Page 60 - Intellectual Property Disputes

allocations to defendants. Further, a question was raised regarding whether the jury could infer if
additional documents contained infringements (due to the defendants’ destruction of documents). "This
step of the damage calculation requiring the allocation of profits between those attributable to
infringement and those attributable to factors other than infringement is a ‘highly fact specific’ inquiry.
Andreas, 336 F.3d at 797 (citing Estate of Vane v. The Fair, Inc., 849 F.2d 186, 190 [5th Cir. 1988]). It
is not our function to second-guess the jury." Unless the jury’s award was such that it "shocks the
judicial conscience" or results in a "miscarriage of justice," then the allocation of revenues and costs,
and ultimate damages related to that allocation, will stand. Further, the jury was "free to infer" that the
infringing material was used in more documents than produced. fn 125

Costs and Profits in Lost Profits Calculations

Measuring Incremental Costs

As discussed previously, when calculating lost profits, the appropriate benefit stream to measure is the
incremental profit margin. Determining incremental costs is challenging and often a significant source of
contention. In addition to the expected direct costs such as labor and materials, an infringer may also
claim that the intellectual property owner may need to increase certain costs proportionately with the
production of additional units or additional revenues. These costs may include increased general and
administrative costs or other non-direct product-related costs. Increasing these types of costs would
lower the profits on the infringing units as well as the related damages. In response, the intellectual
property owner often argues that (a) the gross margin more closely reflects incremental profitability, and
(b) it would not have been necessary to add equipment, overhead, or infrastructure to produce and sell
the infringed units. This position, of course, tends to increase profitability from the lost sales as well as
related damages. An expert’s opinion could fall anywhere within the range of these two polar positions,
depending on the specific facts and circumstances of the case. fn 126

A careful examination of costs is essential to determining the profitability of the lost sales. An
examination of each specific cost line item may be necessary. This effort often involves reviewing the
costs reflected within detailed financial statements, standard accounting records, and other financial
documents. In lieu of a determination by line item, a statistical analysis of the relationship between cost
and volume may provide the required cost estimates. Such analysis can identify, on average, the extent
to which costs have, in fact, increased for each unit increase in sales volume. fn 127

One of the initial determinations for each cost item is whether the cost is variable or fixed over the range
of actual and anticipated incremental production. A comparison of the intellectual property owner’s
output to the claimed incremental sales can help determine the amount of incremental costs that would
need to be incurred to make the incremental sales. For example, a doubling in sales may call for an
investment in additional manufacturing facilities and management personnel, whereas an increase of
only 5% of an intellectual property owner’s sales may not require such an investment.

fn 125 Id.

fn 126 M.A. Glick, L.A. Reymann, and R. Hoffman, Intellectual Property Damages: Guidelines and Analysis (Hoboken, N.J.: John
Wiley & Sons, Inc., 2003), 147.

fn 127 J. Kinrich, R. Mangum, and A. Meister, "Cost Analysis," in Intellectual Property Damages, Guidelines and Analysis, 2004
supplement, M. Glick, L. Reymann, and R. Hoffman, eds. (New York: Wiley, 2004).

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