Opinion ID: 741003
Heading Depth: 3
Heading Rank: 3

Heading: Quantification of Lost Profits

Text: 27 The Claims Court also found that Gargoyles did not properly quantify its lost profits. Mark Peterson, an accountant and Gargoyles' financial expert, estimated that the government saved a certain amount per unit by purchasing B/LPS and the government further saved a large sum in medical costs. That calculation was based on the price paid by Gargoyles' largest commercial buyer and the gross margin reflected in Gargoyles' business plan, adjusted upward to compensate for advertising benefits provided by the commercial buyer. Gargoyles argues that, approached in different ways, and using numbers which are not in dispute ..., the evidence of record allows the calculation of lost profits that are close to, and in some cases higher than, the lost profits Gargoyles requested ... in its proposed findings.... 28 Dr. Hoffman examined Peterson's analysis and testified for the government that the analysis had several flaws, including (i) not allowing for commercial endorsement value of having the military use the glasses, (ii) using the lowest price paid by the Army for B/LPS, not the average, (iii) wrongly including the profits of another entity, 6 (iv) failing to account for additional fixed costs of government contracting, and (v) improper methodology in calculating medical benefits. Thus, using Peterson's analysis as a starting point, Dr. Hoffman found a much smaller incremental profit to Gargoyles per unit. 29 Again, the trial court found Hoffman's analysis to be credible and well reasoned. It also rejected Gargoyles' argument regarding the cost savings from reduction in injuries as speculative and not correctly performed, as it compared Gargoyles' protection to no protection, rather than the next alternative, SPECS. Again, the trial court selected Hoffman's analysis over Peterson's, and did not clearly err in concluding Gargoyles failed to carry its burden of quantifying its lost profits by clear and convincing evidence. Given the trial court's decision to credit Hoffman, though, even under the lower standard of reasonable probability, Gargoyles still fails to meet its burden of showing its lost profits on this record. A remand is not necessary since the decision to credit Hoffman precludes a supportable finding that Gargoyles has shown lost profits even under the lower standard. 30 In sum, under Tektronix, Gargoyles would be required to show by clear and convincing evidence that but for B/LPS, it would have made and kept the profits it can quantify as lost. The trial court, in crediting the government's expert and other witnesses over Gargoyles', did not clearly err in determining Gargoyles failed to make that showing. Even if this panel were to distinguish Tektronix or deem it overruled by Rite-Hite, and accordingly apply a lower standard, Gargoyles' prayer for judgment on the fact findings or a remand to apply the lower standard would fail, as the fact findings made by the trial court would still compel us to affirm judgment in favor of the government. Given the irreversible credibility determinations made by the trial court, there is insufficient evidence of record to entitle Gargoyles to lost profits, even if the private infringement standard applies. Thus, we need not remand even if the lower standard applies, because a holding that Gargoyles would be entitled to lost profits would be clear error. Because Gargoyles cannot succeed under either standard of proof, we affirm the holding that Gargoyles is not entitled to lost profits damages.II. Reasonable Royalty 31 After correctly concluding that lost profits were not appropriate, the trial court, applying the fifteen factor test set out in Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp. 1116, 1120, 166 USPQ 235, 238 (S.D.N.Y.), modified and affirmed, 446 F.2d 295, 302, 170 USPQ 369, 374 (2d Cir.1971), assessed damages as a reasonable royalty. See slip op. at 14-21. The government asserts several factual errors in the Claims Court analysis of the Georgia-Pacific factors. The government contends the royalty rate was double the highest rate supported by any credible evidence. We disagree. 32 First, the government asserts the Claims Court neglected what the government deems an offer to it of a license by Gargoyles. Central to this determination is the interpretation of a letter by Mr. Burns to the Army which states under appropriate circumstances we would be amenable to the negotiation of the sale of a technical data package or a similar contractual vehicle, that would permit competitive procurement of our products. The government argues that Gargoyles' main business was in the commercial, fashion eyewear industry and it was consistent with the company's strategy to license the government business. The trial court, however, credited Burns' testimony that, as the eyewear was the core and heart of the company, it never had, nor would it have, been willing to license the patent. Further, as Gargoyles notes, the patent does not restrict its claims to fashion eyewear. In interpreting the letter, the trial court found that it was merely an offer to sell large orders to the government at lower rates. Since the trial court's interpretation of the letter is entitled to deference just as is its interpretation of the testimony of witnesses, see R.C.F.C. 52(a), we find the decision to credit Burns and interpret the letter as an offer to sell, but not license, was adequately supported and not clear error. 33 Next, the government challenges the finding that Gargoyles' success and profitability in the fashion market was not indicative of the value of the invention for protective eyewear. However, the Army's own documents indicate that attractiveness was a concern so the soldiers would wear the product off-duty. While perhaps in some cases government contractors can expect less profit when licensing to the government than in the private sector, the success in the private marketplace was a reasonable starting point for the trial court to analyze the hypothetical royalty negotiation. 34 Third, the government argues that inclusion of another entity's profits in the royalty calculation was clearly erroneous and in conflict with the prior holding that Gargoyles had impermissibly included that entity in the lost profits calculation. However, the trial court only considered that entity as one of several factors in the value that a reasonable licensor would put on the patent. Based on the nature of the relationship between the entity and Gargoyles, it would be reasonable for Gargoyles to put a high value on a license if it realized licensing would force the other entity to lose profits. Even if the government's argument that this is impermissibly compensating a non-party for loss of business opportunity is correct, the conclusion that Gargoyles placed a high value on the patent is still more than adequately supported by the success of the product and its centrality to the company's business. 35 The government also asserts that the trial court impermissibly compensated Gargoyles for actions outside the accounting period, arguing that before the accounting period AO had conducted research and development and delivered 2,000 pairs of B/LPS to the government, and arguing that the trial court's conclusion that AO would compete with Gargoyles in 2005 when the patent expires was speculative. The government also maintains Gargoyles should not receive a higher royalty because AO received the benefit of the government's challenge to validity. We note that together these asserted errors would not result in a significant change in the royalty rate, but in any event the Claims Court correctly considered the Army's actions in encouraging the creation of AO and that Gargoyles would have demanded a large royalty to compensate for foregoing the business advantage (in the form of vastly increased sales and the accompanying research benefits and production experience) which Gargoyles would have realized if it had licensed the Army to produce the eyewear. While we agree with the government that (i) the right to exclude does not inure until the patent issues, (ii) the government has not waived sovereign immunity for collateral acts like inducement and contributory infringement, see Decca, Ltd. v. United States, 225 Ct.Cl. 326, 640 F.2d 1156, 1167, 209 USPQ 52, 61 (1980), and (iii) consequential damages are not recoverable against the government under section 1498, see id., here it is reasonable to assume that Gargoyles would not have abandoned the opportunity to produce the eyewear without compensation. Also, allowing Gargoyles to recover, partly, for the unsuccessful challenge to the validity of the patent does not, as the government argues, impair the government's right to challenge a patent. AO clearly benefited here from the government's decision to pursue the invalidity of Gargoyles' patent. 36 As for the ultimate determination of the 10 percent royalty, we review to determine whether there has been clear error, overturning the royalty rate only if we are left with the definite and firm conviction that a mistake has been made. Hughes, 86 F.3d at 1571, 39 USPQ2d at 1069, citing SmithKline Diagnostics, 926 F.2d at 1164, 17 USPQ2d at 1925, and quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). The trial court here selected a rate within the bounds of the two parties' estimates proffered by their experts. Contrary to the government's assertion, the trial court did not rely on rates used in prior cases; the opinion is clear that the rates in other cases were merely a check against the court's reasoning on Gargoyles' unwillingness to license, the value of the patent to Gargoyles, and other factors. While obviously the facts of each case (and royalty determination) differ, there is nothing objectionable about a court examining similar cases to confirm that its decision was a reasonable one. In sum, it was not clear error to award the royalty rate of 10 percent on the compensation base described in the trial court opinion. The district court adequately explained the reasoning for its selection of that royalty figure, and given the hypothetical nature of the determination of what number reasonable negotiators would select, see State Indus. v. Mor-Flo Indus., 883 F.2d 1573, 1580, 12 USPQ2d 1026, 1031 (Fed.Cir.1989), we will not disturb the Claims Court's selection.