In U.S. patent litigation, courts award infringement damages as lost profits or reasonable royalties, or both. Recent cases involving medical devices and instrumentation show how litigants have been able to expand or contract the base of a damages award.

In order to receive lost profits in the event of patent infringement, the patent holder must show market demand for the patented product; manufacturing and marketing capability to exploit the demand; absence of non-infringing substitutes; and amount of profit that would have been made. These facts are usually demonstrated via expert opinion at trial.

Church & Dwight, for example, succeeded on its case to obtain lost profits attributable to sales of a pregnancy test sold by an infringing competitor. The marketplace data offered by C&D's expert was sufficient to satisfy the first two requirements. Furthermore, the evidence demonstrated that pregnancy tests, which did not include the patented feature, were not viewed as acceptable substitutes by purchasers. The accused infringer attempted to avoid a lost profits analysis by alleging that there was a second product that buyers would deem an acceptable substitute for the patented device.

However, this tact failed because the second product actually infringed yet another C&D patent, which was not a part of the lawsuit. Here, C&D's patent holdings not only allowed it to recover on a particular patented feature, which was the subject of the suit, but also precluded its competitor from being able to offer a design alternative at market. It is also noted that the infringing competitor was shown to have knowledge of its infringement and yet continued its infringing activity, which caused the trial court to double the amount of patent damages awarded to C&D.

If a patent holder cannot offer sufficient proof to recover lost profits, the court will award damages in the form of a reasonable royalty. The amount of the reasonable royalty requires a determination of the royalty rate and the royalty base. The rate times the base provides the damages figure.

The factors that help establish a royalty rate at trial include:

• royalty rates paid for the litigated patent or analogous licensed patents;

• profitability of the product made under the patent;

• nature of commercial relationship between the plaintiff and defendant;

• effect of sales of non-patented components with the patented components; and

• portion of profit attributable to the invention.

In most industries, the relevance of analogous licensing information can be easily challenged at trial since license agreements vary so widely in scope, duration, and exclusivity. The remaining factors can be put to use by medical device manufacturers, as demonstrated in cases of Warsaw Orthopedics v. Globus Medical; Cordis v. Boston Scientific; and Volovik v. Bayer to either increase or decrease damages. (The names of additional party litigants in these cases were omitted for brevity.)

In the Warsaw case, the court readily acknowledged the high 80% gross profit margin earned by both parties in the area of surgical spinal stabilizers. The court coupled this with the fact that Warsaw rarely licensed its technology to any of its competitors. The court also noted that both parties were engaged in sales of related surgical products, such that the sale of the patented product often implicated sales of related but unpatented subject matter. All these considerations led to a more expansive damage analysis, leading to a 15% royalty rate applied to all infringing Globus devices.

The Cordis case involved a patent directed to a catheter that allowed easier stent insertion. In contrast to the Warsaw case, the patent infringer was actually able to contract damages liability by demonstrating that the market value of the stent assembly was attributable not to the patented catheter, but to the unpatented stent structure. In other words, defendant Boston Scientific was able to ease its damages payment by apportioning the value of the device attributable to the patent. By demonstrating that the technical value of the non-patented feature dwarfed the value of the patented feature, the infringer successfully argued for application of the lowest royalty rate among the royalty rates ranging from 5.1 to 14.8 % offered into evidence by Cordis.

Patent defendant Bayer was able to save itself from having damages assessed based on the market value of an entire immunoassay system, which included several instances of Volovik's patented immunoassay pumps. Volovik's evidence clearly showed the technical importance of the pumps in the system. However, Volovik failed to establish that the pump was the basis of the consumer market demand of the entire system.

The Cordis and Volovik cases demonstrate the patent holders' inability to attribute market demand based on the patented feature. However, the awards in these cases were impacted in two distinct ways. In Cordis, the court awarded damages based on sales of both the patented catheter alone and the catheter sold in conjunction with the unpatented stent. Though the royalty rate set was at the low range, the patent defendant potentially could have further lowered its damages by arguing that the royalty base should have been lower, too. In other words, there was a potential argument that the damages should not have applied to the entire value of the stent-catheter combination, but only to the value of the catheter alone. This was effectively the approach employed by the defendants in Volovik. While patent holder Volovik attempted to establish a royalty based on the entire market value of the immunoassay system, defendant Bayer successfully argued that there was an insufficient basis to tie infringing pumps to the entire market value of the system, which included numerous unpatented components. Thus, the royalty base would be limited to the less costly component pumps.

Clearly, patent damage assessments are flexible, and are also somewhat unpredictable. However, patterns emerging in patent case law show how marketing, licensing, and technical aspects can be emphasized, depending on whether the litigant is seeking to expand the damages or contract potential liability.