Market Share Damages
In a patent case where it would be overly burdensome, if not impossible, to prove the absence of acceptable, non-infringing substitutes under the Panduit test, a patent owner may show the market share held by each competitor and contend that ‘but for’ the infringement, each competitor would have sold its market-share of the infringer’s sales.1 This type of analysis is known as ‘the market share approach’ to determining damages.
The market share approach is a combination of lost profits damages and reasonable royalty damages. Under the market share approach, the patent owner receives lost profits on a portion of the infringing sales and a royalty on the remaining portion of the infringing sales. The market share approach subtracts the infringer from the market and assumes that customers would have purchased products in the same proportions as they did when the infringer was in the market. In other words, ‘but for’ the infringement, all sellers in the market would have sold the same market proportion as they actually sold in the real world (excluding the infringer’s portion of the market).
By eliminating the infringer from the market, the market share approach assumes that the infringer would not or could not have participated in the market without the infringing product. It should be considered whether this is a reasonable assumption. The existence of other competitors, particularly if they are selling non-infringing alternatives, may highlight the acceptability of other ways of achieving the benefits of the patented technology or the relative lack of importance (or value) associated with the technology, or both. In essence, if there are competitive, non-infringing alternatives in the market, the infringer may have reasonably considered employing a non-infringing approach rather than simply disappearing from the market altogether.
When a market share approach is used to determine patent infringement damages, the patent owner must still prove the other Panduit factors, i.e., demand, capacity and the ability to calculate the damages.
Another consideration when using the market share approach to patent damages is that the patent owner could potentially end up in a better position than it otherwise would have been in. For example, under the market share approach, a patent owner would receive: (1) lost profits on the portion of infringing sales it would have made ‘but for’ the infringement; and (2) royalties on the remaining portion of infringing sales that would have been made by other competitors. To the extent that other competitors were licensees of the patent at issue, those royalties would represent royalties the patent owner otherwise would have received. If not, the patent owner would receive royalty compensation it otherwise would not have received. In other words, ‘but for’ the infringement, the patent owner would not have received royalties on those sales made by other competitors (unless the competitors were licensees of the patent owner). Essentially, in such a case, the market share approach results in the patent owner being awarded royalties that it likely would not have otherwise received, ‘but for’ the infringement.
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1 State Indus. Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1577 (Fed. Cir. 1989); King Instruments Corp. v. Perego, 65 F.3d 941, 953 (Fed. Cir. 1995).