The prevailing method for calculating lost profits damages in patent infringement originated with State Industries v. Mor-Flo1 in the late 1980s.
That decision established both the “market share” rule for lost sales and use of the split award.2
The market share rule considers that portion of the patent holder’s relevant market that has been captured by the infringing firm.3 In the simplest two-firm model the market share rule assumes that the patent holder would capture all the infringing revenue.4
When the market also includes non-infringing alternatives, the market share rule divides the infringing sales among the patent holder and the non-infringing firms in proportion to their respective market shares.5
The split award includes a reasonable royalty to the patent holder for the infringing sales allocated to the non-infringing firms (the split award is not used with a two-firm market).6 The logic of State Industries therefore treats each infringing sale in the relevant market as either a lost sale for the patent holder or a basis for a royalty payment.7
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