Many of today's largest and most profitable companies owe much of their financial success to intellectual property. As you read this article, various products that are protected by a patent, copyright, trademark, or classified as a trade secret are likely to be all around you. Under the law, these protections allow the owners of the intellectual property to profit exclusively from their ideas.
Your company may also have protected its intellectual property by securing patents. But what happens if an individual or company steals patented property? What can the company do to recover from the financial loss? In a landmark 1978 case, (Panduit v Stahlin Bros. Fibre Works, 6th Cir.), the court ruled that a patent owner can prove lost profits by satisfying four conditions sometimes called the "Panduit Factors":
1. Demand for the patented product - Is there a demand for the patented product in the market? What is the sales history and market share? This factor requires extensive analytical techniques to support the assertion that consumers demand products with the patented features and that such products sell for a higher price than products without them.
2. Absence of acceptable non-infringing substitutes - The second factor considers whether there are acceptable, non-infringing alternatives to the patented product that were available during the period of alleged infringement. It is important to note that in most cases, if there are substitutes, the plaintiff would not be entitled to lost profit damages. However, recent cases have modified this factor to allow for damages when non-infringing substitutes exist in the marketplace. Your forensic accountant, as well as your attorney, can provide more information regarding this issue.
3. Manufacturing and marketing capability to meet the demand - The third factor considers real world limitations by asking questions such as: Does the patent owner have the manufacturing, as well as the distribution capacity, to support sales? And if additional manufacturing facilities are needed to meet demand, does the company have the financial means to support these expenses? Finally, does the patent owner have the managerial skill to support the demand for the product?
4. The amount of profit that would have been made - Two components are needed to support this factor: the level of sales that the patent owner would have made if it were not for the entrance of the infringing company and the incremental profit that the patent holder earns from the patented product. This factor requires extensive analysis and is generally undertaken by a forensic accountant skilled in this area.
An analysis of the Panduit Factors can provide guidance to a patent owner interested in a lost profits claim. However, the specific interpretation and application of the factors and intellectual property law in general is a highly complicated and specialized area. Therefore, in order to fully support a lost profits claim, it is recommended that you review your company's situation with your forensic accountant and attorney.
WILLIAM P. ALLEN, CPA/ABV, CFE
Bill is a member of the American Institute of Certified Public Accountants accredited in Business Valuations (ABV); a Certified Fraud Examiner (CFE) accredited by the Association of Certified Fraud Examiners; and the New York State Society of Certified Public Accountants. He has more than 5 years' experience in public accounting serving both commercial businesses and nonprofit organizations. As a member of the Brisbane team, Bill is responsible for valuation, forensic accounting, and litigation support services. Bill is a graduate of Le Moyne College and has worked with our Firm since graduating in 2006.