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Apportionment of Lost Profits Damages Appears To Be Making a Comeback
The issue of damages remains a hot topic at the Federal Circuit, with patentees being continuously reminded that damages must be apportioned to account for the value of patented features, as opposed to unpatented features, of an accused product. See, e.g., Ericsson, Inc. v. D-Link Sys., 773 F.3d 1201 (Fed. Cir. 2014); VirnetX, Inc. v. Cisco Sys., 767 F.3d 1308 (Fed. Cir. 2014). However, the vast majority of these cases involve apportionment in the context of reasonable royalties. Very little has been said about apportionment in a lost profits analysis. Universal Elecs., Inc. v. Universal Remote Control, Inc., 34 F. Supp. 3d 1061, 1092 (C.D. Cal. 2014) (“While apportionment in the reasonable royalty context has been the topic of much recent discussion ' its application to the lost profits theory of recovery is less familiar.”). Perhaps this is because many plaintiffs do not have products for sale (e.g., non-practicing entities) or because they cannot meet the exacting standards for proving lost profits. See, Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978). The result is that few courts have addressed the issue of whether a plaintiff must apportion lost profits damages. In light of the Supreme Court's penchant for reversing long-standing Federal Circuit opinions that appear to conflict with earlier Supreme Court decisions, parties in patent litigation should evaluate whether lost profits damages have been apportioned to account for the value of patented features.
Background
The Patent Act provides that “[u]pon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty.” 35 U.S.C. '284. The Federal Circuit has interpreted this as providing two types of damages: lost profits and reasonable royalties. Rite-Hite Corp. v. Kelley Co. , 56 F.3d 1538, 1544 (Fed. Cir. 1995) (en banc). Reasonable royalties are the “floor below which damage awards may not fall.” Id. Plaintiffs commonly seek reasonable royalties, and as a result, the law regarding reasonable royalties has been widely discussed. See, e.g., VirnetX at 1326. Lost profits, however, may be less familiar. To recover lost profits, a plaintiff must show a reasonable probability that, “but for” the infringement, the plaintiff would have made the sales that were instead made by the infringer. Id . at 1545. To show “but for” causation, the Federal Circuit has endorsed the Panduit four factor test, which requires that the plaintiff establish: “1) demand for the patented product; 2) absence of acceptable non-infringing substitutes; 3) manufacturing and marketing capability to exploit the demand; and 4) the amount of the profit it would have made.” Rite-Hite at 1544 (citing Panduit at 1156). Notwithstanding century-old guidance that a patentee “must in every case” apportion damages between the patented and unpatented features of a multi-component product, e.g., Garretson v. Clark, 111 U.S. 120, 121 (1884), courts have been inconsistent in requiring the plaintiff to apportion lost profits.
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