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Patent Infringement Damages Overview | |
There are increasing demands for better economic models to help the patent damages expert develop more reliable analyses. For example, the Federal Circuit recently made it clear in Crystal Semiconductor v. TriTech that the common practice of asserting price erosion independently of the lost sales claim is not credible and is unlikely to be acceptable in the future. Recent ABA Litigation Roundtable discussions also reveal growing concern that the Georgia Pacific factors are no longer adequate to determine a reasonable royalty.
Dr. Epstein's economic research integrates the key insights from economics, accounting, and statistics into coherent and powerful tools for calculation of patent infringement damages. His PERLS (Price Erosion and Lost Sales) model, recently published in the AIPLA Quarterly Journal, is a lost profits analysis that is insulated from the Federal Circuit's criticism in Crystal Semiconductor.
He has also developed FIRRM (Financial Indicative Running Royalty Model), which uses modern principles of corporate finance to extend the Georgia Pacific reasonable royalty analysis. This research was done with his colleague Prof. Alan J. Marcus, a widely cited expert in corporate finance, and was published in the JPTOS.
Dr. Epstein is addressing additional economic issues with use of the market share rule, separate from price erosion, in a future article. The market share rule is a useful starting point for reallocating the infringing sales to the other participants in the "but for" market. However, the rule rests on assumptions that may be overly simplified. Dr. Epstein's work explains how to implement the market share approach more generally to yield more accurate calculations for infringement damages.
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PERLS (Price Erosion and Lost Sales) | |
Presented in Roy J. Epstein, "The Market Share Rule with Price Erosion: Patent Infringement Lost Profits Damages after Crystal." 31 AIPLA Q.J. 1 (2003).
PERLS yields economically consistent damages awards when price erosion is claimed on the patent holder's additional but-for sales, taking explicit account of price elasticity effects. The Court of Appeals for the Federal Circuit made it clear in Crystal v. Tri-Tech in 2001 that a coherent analysis of
price elasticity effects will be expected in price erosion cases.
PERLS meets this requirement in a particularly clear and tractable
way using the logic of the prevailing market share rule and Judge
Easterbrook's method in Mahurkar (831 F.Supp. 1354).
Mathematically, PERLS is a simple
extension of the market share rule in the following sense. Both
PERLS and the conventional approach incorporate the assumption
that the patent holder's but-for market share is given by its
actual market share divided by the total share of non-infringing
sales. PERLS then draws out the implication of this assumption
in the presence of price erosion for any given value of price
elasticity. Putting the elements together, the PERLS lost profits
calculation can be expressed as:
| PERLS
lost profits |
= |
Market
share lost profits + price erosion % times patent holder's revenue
+ price erosion % times market share lost sales + price elasticity
adjustment |
PERLS yields the specific mathematical formula to perform this calculation. The only new parameter in PERLS relative to the naive market share approach is the price elasticity. The economic principles that underlie the PERLS elasticity adjustment ensure that lost profits equal the difference between but-for and actual profits. With zero price erosion, PERLS is equivalent to the conventional market share rule, that is, the market share rule is a special case. It can be shown that Judge Easterbrook's method in Mahurkar is also a special case of PERLS.
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FIRRM (Financial Indicative Running Royalty Model) |
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Presented in Roy J. Epstein and Alan J. Marcus, "Economic Analysis of the Reasonable Royalty: Simplification and Extension of the Georgia-Pacific Factors." Published in the July 2003 Journal of the Patent & Trademark Office Society.
FIRRM extends the framework of the Georgia-Pacific factors for determining a reasonable royalty award in patent infringement. It is based
on standard principles of discounted cash flow ("DCF")
investment analysis in corporate finance. The maximum reasonable
royalty extracts the difference in net present value between
the infringing project and the infringer's next best alternative.
FIRRM has practical advantages
of accuracy, flexibility, and low cost of implementation. It is especially powerful when the case documents already provide information on the key parameters of the cost
of capital and the projected internal rate of return of the infringing
project. The model can then yield results almost immediately. Standard methods of corporate finance are used to calibrate the model when the required parameters are not available directly from the documents.
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