Page 110 - Intellectual Property Disputes

Apportionment based on cost. Apportionment of value should be performed on the basis of relative
value. In economics, it is common to find that the relative cost or price of a component or element is a
fair measure of its relative value. That is, something that costs twice as much is often worth twice as
much. If that is true for a particular product, it may be reasonable to apportion profits in proportion to
the cost of the components.

Other cost-based apportionment methodologies may involve elements other than cost of goods sold. For
example, in a copyright case involving advertising, the relative cost (and volume) of infringing
advertising to total advertising may be one step in the apportionment process. Because a portion of the
value of the good being advertised may come from its inherent quality and desirability and another
portion may come from the advertising, the analysis may also include the relative cost of advertising as a
whole compared to the cost of goods sold.

Cost-based apportionment may be inappropriate if the cost of some elements does not represent their
value. This is particularly true if valuable elements are obtained at no cost (for example, because they
are already owned by the infringer) or if the cost or value of the elements are not easily measured, such
as the value of a brand name. For example, in Columbia Machine & Stopper Corp. v Adriance Machine
Works, fn 17 the expert attempted to apportion a machine’s profits to the infringing element by using a
fraction dividing the cost of the infringing part by the total cost of the machine. The court, however,
rejected this approach, finding that part cost was not a fair measure of the relative contribution of the
infringing element.

Alternative non-infringing hypothetical market. This methodology calls for the creation of a
hypothetical supplementary yet non-infringing product, with a resulting estimate of the profit created by
this product. Under this method, the expert would subtract the hypothetical non-infringing profits from
the actual profits made during the sale of infringing products and apportion the difference to the
infringing feature. This method seeks to measure the profit premium available from the infringing
feature or product compared to a similar, non-infringing feature or product via the analytical method,
discussed previously.

Volume basis. In some cases, the volume of the infringing elements as a portion of the total work is a
rational basis for apportionment. For example, in Frank Music, fn 18 the performing act that used the
infringing music constituted approximately 12% of the show’s weekly running time, and the court
attributed 12% of the show’s profits to the infringement. fn 19 There is, however, no bright-line rule.

For example, in Lottie Joplin Thomas Trust v. Crown Publishers, the defendant used copyrighted
materials in a compilation set. fn 20 The defendant argued that because the infringing portion comprised
10% of the total collection, the plaintiff was entitled to 10% of the total profit. The court found this
method unacceptable because the product was marketed as a complete collection, and the absence of the
infringing material would have had a substantial effect on the overall value of the product. The court

fn 17 Columbia Mach. & Stopper Corp. v. Adriance Mach. Works, 79 F.2d 16 (2d Cir. 1935).

fn 18 Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc., 772 F.2d 505, 512 (9th Cir. 1985).

fn 19 The Ninth Circuit made adjustments to the 12% finding based on other factors not relevant to this discussion.

fn 20 Lottie Joplin Thomas Trust v. Crown Publishers, 456 F. Supp. 531, 538 (S.D.N.Y. 1977), aff’d, 592 F.2d 651 (2d Cir. 1978).

106 © 2020, Association of International Certified Professional Accountants