Patent Law

This article (membership required) by Jeffery A. Stec, Ph.D appears in the July 2008 issue of IP Remedies, a publication of the Intellectual Property Litigation committee of the American Bar Association.  The following is excerpted from his article:

In 1998, Federal Circuit Judge Randall Rader gave a speech at the Annual Meeting of the Licensing Executives Society in which he stressed the importance of proper economic analysis when examining lost profits due to price erosion in the context of a patent infringement claim. In particular, Judge Rader pointed out that district court judges should require experts making price erosion claims to provide ?testimony as to the sensitivity of quantity to price factors in the market place.? [1] In other words, Judge Rader underlined the importance of considering the effect that consumers? sensitivity to price changes would have on the amount of sales embodying the patent(s)-in-suit, if, absent the infringement, evidence suggested that prices on these products would be higher in the marketplace.

The Law of Demand states that, all else equal, as the price of a good or service increases, consumer demand for that good or service will decrease. This suggests that the demand curve for these goods or services will be downward sloping, so that as price increases, the quantity demanded by consumers will decrease. Judge Rader proposed that district court judges should ?exclude from [their] damage trials any expert who tries to base his damage calculation [of price erosion] on anything other than a downward sloping demand curve.? [2] Implicitly, Judge Rader concluded that price erosion damages calculations that do not take into account the price elasticity of demand, i.e., the sensitivity of consumer demand to changes in price, should be disallowed because those calculations are likely to be overstatements of the appropriate price erosion damages.This viewpoint was formalized in Judge Rader?s opinion in Crystal Semiconductor Corp. v. Tritech Microelectronics Int?l. [3] in which he wrote, ?the patentee must also present evidence of the (presumably reduced) amount of product the patentee would have sold at the higher price.? [4] Up to the point of Judge Rader?s admonitions on appropriate price erosion calculations, there were numerous instances of court decisions that did not account for consumer responses to price increases in a but-for world absent patent infringement.

In 1978, in W.L. Gore & Associates v. Carlisle Corp., [7] the district court found that the plaintiff suffered price erosion damages as a result of price cuts it made in response to the prices charged for the infringing product by the defendant. The court adopted the Special Master?s zero price elasticity assumption in absence of evidence to the contrary, effectively concluding that, absent the infringement, the plaintiff would have made the same number of sales at the pre-infringement price that it had at the lower price.

Throughout the 1980?s, a series of cases found lost profits due to price erosion to be appropriate without accounting for the impact price could have on consumer demand. Continuing into the 1990?s, there were mixed signals coming from the courts as to whether the price elasticity of demand, or some such measure of changes in consumers? demand in response to changes in price, should be included in a calculation of lost profits due to price erosion.

The law of demand states that, all else equal, higher prices lead to lower quantities of products or services demanded. Courts have come a long way in their recognition of the importance of consumers? responses to price increases in the context of price erosion damages claims. However, even accounting for Judge Rader?s strong warning about downward sloping demand curves and excluding price erosion experts that do not heed them, it appears that, at least in some instances, this remains an open issue.

I could not find an easy way for non-members to purchase this article (or journal) at the ABA Webstore, but if you contact the ABA directly you may be able to obtain a copy of the full article, including discussion of relevant cases.