Page 51 - Acertaining Economic Damages Calculation

Polaroid’s lost sales, it addressed the need to reduce such sales to Polaroid’s lost profits through the in-
cremental income approach:

The incremental income approach recognizes that typically, the cost of producing additional
units of the patented product is not as great as the cost of producing the first. This approach sepa-
rates the costs the patent owner historically incurred into fixed and variable components. Gener-
ally, the patent owner would incur the variable costs in producing additional volume but, unless
new investment is required, would not incur those costs which are fixed and already paid. Incre-
mental costs are subtracted from incremental revenue in order to determine lost profits. The in-
cremental income method for determining the cost of making the infringer's sales has been wide-
ly used in determining patent infringement damages. fn 61 [citations omitted]

As part of the analysis of the appropriate product costs to include, fn 62 each of the parties’ experts ana-
lyzed the variability of payroll and overhead costs, although via different approaches. Polaroid’s expert
analyzed Polaroid’s fixed and variable portions of these expenses using an account analysis method
based on general ledger data. The court described Polaroid’s approach that involved using a sample year
and then applying the results to each year in the relevant time period:

This method involves examining accounts at the general ledger level and determining whether
that cost is fixed or variable. Polaroid personnel assisted the McNamara team with some of this
analysis. After determining that the cost elements and the ratio of each element to total spending
in both 1976 and 1981 were similar to 1985, the team felt confident using their 1985 analysis to
predict what costs would increase with volume in each year from 1976 to 1985. fn 63

Kodak’s expert analyzed variability of payroll by performing a regression analysis to estimate the
cost/volume relationship, in addition to a "‘high/low’ estimate... compar[ing] the cost/volume ratio at the
points of highest and lowest [historical sales] volume in a certain time period." fn 64 Kodak’s expert pre-
sented 10 different regression analyses based on different "types of cost and volume data," with results
that the court found consistent with Polaroid’s own internal documents that "used similar analyses or
reach[ed] similar results." fn 65

In weighing the merits of each expert’s approach, the court concluded Polaroid’s expert’s methodology
was suspect in this case, writing that "account analysis [was not] the best method for cost accounting in
these circumstances." fn 66 The court appeared to be concerned with a number of issues it identified as af-

fn 61 Id. at *61.

fn 62 Other categories of costs were addressed separately by the parties’ experts in this case and subsequently analyzed by the court.
Because this case is presented as an example of the use of regression in determining costs, the court’s analysis of the experts’ method-
ology in ascertaining these other costs is not addressed in this case summary.

fn 63 Polaroid Corp., 1990 WL 324105, at *62.

fn 64 Id.

fn 65 Id.

fn 66 Id.

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