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Two relatively unheralded Federal Circuit cases from 2000 have erected new hurdles for patent infringement plaintiffs. Grain Processing v. American Maize held that courts can reduce damages if the infringer proves that it could have easily adopted an acceptable non-infringing design to avoid infringement. Crystal Semiconductor v. Tritech Industries requires a plaintiff seeking damages for price erosion to calculate the elasticity of demand in the relevant market or prove barriers to entry. Both cases provide powerful weapons for patent infringement defendants to avoid or reduce damages. In the damages phase of a patent case, the patent owner must construct a hypothetical “but for” world in which to calculate damages. In the “but for” world, the fact-finder assumes the infringer never manufactured the infringing product, then determines how much additional revenue the patent owner would have made. For instance, if the infringer sold 100,000 infringing widgets before trial, in the “but for” world those widgets would never have been sold, and the court would attribute those sales to the patent owner if there are no other acceptable, non-infringing substitutes in the market. Even if there are acceptable, non-infringing substitutes, the court may award the patent owner its pro-rata market share of the sales. Prior to Grain Processing, evaluation of the “but for” world did not include alternative, non-infringing strategies that the defendant might have pursued. Grain Processing changed the boundaries of the “but for” world, holding that the district court should allow the defendant to prove what it would have done had it not infringed. In that case, the defendant proved that it easily could have used a non-infringing process to manufacture food additives. If it had pursued this alternative, the defendant would still have made the same amount of sales, but with a non-infringing product. As a result, the plaintiff was not entitled to recover lost profits. In Grain Processing, the court also held that the availability of non-infringing substitutes caps royalty damages a patent owner can receive. In determining the amount of a reasonable royalty, the court asks this hypothetical question: “What royalty would the patent owner and infringer have agreed upon had they negotiated a license when infringement began?” In Grain Processing, the Federal Circuit held that the infringer would not have paid a royalty higher than the incremental cost of the next available substitute. This effectively capped royalty damages at the amount of the increased cost to manufacture the non-infringing food additives. PRICE EROSION Another damages theory available in patent infringement cases is price erosion. Price erosion compensates a patent owner for a decrease in its own prices due to competition from an infringer. In Crystal Semiconductor, the patent owner sought price erosion damages for the reduction in prices for its patented computer chips. The plaintiff calculated damages based on the number of units it actually sold multiplied by the amount by which it claimed it had to lower its price. In dicta, the Federal Circuit criticized the patent owner’s failure to perform an elasticity calculation or, in the alternative, to show evidence of barriers to entry. “Elasticity” means that at higher prices, demand tends to be lower. The Federal Circuit observed that in the “but for” world where a patent owner asserts that it would have charged higher prices, it should perform an elasticity calculation to determine whether its sales — and, consequently, its damages — would have decreased because of the higher price. Elasticity calculations can be difficult because of the number of variables that must be considered. For instance, elasticity can be affected by a consumer’s income, tastes and preferences, the price of substitutes and the price of complements. It also may be difficult to derive sufficient data points to allow a precise elasticity calculation. Where do these cases leave patent damages? Defendants can now minimize damages by identifying non-infringing alternatives to the patented technology and implementing that technology as a design-around. If the re-design is successful, a defendant may be able to avoid damages by arguing that it could have competed with the non-infringing technology earlier. Patent defendants also can effectively argue against price erosion damages by performing discovery into the existence and prices of competing products, and then arguing that any attempts by the plaintiff to raise its prices would have resulted in a migration of sales to the competing products. Finally, defendants may be able to combine Grain Processing and Crystal Semiconductor to argue that, in determining the elasticity of demand, the patent owner must take into account what competitive, non-infringing options were available to the defendant. Effectively, the defendant may be able to avoid price erosion damages by arguing that, had it not affected the patent owner’s prices with its infringing products, it would have offered a non-infringing product that would have affected the patent owner’s prices anyway. Ted Stevenson is an intellectual property litigation partner in Hughes & Luce in Dallas. His e-mail address is [email protected]

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