Choose Your Damages Theory Carefully

In an effort to maximize damages awards, patent owners may be tempted to push the limits of the recovery boundaries beyond those permitted by law. Record-setting damages awards have been reversed on appeal and others have been tossed on post-trial motions for running afoul of the “entire market value rule.”

This rule permits recovery on the sales of an accused product only if the patented component or feature drove the demand for the “entire product.” In cases involving multi-component products, proof that the rule applies is exceedingly difficult.

Courts view the application of the entire market value rule as the exception to a more general rule which mandates that royalties be tied to the “smallest salable patent-practicing unit.” Thus, one of the first questions a patent owner should ask when evaluating the soundness of its damages theory should be whether the royalty base it has selected is adequately tied to the smallest salable unit to which the patented invention relates.

Courts recognize two broad categories of damages: lost profits, which are available to patent owners who compete in the market and would have made a sale “but for” the infringement; and reasonable royalties, which are available to all patent owners, regardless of whether they compete in the market.

The entire market value rule applies to both categories. Thus, it is incumbent upon patent owners and accused infringers alike to understand the applicability of the rule, as well as its limitations.