Lost Profits

The Panduit test (Panduit Corp. v. Stahlin Bros. Fibre Works, 6th Cir. 1978) requires a patent owner to prove four elements to establish entitlement to lost profits damages: (1) DEMAND for the patented product — customers wanted the patented technology (not just the infringing product, but the specific features the patent covers); (2) ABSENCE OF ACCEPTABLE NON-INFRINGING SUBSTITUTES — no alternatives were available that could have satisfied demand without practicing the patent; (3) MANUFACTURING AND MARKETING CAPABILITY — the patent owner had the capacity to meet the demand that the infringer captured; and (4) THE AMOUNT OF PROFIT — the specific profit the patent owner would have made but for the infringement. All four elements must be proven by a preponderance of evidence.

An acceptable non-infringing substitute is a product or process that: (1) does not infringe the patent; and (2) is actually acceptable to the market as a substitute for the patented product. Availability is assessed at the time of infringement — not whether substitutes were theoretically possible, but whether they were commercially available and acceptable to the relevant customers. In Grain Processing Corp. v. American Maize-Products (Fed. Cir. 1999), the Federal Circuit clarified that even a substitute not on the market but readily producible by the infringer counts if the infringer could have sold it instead — the existence of an economically viable non-infringing alternative reduces or eliminates lost profits. The substitute must satisfy the demand that the patent owner would have captured, not merely be available somewhere.

In a two-supplier market — where only the patent owner and the infringer sell competing products — courts presume that the patent owner would have made all of the infringer's sales but for the infringement. This simplifies proof of Panduit factors 1 and 2: if there are only two suppliers and one infringes, the other would logically capture all diverted sales. The presumption can be rebutted by showing actual non-infringing alternatives or market evidence that customers would have bought neither. In markets with three or more suppliers, the patent owner can still recover a proportion of lost profits based on their market share or other evidence of which sales they would have captured.

Price erosion compensates a patent owner for having to reduce prices to compete with the infringing product — even on sales the patent owner actually made. If an infringer enters the market at a lower price and forces the patent owner to reduce prices to remain competitive, the patent owner loses profit on every unit it sells at the reduced price. Price erosion damages = (the price the patent owner would have charged but for infringement - the actual price charged) × the number of units the patent owner actually sold. Price erosion is a separate damages theory from lost unit sales and can be claimed alongside lost profits on diverted sales. Expert testimony and market analysis are required to establish that infringement caused the price reduction.

Yes — a patent owner can claim different measures for different infringing sales. For sales the patent owner can prove it would have made (meeting the Panduit test), it can seek lost profits. For infringing sales that cannot be attributed to the patent owner (e.g., sales to customers who would have bought from a third party even without the infringer, or where a non-infringing alternative existed), the patent owner receives at least a reasonable royalty. The reasonable royalty serves as the floor for all infringing sales not covered by lost profits. Courts and juries often award lost profits for the provable portion and reasonable royalty for the remainder.