Page 28 - Intellectual Property Disputes

Chapter 2

Calculating Infringement Damages

Introduction

Many intellectual property disputes arise from allegations that one party infringed another party’s
intellectual property rights. As such, practitioners are often engaged to deal with the issue of calculating
economic damages resulting from the alleged infringement. Significant differences exist between
valuing intellectual property for transactional purposes, and, conversely, estimating damages resulting
from intellectual property infringement or misappropriation.

For example, the forensic practitioner often assesses the value of the intellectual property for its
potential future benefits and gains or for purchase price allocation purposes. In this context, the
practitioner may focus his or her analysis on (a) consumer demand for the product, (b) the likelihood
that an alternative substitute product will emerge, or both. In contrast, the orientation of the damages
expert in a litigation context is more retrospective than prospective in nature. Forensic practitioners
often find themselves analyzing historical data for purposes of ascertaining what would have transpired
"but for" the alleged infringement, with an assumption that the future sales of an infringing product will
be enjoined at trial. There are exceptions to this assumption, however, such as when future sales or
pricing will be adversely affected even after the issuance of an injunction against continued
infringement.

Taxes, ordinarily a component of a transactional valuation analysis, are not ordinarily addressed in
calculating damages arising from infringement or misappropriation. In a litigation context, damages are
normally computed on a pretax basis because damage awards from intellectual property disputes are
taxable as ordinary income under U.S. law. Exceptions to this rule may arise, however, if profits would
have been earned in one time period or tax jurisdiction but are shifted to another as a result of the
litigation. In such a case, an adjustment to the damage analysis may be necessary to make the injured
party whole. The expert should consult with counsel to determine the appropriate tax treatment in the
relevant jurisdiction.

Intellectual property case law is often categorized by the nature of the property in dispute. For example,
there is a distinct body of case law individually addressing patents, copyrights, trademarks, and trade
secrets. However, these cases often address principles or concepts applicable to all forms of intellectual
property. Because case law precedent can change, the practitioner should work with client’s counsel to
obtain the appropriate understanding of the relevant case law for any particular case.

Local rules may also affect the timing and disclosures required by the practitioner who, therefore, should
work with client’s counsel to gain the necessary understanding for compliance. For example, newer
2017 Northern District of California rules, which are often adopted elsewhere, require the parties to
provide the court with a nonbinding, good-faith estimate of the damages range expected for the case,
along with an explanation for the estimates at the initial case management conference (Section 2-1(b)5,
3.8 and 3.9). This is much earlier than historically required, which suggests that damages experts will
likely be asked to get involved earlier in the life cycle of a patent dispute.

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