The Federal Circuit weighs in on the lost-profits opinion involving head-to-head competitors

March 01, 2016

The Federal Circuit’s opinion in Akamai Technologies, Inc. (“Akamai”) v. Limelight Networks, Inc.(“Limelight”) is a reminder of the distinction between the fact of and the amount of damages. The ruling also emphasizes that reasonable certainty is the standard for proving lost profits in a patent infringement matter. Given the court’s recent focus on methods for calculating damages, this opinion is noteworthy because it does not address the amount of lost profits — rather, it addresses the question of whether there was a reasonable certainty that Limelight’s alleged infringement caused damage to Akamai.1

Reasonably certain evidence of lost profits is a fact-intensive determination.2 To collect lost profits, a “patentee must show a reasonable probability that ‘but for’ the infringing activity, the patentee would have made the infringer’s sales.”3 “Reasonably certain” and “reasonable probability” are not concretely defined, and courts agree that reasonable certainty as to damages is a flexible, inexact concept.4

Overview of Lost Profits Damages

Assuming the infringer is found liable, a plaintiff in a patent infringement matter is entitled to “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty.”5 The patentee may recover its lost profits rather than a reasonable royalty if the patentee can prove the defendant’s infringement caused the patentee to lose profits that it otherwise would have made.6 Courts frequently refer to this as “but for” causation — that is, the patentee bears the burden of proving to a reasonable probability that it would have made additional profit but for the infringement.7 According to case law, once the patentee establishes the but-for causation to a reasonable degree of certainty, the burden shifts to the infringer to demonstrate that causation is unreasonable.8 The patentee bears the burden of proving the amount of lost profits.

Overview of the Akamai v. Limelight Dispute

The dispute between Akamai and Limelight dates back to 2006 when Akamai accused Limelight of patent infringement.9 The companies operate competing content delivery networks (“CDNs”) that provide services to news organizations and businesses with e-commerce websites.10 In 2008, a jury awarded Akamai damages of $40 million for lost profits on lost sales, $1.4 million in the form of a reasonable royalty, and $4 million for lost profits on a price erosion theory.11 Between 2008 and 2015, the Federal Circuit and the Supreme Court heard a series of appeals and cross-appeals on this case.12 The courts wrestled with the issue of divided infringement, which generated a great deal of interest in their rulings.13 The Federal Circuit, in a 2015 en banc ruling, settled that issue and then turned to the remaining issues on appeal, including the issue of lost profits.14

The jury’s award of lost profits on lost sales was based in part on the testimony of Akamai’s damages expert, who testified that his opinion relied on an “adjusted market share” analysis, which estimated the proportion of Limelight’s infringing sales that Akamai would have captured but for the infringement. The expert first noted that Akamai controlled approximately 75% of the market, despite its prices being twice that of its competitors. He then opined that Limelight and Akamai were head-to-head competitors for the same customer base and determined that for many customers, Akamai’s service was the only reasonable alternative to Limelight’s services. In support of his position, the expert pointed to the testimony of Limelight’s chief strategic officer, who stated that Limelight was the only company with sufficient scale to compete effectively with Akamai.15

Based on these facts, Akamai’s expert calculated the proportion of Limelight’s sales that would have gone to Akamai but for Limelight’s infringement. The expert adjusted his calculation by accounting for noninfringing alternatives and by assuming that 25% of Limelight’s lowest-revenue-generating customers would not buy services from Akamai.

Limelight’s Brief before the Federal Circuit (December 9, 2009)

Limelight appealed the jury’s lost profit award on the basis that “Akamai failed to present sound economic proof of a causal link between Limelight’s infringement and any Akamai lost sales.”16 Limelight characterized the Akamai expert’s opinion as conjecture insofar as his market share analysis assumed Akamai would have captured 75% of Limelight’s customers, despite Limelight customers’ having indicated an unwillingness to pay the higher price for Akamai’s services.

Limelight found support for its arguments in the Federal Circuit’s prior ruling in BIC Leisure Prods., Inc. v. Windsurfing Int’l, Inc.17 In BIC, the accused products sold at a drastically lower price than the patentee’s products, and the record indicated a relatively elastic market for the accused products. In its decision, the Federal Circuit held that without BIC in the market, BIC’s customers would have sought products in the same price range; therefore, the court reversed the district court’s award on the basis that the patentee did not demonstrate but-for causation given this market segmentation.

Accordingly, Limelight requested the Federal Circuit to reverse the award of lost profits because Akamai failed to present sound economic proof that its lost profits were caused by Limelight’s infringement. Notably, Limelight did not appeal the amount of the award. Instead, Limelight’s opening brief argued only that the Akamai expert’s reconstruction of the market was not based on sound economic proof of the nature of the market. Limelight suggested that under the actual segmented market conditions in which both companies operate, the damages expert’s assumption that Akamai would have captured 75% of the market share was simply speculation.18

Akamai’s Brief before the Federal Circuit (February 11, 2010)

Akamai agreed with the foundation of Limelight’s argument — that lost profits are recoverable so long as they are supported by an appropriate market reconstruction theory.19 Akamai argued, however, that it had met its burden of proof by showing with reasonable certainty that it would have made additional profits but for the infringement. Akamai’s argument hinged on the fact that

Limelight was its only real competitor20 and that its damages expert made adjustments to Akamai’s but-for market share to account for noninfringing substitutes and elasticity in demand.

Akamai distinguished the facts of its case from the facts in BIC by pointing out that in BIC, the patentee’s high-priced product was not a substitute for the infringer’s low-priced product. Akamai also observed that the record in BIC showed a relatively elastic market for the patented products, especially for the lower-end products.

Akamai concluded there was no credible comparison between its case and BIC because, in its case, Akamai’s and Limelight’s services were the only reasonable substitutes for many customers in the relatively inelastic market.

The Federal Circuit Decision (November 16, 2015)

The Federal Circuit sided with Akamai, ruling that its damages analysis was supported by “sound economic proof of the nature of the market and likely outcomes with infringement factored out of the economic picture.”21 The opinion stated that Akamai’s damage expert’s use of a market-share approach has been repeatedly approved repeatedly approved as a method for demonstrating with reasonable probability that but for the infringing activity, the patentee would have made the infringer’s sales.22 The Federal Circuit also found that:

  1. the expert’s adjustment for market elasticity was “sufficiently grounded in economic principles for the district court to allow it” and
  2. the expert’s testimony considered customer preferences for lower-priced products by excluding a portion of Limelight’s customers and by discounting the potential award based on price elasticity. The court stated, “Whether this discount was sufficient is not a legal challenge to the availability of lost profits but as to the amount of lost profits, which Limelight failed to address in its panel briefing.”23

The decision also clarified the court’s prior ruling in BIC, stating that the “decision in BIC did not rest solely on […] price disparity.”24 The Federal Circuit’s decision made several distinctions between the facts of BIC and the facts of the present case, including

  1. the similarity between Akamai’s and Limelight’s services,
  2. that Akamai and Limelight were direct competitors and leaders in the CDN market,
  3. that Akamai and Limelight both possessed capabilities and infrastructure beyond those of their other competitors, and
  4. that demand in the CDN market did not change significantly with changes in price.25

Conclusion

In accepting Akamai’s argument, the Federal Circuit reiterated the “reasonably certain” standard by which lost profits claims are to be evaluated. In the absence of any bright-line test, courts will enjoy wide discretion in determining whether a patentee’s claim of lost profits is reasonable. This ruling is a reminder that

  1. proving the existence of lost profits is a fact-intensive analysis that forms the basis for subsequent calculation of the amount of profits lost and
  2. defendants can separately challenge the fact of and amount of a lost profits award.

 


 

  1. Akamai Techs., Inc. v. Limelight Networks, Inc., 805 F.3d 1368 (Fed. Cir. 2015).
  2. BIC Leisure Prods., Inc. v. Windsurfing Int’l, Inc., 1 F.3d 1214 (Fed. Cir. 1993).
  3. Ericsson, Inc. v. Harris Corp., 352 F.3d 1369, 1377 (Fed. Cir. 2004).
  4. Ashland Mgmt. v. Janien, 624 N.E.2d 1007, 1010 (N.Y. 1993) (“The law does not require that [damages] be determined with mathematical precision.”); Holt Atherton Indus. v. Heine, 835S.W.2d 80, 84 (Tex. 1992) (“Recovery for lost profits does not require that the loss be susceptible of exact calculation.”).
  5. 35 U.S.C. § 284.
  6. Am. Hoist & Derrick Co. v. Sowa & Sons, Inc., 725 F.2d 1350, 1365 (Fed. Cir. 1984) (citing Milgo Elec. Corp. v. United Bus. Commc’ns, 623 F.2d 645, 663 (10th Cir. 1980)).
  7. Skenyon, Marchese & Land, Patent Damages Law & Practice (West Group 2007).
  8. Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1545 (Fed. Cir. 1995).
  9. Akamai Tech., Inc. v. Limelight Networks, 494 F. Supp. 2d 34 (D. Mass. 2007).
  10. Id.
  11. Akamai Techs., Inc. v. Limelight Networks, Inc., 805 F.3d 1368, 1373 (Fed. Cir. 2015).
  12. Id. at 1371-1374.
  13. See, e.g., Brief of Biotechnology Industry Organization as Amicus Curiae in Support of Respondents, Limelight Networks, Inc., v. Akamai Tech., Inc., (No. 12-786); Brief of PharmaceuticalResearch and Manufacturers of America as Amicus Curiae in Support of Respondents, Limelight Networks, Inc., v. Akamai Techs., Inc., (No 12-786); Brief of Amici Curiae Double RockCorporation, Island Intellectual Property, LLC and Broadband iTV, Inc. in Support of the Statement Requesting Continued En Banc Review (Nos. 2009-1372; 2009-1380; 2009-1416; 2009-1417); Brief of Amicus Curiae American Intellectual Property Law Association (“AIPLA”) in Support of Petition for Rehearing En Banc (Nos. 2009-1372; 2009-1380; 2009-1416; 2009-1417);Amicus Curiae Brief of the Coalition for 21st Century Medicine in Support of Akamai Technologies, Inc.’s and MIT’s Petition for Rehearing En Banc (Nos. 2009-1372; 2009-1380; 2009-1416;2009-1417).
  14. Akamai Techs., Inc. v. Limelight Networks, Inc., 805 F.3d 1368, 1372 (Fed. Cir. 2015).
  15. Response and Reply Brief of Plaintiffs-Appellants Akamai Technologies, Inc. and The Massachusetts Institute of Technology, 2010 U.S. Fed. Cir. Briefs LEXIS 1317 (Feb. 11, 2010).
  16. Principal and Response Brief of Defendant-Cross-Appellant Limelight Networks, Inc., 2009 U.S. Fed. Cir. Briefs LEXIS 1050, at 36 (Dec. 9, 2009).
  17. BIC Leisure Prods., Inc. v. Windsurfing Int’l, Inc., 1 F.3d 1214, 1218 (Fed. Cir. 1993).
  18. Principal and Response Brief of Defendant-Cross-Appellant Limelight Networks, Inc., 2009 U.S. Fed. Cir. Briefs LEXIS 1050, at 64 (Dec. 9, 2009).
  19. Response and Reply Brief of Plaintiffs-Appellants Akamai Technologies, Inc. and The Massachusetts Institute of Technology, 2010 U.S. Fed. Cir. Briefs LEXIS 1317, at 65 (Feb. 11, 2010).
  20. Id. at 5.
  21. Akamai Techs., Inc. v. Limelight Networks, Inc., 805 F.3d 1368, 1379 (Fed. Cir. 2015).
  22. Id. at 1380.
  23. Id. at 1381.
  24. Id. at 1380.
  25. Id. at 1381.