Lost Profits, the Bottom Line for IP Infringement Litigation

0 Comment

It’s always interesting to get a glimpse into the thinking behind intellectual property litigation decisions. When are the circumstances sufficient to justify filing an infringement case? The list of factors is long, but the importance of lost profits was emphasized by the recent remarks of Robert Holleyman, head of the Business Software Alliance. The Wall Street Journal ran a short piece about the likelihood of increased litigation in 2012. What’s going on that would justify a ramp-up in lawsuits?

“The problem here is getting bigger and there are more instances of piracy” occurring, as growth in China’s personal-computer market outweighs the country’s gradually falling piracy rate, Mr. Holleyman said.

BSA estimated that 78% of the PC software installed in China last year was pirated, down from 82% in 2006. Despite that, growth in the Chinese PC market means piracy is occurring more often overall. “The dollar loss, the lost opportunity, is really exploding,” Mr. Holleyman said.

Get it? The incidence of piracy in the sector has been falling, although it’s still very high when compared to other industries. However, the decision whether to litigate is not just about the prevalence of piracy in the market but rather the lost profits suffered by these firms. That dollar value has been going up, significantly altering the cost-benefit analysis applied to possible copyright litigation.

The WSJ article does not address the issue of damages, but I suspect that this is of little importance. Damages in copyright cases are notoriously low in China. I suspect that when measured against lost profits, any amounts that could be collected from infringers pales in comparison to an increase in market share.

3 responses on “Lost Profits, the Bottom Line for IP Infringement Litigation

    1. Stan Post author

      Damages would include whatever you are awarded by the court. Lost profits, according to groups like BSA, includes profits on hypothetical sales made to folks who purchase/obtain pirated copies. The BSA, MPA and other industry groups commonly put out lost profits stats based on legal market value, which is complete crap because it fails to adjust for consumers who would just forego the purchase.

      Anyway, damages in China are always much lower than lost profits, however they are calculated.

  1. Robert Park

    Software and information-related goods piracy is always an iffy subject. I think it’s very easy to argue that pirates would pay for something if it made sense convenience-wise, technology-wise, and price-wise.

    http://www.gamasutra.com/view/news/38082/Valve_Piracy_Is_More_About_Convenience_Than_Price.php
    http://techcrunch.com/2011/09/29/music-piracy-down-as-streaming-services-take-over/
    http://techcrunch.com/2011/08/22/delay-on-hulu-availability-more-than-doubles-piracy-of-fox-shows/

    Blizzard has realized this a long time ago. That’s why Starcraft 2 will be free to install in China, but will require a la carte payments to play online. Traditional software pricing strategies won’t work in places like China where the median income is so low.

    People who cry about software piracy come close to saying that luxury companies lose profits because people buy counterfeit items instead of the real thing. They don’t realize there’s a different market segment. If no other way to get the product (i.e. piracy) existed, most of those people would never have bought the darn real thing anyway.

    It reminds me of a talk I heard at APCAC 2010. Honeywell’s Asia chief was speaking at a panel, and he quoted some copycat competitors as to why Honeywell was having trouble breaking into China: “Honeywell came in and created the market by making everyone realize how useful this equipment was, but their products were too expensive, so Chinese manufacturers had to fulfill the demand.” Or something like that. Honeywell adapted and thrived. Other companies need to figure out they’re not in Kansas anymore.