December 12, 2012 Articles

Valuing Standard Essential Patents

An examination of announced FRAND royalty rates for LTE.

By Peter Quies

There are a several remedies available to a successful plaintiff in a trademark infringement action. The Lanham Act, which governs trademark cases in federal court, allows a plaintiff to seek either injunctive relief or monetary relief in the form of (1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.

This article focuses on the calculation of the defendant's profits. On its face, this seems like a straightforward calculation—defendant's revenues less its costs. Courts have often ruled that costs with a "sufficient nexus" to the product or products at issue may be included in the calculation of profits. However, there is no accounting literature or term that defines these costs, and this leaves substantial room for judgment and disagreement between the parties and the courts. Some courts look at costs on a variable basis, the "incremental approach" in which only direct costs of production are deducted, while others adopt the "full absorption approach," which provides for an allocation of overhead on a fixed and fully loaded basis. Other courts fall somewhere in between. The different approaches to allowable cost deductions, as well as the concepts and methodologies used by experts to determine "nexus," are addressed here.

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