Page 49 - Intellectual Property Disputes

Courts have held that a claim for price erosion can be sustained if an infringer’s actions prevented an
intellectual property holder from raising prices or maintaining historical price increases. For example, in
Ziggity Systems, Inc. v. Val Watering Systems, the court held that but for the infringement, the patent
holder would have raised the price for products covered by the patent. fn 72 The court applied this theory
to both the sales made by the patent holder and those made by the infringer, which collectively
represented 95% of the total market. However, the court did not consider the doctrine of price elasticity
to be applicable to its analysis. fn 73 Price elasticity, which measures the responsiveness of quantity
demanded to a change in price, fn 74 is discussed in the section, "Price Elasticity," in this chapter.

A careful analysis of the industry in which the infringed and infringing products operate is often central
to assessing a potential price erosion claim. For example, in Crystal Semiconductor Corp. v. TriTech
Microelectronics International, Inc., Crystal Semiconductor’s expert witness attempted to measure price
erosion by comparing the price performance of (a) the plaintiff’s product covered by the patent in suit
and (b) a similar product manufactured by the plaintiff that served a different market. fn 75 The expert’s
approach compared the market for Crystal Semiconductor’s computer audio chips in the Apple
computer market to the market for Crystal Semiconductor’s computer audio chips in the IBM and IBM-
compatible personal computer (PC) market. This benchmark approach was designed to link the price
performance of a non-infringed product to the price performance of the infringed product as a
reasonable proxy. The Federal Circuit, however, found this benchmark approach unreliable because the
"Apple CODEC market had characteristics of an oligopoly while the PC CODEC [IBM-compatible]
market was competitive." fn 76

In Crystal Semiconductor, the Federal Circuit also addressed the necessity of examining the law of
demand in the context of potential price erosion. In this regard, the court found that Crystal had failed
"to show the reaction of the market if, ‘but for’ [the] infringement, Crystal would have tried to charge at
least 89¢ more per CODEC. All markets must respect the law of demand." fn 77 In other words, if the
patent holder claims it could have charged higher prices but for the infringement, the patent holder must
show the impact of such higher prices on the units demanded in the marketplace.

Another case illustrating the importance of industry analysis in price erosion litigation is Ericsson, Inc.
v. Harris Corp. fn 78 Ericsson (the patent owner) contended that it was entitled to "lost profits due to lost
sales" and "lost profits due to price erosion." To prove lost profits due to lost sales, Ericsson divided the
market between the broader "Harris market" and the narrower "Ericsson market." The Harris market
included customers that designed the infringing Harris product into their products. But these Harris
customers may not have designed the Ericsson patented product into their products, meaning that Harris
had actually expanded the market. The narrower Ericsson market was limited to customers that had

fn 72 Ziggity Sys., Inc. v. Val Watering Sys., 769 F. Supp. 752, 824 (E.D. Pa. 1990).

fn 73 Id. at 824.

fn 74 M.L. Katz and H.S. Rosen, Microeconomics, 3d ed. (Boston: McGraw-Hill, 1998), 73.

fn 75 Crystal Semiconductor Corp. vs. TriTech Microelectronics Int’l, Inc., 246 F. 3d 1336, 1357 (Fed. Cir. 2001).

fn 76 Id. at 1358.

fn 77 Id. at 1359.

fn 78 Ericsson, Inc. v. Harris Corp., 352 F. 3d 1369 (Fed. Cir. 2003).

© 2020, Association of International Certified Professional Accountants 45