To recover damages for lost profits, a patent owner must show causation in fact, establishing that, but for the infringement, the patent owner would have made additional profits. The patent owner typically seeks to prove causation in fact using the four Panduit factors: (1) a demand for the patented product, (2) an absence of acceptable noninfringing substitutes, (3) the manufacturing and marketing capability to exploit the demand, and (4) the amount of profit the patent owner would have made. In a recent decision, the Federal Circuit considered whether a patent owner could satisfy the first two Panduit factors with gross sales data for a patented product when the owner failed to establish that lost sales were a direct result of the infringing product. Reversing the district court's holding that lost profits damages were available, the Federal Circuit found that the gross sales data alone was insufficient in this case to establish consumer demand and a that failure to establish that lost sales were a direct result of the infringing product precluded the recovery of damages for lost profits.
In Calico Brand, Inc. v. Ameritek Imports, Inc.,1 Calico sued Acme, claiming willful infringement of its patents directed to safety features in a lighter. The jury found that Acme willfully infringed Calico's patents and that Calico was entitled to lost profits as compensation for that infringement. But after post-trial motions, the court held that Acme's infringement was not willful. On appeal, Calico claimed that the district court should not have set aside the jury verdict of willfulness. Acme cross-appealed, arguing that the jury's award of lost profits should have been overturned.
First addressing willful infringement, the Federal Circuit held that the record showed that when Acme learned of its potential liability for infringement, it immediately demanded assurances from its supplier that the products did not infringe. Acme stated that it would, and in fact did, return its inventory of accused products to the supplier. Calico argued, however, that a document showed Acme had sold four lots of product days after learning of Calico's patents. After reviewing the record, the Federal Circuit concluded that the document lacked detail regarding the nature of the products and that the jury had not been presented the document. Without evidence that the jury had relied on the document and that the document could in fact prove sales of infringing products, the court did not give it weight. Because Acme's actions showed that it had not proceeded with infringement after notice of the patents, the Federal Circuit affirmed the district court's holding that the infringement was not willful.
Regarding lost profits, the Federal Circuit focused its analysis on two Panduit factors: (1) a demand for the patented product, and (2) an absence of acceptable noninfringing substitutes. As to the first factor, the Federal Circuit held that, in this case, gross sales data alone could not establish consumer demand based on the patented invention. Calico had not elicited any testimony regarding the commercial value of the patented features or distinguishing between the value of the patented and unpatented features. Moreover, the evidence indicated that the price of the accused products drove customer demand, not the patented safety features.
For the second factor—an absence of acceptable noninfringing substitutes—the Federal Circuit held that Calico failed to demonstrate a reasonable probability that, in the absence of the infringing product, Acme or its customers would have purchased Calico's products rather than one of the many competitors' noninfringing alternatives. Calico's failure to establish that its lost sales were a direct result of Acme's infringing sales rather than other noninfringing sales precluded the recovery of lost profits. Reversing the district court's conclusion that, under a market-share theory, Calico would have captured profits “but for” Acme's infringement, the Federal Circuit vacated the award of lost profits and remanded for entry of judgment reflecting the jury's award of damages in the form of a reasonable royalty.
Strategy and Conclusion
This case illustrates potential pitfalls in satisfying the first two Panduit factors. For the first factor—demand for the patented product—courts may look for testimony distinguishing between the value of the patented and unpatented features. Additionally, the second factor—an absence of acceptable noninfringing substitutes—may be difficult to satisfy in a diverse market. Patent holders need to be able to establish a reasonable probability that, in the absence of the infringing product, customers would have purchased the patented product rather than the noninfringing alternatives.