KrAFt AnALYtIcS
Attributing a value to software-related Ip infringement is a complex
business. Glenn perdue unravels the process by which damages are
calculated in the US.
In the US, software-related products and In determining a reasonable royalty, or misappropriation. Lost revenues may result
services may embody intellectual property that considerations may include: established royalty from lost sales of the protected product or
is protected by a patent, copyright or trademark, rates; market royalty rates; the profitability of the service; lost sales of complementary products
or as a trade secret. Federal law governs the business; the nature of the product or protected and services; and/or price erosion resulting
infringement damages related to patents and feature; and the likely nature of a hypothetical from the infringer’s entry into the market with a
copyrights. Damages arising from trademark licence, to name a few. Another consideration
competitive good or service.
infringement are governed largely by federal law, that may be relevant in software cases are the
but state laws may also apply. Damages arising non-infringing alternatives available prior to
If a lost profits claim is based upon lost revenues,
from the misappropriation of trade secrets are infringement. The time and costs associated
the costs associated with the revenues identified
governed by state law. with buying or developing alternatives that
are subtracted to determine lost profits. For a
would allow the infringer to design around the
tangible good, deductible costs might include the
When discussing IP damages, it is always
protected feature may help inform the infringer’s
direct material and direct labour costs associated
tempting to approach the topic vertically—by
view of a reasonable royalty.
with making the product, along with the
the class of IP (patent, copyright, etc.) and to
commission and shipping expenses associated
begin by considering the statutory rules that
Actual damages
with selling and delivering the product. In
apply to each particular class. However, there is
accounting parlance, these are ‘variable costs’ to
an underlying economic logic that lends itself
An award of actual damages is intended to
the extent that they vary directly with revenues.
to a more horizontal discussion of IP damages
compensate an injured party so that it is
focused upon the types of remedies available.
economically ‘made whole’. Consistent with
But software is a digital good, with labour costs
These are generally based upon: (i) a reasonable
this concept, a plaintiff may seek lost profits
typically incurred upfront during the initial
royalty, (ii) actual damages, (iii) the defendant’s
as a method of recovery for the infringement
development period and on an ongoing basis
profits and (iv) statutory damages.
of patents, trademarks and copyrights, or the
thereafter for maintenance and new version
misappropriation of trade secrets. It makes
updating. Therefore, incremental labour costs—
reasonable royalty
economic sense that this method of recovery
labour costs incurred directly to develop, deliver,
is broadly available because it is conceptually
A royalty is compensation paid for the
install and support lost software sales—may
straightforward and often the most apparent
use of IP. A reasonable royalty generally
approach zero.
means of making an injured party whole.
represents compensation that a willing licensee
If the software is delivered via physical media
and willing licensor would have negotiated Damage theory related to lost profits is highly
such as a CD, there may be direct costs associated
in an arm’s-length setting prior to infringement evolved in the US, particularly in the area of
with reproduction, packaging and transportation.
or misappropriation. IP damages. Lost profits are typically based
However, with software that is delivered online—
upon the plaintiff ’s lost ‘net profits’ or ‘incremental
A reasonable royalty represents a floor value for
also known as software as a service (SaaS)—physical
profits’ as measured at the operating profit level.
damages in patent infringement cases. This view
distribution costs may also approach zero on an
is made explicit in a federal statute that states If lost profits result from lost revenues, costs
incremental unit basis. An example of SaaS software
that a patentee is entitled to: “Damages adequate related to those revenues are deducted. These are
is the Salesforce.com CRM (customer relationship
to compensate for the infringement, but in no generally costs that would have been incurred if
management) application.
event less than a reasonable royalty.” the lost revenues had been realised by the plaintiff.
In either delivery setting, incremental costs
Put another way, these are the ‘costs saved’ by
Though not as explicit, a reasonable royalty may
may exist as a result of third-party licences and
the plaintiff as a result of not generating the lost
also provide an appropriate basis for determining
commissions. Third-party licensing expenses
revenues. While the philosophical basis of lost
the plaintiff ’s lost profits in copyright, trademark
can be significant in software and other high-
profits may be straightforward, the legal and
and trade secret cases under the premise that,
tech businesses, where IP may be dispersed but
economic concepts to be considered in calculating
had the infringer negotiated a licence instead of innovation is cumulative. This factor may give
lost profits can be esoteric and complex.
infringing, the plaintiff would have generated rise to royalty stacking, where multiple layers of
additional revenues and profits. In this regard, A plaintiff may experience actual damages IP have been licensed and require multiple royalty
a reasonable royalty may be relevant in any type due to lost revenues and/or increased costs payments for each new software sale. Third-party
of IP damages matter. resulting from the defendant’s infringement royalties of this type are incremental costs.
www.worldipreview.com World Intellectual property review September/October 2009 27
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