Page 43 - Acertaining Economic Damages Calculation

Although the court of appeals approved of the framework and certain assumptions used by Waverly
Church’s expert to calculate damages, it also found shortcomings in his analysis. Waverly Church’s ex-
pert had properly deducted sales commissions to determine Waggoner’s lost profits, but the court of ap-
peals noted that Waverly Church’s expert had also failed properly to deduct other expenses that "would
have reflected a more accurate net profit figure." Relying on Waverly Church’s analysis of the appropri-
ate damages period and estimate of lost revenue, while applying his imperfect deductions of expenses,
the court of appeals reversed the trial court’s award of lost profits, reducing it to $54,682 plus interest.

This case serves as a practical reminder to experts not to forget the basic definition of lost profits, which
requires that they be based on net profits, not gross profits. By failing to include all variable expenses,
including sales commissions, in his lost profits calculation among other failings, Waggoner’s expert
caused the court to disregard his opinion as "little more than speculation." In contrast, the court accepted
Waverly Church’s expert opinion even though he also failed to deduct certain expenses but had included
the larger variable expense of the sales commissions.

In re Mahurkar Double Lumen Hemodialysis Catheter Patent Litig., 831 F. Supp. 1354 (N.D. Ill. 1993)
(Judge Easterbrook, sitting by designation)

Sakharam D. Mahurkar (Mahurkar) was a nephrologist who developed a dual-lumen catheter designed
to assist in the treatment of kidney failure, providing doctors with access to patients’ blood streams
without doing excessive damage to the circulatory system and the blood itself. Mahurkar was granted a
series of patents related to the catheter, including U.S. Patent No. 4,583,968. Mahurkar licensed his
technology for dual-lumen catheters to Quinton Instruments Company (Quinton).

Mahurkar (and Quinton) brought suit against IMPRA, Inc. (IMPRA) asserting that IMPRA infringed the
968 patent through IMPRA’s production and sale of a catheter "all but identical to the one described in
the 968 patent." The court found IMPRA’s devices infringed the 968 patent and turned to the question of
damages.

In deciding that the appropriate compensatory damages to award Mahurkar and Quinton were their lost
profits, the court explained that there were two components to the calculation: sales diverted to IMPRA
and the reduction in the price Quinton realized for the catheters it sold with an additional competitor on
the market.

Mahurkar and Quinton offered two accounting experts to establish costs of production and the volume
of business diverted to IMPRA (expert 1 and expert 2). In analyzing the question of costs necessary for a
lost profits analysis, expert 1 concluded Quinton’s variable costs of manufacturing and selling catheters
were approximately 28% of its selling price, excluding variable overhead costs, such as the expenses of
the sales force, on the ground that the same salesman could handle higher volumes of sales. Expert 1
reasoned that the salesperson’s "salaries and related costs, while incremental costs of Quinton’s actual
production, would not be incremental costs of an expansion in output." fn 37 The court noted that there
was testimony from other witnesses seemingly supporting this conclusion because "when IMPRA with-
drew its catheters from the market because of production difficulties, Quinton was able to expand its
output at only the marginal costs of materials and labor." fn 38

fn 37 In re Mahurkar, 831 F. Supp. at 1385.

fn 38 Id.

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