Judge Posner Excludes Reasonable Royalty Calculation Based on “At Risk Profits” Instead of Cost of Noninfringing Substitute

The court granted in part defendant's motion to exclude testimony from plaintiffs' damages expert to the extent such testimony was based on the calculation of defendant’s “at risk” profits. "[Defendant] would not have paid a royalty higher than the cost to it of switching to a noninfringing substitute . . . or otherwise reworking its manufacturing process to avoid making the infringing [product]. . . . Maybe there’s no perfect substitute for the patented invention (or something quite like it). . . . But even if there is no perfect substitute, this by itself would not allow the estimation of a reasonable royalty. For that royalty would depend on the cost, in higher production costs and loss of business to competitors, of the best imperfect substitute; and [plaintiffs' expert] offered no evidence about either cost. In fact she based her calculation of a maximum reasonable royalty not on costs, but on the maximum profits of [defendant] that she deemed at risk if [it] didn’t get a license from [plaintiff]. . . . She has not used a reasonable methodology to calculate the plaintiffs’ damages by reference to [two licenses from settlements], or profits at risk, or to assess the cost of noninfringing alternatives. [One of plaintiff's nonexclusive licenses], however, remains a possible basis for estimating a reasonable royalty for a license to [defendant]. She may testify to that, and also to general principles of patent damages."

Brandeis University, et. al. v. East Side Ovens, Inc., et. al., 1-12-cv-01508 (ILND January 18, 2013, Order) (Posner, C.J.).