`Eccerosaaceaasr
`angers“
`aim agencies.
`$€€E§Z§§
`
`BY R. DEFOREST MCDUF‘F,
`
`RYAN C. ANDREWS, AND MATT D. BRUNDAGE
`
`conomic experts frequently evaluate commercial success as a secondary consideration
`of the obviousness of a patented invention.‘ While other common economic inquiries
`are often based on widely recognized methodologies (e.g., the Fender? factors for lost
`profits. the Georgia-Pacific factors for reasonable royalties), experts often base analysis of com-
`mercial success on a Iayperson’s notion of “success,” without appreciation of its purpose. For
`example. an expert may conclude that a product is a commercial success because sales and profits
`are “large" or “substantial," appealing to preconceived notions of success in other contexts (“sales
`of $l00 million a year? .
`.
`. sounds like a success to fuel”).
`We should be wary of such simplistic approaches to evaluating commercial success,
`which often fail to ask a fundamental economic question: success Compared to What? Just
`as one individual’s success in life may differ from another’s, commercial success for one
`product in a particular context may differ from commercial success for another product in
`another context. Improper analysis of commercial success can be particularly problematic in
`pharmaceuticals, for example, which often require billions of dollars in sales for economic
`incentives to have existed for others to bring the product to market sooner. Evaluations of
`commercial success without proper context (or, for some experts. without any context at all)
`are unhelpful to the role of commercial success in patent litigation.
`Recent case law has clarified the purpose of commercial success and what it is intended to
`demonstrate. For example, the Federal Circuit stated in Merck v. Teva that commercial suc-
`cess is relevant “because the law presumes an idea would successfully have been brought to
`market sooner, in response to market forces, had the idea been obvious to persons skilled in
`the art.“2 This makes sense, from an economic perspective, because other parties would have
`economic incentives to commercialize obvious inventions if there were economic incentives
`
`to do so. However, based on our experience evaluating dozens of expert reports on com-
`mercial success, all too often experts fail to provide relevant context and/or tie any alleged
`success back to the fundamental purpose outlined by the courts.
`This article summarizes challenges and shortcomings with common approaches to evalu-
`ating commercial success, and offers guidance for providing appropriate economic analysis.
`We draw upon numerous expert evaluations of commercial success, with a focus in phar-
`maceuticals and electronics, to provide practical insights on commercial success for both
`plaintiffs and defendants.
`
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`Overly Simplistic Analysis of Commercial Success
`Overly simplistic evaluations of commercial success frequently
`fail to provide sufficient information and analysis to conclude
`that economic incentives existed to bring the product to mar-
`ket sooner. Such analysis often simply tabulates sales, profits,
`and market shares. followed by some grand conclusion on
`whether those constitute commercial success. Very little is said
`for whether sales are sufficient to compensate for the economic
`costs needed to develop the product and bring it to market.
`Experts often fail to compare sales and profits from the product
`in question to other comparable products in the industry, even
`though millions of dollars in one market might be successful in
`one industry and an utter failure in another.
`In our experience, this kind of analysis is too often set
`forth as alleged evidence of commercial success. This overly
`simplistic approach to evaluating commercial success often
`misses the economic purpose of commercial success in
`informing on obviousness. Analyses rooted in a layperson’s
`notion of success are not necessarily unscientific or false—
`rather. they simply fail to connect with the purpose of the
`commercial success established by the courts.
`Over time, courts have clarified the purpose of commer-
`cial success in evaluating 21 patents obviousness. Dating
`back to Smith v. Goodyear Dental (1876), the Supreme Court
`grappled with how to determine whether a new product was
`a legitimately novel invention.3 The Court indicated what
`might be learned from one product displacing others previ-
`ously used for the same purpose, establishing the relevance
`of a product‘s market performance, but provided no clear
`economic standard for what kind of displacement would be
`informative." The Supreme Court later identified commer-
`Cial success as a secondary consideration for nonobviousness
`in Graham v. John Deere (I966),5 a role that was strength-
`ened upon establishment of the Federal Circuit in 1982.6 One
`scholar suggested that commercial success was transformed
`“from a tiebreaker to a virtual trump card."7 Most recently.
`the Federal Circuit stated in Merck l’. Tat-vi (2005) (citing to
`Graham v. John Deere) that “[c]ommercial success is relevant
`
`because the law presumes an idea would successfully have
`been brought to market sooner, in response to market forces.
`had the idea been obvious to persons skilled in the art."8
`Merely reporting sales or market shares in a vacuum misses
`the point ofa commercial success analysis as explained by the
`corms. Net sales or market shares in isolation tell as my little
`about whether market forces would have existed for other compa-
`nies to have responded by bringing the product to market sooner.
`As one author noted: “For commercial success to be persuasive,
`a patentee must do more than show sales or market share data for
`her patented product. (Although, under some older cases, this was
`enough)?” Rather, commercial success should inform on whether
`
`sales and profits provide objective evidence on whethernmreriai
`economic incentives (i.e., “market forces") would have incen—
`
`tivizcd others to bring the product to market, had the invention
`been obvious. Other economists and scholars agree that this is. in
`essence, the fundamental purpose of commercial success analy-
`sis.” Said another way. ideas are brought to market when there is
`a profit opportunity. not merely when sales or market shares are
`“high” or “substantial” in some abstract sense.
`
`Economic Analysis of Commercial Success
`A better approach to evaluating commercial success focuses
`on factors that are economically relevant for its purpose. While
`each analysis will be unique and specific to the facts of the par-
`ticular case, some principles can provide guidance to improve
`putting forth or rebutting evidence of commercial success. This
`section elaborates on several such factors: (1) comparisons to
`relevant benchmarks. (2) comparisons to commercialization
`costs, (3) evaluation of market shares. and (4) evaluation of the
`
`inferential limitations of any alleged commercial success.
`
`Comparisons to Relevant Benchmarks
`One useful measure in evaluating commercial success is a
`comparison of sales to relevant benchmarks in the industry—
`for example: average product sales. sales of competitors, and
`projections of potential sales. This provides guidance on what
`level of sales or revenues in the field are typical, sought. and
`expected, and would yield an economic profit for a particular
`industry at a particular point in time.
`In the pharmaceutical industry. for example, economic lit-
`erature provides context on the range of drug sales by dmg type
`(e.g., cardiovascular. neurologic. etc.) and time period. For drugs
`launched from 1990 to 1994. anesthetic drugs earned $556 mil-
`lion over the product life cycle, on average, compared to more
`than $2 billion for anti-infective drugs and more than $3 billion
`for cardiovascular drugs.” Economic research examining drugs
`by deeile (i.e., lst decile front 90th percentile to 99th percentile,
`2nd decile from 80th percentile to 89th percentile) often pro-
`vides additional context for where a drug fits into the broader
`industry.”- Notably. research indicates that only the top three
`deciles of drugs tend to be economically profitable, and that an
`average drug tends to yield close to break-even or even negative
`profits.” All else equal. it is unlikely that a drug with sales below
`an average drug would be a commercial success.H
`All too often, experts assert that sales are “high” in some
`abstract sense (even with little or no profit), without evaluat-
`ing what sales might have been expected or what sales have
`been earned by competitor products. By adding comparisons
`to the types of benchmarks described herein. sales can be
`evaluated in proper context and better inform whether mate—
`rial economic incentives for development existed.
`
`R. DeForest McDufi', PhD. is a partner at insight Economics; he is an expert in applied business economics and provides expert witness testimony on
`intellectual property and other areas. Ryan C.Andrews is a former senior associate at Intensity; he has extensive experience evaluating lost profits.
`reasonable royalties, commercial succe55,and other areas. He is currently pursuing his MBA atThe Wharton School at the University of Pennsylvania.
`Matt D. Brundage is an analyst at |ntensity;his experience includes economic research and analysis for commercial success. reasonable royalties. and
`other economic damages.They may be reached. respectively. at deforest@insighteconomicscom. ryanandr@wharton.upenn.edu.and mambrundage@
`fl‘ Bkofltlfi'gzpspective
`intensitycom.The opinions expressed are those of the aurhor(s) and may not reflect the views oftheir employel
`affiliates.This article'IS for general information purposes and'Is not intended to be and should not be taken as lega
`ice.
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`Comparisons to Commercialization Costs
`Another useful but often overlooked measure in evaluating
`commercial success is a comparison to commercialization
`costs for a product. Properly evaluated. including economic
`costs associated with actual expenditures, costs of capital,
`risk. and uncertainties. comparisons to commercialization
`costs can provide information for whether sales and profits
`are sufficient to generate an economic return on investment—
`in other words. a material economic incentive for others to
`
`bring the product to market. For example, some economists
`argue that ”commercial success could in principle be defined
`by a single criterion: Does the patented invention earn a
`positive net return (risk-adjusted) on invested capital after
`accounting for all relevant costs associated with developing
`and commercializing the patent as well as any alternatives
`available to the patent hoider‘i‘”j Techniques such as net pres-
`etrt value analysis can be helpful for comparing sales over
`time with costs associated with commercialization.
`
`lit the pharmaceutical industry, a number of authors have
`determined that the cost of bringing a new pharmaceutical
`product to market exceeds SI billion (and more than $2 bil-
`lion based on estimates for more recent products)” These
`costs include out-of—pocket expenses of development and
`clinical trials, the cost of capital over time, and the risk
`of nonapproval (in which case all expenditures would be
`wasted). all of which are expected and considered when eval-
`uating products in the pharmaceutical industry.” If a drug
`product does not earn revenues and profits that sufficiently
`compensate pharmaceutical companies for significant eco-
`nomic costs in bringing a product to market. that product will
`tend not to be a cotnmercial success. all else being equal.”
`Despite the economic foundation and connection to material
`economic incentives. expens frequently fail to take into account
`the costs of development and commercialization when evaluat-
`ing commercial success.w By adding comparisons to potential
`costs of commercialization described herein. sales and profits
`can be evaluated relative to the expense and investment required
`to bring the product to market. providing further evidence on
`material economic incentives for commercialization.
`
`Evaluation of Market Shares
`Market shares are a factor frequently considered by experts in
`evaluating commercial success, because they provide implicit
`comparisons to competitor products. However. the interpre—
`tation of market shares can be diflicult. For example, experts
`are often pressed at deposition to define what market share
`would provide a global cutoff for a commercially success-
`ful product (e.g., "Is it 5 percent? it) percent? 25 percent? 50
`percent?"). The answer, because of how market shares are
`defined. is often: it depends.
`For example, a 5 percent share of one market might be com-
`mercially successful. whereas a 20 percent share of another
`market might not be. The former market might be significant
`and commercialization costs may be low, whereas the second
`market might be smaller and commercialization costs may be
`high. As another example, a product may have a very high rev-
`enue share but a very low quantity share due to factors like
`patent protection of competitors (e.g.. branded versus generic
`
`pharmaceuticals). Trying to define an absolute cutoff for what
`market share, in the abstract, denotes a commercial success is
`a futile exercise?U Experts often disagree about market defi-
`nition~—i.e.. which products define competition and which do
`notkyet the market definition and market share are interre-
`lated. It is the overall context. rather than a particular market
`share per se. that defines whether market shares are interpreted
`as persuasive evidence of commercial success.
`Unlike the other economic factors described thus far. market
`
`shares are less directly connected to whether material economic
`incentives existed to bring the product to market sooner. Yet they
`can. at times. provide insight on the market opportunity for an
`invention and, in that sense. may inform on incentives to bring a
`product to mruket sooner when other information is less concrete.
`
`Economic Relevance of Commercial Success
`Finally. a thoughtful analysis of commercial success may
`consider whether any alleged success. ifit exists, is relevant
`for evaluating the existence of material economic incentives
`to bring a product to market sooner. There are circumstances
`where even sales and profits that might normally be sufficient
`to generate economic interest in the product (eng a potential
`commercial opportunity) might not be informative on obvi-
`ousness at the time of the invention because of other factors.
`
`For example. the presence of blocking patents or regui
`latory exclusivity often limits the economic relevance of
`commercial success. In this case. incentives for development
`may only exist for the party with that exclusivity and not
`for the market tnore generally. in Merck v. Tern, the plaintiff
`argued that Fosamax. the patented product in question. was
`commercially successful.“ The Federal Circuit agreed. but
`found that Merck‘s earlier patent (a so-called “blocking pat—
`ent" that blocked others from commercializing a Fosamax
`product) limited the economic relevance of commercial suc—
`cess because other parties in the market could be blocked
`from bringing the product to market.” The court stated:
`"Because market entry by others was precluded on those
`bases. the inference of non-obviousness .
`.
`. from evidence of
`commercial success. is weak."l-‘
`
`As another example, there may be contemporaneous evi-
`dence around the time of the invention that shows a lack of
`
`commercial interest. even ifthe product later turns out to be
`commercially successful. In such a situation, sales and profits
`may provide limited evidence on whether material economic
`incentives existed to bring the product to market sooner.
`above and beyond the contemporaneous evidence already
`demonstrating this directly.
`in summary, experts cart often benefit from asking whether
`commercial success. even if it exists. is relevant in evaluating
`the existence of material economic incentives around the time
`
`of the invention and. in turn. in evaluating obviousness of a
`particular patent at issue.
`
`Conclusion
`
`While the purpose of commercial success has been established
`for sotne time. too often we see basic principles being misap-
`plied. misunderstood. or not acanieIfol Eglll Waring
`“success" in a vacuum. without proligr context or benchmarks
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`for comparison. can result in a flawed and misguided analysis.
`There is. of course, no single set of factors that are disposi-
`tive on commercial success in every situation. but providing
`additional context relating to the purpose ofeommercial suc-
`cess (i.e.. whether sales and profits demonstrate material
`economic incentives existed to have brought the product to
`market sooner) appears to be a step in the right direction. Suc-
`cess. both in business and in life. requires an understanding and
`appreciation for what is meant to be achieved. I
`
`Endnotes
`
`. Commercial success is one 01‘ several secondary consider-
`1
`ations intended to inform on whether a particular technology is
`obvious—Le. whether it differs enough from prior art in order to
`qualify as a patentable invention—which are often evaluated when
`defendants challenge a patent's validity in patent litigation. Because
`obviousness is the most common basis for finding that a pat‘
`cut is invalid. commercial success can play an important role. For
`discussion and references. see Andrew Blair—Stanek. Profits as Corn-
`rrrercial Success. 1 I7 YALE LJ. 642. 646 (2008); and Rebecca S.
`
`Eisenbcrg. Obvious to Wltonr.’ Evaluating Irrrentiorrsfr'orn tlrc Per-
`spective of'PI-IOSITA, 19 BERKELEY TECH. L.J. 885. 885 (2004).
`2. Merck & Co. v. Teva Pharm. USA. Inc.. 395 F.3d 1364. 1376
`(Fed. Cir. 2005).
`3. Smith v. Goodyear Dental Vulcanite Co., 93 US. 486. 495 (1876).
`4. Id. at 495—96. cited in Blair-Stanek. supra note 1. at 647.
`5. Graham v. John Deere Co.. 383 U.S. l. 17—18(1966) ("Such
`
`secondary considerations as commercial success. long felt but
`unsolved needs. failure of others. etc.. might be utilized to give light
`to the circumstances surrounding the origin of the subject matter
`sought to be patented. As indicia of obviousness or nonobviousness.
`these inquiries may have relevancy").
`6. Blair-Stanek. supra note I. at 647—48: sec Gralranr. 383 US. at l l.
`7. Robert P. Merges. Commercial Success and Patent Standards:
`Economic Perspectives on innovation. 76 CAL. L. REV. 803, 827' (1988).
`8. Merck & Co. v. Teva Pltarm. USA. Inc.. 395 F.3d 1364. 1376
`(Fed. Cir. 2005).
`9. Merges. supra note 7. at 823.
`10. Jesse David 8: Marion B. Stewart. Corrrrrrercial Success: Eco-
`
`nomic Principles Applied to Hrterrt Litigation. irt ECONOMIC APPROACHES
`TO INTELLECTUAL PROPERTY: POLICY. LITIGATION. AND MANAGEMENT
`
`196—99 (Gregory K. [canard 8r. Lauren J. Stiroh eds.. 2005) (“A patented
`invention should be considered a commercial succeSs if it can be shown
`
`to have earned, or can reasonably be expected to earn, a positive net return
`on invested capital after accounting for all relevant costs associated with
`development and conimercialimtion .
`.
`. 3’): Blair-Stanek. supra note 1. at
`649 (“The potential for commercial success presumably provides incen-
`tives for others to try to perfect the invention, and the failure of others to
`do so suggests nonobriousncss. Put most simply. the classical theory-
`based argument goes, ‘ifalt invention is both obvious and lucrative. why
`wasn’t it thought of earlier‘l‘"); Raltul Guha et al.. The Errortorrrt'cs of
`Corrrmerrial Success in Plurrrrracerrtical Patent Litigation. i LANDSIJDE.
`no. 5. May/June 2009. at 8 (“From an economic perspective. commercial
`success supports a conclusion of nonobviousness because it suggests that
`an economic incentive existed to produce the invention T”).
`ll. Joseph DiMasi et al.. R&D Costs and Returns by Therapeutic
`Category. 38 DRUG INFO. J. 21 l. 219 (2004).
`
`12. Henry Grabowski et al.. Returns on Research and Develop-
`rnentfor 1990s New Drug introductions. 20 PHARMACOECONOMICS
`l l. 17.22 (Supp. 3 2002).
`13. Id. at 17, 23: Ernst R. Berndt et al.. Decline. in Economic
`
`Returns from New Drugs Raises Questions about Sustaining Innova-
`tions. 34 HEALTH Art-1 245. 245. 252 [2015).
`
`14. Skeptics might question why so many unprofitable drugs are
`brought to market. Reasons may vary. of course. but one impactl'ul
`factor is the uncertain process of clinical trials and FDA approval
`occurring over many years. Once a company incurs sunk costs of
`development and clinical trials. it may be worthwhile to proceed to
`the market, even ifthe product never recoups all of those sunk costs.
`15. David St. Stewart. supra note 10. at 196.
`16. For sources and discussion. see Joseph DiMasi et al.. Inrurt'rr-
`lion lit the Pltar‘rttaccrrtt'cal Ir'rrlrrsrry: New Estimates (rfRdZD Costs.
`47' J. HEALTH ECtrN. 20 (2016). For a variety of other sources and ref-
`erenccs over time. see JORGE MES'I‘RE—FIERRANDIZ E'r A1... OFFICE or
`
`HEALTH Econ. Tm: R&D Cosr or rt New MEDICINE 1—86 (2012):
`Joseph A. DiMasi 8: Henry G. Grabowski. R&D Costs and Returns to
`New Drug Developrrrent: A Review oft/ta Evidence, in THE OXFORD
`HANDBOOK or 'I'HE ECONOMIcs or THE BIOPHARMACEUTICAL INDUS-
`
`TRY 29 (Patricia M. Danzon & Sean Nicholson eds.. 2010); Joseph A.
`DiMasi et al.. Tire Price ofInnovation: New Estirrrates of Drug Devel-
`oprrrenr Costs. 22 J. HEALTH ECON. 151. 151 (2003): Joseph A.
`DiMasi & Henry G. Grabowski. The Cost of Biopr'rarmaccrrtical
`Rd‘rD: Is Bioteclr Differerrrl 28 MANAGERIAL & DECISION ECON. 469,
`477 (2007); and Grahowski et al.. supra note 12.
`17. Sec MES'I‘RE-FERRANDIZ ET AL. supra note 16: DiMasi et al..
`Innovation in tire Plarrrrrrtt‘etrtir'rrl Irrrirrstrjr. supra note 16; DiMasi et al..
`Tire Price ofInnovation. supra note 16; Grabowski ct al.. supra note 12.
`18. interestingly. some authors have argued that pharmaceuti-
`cal products may be commercially successful even when they do
`not generate a positive return on investment, because there may still
`be sortie therapeutic value associated with their use. See, e.g., Guha
`et al.. supra note 10. at 1 1—12 11.10 (“[A] lack of positive return on
`capital investment should not necessarily undermine a conclusion of
`commercial success. A few ‘blockbustcr’ drugs generate the major-
`ity of profits for the drug companies. That means the majority of
`smaller drugs may not be profitable in the sense of recouping all the
`costs of their discovery and development, even if they have proven
`therapeutic value"). However. products may be therapeutically
`valuable or desirable without being commercially successful and
`sufficient to provide incentives to bring products to market sooner.
`19. While the costs of commercialization are often not available
`
`in historical records. either due to the passage of time or non-
`specific attribution Of costs to a particular product. we have had
`success linking the facts and circumstances of a particular product
`to peer-reviewed published literature on commercialization costs.
`accounting for time of launch. therapeuric category. and the actual
`duration of clinical costs.
`
`20. See, e._s,r.. David 81. Stewart. supra note 10. at 196 (“However.
`under certain circumstances, rapid sales growth and gains in market
`share will not necessarily reflect a profitable underlying invention").
`21. Merck & Co. v. Teva Pharm. USA. Inc.. 395 F.3d I364. 1376
`(Fed. Cir. 2005).
`22. Id. at 1376—77.
`
`231d. at 1377.
`
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