“Recovering Lost Profits in Patent Infringement Litigation” with Tom McNulty of Lando & Anastasi

Nathan (0s):
Welcome back radio entrepreneurs, listeners and fans. I’m producer Nathan Gobes, filling in again for Jeffrey Davis this morning. I have on my side, my trusty cohost, Peter Meyerson author and retired attorney. Welcome Peter.

Peter (14s):
Thank you, Nathan. It’s a, this is a question whether anybody could ever fill in for Jeffrey.

Nathan (20s):
Yeah, well, we do our best though. We do our best and Thank you. We want to welcome back returning guests to our show, Tom McNulty, attorney at Lando & Anastasi. Welcome Tom.

Tom (35s):
Thanks for having me again.

Nathan (37s):
Thank you for being here. So I understand you want to talk to us about monetary, the monetary effects of litigation and IP claims and how you can structure a business around that. Is that correct? Or did I, did I mumble that a little bit?

Tom (54s):
Yeah, that’s, that’s pretty much it specifically in this case, the types of money damages you can get in the patent infringement lawsuit and, and the, the different ways you can structure your business that may or may not impact that.

Nathan (1m 7s):
Great. Well, why don’t we get into it?

Tom (1m 9s):
Okay. Well, I’m sure many people know if you’ve got a patent and you Sue somebody, there’s a couple of different types of relief that you potentially could win. One of them is injunctive relief. You prevent the other side from doing anything that would infringe in the future. Sometimes you can get attorney’s fees, not in the usual case, but sometimes, but specifically what I’m focusing on today is the types of money damages you can potentially get when somebody is found to be an infringer. So under the patent statutes upon a finding of infringement, a patentee, which is the owner of a patent is entitled to damages adequate to compensate for the infringement and a no less and no event, less than a reasonable royalty for the use made of the invention by the infringer.

Tom (1m 59s):
So the statute sets as a floor, a reasonable royalty and a, and reasonable royalties are basically treated by the courts is what the parties would have agreed to. If hypothetically at the time they were beginning the infringement, they had actually sat down and negotiated at a patent license. A lot of people viewed this as perhaps an unfair approach because, you know, there’s no sort of kicker for the fact that they went ahead and infringed and you had to go through the time and effort and expense of a patent lawsuit to get them to stop. But for whatever reason, that’s, that’s the way courts go with it.

Nathan (2m 39s):
Interesting. But you said that’s the, that’s the floor though, correct?

Tom (2m 42s):
That’s the floor. The other thing you could potentially get and not always, but usually it’s a, it’s a higher measure of damages is your lost profits. What you would have made had that other party, not infringed. And that’s the one, like I say, in most cases, that’s the one you want to go for, but there’s a couple of things you have to do to qualify. It’s not an automatic that you can get your lost profits. The first is that you have to actually make a patented product or Selly or patented service provide a patented service. You have to be in business. So, you know, your classic patent troll that they’re in the business simply of holding patents and suing people.

Tom (3m 23s):
They, they generally are pretty much always will not get lost profits because they’re not actually directly competing. The other part of it is a go ahead.

Peter (3m 34s):
So, so you have to actually be in business of selling that product to get that kind of relief.

Tom (3m 43s):
Yes. Yes. The other thing that typically comes into play is you have to be a direct competitor with the accused infringer. So if you are selling into, you know, say the medical field and they’re selling into something wholly unrelated to the medical field courts would be certainly more reluctant to offer to award you lost profits because you’re not really, they’re not really taking sales away from you with their activities. And that’s sort of the focus is, are they taking sales away? So there’s a, there’s a particular test that the courts use called the Pandora test named after the case, in which it was sort of devised and set forth to be entitled to recover for loss profits, you have to show demand for the patented product, the absence of acceptable non-infringement alternatives.

Tom (4m 31s):
And I’ll go into these in a little bit more detail. You have to show that you have the manufacturing and marketing capability to exploit the demand. And then you have to be able to prove the amount of profits you would have made. So looking at these kind of one by one demand for the patented product, you have to show that, you know, there are people out there that are looking to buy this thing. And the second is the absence of acceptable non-infringement alternatives. You have to show that if, if the accused infringer wasn’t on the market, that the market would be basically forced to buy from you as opposed to turning to a non infringing alternative. And that’s, that’s one of the key ones that, that the lost profits analysis kind of rises and falls on because you have to demand, you have to define, excuse me, what it is that you have to be showing the absence of non infringing alternatives and the, the broader, the category of things that you’re discussing.

Tom (5m 30s):
The more likely there’s going to be something non infringing that they could turn to instead, and sort of to, to illustrate that we represented a company that made a, it was, it was a board game that involved mirrored pieces moving around a board and a fixed laser that you had to try and get the mirror to direct to the opponent’s target. And we were suing a company that was making a competing product pretty much, you know, the same thing. It was lasers and mirrors and moving around the board. And we actually, in that case, in that case, the client was able to actually get lost profits because there were no other games on the market that sort of involved the whole laser mirror thing.

Tom (6m 16s):
But that analysis would have been different. Had the courts defined the, the sort of market or the sort of, you know, the sphere of goods and services as you know, board games generally, as opposed to, you know, this particular iteration of, of board games had they done that we almost certainly would not have been able to get lost profits.

Nathan (6m 34s):
Right. So if it had been something, some more general strategy board game, for example, then, you know, the courts could say, well, they can just go pick up a copy of risk or whatever. Yup.

Tom (6m 45s):
And it wouldn’t, you know, quite frankly, it wouldn’t be an unreasonable thing for the courts to do because, you know, when Walmart’s choosing what to put on the shelves of their store, they don’t necessarily care that they have a laser mirror game. They just want something that sells that’s taken up this pace. So that wouldn’t, that wouldn’t have been wildly unfair. But like I say, in that case, we sort of got lucky and, and, and got the, the outcome that we were looking for. And in that case, the, the difference between lost profits and reasonable royalty was like an order of 10, You know? So like I say, it can be, it can be pretty significant. Excuse me. The third factor is being able to show that you’ve got the manufacturing and marketing capability, you know, with the globally connected, or at least perhaps once globally connected world, that sort of became easier because you didn’t necessarily have to show that you had manufacturing capability yourself.

Tom (7m 42s):
You, you could meet that criteria by showing that you could outsource it to, you know, one of, one of many places that do that sort of thing, and that you could handle delivery through third-party delivery services and that sort of thing. So that, that kind of that criteria has become easier over time

Nathan (7m 59s):
With that, though. If, if you don’t mind, did you have to actually have set up an agreement with outsourced organizations to handle those things, or do you just have to prove that the, the capability exists within the global marketplace?

Tom (8m 13s):
You have to show that you could exploit the capability. So it doesn’t necessarily mean you’ve already got an agreement in place, but you know, you’d really have to show that, that, you know, you could make the contact, you could, you know, frankly finance the, to the third party to do this sort of thing. You have to show that, you know, that you have the ability beyond that. There’s no sort of hard set, fast set of rules it’s you can sort of show it in any way that you can kind of conjure up for lack of a better term. So I guess I, so these things are generally less profits generally available. If you’re direct rivals, you don’t necessarily have to be selling a patented product so long as you’re selling a competing product, you can, you can, you know, sometimes get your last profits on things that, that don’t themselves in fringe.

Tom (9m 6s):
And that, that can either be, you know, you’ve got a patent that you’re not exploiting, but that you’re preventing others from exploiting. It can be sales that come along with the patented product. So if you had, for example, a patented printer, you could potentially get your lost profits on the printer and on the, in cartridges that would have been sold with it. The other part about it is if you’ve got a patent that covers a component of a product, the last prophet applies to the product as a whole, and not just to the patented component, provided that you’re selling the product as a whole. If you’re, if you’re a component supplier, you’re only going to get the component profits, but if you’re selling, you know, so if you’re selling a smartphone and you’ve got a patent on some piece of that, you know, there’s obviously going to be all kinds of other IP and all kinds of things like that, that are involved in it, but you could potentially get lost profits.

Tom (10m 0s):
You know, if you’re selling the entire phone yourself on, on the entire phone and not just on the component, now, one of the catches to this, and this is one of the things that sort of leads to how you structure your business is you can only get lost profits on your own damages, not profits that it related company would have received. So that might impact, you know, like I say, how you choose to structure your business, how you choose to decide who’s going to be the owner, you know, the patent holder of a particular set of patents. You know, if, if, if you’ve got a, a parent, for example, that holds a patent portfolio and a subsidiary that does the actual manufacturing, the parent wouldn’t be able to get lost profits, unless it was sort of a necessary condition that the profits from the subsidiary, you know, automatically flow to the parents.

Tom (10m 59s):
And I know a lot of

Peter (11m 0s):
How would you, how would you structure that? Would you do a licensing agreement between the parent and the sub to give the sub you know, access to the intellectual properties of housing?

Tom (11m 13s):
Yeah. I mean, obviously this would depend on a lot of other factors tax related, you know, what your business is doing, all that sort of thing, but in a case like that, you could potentially give the subsidiary a, an exclusive license. If you don’t have the exclusivity, then they probably still wouldn’t be able to get lost profits. But if they’ve got exclusivity, at least within their geographic range or their particular area of business, you know, then they’ve, they’ve got a chance of getting the lost profits themselves. But again, that would be the subsidiary of getting the lost profits and not the parent company, you know, the, the, the actual owner of the patent in that case, obviously they can then divvy up as they see fit.

Tom (11m 57s):
But that would be, that would be sort of one way of doing it. I know a lot of times you’ll have companies that have like a shell corporation holding intellectual property, you know, for various reasons. And this would be, you know, arguably a reason to reconsider that strategy.

Nathan (12m 11s):
Right, right. Because they’re not the ones generating any profits or anything like that, that, that could prove lost profits.

Tom (12m 18s):
Yeah. Well, they’re not a, they’re not, you know, frankly they’re not engaging in business. So they probably would sort of default out of this right. From the get-go, because they’re not actually making a product. The other thing we run into a lot in, particularly with some of the startups and smaller companies that we deal with is the owner of the company is the creator of the technology and, you know, the inventor on a patent. And they just, for whatever reason, choose not to, or don’t get around to, or however it may come to be to assign the patent to the company itself. And then, you know, they’ll, they’ll be surprised to find out that they’re not entitled to lost profits and in a circumstance like that,

Peter (12m 58s):
Can they retroactively make the assignment

Tom (13m 4s):
Generally speaking? No. I mean, you could potentially get, you know, if you do it like mid suit, you could put, and the other side still doing what they’re doing, you could do at mid suit and potentially get lash profits from then forward. You know, the type of damages can be sort of divided by, you know, divided in time. So, you know, so that you’re entitled to royalties for this part in profits for this part.

Peter (13m 30s):
Yeah. I guess it makes the point that you really need to have very sophisticated technical advice when you’re setting up your business and using patterns.

Tom (13m 41s):
Yeah. And you probably need to get that sort of advice from, you know, several sources, you know, I can, I can tell people what to do on the patent side. I can’t really specifically advise on the tax implications of these sorts of things or, or that sort of thing, or, you know, I mean, one reason, one reason people sometimes won’t include IP or won’t assign IP to the particular company that’s in businesses. So it’s not an asset of the company. Should they go into receivership?

Nathan (14m 10s):
So, you

Tom (14m 10s):
Know, there’s, there’s, there’s, there’s, there’s a few different kinds of factors that come into play. So it’s not, you know, it’s, it’s worth consideration, but it shouldn’t necessarily be the sole driving factor in how you structure sex.

Peter (14m 22s):
Yeah. Hard speaking from experience, it’s hard to get startup companies to spend the kind of money necessary to get the brains around the table. They analyze the problem.

Tom (14m 33s):
Yeah. And that’s understandable. I mean, there’s, you know, when you’re starting out, there’s a limited pool of resources to be, you know, to be throwing on, on abstract, not directly leading to money advice, even if, even if down the road that doesn’t lead to money.

Nathan (14m 48s):
Yeah. It makes sense. Especially since at that time, you know, some of these like, well, what if somebody rips off our patent is not always what they’re considering. You know, they’re looking at their first few customers getting their, their business up and running, et cetera. But regardless, it’s clearly a complex issue that, you know, if people have questions they should be talking to you and, you know, even though it can be expensive for, for startups in general, I don’t mean you guys, particularly. I just mean, like we said, to get, to get brains around the table. That’s why we produce a lot of this content we bring you on regularly. But if people wanted to get more advice from you or find out how Lando and Anasazi can help their company, what’s the best way to reach you.

Tom (15m 29s):
You can always get me on my email TK. I’m sorry. That’s my home email T McNulty. I do that all the time. Team McNulty, MCN, U L T y@lalaw.com. Or you can try me by phone (617) 395-7040.

Nathan (15m 46s):
Great. And Peter, I know you’re an author. You may be retired from your practice, but if people want to reach you or find out how they can get your book, what’s the best ways for them to do that?

Peter (15m 59s):
Well, they can email me at PP Myers, M Y E R S O n@aol.com. And if they want an electronic copy of my novel, they can go on Amazon type in the search bar, Peter Meyerson and my novel will come up. And if they want a real printed version, I have a great print on demand company out in Arizona. I think it’s Arizona. You know, you don’t even know where they are called the book patch. And if you go on the book patch and type in my name, you’ll get my novel.

Nathan (16m 37s):
Great. All on. Of course, you’ll find more content with Tom on our show, radio entrepreneurs on our websites, right to entrepreneurs.com. We’re on LinkedIn, YouTube, and many podcast sites as well. I want to thank both of you gentlemen for joining us today. Thanks. And we’ll be back with more on radio on.