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23 IPL Newsl. 1 (2004-2005)

handle is hein.journals/iprolane23 and id is 1 raw text is: A PUBLICATION OF THE AMERICAN BAR ASSOCIATION SECTION OF INTELLECTUAL PROPERTY LAW VOLUME 23, NUMBER 1 Lost Profits Damages When Infringement Raises Patentee's Prices BY PHILLIP JOHNSON AND TESSIE SU I. Introduction Price effects in the form of price erosion have long been recognized as a valid component of lost profits damages. In recent years, courts have even begun to recognize that I 9 n h coherent economic analysis is nec- essary to accurately determine lost Phillip Johnson profits with price erosion. However, there appears to be little awareness that the opposite price effect-an increase-is a real pos- sibility. The entry of an infringing product may result in higher prices charged by the patentee. Experts undertaking lost profits damages analysis in patent infringement cases need to evaluate market cir- Tessie Su cumstances to determine whether this effect is a possibility and, when necessary, incorporate the price effects into their analy- ses. Failure to do so could lead to a result that overstates the plaintiff's damages. Generally accepted economic theory provides several situations in which an incumbent firm might rationally raise its price when a competing product enters the mar- ket. In these situations, an incumbent firm surrenders the segment of the market where it is most vulnerable to the entrant and, at the same time, increases price to the seg- ment in which its position is strong. This strategy can be more profitable than can lowering prices to all customers if there exists a sufficiently large number of consumers who are not price sensitive (e.g., are brand-loyal). When Phillip Johnson is an economist at Econ One Research Inc. Dr. Johnson was previously an assistant professor at the Instituto Tecnol[gico Aut6nomo de Mdxico. He con be reached at pjohnson @ ecnone. com. Tessie Su is an independent economic consultant. Dr Su was previously an assistant professor at the lnvtituto Tecnologico Autcnomo de Mtxico. She can be reached at tessiesu@ yahoo. com. that occurs, it is more profitable to raise the price to that group of consumers while conceding the sales of the more price-sensitive customers. One circumstance in which it has been argued that an incumbent's higher price could result from a competi- tor's entry is in the market of operating systems for per- sonal computers. In their analysis for the class-action suits following United States v. Microsoft,1 Davis, Murphy and Topel argued that entry could trigger higher prices for the Microsoft Windows®2 operating system.3 They observe that market segmentation is a natural con- sequence of entry in this industry.4 When a competing product enters the market, Microsoft, the incumbent firm, could surrender the low end of the market to the entrant and raise its price to the remaining relatively less price-sensitive customers. Over the past decade, courts increasingly have relied on economic analysis for determining lost profits dam- ages resulting from patent infringement. A damages analysis based on a but-for model-constructed with a good understanding of the industry involved and the appropriate economic theory-is necessary to accurately reveal how an infringed patentee was damaged. If actual prices charged by the patentee during infringement were (continued on page 6) Keeping Current with the Chair .................. 3 From the Editors .............................. 4 Knorr-Bremse- The Federal Circuit Overrules Its Precedent ............. ..... 12 Agreement to Assign Patents Subject to Canadian Competition Act .... ................ 17 m Use of the Accused Device in Patent Claim Construction ............................ 18 PP Gimip N ws .............................. 22 Necent Developments in Intellectual Property Law .. 24 VII TH SETO WEST AI)M*IAETOGINEPO FALL 2004

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