How to value a patent: a simple formula for lost profits patent damages

Patents are valuable only when they are enforced in court. The purpose of this paper is to measure a patent owner’s profits that are lost when a competing firm unlawfully makes infringing sales. Our microeconomic methodology computes a two-firm duopoly equilibrium with an infringer present and compares it with the same market but with the infringer removed. The second equilibrium represents a legally sanctioned single-firm patent monopoly. We derive a single equation representing the lost profits damage percent to be paid to the patent owner by the infringer. We incorporate product demand, both firms’ marginal costs, output, market shares, and prices in our equation. There are three contributions of this paper. One, we derive the simplest duopoly/monopoly damage equation we have seen that captures all the economic effects into a single percentage damage number. Second, that damage percent multiplied times the patent owner’s actual profits (with infringement ongoing) equals the dollar damages the infringer should pay in court for the patent owner’s lost profits. Third, we apply our formula to a small pilot study of classic US patent lost profit cases and find that our equation’s damage predictions had a correlation of .71 with the actual Federal court damage outcomes. We also illustrate the use of the formula. For example, if a patent owner’s actual profits on its patented product was $10 million with infringing sales present, then lost profits damages due to the patent owner would be $12.5 million if the two firms’ sales were equal. Patent damages increase to over $40 million if the infringer’s market share increased to triple that of the patent owner in the two-firm market. Corresponding author: Stephen P. Magee Email address for corresponding author: magee@mail.utexas.edu First submission received: 3rd January 2019 Revised submission received: 19th March 2019 Accepted: 21st March 2019