Distinguishing Lost Profits from Reasonable Royalties

Patent damages are designed to compensate patentees for their losses, notto punish accused infringers or require them to disgorge their profits. Thestatute provides for damages "adequate to compensate for the infringement,but in no event less than a reasonable royalty." Courts interpreting thisprovision have divided patent damages into two groups - lost profits,available to patent owners who would have made sales in the absence ofinfringement, and reasonable royalties, available to everyone else.Traditionally, patentees want to prove lost profits, because only thatmeasure captures the monopoly value of exclusion of competitors from themarket. As the statutory language suggests, reasonable royalties exist as afloor or backstop for those who cannot prove that they have lost profits asa result of infringement.In practice, however, the lines between lost profits and reasonableroyalties are blurring. In significant part this is because courts haveinsisted on strict standards of proof for entitlement to lost profits.Specifically, patentees must prove demand for the patented product, theabsence of noninfringing substitutes, the ability to meet additional demandin the absence of infringement, and the proportion of those sales thatrepresent profits. This in turn means that many patent owners who have infact probably lost sales to infringement cannot prove lost profits damages,and turn to the reasonable royalty measure. The result is that courts havedistorted the reasonable royalty measure in various ways, adding "kickers"to increase damages, artificially raising the reasonable royalty rate, orimporting inapposite concepts like the "entire market value rule" in aneffort to compensate patent owners whose real remedy probably should havebeen in the lost profits category.In Part I, I explain the strict requirements for proving lost profits, andgive examples of patentees who have failed to meet these requirements. InPart II, I explain how relegating these patentees to reasonable royaltieshas led to problematic changes in reasonable royalty law. Finally, Isuggest in Part III that courts should draw a sharp division between theinjury suffered by patentees who compete with infringers and those who donot. Patentees who compete should be entitled to the best estimate of lostprofits, even if not all elements of proof are available. Doing so willavoid overcompensating patent owners in reasonable royalty cases.