1	New Standards for Proving Patent Infringement Damages: Understanding Crystal Semiconductor, Micro Chemical, and Other Recent Cases Roy J. Epstein, PhD rje@royepstein.com Boston Bar Association September 24, 2003
2	Cases for Discussion Crystal Semiconductor v. Tritech (Federal Circuit, 2001) New standards for analysis of lost profits with price erosion. Micro Chemical v. Lextron (Federal Circuit, 2003) Application of Grain Processing and other economic issues for proving lost profits. Micro Chemical v. Lextron and Turnkey Computer (Federal Circuit, 2003) Application of Grain Processing in context of reasonable royalty.
3	Crystal Semiconductor v. Tritech 246 F.3d 1336
4	Damages Overview Infringement of audio chips used in personal computers. Crystal sought: $35+ million price erosion; $14 million lost sales under market share rule from State Industries v. Mor-Flo; Reasonable royalty on remaining infringing sales (a “split” award).
5	Federal Circuit Opinion Upheld jury award of lost sales and reasonable royalty ($21.8 million total). Denied jury price erosion award of $26.6 million because of deficient economic analysis.
6	Price Erosion and Price Elasticity Federal Circuit: need “credible economic evidence” to quantify decrease in sales at higher but-for price. Effect = Price Elasticity (percentage sales decrease per 1% price increase).
7	Example 2-supplier market, price is $10. Patent holder sold 800 units @ $4 profit/unit, infringer sold 200 units. Assume $1 price erosion (i.e., but-for price is $11). Lost profits NOT $1,800. $1,800 = $1 ´ 1,000 total units + $4 ´ 200 “lost” units. Ignores price elasticity.
8	The PERLS Solution PERLS (Price Erosion and Lost Sales) Roy J. Epstein, 31 AIPLA Quarterly Journal (Winter 2003). Integrates market share lost sales from State Industries v. Mor-Flo with price erosion. Addresses the Federal Circuit’s concern. Key idea: market share formula easily extended to include elasticity effects.
9	PERLS Lost Profits Equation PERLS lost profits = Market share lost profits + price erosion ´ patent holder’s revenue + price erosion ´ market share lost sales + price elasticity adjustment. Elasticity adjustment reduces damages.
10	Elasticity Adjustment PERLS price elasticity adjustment depends on: Magnitude of the price elasticity Amount of price erosion (in %) Infringer’s market share Patent holder’s revenues Patent holder’s profit margin With zero price erosion, PERLS is equivalent to conventional market share damages.
11	PERLS Application to Crystal Elasticity 0 –1.0 –2.0 Damages $40.8 $28.0 $15.1 ($ millions)
12	Pitfall with Split Award and Price Erosion Split award: infringer owes reasonable royalty on sales NOT awarded to patent holder. Not appropriate with price erosion. Lost profits (difference between but-for and actual profits) already make patent holder whole; royalty is overcompensation.
13	Micro Chemical v. Lextron 318 F.3d 1119
14	Damages Overview Infringement of patent for microingredient nutrient dispensing machine for livestock. Lost profits denied by summary judgment. District Court awarded 1% reasonable royalty on sales of microingredients (not machines). Federal Circuit reversed, vacated, and remanded to allow lost profits in place of a reasonable royalty.
15	Emphasis on Economics The damages case is overwhelmingly about economics, not accounting or law. The District Court and the Federal Circuit opinions make intensive use of economic analysis.
16	Complex Economic Evidence But the District Court and the Federal Circuit disagreed on virtually every critical economic finding about lost profits. Key disagreement: application of Grain Processing.
17	Grain Processing and the Facts District Court: “Lextron did not have to ‘invent around’ the patent.” Defendant removed the mixing element, added a tank, modified the discharge line, and changed the software. Federal Circuit: “Lextron designed around.”
18	Timing Issues Lextron’s non-infringing alternative was not immediately available. Several months to design and test. Four months to convert infringing machines. Federal Circuit: delay eliminates Grain Processing defense.
19	A Less Strict Grain Processing Standard? If infringer can prove timing and rate of market penetration of non-infringing alternative, then Grain Processing should reduce damages (but not to zero). Better reconciles District Court and Federal Circuit opinions. No case on this point so far.
20	Micro Chemical v. Lextron and Turnkey Computer 317 F.3d 1387
21	Damages Overview Infringement of patent for computerized livestock medical records system. Micro Chemical awarded reasonable royalty. Federal Circuit affirmed award. Decision focused on Daubert issues, including a Grain Processing analysis.
22	Royalties and Grain Processing Federal Circuit: “This court has not had occasion to address whether the holding of Grain Processing has applicability in the reasonable royalty context.” Further, “We need not decide that issue here.” Potential broad impact, e.g., remand in other Micro Chemical case.
23	Grain Processing Should Apply Key issue: value of infringer’s next-best investment. Equally good non-infringing alternative reduces the competitive royalty to zero. FIRRM (Financial Indicative Running Royalty Model) Roy J. Epstein and Alan J. Marcus, “Economic Analysis of the Reasonable Royalty,” 85 J. Patent and Trademark Office Society (July 2003).
24	Conclusions Patent damages cases require increasingly sophisticated economic analysis. Federal Circuit will consider new economic methods for “reconstruction” of but-for market. Recent scholarly work provides useful guidance for both lost profits and reasonable royalty determinations.
25	"Visit www.royepstein.com to download" Visit www.royepstein.com to download This presentation CV Other economic analysis for IP, antitrust, and complex litigation Roy Epstein’s contact information is: email: rje@royepstein.com phone: (617) 489-3818