The main reason why people obtain patents (other than being inspired by Shark Tank) is to stop someone else from making the same product, and if someone else makes the same product to be able to recover damages.
Patent laws require that the damages awarded in patent infringement actions must be “adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.” Courts have construed this statutory phrase as award for 1) lost profits, 2) compensatory damages, where the patentee can prove such damages, and 3) enhanced damages. Accordingly, even when the patentee has not shown any harm caused by the infringement, the patentee is still entitled to compensatory damages. This can be beneficial for many small start-ups that do not have the market channels to reach a high number of end users.
Lost profits are not always available to the patent older, or lost profits may not be the best available avenue for recovery for the patent holder. To recover for lost profits, the patent holder will need to show that but for the infringement, the patentee would have made additional profits. Lost profits must be awarded when the patent hold can establish, 1) the demand, 2) no non-infringing substitutes; 3) the patentee had the manufacturing and marketing capability to exploit the demand, and 3) the amount of the profit the patent holder would have made absent the infringing conduct.
Accordingly, smaller start-ups may not have the ability (i.e. manufacturing plants) able to produce enough products, if a larger company is making the infringing product. For example, if APPLE is infringing your product, it is not likely that your smaller start-up would have the capability and reach to produce and sell the amount of product.
Furthermore, it is hard to prove lost profits. Lost profits are only easy to prove when there are two companies in a similar market. The lost profits may be shown by comparing profits when there was no infringing product in the market place with the profits when there was an infringing product.
After there is a determination of lost profits, courts must determine which portion of the lost profits are attributable to the patent. It is hard to determine what portion of a product sales are attributed directly from the patent technology, when the patent is only a portion of the overall product. For example, if you were to patent Bluetooth, and the iPhone uses Bluetooth. The iPhone’s Bluetooth functionality would only be a portion of the iPhone’s functionality, and how much the iPhone’s value is derived from the Bluetooth.
The main components to determine what would be reasonable compensation for lost profits include: unpatented components (or unrelated patents) of a product, price erosion/harm caused by the infringement, future lost profits, and lost profits for pre-infringement conduct.
In addition to lost profits, patent holders may sue an infringer for a Reasonable Royalty. Patent holders sue for a reasonable royalty if they cannot prove lost profits, or they cannot prove the amount of the lost profits. Lost profits may be split with a reasonable royalty based on market share analysis during litigation. Various factors may go into what might be considered in reasonable royalties, including: royalties receive by the patent holder for past licensing of the patented technology, nature and scope of license, commercial relationships (competitors in the same market base?), specifically product, duration of the patent, established profitability of the patent, technology area of the patented technology, extent of which infringer has made use of the invention, portion of the profit or selling price in the technology area, reliable profit, what the amount that a licensor might have agreed upon if both had been reasonably and voluntarily trying to reach an agreement.
There are certain limitations on patent damages. The limitations are that there shall be no recovery for any infringement committed more than six years prior to filing the complaint. The reason behind this limitation is so that a company cannot be held liable for things that happened 20 years ago, or a patent holder cannot take a “wait and see approach” long after a patent expired.
The second limitations on damages it that a patent holder is only able to recover from the time when it began marking its products in compliance with standards or when it actually notified the accused infringer of its infringement. Accordingly, if you do not mark your products as “PATENTED”, then someone else cannot be held liable until you let them know they are infringing. The main issue here is that a company may complete due diligence to determine that there are no patents on a product. After completing the due diligence, the potential infringers should not be held liable for information that the patent holder held back.