Calculating Lost Profits in Patent Infringement Cases

In a recent opinion, Mentor Graphics Corp. v. EVE-USA Inc., No. 15-1470 (Fed. Cir. Mar. 16, 2017), the Federal Circuit evaluated when a patentee is entitled to lost profit damages. Lost profit damages are the profits that a patent holder would have made if an infringer had not infringed. The Court found that one “useful, but non-exclusive” method to establish an entitlement to lost profit damages is the test first articulated in Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978).

In Mentor Graphics, the parties appealed several trial court decisions from a patent infringement case, including the jury instructions that led to an award of lost profits as damages. Specifically, the jury awarded the plaintiff/patentee (“Mentor”) over $36 million in lost profit damages resulting from the defendant’s (“Synopsys”) sales of its infringing product to Intel Corp. (“Intel”). Synopsys appealed the district court’s denial of judgment as a matter of law and motion for a new trial with regard to damages, arguing that the court failed to properly apportion the lost profits.

In considering this issue, the Federal Circuit first established that the Patent Act calls for compensatory damages as a remedy to patent infringement, and that the standard for determining compensatory damages is fairly consistent across all areas of the law, including torts and contract disputes.¹ This standard embraces the notion that “but for” a harmful act by a defendant, a plaintiff would be in a better position; accordingly, “[w]hen a plaintiff proves it would have been in a certain position but for a defendant’s harmful act, it is entitled to damages to put it in the same position it would have occupied had the harmful act never occurred.” Applied to a patent litigation, “[t]he goal of lost profit damages is to place the patentee in the same position it would have occupied had there been no infringement.”²

The Federal Circuit then went on to apply the Panduit factors to establish the patentee’s entitlement to lost profits. Under Panduit, a patentee is entitled to lost profit damages if it can establish: (1) demand for the patented product, (2) absence of acceptable non-infringing alternatives, (3) manufacturing and marketing capability to exploit the demand, and (4) the amount of profit it would have made.³ Panduit, the Federal Circuit found, applied neatly to the facts of the immediate case-namely, for each infringing sale Synopsys made to Intel, Mentor lost that sale. In other words, there was (1) demand for Mentor’s emulators, (2) a lack of non-infringing alternatives to Mentor’s emulators, (3) manufacturing and marketing capability for Mentor to exploit the aforementioned demand, and (4) an easily calculable profit that Mentor would have made absent Synopsys’ infringing sales. The Federal Circuit determined that the facts of this case were “remarkably simple for a patent damages appeal,” and were undisputed.

However, Synopsys argued that the Court should apply a different compensatory damages framework. Synopsys proposed an apportionment framework, which would require that: (1) “a patentee must calculate the amount of profits it lost as a result of the infringement using the Panduit factors,” and (2) “a patentee must further apportion its lost profits to cover only the patentee’s inventive contribution.”⁴ Synopsys argued that such apportionment would limit damages to “only the amount of profit properly attributable to [the product’s] patented features.” Applied to this case, this proposed framework would have discounted most, if not all, of Mentor’s lost profits from the emulator sales to Intel.

The Federal Circuit rejected Synopsys’ proposal, deciding that “Panduit’s requirement that patentees prove demand for the product as a whole and the absence of non-infringing alternatives ties lost profit damages to specific claim limitations and ensures that damages are commensurate with the value of the patented features.” The Federal Circuit held that, under the facts in this case, “satisfaction of the Panduit factors satisfies principles of apportionment,” and that “Mentor’s damages are tied to the worth of its patented features.” The court reasoned that it was undisputed that Mentor’s emulator and Synopsys’ infringing emulator were the only suitable alternatives to Intel and that “Intel would not have purchased emulators without the features claimed in [the patent-in-suit].”⁵ Accordingly, the Federal Circuit found that Mentor “is entitled to be made whole for the injuries it suffered as a result of the infringement,” which the jury appropriately calculated as be the profits Mentor would have earned by selling its emulators to Intel “but for” Synopsys’ infringing sales.