## Facts

- Panduit Corp. owned U.S. Patent No. 3,024,301 (the Walch patent) for wiring duct used in electrical control systems.
- In 1964, Panduit sued Stahlin Bros. Fibre Works, Inc. for patent infringement based on Stahlin’s competing wiring ducts (including “Lok‑Slot” and “Web‑Slot”).
- In 1969, the district court held the relevant claim valid and infringed, enjoined further infringement, and ordered an accounting; that judgment was affirmed on appeal.
- After the injunction, Stahlin sold another duct (“Tear Drop”) that the district court found to be a colorable imitation; Stahlin was held in contempt, and that contempt judgment was also affirmed.
- In 1971, the district court appointed a special master to take evidence and recommend damages and related items under 35 U.S.C. § 284.
- The special master recommended damages of $44,709.60 based on a “reasonable royalty” of 2.5% of Stahlin’s gross sales of the infringing products. The rate was derived largely from testimony that Stahlin’s typical overall profit margin was about 4.04% and from the assumption that a royalty should leave the “licensee” some profit.
- The district court adopted the special master’s report in full.
- Panduit appealed the damages award, arguing it was entitled to substantial lost profits on sales allegedly diverted to Stahlin and additional damages for alleged price reductions on Panduit’s own sales; alternatively, Panduit argued that any reasonable royalty should be far higher than 2.5%.

## Issues

1. What must a patentee prove to recover lost profits under 35 U.S.C. § 284 for sales allegedly lost to an infringer?
2. If the patentee cannot prove lost profits, what is the correct method for determining a reasonable royalty under § 284, and was the 2.5% royalty supported by legally sufficient analysis and evidence?

## Decision

- The Sixth Circuit held that § 284 aims to award “damages adequate to compensate for the infringement,” which requires a but-for inquiry into what the patentee would have earned absent the infringement.
- For lost profits on diverted sales, the court identified a four-part evidentiary framework requiring proof of: (1) demand for the patented product, (2) absence of acceptable noninfringing substitutes, (3) the patentee’s manufacturing and marketing capability to meet demand, and (4) the amount of profit the patentee would have made (the “Panduit test”).
- Applying that framework, the court concluded Panduit did not carry its burden on the fourth element because it failed to prove the profit it would have made on the claimed lost sales with the required degree of certainty (including support for the cost/profit figures used to compute incremental profit).
- The court also rejected Panduit’s claimed price-reduction damages due to insufficient proof tying the alleged price effects to the infringement and insufficient proof of amount.
- The court ruled that the special master’s 2.5% royalty was not a valid § 284 reasonable royalty because it was driven largely by the infringer’s overall profit margin and a generalized desire to leave the infringer a profit, rather than a fact-based reconstruction of the royalty the parties would have agreed to in a voluntary, arm’s-length negotiation at the time infringement began.
- The Sixth Circuit reversed the damages judgment and remanded for a new determination of damages consistent with § 284’s compensatory standard and a properly supported reasonable-royalty analysis.

## Legal Principles

- Patent damages under 35 U.S.C. § 284 must be adequate to compensate for infringement and are assessed through a but-for causation inquiry.
- A patentee seeking lost profits for diverted sales may make a prima facie showing by proving: (1) demand for the patented product, (2) absence of acceptable noninfringing substitutes, (3) capacity to meet demand, and (4) the amount of profit the patentee would have made.
- Lost-profits recovery requires proof of profit (incremental/net profit) with reasonable probability; unsupported profit calculations or unclear cost treatment will not sustain a lost-profits award.
- If lost profits are not proven, § 284 guarantees at least a reasonable royalty, determined by reconstructing the royalty the parties would have agreed to at the start of infringement in a voluntary hypothetical negotiation, based on record evidence about the technology, market, and bargaining positions.
- A reasonable royalty may not be set by simply selecting a percentage that fits the infringer’s profit margin or by assuming the royalty must leave the infringer a predetermined profit; the royalty must reflect the value of the patented invention in the relevant commercial setting.

## Conclusion

Panduit arose from long-running litigation over infringement of Panduit’s wiring-duct patent, culminating in an appeal from a damages judgment that adopted a special master’s 2.5% royalty on the infringer’s sales. The Sixth Circuit articulated the four-factor test for proving lost profits and held Panduit could not recover lost profits because it failed to prove the amount of profit it would have made with sufficient certainty, and it likewise failed to support its price-reduction theory. The court further held that the 2.5% royalty was not a legally adequate reasonable royalty because it relied largely on the infringer’s profit margin rather than a fact-based hypothetical-negotiation analysis. The court reversed and remanded for a new damages determination consistent with § 284.


Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (1978)