KWM New York Office
This article provides an overview of some issues related to properly valuing damages in US patent litigation, including identifying on common challenge to the quantification of patent damages based on valuing technology beyond the scope of the patented invention, and how the use of the cost savings approach to patent damages valuation can make a damages expert’s opinion more robust and less susceptible to such a challenge.
The issues of patent infringement and patent validity are often at the forefront of the parties’ strategy and planning in patent litigation in the United States. It is easy to understand why. If none of the asserted patent claims are found to be infringed, that resolves the case in favor of the accused infringer. Similarly, if all of the asserted claims are invalidated, that also resolves the case in favor of the accused infringer. But the importance of being able to quantify and prove patent damages should not be overlooked, particularly for patentees.
A patentee who proves infringement and survives an opposing party’s validity challenges may find victory hollow if the patentee’s damages theories are not upheld and if the patentee is not able to prove an amount of damages that it is satisfied with. This is particularly important when considering the substantial costs associated with patent litigation in the US, where a patentee achieving a victory in patent litigation that only includes a modest damages award may realize a net financial loss from the patent litigation.
Proving Damages With Experts
In almost all US patent litigation cases, the parties engage outside experts to help quantify and prove damages. Patent damages experts analyze extensive fact discovery related to the patented invention and the accused products or services and write lengthy reports that quantify and prove the damages the patentee is entitled to, not less than a “reasonable royalty,” if the patent is found to be valid, enforceable, and infringed. These damages experts then testify at both deposition and trial, if the case reaches that stage, about their damages opinions and their underlying methodology.
Experienced patent damages experts, particularly those who have testified at multiple patent litigation trials, tend to be very expensive and often require the aid of assistants and staff who compound the expense. But trying to limit such expenses too much can ultimately be more costly for the parties in a patent litigation, particularly for the patentee whose burden it is to affirmatively quantify and prove damages.
Determining an appropriate methodology for valuing a patented invention is almost always a complex and nuanced undertaking. This is particularly true for patent cases where the accused product or service includes many overlapping features and technologies. For example, there have been many US patent litigations directed to smartphone handsets. But these devices often have hundreds, if not thousands, of components and features that potentially implicate a large and varied set of patents. Determining damages that are limited to the proper scope of the patented invention when a smartphone is the infringing device requires substantial effort, resources, and precision. Another common example is patent litigation involving communications networks, which include many different types of devices and implicate many different technologies. Typically, patented invention would only implicate a discrete and often narrow feature or aspect of such a network, although that feature or aspect of the network could be incredibly important and the patented invention therefore very valuable.
It is often advisable to have damages experts involved in the litigation from the early stages of the case, including to build and implement strategies for fact discovery and proving damages. This can extend the involvement, and therefore cost, of the damages experts. But this often proves less costly than learning near the end of fact discovery that important issues were not investigated and need to be pursued in a rushed manner, or even worse, that the patentee has not marshalled the evidence necessary to quantify and prove damages.
While damages experts have the primary role in proving or disproving damages in a patent case, it is often a best practice for technical experts to be involved in this process as well. This is because damages experts are required to limit their valuation of the patented invention to the footprint of the invention and not to pull in other features or technologies that are not part of the patented invention. Put another way, a proper patent valuation must only include the value that the patented invention itself contributes to the infringing product or service, and not the value added by any other features or components. This often requires complex technical analysis, especially for products that have many features where the patented feature itself is not what customers are buying directly, such as in the smartphone of communications network examples mentioned above. Technical experts can help identify the boundaries of the patented invention within the complex framework of a product or service with many overlapping features, components, and technologies. Patent damages experts are typically not qualified to make such determinations themselves, but they may rely on the opinions of technical experts so long as those opinions are of the type that a technical expert would normally give.
Surviving Attacks on Your Expert’s Damages Analysis by Including a Cost Savings Approach
The parties in a US patent litigation are afforded the opportunity to attack the opinions of opposing experts and seek to have those opinions excluded on the grounds that they are not based on the facts of the case, proper methodology, or the application of sufficient facts to the chosen methodology. Accordingly when the facts of the case allow, it is advisable for a patent damages expert to have multiple methods of damages analysis and quantification that are consistent with each other and can each stand up independently, such that if one of the methods is excluded, the expert can still opine on damages.
One common approach that patent litigation parties use to attack the reports of opposing damages experts is to argue that the opposing expert did not properly limit the damages analysis to the scope of the invention. This is a particularly common tactic that accused infringers use to try to limit, or completely exclude, the damages opinions of the patentee’s damages expert. In this type of challenge, the party challenging the expert opinion argues that damages methodology and quantification improperly captures value from features or technologies that are not covered by the asserted claims of the patent. If such a challenge is successful, it can result in the damages expert’s opinion being narrowed or excluded entirely. It is therefore important that damages experts, with the help of technical experts, seek to appropriately limit the scope of the damages analysis to the patented invention.
There are different accepted methodologies that damages experts can use to quantify patent damages, and not all such methodologies are equally susceptible to an attack based on damages covering only the proper scope of the patented invention. While damages may be based on the sale price or revenue from an infringing product, this may create a difficult apportionment problem for damages on complex infringing devices or services. If the patentee’s expert does not apportion the revenue down to the specific parameters of the patented invention, the expert’s opinion will likely be excluded.
An alternative damages methodology that is less susceptible to this challenge it to value the patented invention based on the cost to the infringer of switching to the next best non-infringing alternative, which effectively quantifies the cost of not infringing. This approach may be referred to as a cost savings approach, and it inherently values the benefit of the patented invention to the infringer and excludes non-infringing technology and devices. For example, in a case involving patented technology that makes network equipment more efficient, a damages expert may choose to evaluate the benefit to the infringer by looking at the alternative cost of using additional equipment that does not include the technology covered by the patent. This approach does not focus on the revenue the infringer generates from the infringing service it offers, which likely relies on many other features and technologies not covered by the patent. Instead, this approach looks at what the incremental cost would be to the infringer to offer an equivalent service using additional non-infringing equipment. Put another way, this approach seeks to hold everything else equal and quantify how much more it would cost the infringer to provide an equivalent product or service without infringing. Accordingly, this damages methodology tends to avoid capturing value attributable to non-infringing technologies that are used to provide the infringing product or service, and rather quantifies how much more it would cost the infringer to provide the product or service without having the benefit of practicing the patented invention. This cost savings approach is a proper measure of patent damages that should be considered by counsel and experts for patentees in patent litigation as a robust methodology that is well suited to withstand challenges based on valuing damages beyond the scope of the patented invention.