Lyda had litigated the case in an unreasonable manner by failing to perform pre-suit diligence. Returning to the contradiction between Lyda’s current argument and the earlier litigation’s record, the court noted that had Lyda reviewed his own records, he would have realized his current argument was foreclosed. The court also noted that Lyda had sued a different entity for infringement under the same patent in 2012, so requiring Lyda to pay CBS’s attorneys’ fees would serve as a deterrent as well.
Given Lyda’s substantively weak position and his failure to perform adequate pre-suit diligence, the court granted CBS’ motion for attorneys’ fees, ordering the parties to meet and confer on the specific amount.
This case shows that “exceptional” is still a high bar to meet.
Actual Damages: The first section of the relevant law (17 U.S.C. §504(b)) makes it clear that an infringer can be liable for the actual damages suffered by the rightful owner: “The copyright owner is entitled to recover the actual damages suffered by him or her as a result of the infringement…”
Lost Profits: Here’s the second part of the relevant law we partially quoted in section one: “…and any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages. 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.” That means that a defendant isn’t only liable for your actual damages, he’s liable for the additional profits he made from using a plaintiff’s work – over and above the amount you lost in sales.
Statutory Damages: Statutory damages aren’t automatically awarded in a copyright suit, even to those who have filed properly. The plaintiff has the option of choosing either the actual damages and profit awards we’ve already discussed, or the statutory amounts allowed by law. But not both. Time for the big question: how much? The answer once again is not cut-and-dried. The penalty for innocent infringement may be as low as two hundred dollars. Statutory damages can range from $750 to $30,000 for each work infringed upon (which means one award for the e-book that Snidely stole, not an award for each copy sold). And in cases of deliberate infringement, statutory awards can be $150,000 or even more.
Section 1117 of the Lanham Act sets out several bases for awards of money relief in trademark infringement, false designation of origin and willful trademark dilution cases, including the following:
1) an accounting of the defendant’s profits;
2) an award based on the damages sustained by the plaintiff;
3) recovery of costs of the action; and
4) an award of reasonable attorney’s fees to the successful party in “exceptional” cases.