Legal Definitions - market-share theory

Market-share theory is a legal principle primarily used to calculate financial damages, particularly lost profits, by assessing how a defendant's wrongful actions impacted a plaintiff's portion of a specific market.

This theory operates on the assumption that, without the defendant's illegal or infringing conduct, the plaintiff would have maintained or increased their market share, and consequently, their sales and profits. It is applied in two main contexts:

• Antitrust Law: Here, market-share theory helps determine the damages a company suffered due to another company's anti-competitive behavior, such as monopolistic practices or illegal price fixing. Courts examine what the plaintiff's market share would have been had the defendant not engaged in the wrongful conduct, comparing it to their actual market share during the period of violation.

• Patent Law: When a company infringes on another's patent, the patent holder can claim lost profits. If the market includes the patent holder, the infringer, and other non-infringing competitors, the market-share theory can be used. It generally assumes that the patent holder would have captured a portion of the infringer's sales equal to the patent holder's established market share for that product or technology.

Here are some examples illustrating the application of market-share theory:

• Example 1 (Antitrust): Imagine a small, innovative software company, CodeFlow Solutions, develops a popular project management tool. A much larger competitor, MegaCorp Software, then engages in illegal bundling practices, forcing customers to buy their less effective project management tool alongside their essential operating system. As a result, CodeFlow Solutions sees its market share for project management software drop from 10% to 3% over two years. CodeFlow's legal team could use market-share theory to calculate lost profits by arguing that, absent MegaCorp's illegal bundling, CodeFlow would have maintained its 10% market share. They would then quantify the financial value of the 7% market share difference based on the total market size during that period.

• Example 2 (Patent Infringement): Consider EcoCharge Innovations, a company holding a patent for a highly efficient solar panel design. Another company, SunSteal Co., begins manufacturing and selling solar panels using EcoCharge's patented technology without permission. The market also includes GreenEnergy Inc., which sells non-infringing, but less efficient, solar panels. If EcoCharge Innovations had a 30% market share for high-efficiency solar panels before SunSteal Co.'s infringement, and SunSteal Co. subsequently captured 15% of that market with its infringing product, EcoCharge could argue that it would have captured 30% of SunSteal Co.'s sales. The damages would then be calculated based on the profits EcoCharge would have made from those additional sales, reflecting its established market share.