When it comes to intellectual property litigation, successfully asserting or defending against a claim of IP infringement is only one part of the battle. It’s a big part, no doubt, but calculating the damages resulting from said infringement is equally as vital. After all, if someone capitalizes on your brand’s reputation or other IP asset, what’s the actual value of that infringement to you or to them?
Luckily, there are tools, techniques, and experts who can help IP owners navigate the complexities of not only IP ownership but affixing values to those often-intangible assets. One such expert is Brian Buss of CBIZ Forensic Consulting Group LLC. A long-time colleague of Eric Ludwig, founder and principal of business and technology litigation law firm Ludwig APC, Brian recently presented a 60-minute webinar on the topic of assessing damages resulting from IP infringement.
“In awarding damages to plaintiffs in IP infringement cases, there are a great many vagaries involved,” explains Ludwig, whose firm helps clients protect intellectual property assets, assert IP rights, and defend against infringement claims around the world. “IP valuation experts need to be able to define the asset involved, determine when the alleged infringement took place, and then calculate the actual value of damages to the plaintiff—and they need to be able to do so in a way that’s understandable to jury members, who often are not experts in IP law.”
Reasonable, Testable, Equitable
According to Buss, winning an infringement case is not supposed to be like winning the lottery. “Federal statutes require damages awarded for IP infringement to be fair and reasonable,” he says. “Developing and communicating what’s ‘fair and reasonable’ requires both accurate calculations and the ability to communicate clearly with the jury.”
That’s why IP owners, whether asserting or defending against claims of infringement are best served when working with experts who have experience and success making the case for damages and then communicating the fine points of the case in understandable and relatable ways.
The basic concepts behind IP-related analysis for purposes of assessing damages rely on the following:
- Is the remedy equitable and focused on repairing the harm? Damages should be based on actual lost profits or lost royalties, not be punitive in nature.
- Has the damages amount been calculated using reasonable and tested methodologies accepted by the courts and the IP business community?
- Is calculating the award amount replicable? In other words, would another analyst arrive at the same or similar result?
Challenges of Calculating Damages
One of the main challenges of calculating damages is reflected by the very nature of IP assets. “Valuing IP assets is not like assessing the value of real estate by comparing the sales prices of comparable homes in a given area,” says Buss. “With each business and its assets being unique, performance benchmarks involving comparable assets may be hard to find or not relevant.”
Equally challenging may be defining the asset and infringement event itself. In other words, what specific asset was infringed, what was the nature of the infringement, and when did it occur? For example, asserting infringement of one’s “brand” may not be sufficient or specific enough because a brand could include a bundle of assets. Likewise, accusing a party of stealing a “trade secret” can apply to many things.
Additionally, standard accounting and financial reporting by most companies does not disaggregate profits and losses by their related IP assets or activities. Analysts need to use research and analysis to develop quantitative and qualitative observations that measure the specific financial impact of an asset infringement or event.
“The more complex the offering, the more challenging the valuation of damages and lost profits can be,” Buss explains. “Sometimes, even if there was an infringement, that doesn’t necessarily mean there’s been an impact on profits or brand performance. That’s why it’s important to bring in the experts.”
Methods for Calculating Damages
When calculating IP-infringement-related damages, analysts typically look at one or more of three main areas:
- Lost Profits
- Unjust Enrichment
- Reasonable Royalties
When looking at lost profits, the argument is that an IP owner would have performed better if not for the infringement. Analysts will consider projected performance as though there had been no infringement (commonly known as “but-for” performance) and compare that to actual performance before and after the infringing event, which is often labeled “as-is” performance. The difference is what they project to be lost profits resulting from the infringement.
For example, a former CEO posts disparaging and defamatory comments on Twitter and Facebook about his former company. An analyst could calculate lost profits due to declining online sales using historical data as reference points.
Unjust enrichment (aka profit disgorgement) explores how much the accused party gained as a result of the infringement. An example of this might be an online apparel retailer who benefits from increased consumer demand when an online influencer said the retailer’s clothes “look just like Armani.” In this scenario, the retailer may have achieved incremental profits due to copyright and/or trademark infringement. The analyst’s job is to determine the portion of incremental profit achieved from misuse of the subject IP (in this example, the reference to the Armani and possibly the similarity in appearance).
Infringement-related damages can also be awarded for lost royalties if IP owners can demonstrate the IP assets could have been licensed to the alleged infringing party. Calculating damages based on lost royalties requires review of similar license transactions to assess a reasonable royalty rate that is applied to the amount of sales achieved by the alleged infringing party. Determination of the reasonable royalty rate considers multiple factors including the similarity of benchmark agreements, differences between the parties, other forms of license transaction compensation, and the nature of the subject IP assets.
“As we see with essentially all aspects of intellectual property matters, the playing field is varied and complicated,” says Ludwig. “Great ideas deserve protection, and no two IP cases are alike. Any IP owner faced with asserting IP rights or defending against infringement claims needs the expertise of experienced counsel and IP damage valuation experts like Brian Buss on their side.”
Let’s Work Together: Global Experience, Personal Focus
Ludwig APC works with clients to protect intellectual property assets, assert IP rights, and defend against infringement claims. Contact us today to arrange a free consultation: (619) 929-0873 | [email protected].