Opinion ID: 784541
Heading Depth: 3
Heading Rank: 2

Heading: Lost Profits Due to Lost Sales

Text: 19 On the merits of the cross-appeal, Harris objects to the jury's award of $3.5 million for lost profits due to lost sales. First, Harris argues that Ericsson failed to provide sound economic proof of its market definitions and market share estimates. Harris contends that Ericsson's damages expert, an accountant named Daniel Jackson, improperly based his definition of the so-called Harris market on one witness's testimony, rather than on market research and recognized economic principles such as the cross-elasticity of demand between the infringing product and available substitutes. With respect to the narrower Ericsson market, Harris maintains that Mr. Jackson again failed to calculate the cross-elasticities of demand, improperly assumed that switching costs were so high as to prevent customers from purchasing SLICs that were not pin-compatible with their existing line cards, and ignored that the SLIC industry is characterized by second-sourcing. Second, Harris argues that Jackson arbitrarily allocated Harris's sales between the Harris market and the Ericsson market, neglecting to consider that many of Ericsson's customers purchased from Harris as a second source to Ericsson and that customers might redesign their line cards. Finally, Harris asserts that Ericsson failed to establish the but for causation necessary to recover damages for lost profits because Jackson's analysis failed to take into account available low-power standby SLICs that were noninfringing substitutes for those covered by the '222 patent. 20 Ericsson responds that Jackson used an approved methodology for determining lost profits, that set forth in Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir.1978), and that his expert opinions were independently supported by testimonial and documentary evidence. First, Ericsson argues that Jackson appropriately segmented the market to reflect differing barriers to entry depending on whether a customer had already designed-in a Harris SLIC or an Ericsson SLIC. Ericsson defends Jackson's Harris market definition and his market share figures as supported by the estimate of a Harris employee. Similarly, Ericsson argues that Jackson's Ericsson market definition and his corresponding market share calculations were supported by actual sales records and evidence relating to the costs associated with redesigning a line card. Ericsson also maintains that a lost profits analysis need not include cross-elasticity calculations. Second, Ericsson argues that it proved causation of lost profits. Ericsson adverts to internal Harris emails, customer testimony, Harris marketing materials, and Harris's sales of infringing products as evidence of customer demand for the patented low-power standby feature. Ericsson further argues that Jackson accounted for noninfringing substitutes in his analysis of the Harris market but that noninfringing substitutes were necessarily excluded from the Ericsson market because that market segment consisted only of SLICs that were pin-compatible and function-compatible replacements of the Ericsson SLIC. 21 We agree with Ericsson that substantial evidence supports the jury's damages award for lost profits due to lost sales. To recover lost profits, a patent owner must prove a causal relation between the infringement and its loss of profits. BIC Leisure Prods., Inc. v. Windsurfing Int'l, Inc., 1 F.3d 1214, 1218 (Fed.Cir.1993). More specifically, the patentee must show a reasonable probability that `but for' the infringing activity, the patentee would have made the infringer's sales. Crystal Semiconductor Corp. v. TriTech Microelecs. Int'l, Inc., 246 F.3d 1336, 1353 (Fed.Cir.2001). To show but for causation, the patentee must reconstruct the market to determine what profits the patentee would have made had the market developed absent the infringing product. Grain Processing Corp. v. Am. Maize-Prods. Co., 185 F.3d 1341, 1350 (Fed.Cir.1999). Such market reconstruction must be supported by sound economic proof of the nature of the market and likely outcomes with infringement factored out of the economic picture. Id. 22 We have affirmed lost profits awards based on a wide variety of reconstruction theories in which the patentee has presented reliable economic evidence of `but for' causation. Crystal Semiconductor, 246 F.3d at 1355. We believe that Ericsson has done just that. Ericsson presented its damages theory at trial through Jackson's expert testimony. Jackson reconstructed the but for market by segmenting the market and determining Ericsson's lost profits based on its market share, a method that has met with this court's approval on previous occasions. See, e.g., id. at 1354-56; State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1577-80 (Fed.Cir.1989). Specifically, Jackson identified two markets: the Harris market and the Ericsson market. Jackson defined the Harris market as consisting of sales to customers that had not previously designed-in an Ericsson SLIC. Jackson identified Ericsson, AMD, and others as the competitors in that market and, based on documents and the testimony of various witnesses, estimated that Ericsson would have had a 40% market share in the Harris market. Jackson defined the narrower Ericsson market as consisting of only those SLICs that were compatible with a customer's existing line card. Jackson identified Ericsson and AMD as the only competitors in that market and, based on actual sales records and the switching costs that a customer would incur to redesign a line card, estimated that Ericsson would have had a 97% market share in the Ericsson market. Jackson then allocated Harris's infringing sales in the reconstructed market as follows: 24% to the Harris market and 76% to the Ericsson market. Finally, Jackson calculated Ericsson's lost profits due to Harris's infringement to be $3.5 million. 23 Based on our careful review of the record, we conclude that Ericsson's market definitions and allocations were supported by substantial and economically sound evidence. We also conclude that Ericsson's market share analysis adequately compensated for the effects that any noninfringing substitutes would have had on Ericsson's lost profits. See BIC Leisure Prods., 1 F.3d at 1219 (stating that a patentee may rely on proof of market share in lieu of proof of noninfringing substitutes in a lost profits analysis); State Indus., 883 F.2d at 1577-78 (same). Moreover, we point out that Ericsson's failure to present all of the economic evidence that Harris now identifies does not mean that Ericsson failed to present sound economic evidence. Harris was entitled to present its own damages theory regarding, for example, how cross-elasticity calculations and second-sourcing would have affected the but for market. It was ultimately up to the jury, however, to weigh the credibility of the parties' opposing theories and evidence. See Micro Chem., 317 F.3d at 1394. We will not overturn a jury's determination as to the amount of a damages award when, as in this case, that verdict was supported by substantial evidence.