The Panduit Test
Guidance Provided by Godinger Silver Art Ltd.
The Panduit test is a widely used four factor test that is applied primarily in patent cases but also intellectual property cases. The test factors can be found in Panduit Corp v Stahlin Bros. Fibre Works, Inc. This article will focus primarily on the 2024 Godinger Silver Art Ltd. decision. The language of that decision has been used to explain the court’s understanding of how experts should apply the Panduit factors.
Experts are asked to apply their education, training, and experience to assignments in estimating lost profits or critiquing the opposing expert’s analysis. However, knowledge in one’s field is not enough. A financial expert working in the judicial system must also understand the interpretation of precedent cases that govern and guide current courts in assessing an expert’s work. This is why it is important for financial experts to continue to review decisions discussing lost profits and/or business valuation. The Panduit test is a widely used four factor test that is applied primarily in patent cases but also intellectual property cases. The test factors can be found in Panduit Corp v Stahlin Bros. Fibre Works, Inc. This article will focus primarily on the 2024 Godinger Silver Art Ltd. decision. The language of that decision has been used to explain the court’s understanding of how experts should apply the Panduit factors.
The Panduit Test
The Panduit test is a widely used four factor test that is applied primarily in patent cases but can also be found in calculations for lost profits in intellectual property cases. The test factors can be found in Panduit Corp v Stahlin Bros. Fibre Works, Inc.[1] Two 2024 court decisions have applied the Panduit test for assessing motions made by plaintiffs in lost profits in patent cases.[2] This article will focus primarily on the Godinger Silver Art Ltd. decision. The language of that decision is also used to explain the court’s understanding of how experts should apply the Panduit factors.
The Four Factors of the Panduit Test
According to the Godinger Silver Art Ltd. decision, a patentee seeking lost-profit damages must address the following four factors:
“(1) Demand for the patented product,
(2) Absence of acceptable non-infringing substitutes,
(3) His manufacturing and marketing capability to exploit the demand,
(4) The amount of the profit he would have made.”[3]
The decision goes on to say, “The Panduit factors speak to the critical question of whether the plaintiff in fact would have made the sales absent the sales made by the infringer, absent the infringement. [cite omitted] The patentee must show a reasonable probability that ‘but for’ the infringing activity, the patentee would have made the infringer’s sales. [cite omitted] 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. Such market must be supported by ‘sound economic proof of the nature of the market and likely outcomes with infringement factored out of the economic picture.’[cite omitted] Although the ‘but for’ analysis requires the hypothetical enterprise of reconstructing the market as it would have been absent the infringing product to determine what profits the patent owner lost, courts insist that plaintiffs provide ‘sound economic proof’ as to how they were affected by the infringement so as to ‘prevent the hypothetical from lapsing into pure speculation.”[4]
Financial experts will recognize in this statement how the Panduit factors go to helping the expert meet two of the three standards required by the courts for estimating lost profits: proximate cause and reasonable certainty. The first standard, foreseeability, is not generally included in a financial expert’s assignment. The expert generally assumes the foreseeability standard will be found by the court thus causing the remaining two standards to come into play.
To meet the proximate cause standard, an expert must show with reasonable probability that “but for” the infringement, the patentee would have made the claimed lost sales. This means the expert must show that the cause of the loss is the actions of the infringer not another source. To show lost profits with reasonable certainty, an expert must reconstruct the market that would have existed without the infringement and show how the patentee had the capacity, financial strength, and market share to generate the lost sale. This must be done with sound economic proof.
So, the Panduit test does not create greater barriers for an expert calculating lost profits in a patent or intellectual property case. It provides the framework for an analysis that will meet the overall standards of the court.
Factor One
“The first factor—demand for the patented product—considers demand for the product as a whole. [cite omitted]”[5] An expert may demonstrate this in various ways. He or she may offer “sufficient evidence that defendants are its direct and only competitor and that there is a market demand for the product as a whole. “A patent owner may satisfy the first prong by demonstrating a significant amount of sales of the infringing product as evidence of demand for the product.”[6]
The plaintiff may also show that the substantial number of sales by the infringer containing the patented features itself is compelling evidence of the demand of the product.[7] “For example, in Gyromat Corp., Champion’s sales [the infringer] necessarily meant that there were buyers who wanted the product and were willing to pay Champion’s price, which was substantially the same as that or Gyromat.”[8]
Factor Two
“The second factor—the absence of non-infringing alternatives—considers demand for particular limitations or features of the claimed invention. This often proves the most difficult obstacle for patent holders. [cite omitted]”[9] For this factor to be met, the patentee may prove either the potential alternative is not acceptable to potential customers, or the alternative was not available at the time of the infringement. “For example, if the customer would have bought the infringing product without the patented feature or with a different, non-infringing alternative to the patented feature, then the patentee cannot establish entitlement to lost profits for a particular sale. And this determination is made on a customer-by-customer basis. For this reason, it is quite common to see damage awards where … the patentee proves entitlement to lost profits for some of its sales, but not others.”[10]
In cases where I have been able to identify that customers of the patentee have begun purchasing from the alleged infringing business, I have provided one scenario with the infringer’s sales to the prior customers as the source for the lost profits. I then provide a second scenario that includes the infringer’s sales to the patentee’s prior customers and a percentage of the additional sales made by the alleged infringing business to non-prior customers. The percentage of additional sales is based on the facts of the case.
Factor Three
“The third Panduit factor examines a patentee’s manufacturing and marketing capability to exploit the demand. Lost profit damages are not available as a matter of law where the plaintiff did not have the ability or intent both to manufacture and market a product embodying the patented invention in the same market in which the defendant sold the allegedly infringing product. A plaintiff must offer evidence confirming that it had the manufacturing capacity to make the additional [sales] it would have made if the [infringing products] were not on the market.”[11]
In one litigation, I was asked to calculate lost profits for a company that had marketed their product which was created by a patented mold to Wal-Mart. A representative of the company had stolen one set of the molds and sold them to a competitor. The patentee sued the infringing company that had purchased the stolen molds for lost profits related to the Wal-Mart contract.
After discussions with the patentee, it became obvious that they only had the capacity to provide about 20% of Wal-Mart’s order. It would take the patentee several months to hire other manufacturers to use its molds to fulfill the Wal-Mart contract. Because of this, my damage figures had to be adjusted to reflect a more realistic estimate of production, sales, and profits from the Wal-Mart contract.
Factor Four
“The fourth Panduit factor looks at the amount of profit the patent holder would have made ‘but for’ the infringing product’s presence on the market. To meet this factor, patent holders have offered documentation showing a drop in their own sales volume and revenues during the pertinent period as compared to prior years. [cite omitted]”[12]
This factor may become an Achilles heel to the analysis. This is because a lack of evidence showing lost sales, or the costs related to the manufacturing of the patented product could make the court rule in favor of the defendant finding the plaintiff had not proven lost profits with reasonable certainty.
Alternative Option
“For sales as to which the patentee cannot prove the elements necessary to establish entitlement to lost profits, the statute guarantees the patentee a reasonable royalty for those sales based on the alternative theory of royalties owed. The infringed party bears the burden of proof to persuade the court of the legally sufficient evidence regarding an appropriate reasonable royalty. … Determining a reasonable royalty does not require mathematical exactness, but a reasonable approximation under the circumstances of a given case. [cite omitted] The more common approach of determining damages attempts to ascertain the royalty rate to which parties would have agreed had they negotiated an agreement prior to infringement.”[13]
The decision goes on to say that the 15 factors found in the Georgia-Pacific decision (Georgia-Pacific factors) are used by many courts to assess the approach forwarded by the plaintiff.[14]
I have used the alternative option in several cases. This was because of the failure of the defendant to exchange information requested through discovery and/or incomplete financial information for the company alleging to have been harmed. There are a number of studies (some of them free) on the internet reporting the standard royalty formulas for numerous industries. Most of these studies have been performed by national and international accounting firms. Use of these sources lends credibility to any analysis.
Even the alternative approach may prove difficult because the expert, in some cases, needs to estimate the number of units sold or the profit margin earned by the alleged infringer. Either of these markers require knowledge of the defendants financial and production data. If the data are not received or not received prior to the completion of the lost profits analysis and report, the expert may have to estimate the losses relying on the plaintiff’s financial information. This is problematic if the plaintiff does not manufacture the patented product.
Conclusion
This has been a brief review of the Panduit factors used in estimating lost profits in patent and some intellectual property litigation. Two 2024 cases provide additional insight as to the court’s application of these factors. In the Godinger Silver Art Ltd., the court explained how the plaintiff’s motion for lost profits failed to meet any of the Panduit factors.[15]
In the Woodway USA, Inc. decision, the court went to great lengths to explain why the motions to compel the plaintiff to provide financial data to the defendant’s experts were denied in part and approved in part. The decision explains why some of the requested data were needed for meeting the Panduit factors and while other requested data would not assist in addressing the four factors. For financial experts working in the lost profits area, the two decisions should be an interesting read.
Experts are asked to apply their education, training, and experience to any assignment in estimating lost profits or critiquing the opposing expert’s analysis. However, knowledge in one’s field is not enough. A financial expert working in the judicial system must also understand the interpretation of precedent cases that govern and guide current courts in assessing an expert’s work. This is why it is important for financial experts to continue to review decisions discussing lost profits and/or business valuation so that they can apply commonly accepted methods for accounting and finance in a way that is acceptable to the courts.
[1] Panduit Corp. v Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6ht. Cir/ 1978)
[2] Godinger Silver Art Ltd. v Shenzen Tangson Houseware Co. Ltd., 2024 U.S. Dist. LEXIS 31652; Woodway USA, Inc. v Lifecore Fitness, Inc., 2024 U.S.Dist. LEXIS 36307
[3] Godinger Silver Art Ltd., 20234 U.S. Dist. LEXIS 31652, 8
[4] Ibid., 8–9
[5] Ibid., 10
[6] Bic Corp. v First Prominence Co. Ltd., 2001 U.S. Dist. WL 1597983, 2
[7] Godinger Silver Art Ltd., 20234 U.S. Dist. LEXIS 31652, 10
[8] Ibid., 10
[9] Ibid., 11
[10] Ibid., 11
[11] Ibid., 11–12
[12] Ibid., 12–13
[13] Ibid., 13–14
[14] Georgia-Pacific Corp. v United States Plywood Corp., 315 F. Supp. 1116, (S.D.N.Y. 1970)
[15] Godinger Silver Art Ltd., 20234 U.S. Dist. LEXIS 31652, 14-20
Allyn Needham, PhD, CEA, is a partner at Shipp Needham Economic Analysis, LLC, a Fort Worth-based litigation support consulting expert services and economic research firm. Prior to joining Shipp Needham Economic Analysis, he was in the banking, finance, and insurance industries for over 20 years. As an expert, he has testified on various matters relating to commercial damages, personal damages, business bankruptcy, and business valuation. Dr. Needham has published articles in the areas of financial and forensic economics, and provided continuing education presentations at professional economic, vocational rehabilitation, and bar association meetings. In 2021, Dr. Needham received a NACVA Outstanding Member Award. He is also a member of NACVA’s QuickRead Editorial Board.
Dr. Needham can be contacted at (817) 348-0213 or by e-mail to aneedham@shippneedham.com.
