Capturing Value: Multiple New Approaches to Damages in IP Litigation
While there are many new and different ways to attack the issue of accurate damages valuation and quantification, three broad approaches are used most often to calculate and quantify economic or business damages or lost profits:
- The "before and after method." In this approach, one compares the value of the IP before the damages took place, with the value of the IP after the damages;
- The "but for method" in which an expert will quantify the damages by establishing what amount of income (sales, profits, etc,) would have been earned by the patent or trademark owner, but for the damages cause by the infringer. This method typically requires a backward look at economic income, as well as forward looking projections for what would have been earned but for the infringement and other damage; and
- The "opportunity cost methodology." In this so-called cost approach, one can include the value or income from the IP that the owner or plaintiff would have earned. This is added to current or opportunity costs, which essentially is the calculation of value for the income or revenue that the plaintiff or IP owner could have earned in the future. Taken together, then, these historical and future opportunity costs become the basis of the valuation or damages calculations.
In all three approaches, there are a number of different bases upon which damages can be quantified, or calculated and valued in today's constantly changing world. Damages can take many forms as noted briefly above. And, economic or business damages can be measured in many different ways, depending on the circumstances, industry, and case-specific circumstances, including the following:
- Increase or decrease in the number of units sold;
- Increase in fixed production costs;
- Increase in variable production or management costs;
- Decreases in R & D or development costs;
- Increases in capital expenditures to run a business;
- Increase or decrease in working capital needed;
- Increase or decrease in past sales or future sales;
- Changes in the price per unit charged;
- Changes in market share, both relative market share and absolute;
- The cost of not being the first to market.
All of these can be used as practical bases for the valuation and calculation of damages; and, in many cases, multiple approaches will be used in order to capture all of the value imbedded in the damages case. Damages valuation in today's world has to be based on an analytical methodology. In the famous Panduit decision, the courts finally adopted a version of economic reality that has been termed the analytical method. The analytical method, in one form or another, needs to be used in all IP damages cases to establish royalties and/or to quantify all other damages measurements. It is interesting to note that while there are four primary valuation methodologies, there are many proprietary methodologies which are often appropriate in specific situations. The four primary valuation techniques are as follows:
- The market approach;
- The cost approach;
- The income approach; and,
- The relief from royalty approach (a variation of the income approach).