Page 46 - Intellectual Property Disputes

or only slightly increase, relative to the increases in production. The Federal Circuit addressed this
damage measure in Paper Converting Machinery Co. v. Magna-Graphics Corp., acknowledging that

[t]he incremental income approach to the computation of lost profits is well-established in the
law relating to patent damages. The approach recognizes that it does not cost as much to produce
unit N+1 if the first N (or fewer) units produced already have paid the fixed costs. Thus fixed
costs—those costs which do not vary with increases in production, such as management salaries,
property taxes, and insurance—are excluded when determining profits. fn 62

"Incremental costs are distinct from marginal costs in that marginal costs include only those costs that
vary when producing one more unit, whereas incremental costs include any costs that increase as
production expands over a relevant range . . ." fn 63 The incremental profit margin is typically defined as
the profit left after the deduction of those costs necessary to make and sell the additional units within a
relevant incremental range. For example, 5,000 products may be produced at a certain level of
incremental cost, but if a quantity greater than 5,000 is produced, the incremental costs may be reduced.
The cost reduction may arise, for example, from the producer’s ability to obtain volume discounts for
purchasing additional materials. The incremental profit margin may be expressed in terms of either a
specific dollar amount per unit or as a percentage of the unit price of the product.

Conceptually, lost profits can be separated into two parts, namely (a) the but-for lost sales or revenues
and (b) the incremental profit margin on those but-for sales. The courts have often followed the
recommendations of accounting or economic experts in this area. As one example, in Lam, Inc. v. Johns-
Manville Corp., the Federal Circuit awarded the patent holder incremental profits based on the following
calculation:

1. Start with revenue derived from sales of the patented product and subtract the direct costs of
material, labor, commissions, and freight for these sales.

2. Divide this difference by the number of units sold by the patent holder, yielding the incremental
profits per unit.

3. Multiply this incremental profit figure by the number of infringing units sold.

4. Solve for the aggregate lost profits by the patent holder. fn 64

Lost Profits in Copyright, Trademark, Trade Secret, and Trade Dress Cases

In copyright, trademark, and trade secret cases, lost profits represent those profits that the intellectual
property owner failed to earn as a result of the infringement. The lost sales measure attempts to equate
the intellectual property owner’s damages with the profits that would have been earned from each lost
sale due to the infringer’s misconduct. The lost profit test typically applies only if the intellectual

fn 62 Paper Converting Mach. Co. v. Magna-Graphics Corp., 745 F.2d 11, 14 (Fed. Cir. 1984).

fn 63 Micro Motion, Inc. v. Exac Corp., 761 F. Supp. 1420, 1429 (N.D. Cal. 1991).

fn 64 Lam, Inc. v. Johns-Manville Corp., 718 F.2d 1056 (10th Cir. 1983).

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