Legal Definitions - price-erosion theory

The price-erosion theory is a legal principle used in patent infringement lawsuits to determine the financial damages, specifically the "lost profits," that a patent holder has suffered. This theory posits that when an unauthorized, infringing product enters the market, it forces the patent holder to reduce the price of their own patented product, or prevents them from charging the full, higher price they otherwise could have commanded. The price-erosion theory measures the difference between the revenue the patent holder *would have earned* by selling their product at its market price without infringement, and the *actual, lower revenue* they generated due to the price pressure created by the infringing item.

Here are some examples to illustrate the price-erosion theory:

• Example 1: Innovative Medical Device

  A company called MediTech invents and patents a groundbreaking surgical tool that significantly improves patient recovery times. They launch this tool at a premium price, reflecting its unique benefits and market exclusivity. Shortly after, a competitor, BioCopy, begins manufacturing and selling an identical, infringing version of the tool at a substantially lower price. To maintain its market share and continue selling its product, MediTech is compelled to reduce the price of its patented tool.

  How it illustrates the theory: The price-erosion theory would be used to calculate MediTech's lost profits. It would compare the higher revenue MediTech *could have generated* by selling its tool at the original premium price if BioCopy had not infringed, against the *actual, lower revenue* earned from selling the tool at the reduced price necessitated by BioCopy's competition. The difference represents the profits lost due to price erosion.

• Example 2: Advanced Software Technology

  TechGenius develops and patents a unique algorithm that dramatically optimizes data processing for large corporations. They license this software at a high annual fee, reflecting its efficiency and proprietary nature. Another company, DataPirate, creates and offers a software solution using an identical, infringing algorithm, but at a significantly lower licensing cost. TechGenius finds that potential clients are opting for DataPirate's cheaper, infringing product, forcing them to offer discounts or lower their standard licensing fees to secure new contracts.

  How it illustrates the theory: In this scenario, the price-erosion theory would assess the financial harm to TechGenius. It would quantify the difference between the higher licensing fees TechGenius *would have collected* for its patented software if DataPirate's infringing product wasn't available, and the *actual, reduced fees* or *lost opportunities to charge full price* that resulted from competing with the infringing software.

• Example 3: Eco-Friendly Building Material

  GreenBuild holds a patent for a revolutionary, highly durable, and environmentally friendly insulation material. They introduce it to the construction market at a price reflecting its superior performance and green credentials. A few months later, EcoClone begins manufacturing and selling an identical, infringing insulation product at a significantly lower price point. GreenBuild experiences pressure on its pricing and must offer discounts or lower its list price to secure contracts with builders and developers.

  How it illustrates the theory: The price-erosion theory would be applied here to calculate GreenBuild's damages. It would assess the difference between the higher, non-infringed market price they *could have commanded* for their patented insulation and the *actual, lower average selling price* they achieved while competing against EcoClone's infringing product. This difference represents the profits GreenBuild lost because the market price for their innovation was "eroded" by the unauthorized competition.