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When it comes to calculating damages in patent infringement cases, the perfect has become the enemy of the good. Over the past several years, the U.S. Court of Appeals for the Federal Circuit has embarked upon a quest for mathematical perfection in damage calculations. Though well meaning, the quest for perfection threatens to add more expense and complication to patent trials. It also threatens to undercompensate patent owners. Before the Federal Circuit began its quest, patent damages were calculated using a fairly straightforward model that lawyers and economists who practice in this geeky area refer to as the “but for” world. Under this model, the patent owner must travel back in time and construct a hypothetical world where the defendant never infringed the patent. Practitioners use the but-for world when they calculate damages for price erosion, the price reduction the patent owner had to make to counter the infringing competition. Price erosion is common sense: A patent confers a legal right to be a monopolist, and if another person competes against the patent owner with infringing goods, the patent owner loses his legal monopoly and may be forced to reduce prices. To calculate price erosion damages, the patent owner figures out how much higher a price he would have received for his patented goods. He then takes the difference between the price in the but-for world and the price in the real world (as affected by the infringing goods), then multiplies that amount by the number of units he sold. This sensible methodology was endorsed by many earlier Federal Circuit cases. Enter the Federal Circuit on its newfound quest for perfection. In Crystal Semiconductor v. Tritech, a 2001 decision, the Federal Circuit suggested in dicta that the old method of calculating price erosion damages could be made more mathematically perfect by considering price elasticity. Elasticity is an economic concept that measures the common-sense notion that, as the price of widgets goes up, fewer widgets will be sold. Economists can try to quantify elasticity by drawing a demand curve for widgets in the real world and then modifying it for the but-for world. This is much harder than it sounds because many variables have to be taken into account: consumer income; consumer tastes and preferences; the price of substitutes (i.e., wax paper might be a substitute for aluminum foil); and the price of complements (a complement is something used in conjunction; for example, buns, mustard and relish are complements to hot dogs). Supply and demand curves look nice in economic textbooks, but it is safe to assume they weren’t calculated in the course of a patent infringement case. The real problem is the lack of readily available data points. There often is just not enough sales data for the products in dispute (such as particular semiconductors or dock levelers) to construct a demand curve for these markets without resorting to wholesale approximations that will be subject to an expert witness challenge under Daubert v. Merrell Dow Pharmaceuticals(1993). Add to this the fact that the data is rarely public. It is held by the patent owner’s competitors, who consider it a core trade secret. The patent owner must serve nonparty subpoenas on its competitors. The competitors will respond by moving to quash, citing Micro Motion Inc. v. Kane Steel Co., a Federal Circuit case in 1990 that says a district court has discretion to quash subpoenas that seek production of the trade secrets of nonparty competitors. This virtually ensures further litigation on a host of subpoena enforcement actions sprinkled around the country or proceedings against foreign competitors under the Hague Convention. The next realm in the Federal Circuit’s pursuit of perfection may be lost profits damages. The 1978 case of Panduit v. Stahlin Bros. set forth the framework for proving lost profits in the but-for world. The patent owner has to show demand for the patented product (usually easy — just show some sales) and the manufacturing and marketing capacity to make additional sales. The final, key prong of the Panduittest is showing an absence of acceptable, non-infringing substitutes in the market. This prong, which is similar to the antitrust concept of a relevant market, is a watered-down proxy for an elasticity analysis. The concept of whether other items in the market are acceptable substitutes for the patented item boils down to a question of cross-elasticity. At this point, the fundamental inconsistency between the current law of price erosion and lost profits is evident. For price erosion, the Federal Circuit requires an elasticity analysis (or at least a showing of barriers to entry), while for lost profits the Federal Circuit requires only proof (which can be anecdotal) that there are no acceptable, non-infringing substitutes in the market. Many believe there is a push within the Federal Circuit to modify the Panduittest to include elasticity considerations. While being accurate is certainly a laudable goal, at some point the Federal Circuit needs to look at the big picture and decide whether the quest for precision comes at too great a price. A patent case already costs millions of dollars. Grafting an elasticity analysis onto every case seeking lost profits or price erosion would increase attorney and expert witness fees substantially. And let’s not forget the plight of the jurors. They already must sit still for days on end learning about how a semiconductor is fabricated or how software works, but now they also will have to sit through a stiff dose of demand curves and elasticity. Nonparty subpoena practice will multiply, as litigants frantically pursue data points for their economic experts to use. Challenges to damages experts will become routine, and, given the current judicial attitudes toward their gatekeeping function under Daubert, at least some challenges on elasticity analysis will be sustained. As a result, the law will undercompensate those patent owners who suffer real damages due to infringement but who are unable to amass enough data to satisfy the legal requirement of proving elasticity. The result of the Federal Circuit’s quest for perfection will be costlier trials, increasingly bored juries and systematic undercompensation of patent owners. Isn’t the old standard for measuring damages — that they be a reasonable approximation — good enough? Theodore “Ted” Stevenson III is a principal in Dallas’ McKool Smith ( www.mckoolsmith.com). His practice focuses on the trial of patent, trademark, copyright, trade secrets and Internet-related cases.

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