The American Intellectual Property Law Association (AIPLA) reports that for patent infringement lawsuits where $1M to $10M is at risk the cost to go to trial is about $2M. Just getting through discovery costs about $1M.

Given the high costs of patent litigation, a patent owner needs to evaluate the amount of possible recovery before instituting a patent infringement lawsuit. If the amount of possible recovery - without regard to the likelihood of proving infringement — does not exceed the litigation costs, there may not be sufficient justification to bring a lawsuit.

A more accurate analysis of the amount of possible recovery might also account for the likelihood of proving infringement. If this likelihood is quantified at less than 100%, then the amount of recovery can be accordingly reduced.

The amount of possible recovery is affected by different factors. One factor is when the patentee's damages start to accrue. A second factor is whether the patentee can seek a reasonable royalty or damages. A third factor is the extent to which the patentable features can be linked to infringing sales.

Under the first factor, the patent owner can recover damages from the infringer from the time of notice of infringement. This notice may be in the form of a "patent mark" on the patented product, a letter to the infringer advising of infringement, or the filing of an infringement lawsuit.

The "patent mark" is where the patent number is placed on the patented product. Where the patent owner does not make or sell a product covered by the patent (e.g., a non-practicing entity — NPE), there is no obligation to mark the patented product or give actual notice. Likewise, there is no requirement of marking a patented method.

Under the second factor, the patent owner is entitled to damages but not less than a reasonable royalty. If the patent owner can prove lost profits due to the infringement, it can recover its lost profits.

However, one limitation to proving lost profits is that the patentee must compete with the infringer in the relevant market for the patented product. Thus, an NPE who does not make a competing product would be foreclosed from recovering lost profits.

Another limitation to recovering lost profits is proving that the loss was due to the infringement rather than market conditions.

To recover a reasonable royalty, the patent owner must prove what would have been paid as a royalty between a hypothetical willing licensor and a hypothetical willing licensee.

Under the third factor, damages are generally recoverable only for the infringing product. But often, an infringing component is sold with non-infringing components as part of a larger product. In that case, damages are limited to the infringing component.

An exception can apply where the patented feature drives demand for the entire product. Damages or royalties may then be based on the entire market value of the product.

The above and other damage factors then need to be weighed against what counsel for the patent owner estimates to be the total costs through trial, as well as the probability of success at trial. Though difficult to estimate, the patent owner needs the estimates to weigh the costs and benefits of an infringement suit.

SUMMARY: Patent owners often look to the gross amount of infringing sales to determine the extent of their harm or damages. However, the gross amount is not what the patent owner will receive for damages at trial. It is far less, if at all. That lesser amount needs to be weighed against the cost of litigation before deciding to initiate litigation.

© Michael A. Shimokaji, 2014 The contents of this article represent the opinions of the author and not those of the author's law firm or clients.

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