Calculate lost profit damages in the Cat Toy Case assuming that the only other company selling infringing cat toys is SportPet.

Income SportPet Income Statement 2009 2010 2011 2012 2013 Units Wholesale CMIYC Direct CMIYC 3,894 3,873 21 56,352 56,289 62 128,548 128,422 126 159,701 159,623 78 130,161 129,868 293 Revenues Wholesale CMIYC Direct CMIYC Other Products Freight $694,211 $32,133 $421 $655,216 $6,441 $906,439 $541,238 $1,245 $354,265 $9,691 $1,964,738 $1,248,537 $2,513 $702,543 $11,145 $2,324,447 $1,532,544 $1,564 $777,523 $12,816 $1,907,690 $1,245,873 $5,843 $641,235 $14,739 COGS Manufacture Freight Sales Commission Labor $248,344 $92,343 $3,116 $66,108 $86,776 $389,131 $149,742 $44,186 $81,898 $113,305 $858,713 $327,859 $100,736 $184,526 $245,592 $1,030,296 $394,929 $124,859 $219,953 $290,556 $851,021 $322,856 $102,615 $187,089 $238,461 Gross Margin $445,867 $517,308 $1,106,024 $1,294,151 $1,056,668 SG&A Advertising Bank Dues Equipment Rental Freight - Other Insurance Office Supplies Outside Svcs Postage Rent Repair R&D Ship Materials Shop Supplies Small Tools Property Tax Telephone Travel Entertainment Utilities Vehicles Personnel $289,488 $15,435 $192 $160 $$455 $16,036 $1,871 $4,537 $1,304 $14,584 $676 $254 $1,410 $4,782 $804 $415 $3,000 $1,637 $208 $5,122 $1,250 $215,356 $330,059 $25,412 $212 $160 $227 $242 $27,490.96 $1,230 $3,434 $1,287 $14,584 $451 $1,045 $3,601 $4,973 $1,690 $393 $3,017 $5,809 $833 $5,277 $2,568 $226,124 $390,764 $34,512 $212 $160 $227 $300 $28,041 $3,023 $4,537 $2,789 $14,584 $977 $3,055 $7,805 $10,779 $3,662 $393 $6,539 $12,874 $1,805 $11,438 $5,621 $237,430 $424,461 $24,589 $212 $160 $227 $300 $28,602 $3,154 $4,537 $3,299 $14,584 $1,156 $2,843 $9,234 $12,752 $4,333 $393 $7,737 $34,921 $2,135 $13,533 $6,458 $249,301 $504,937 $90,425 $212 $160 $227 $300 $29,174 $2,589 $4,537 $2,708 $14,584 $949 $3,820 $7,578 $10,466 $3,556 $393 $6,350 $45,129 $1,752 $11,106 $7,156 $261,767 EBITDA $156,380 $187,249 $715,260 $869,690 $551,731 Interest Rate Term Depreciation Taxes1 $(18,750) 6.25% 10 ($2,905) $(45,806) $(17,344) $(15,850) $(14,263) $(12,577) $(4,271) $(56,316) $(6,419) $(235,617) $(6,419) $(288,663) $(6,193) $(181,207) $88,918 $109,319 $457,374 $560,345 $351,754 Net Income SportPet Pacific Mountain Central East Pacific Mountain Central East Geographic Breakdown of Revenues 2009 2009 2010 2011 2012 $151,043 $209,979 $429,671 $520,230 $336,282 $470,503 $1,076,762 $1,374,400 $88,042 $103,704 $209,581 $230,382 $118,844 $122,252 $248,723 $199,435 2008 22% 48% 13% 17% 2009 23% 52% 11% 13% 215356 226123.8 2010 22% 55% 11% 13% 2013 $434,602 $1,150,611 $200,476 $122,001 2011 22% 59% 10% 9% 2012 23% 60% 11% 6% 237429.99 249301.4895 261766.564 Balance SportPet Balance Sheet 2009 2010 2011 2012 2013 $1,109,817 ($654,460) $530,424 $984,799 $1,781,342 $877,678 ($870,270) $314,616 $801,821 $1,613,800 $183,270 $36,812 $687 $145,771 ($1,295,201) $27,669 $314 ($1,323,184) ($471,269) $31,233 $300 ($502,802) ($156,349) $34,267 $300 ($190,916) $758,845 $22,143 $300 $736,402 $39,192 $70,666 $83,342 $180,647 $213,720 $655,216 $8,731 $33,194 $3,967 $2,127,242 $354,265 $8,652 $51,727 $10,462 ($1,158,152) $702,543 $8,652 $51,727 $10,462 $1,067,311 $777,523 $18,754 $112,119 $22,676 $1,913,109 $641,235 $22,188 $132,646 $26,828 $3,361,030 $232,140 $215,810 $215,808 $182,979 $167,543 $67 $29 $29 $30 $30 $86 $24,351 ($1,306) ($12,266) $39 $24,351 ($4,804) ($7,306) $38 $24,351 ($8,302) $0 $38 $24,351 ($11,800) $0 $38 $24,351 ($15,298) $0 Warehouse Cost Accum. Depr. $28,526 $30,125 ($1,599) $27,753 $30,125 ($2,372) $27,753 $30,125 ($5,293) $25,605 $33,819 ($8,215) $26,604 $37,514 ($10,910) Equipment Cost Accum. Depr. $203,528 $226,142 ($22,614) $188,018 $235,124 ($47,106) $188,018 $247,867 ($72,926) $157,337 $257,037 ($99,700) $140,902 $268,579 ($127,677) $0 $0 $0 $0 $0 $1,109,817 ($654,460) $530,424 $984,799 $1,781,342 $318,509 $15,951 $420 $322,307 $38,204 $111 $302,693 $42,156 $111 $321,923 $82,809 $240 $311,583 $97,970 $284 $1,927 $483 $331 $331 ($6) $787 $212 $300,000 $3,354 $990 $544 $544 ($6) $1,281 $3,132 $277,505 $3,689 $1,089 $599 $599 ($6) $1,409 $3,132 $253,605 $3,874 $1,143 $628 $628 ($6) $1,480 $6,789 $228,211 $4,067 $1,201 $660 $660 ($7) $1,553 $8,032 $201,229 $791,308 ($976,767) $227,731 $662,876 ASSETS Wholesale CMIYC Direct CMIYC Checking Petty Cash Wholesale CMIYC Direct CMIYC Other Products Finished Goods Raw Materials WIP Undeposited Funds Fixed Assets Sales Commission Vehicle Cost Accum. Depr. Personal Portion Goodwill LIABILITIES & EQUITY Liabilities A/P Credit Cards Payroll Liabilities Fed. Withholding SS -- Employee SS - Employer ETT Other Sales Tax Payable Bank Debt Equity ### ### ### ### $1,469,759 ### Comerford v. SportPet This case is a work of fiction and intended only for teaching purposes. There is no confidential information in the case. I have pulled both an actual complaint and the patent from real life, generated financial data using the random number generator in Excel, and the remaining facts of the case are purely a work of fiction and any resemblance to real life is accidental. The Invention In 2007 as Paul Comerford was exercising his cat with a laser pointer he started thinking about how the cat might be just as amused by an automated exercise toy. After going online to see what automated cat toys were available, he purchased a few. However, he was uniformly disappointed in the toys. If they were interesting to his cat, they were too fragile, if they survived for any period of time, it was because the cat simply got bored and ignored the toys. The one activity that he could count on to entertain his cat endlessly was moving something under a blanket. Paul worked as an engineer for Raytheon so he was quite comfortable building things. He went down to his basement and, after a few weeks of playing with motors and small controllers he developed a prototype of a toy he called the Undercover Mouse. The original Undercover Mouse was made from wood and metal with some gears, motor and a controller he purchased online. But it worked. Very well in fact. He could start it up and his cat would play with it for hours. Paul's mind started grappling with the possibilities. He was pretty sure that other cat owners would find his toy compelling - if he could sell it at the right price. Getting the price down low enough meant that he would have to work with a partner - most likely overseas - to manufacture the Undercover Mouse. This would require him to pay for product design, development and tooling. Paul had enough experience in business to know that if the Undercover Mouse started selling successfully, he would soon see imitation products in the market. He was deeply concerned that he would spend hundreds of thousands of dollars in development and marketing costs only to see his invention copied by others. After looking at other cat toys and spending half a day going through the US Patent and Trademark Office (USPTO) website looking at cat toy patents, Paul didn't see anything like his Undercover Mouse. That led him to think that he might have something patentable. He contacted a patent attorney who had been recommended by a friend of his. After several weeks of discussion, the patent attorney told Paul he was reasonably sure that his idea was patentable. So Paul went to work. After months of working with the patent attorney, Paul filed US Patent Application No. 12/129,974 on May 30, 2008. The filing of the application was just the beginning of the process. The patent attorney told Paul that it 1 2014 Douglas G. Kidder typically takes three years for the USPTO to grant a patent and the process involves a great deal of discussion and revision of the claims in the patent. There was nothing for Paul to do at the moment except go back to work and respond to questions from the USPTO when they came up. Going to Market While he was in the process of filing the patent application, Paul began locating companies that would be capable of manufacturing his cat toy. The most promising company he found was CHY Manufacturer Co. Ltd. in Shenzhen, China. CHY specialized in helping inventors like Paul get their ideas to market. They would do all the product development, tooling, manufacturing and distribution of the product for $300,000 up front, an initial price of $2.35/product delivered to Paul's warehouse in California and a minimum annual commitment of $150,000. In July of 2008, Paul signed a five year contract with CHY with the first shipment of 500 cat toys expected in January of 2009. Paul's idea for selling his toys was to promote them on TV. He decided to sell directly to consumers instead of going through retailers. His bet was that he could keep more of the profits for himself if he sold directly. Now Paul had to get busy. He had to rent a warehouse, develop a logo, advertising campaign and distribution center. The next several months were both busy and nervewracking as Paul kept working full time at Raytheon while depleting his savings and taking out a $300,000 loan from the bank. If this didn't work, he was going to be in a lot of debt. The first shipment of cat toys arrived six weeks later than promised, but Paul needed the time to finish his advertising promotional spots. By March of 2009, Paul aired his first TV commercial on the Animal Planet channel. And the phone started ringing. His commercial was compelling. It just showed a cat that was fascinated with his toy while the owner sat in the background. He was hearing stories of people watching TV with their cats and the cats would sit and stare at his commercial. The pets and their owners were fascinated. Paul targeted the initial price for the toy at $24.95. However, with discounts and various credits, he achieved somewhat less than that. He found it particularly compelling to advertise a special in which customers who called and said the name of their hometown got 10% off. This enable him to find out where his customers were located and the customers felt like they were getting a deal. Success After several months of success, Paul quit his engineering job and turned full time to selling the Undercover Mouse. It was an exciting time for him. It seemed as though he was eating, breathing and sleeping cat toys. But they were selling very well and he could see that there was a lot of money to be made if the market held up for him. However, until that time, he paid himself a small salary and managed to pay his mortgage. In the ten months of sales during 2009, Paul's company posted sales of $600 thousand. In 2010, Paul's sales almost tripled and the company had positive net income and positive cash flow. While most of his sales were direct to consumers through TV ads, the TV ads had also brought inquiries from pet store owners about carrying the Undercover Mouse. So he negotiated deals with several small stores to sell them packages of 10 Undercover Mouse toys for a reduced price. 2 2014 Douglas G. Kidder Then came the day in 2010 that Target called. One of Target's buyers for pet supplies had a cat, bought an Undercover Mouse and just loved it. He wanted to know if Paul was prepared to supply Target. Paul took a deep breath and said he was. He could call the factory in China and get as many as he needed with 6 months lead time. Of course the price that Target was going to pay was substantially less than he'd been getting direct or through his existing stores, but there was too much potential there for him to pass up. He signed the deal. In the last 5 months of 2010, he sold almost $300,000 of product to Target alone. And of course he had all his other customers too. Life was looking pretty great for Paul. Competition In 2010 Paul found he had a competitor. SportPet located in Wisconsin had been selling a toy that looked remarkably like his Undercover Mouse, but they called it the \"Catch Me If You Can.\" It had the same central motor with a rotating wand and a cloth cover. For all intents and purposes, it was the same as Paul's Undercover Mouse. But it was selling at retail for $19.95 before any discounts or promotions. SportPet was founded in 2004 originally to sell foldable cathouses and toys. SportPet's business model was similar to Paul's. All the toys were manufactured in China but SportPet's sales were mostly handled through commissioned salespeople who visited pet stores throughout the country. However, SportPet did have one major account; Walmart. While Paul had been selling to Target, SportPet had been selling to Walmart. In 2009 when SportPet introduced the CatchMeIfYouCan (\"CMIYC\") it was already a profitable and established company. In 2009, SportPet sold around $700,000 in toys other than the CMIYC. But the CMIYC was a hit. In 2010, SportPet made sales of over $500 thousand of the CMIYC and it looked like sales were going to grow rapidly. After Paul found out about SportPet's product, he contacted his attorney to see what could be done. The attorney advised Paul that until his patent issued, there was no legal way to prevent SportPet from selling its products. He would have to wait until the USPTO granted his patent before he could make a move. The Lawsuit Finally, after spending $32,156 in legal fees, in November of 2010, Paul's patent issued. He was granted U.S. Patent No. 7,823,541. Paul framed the patent and hung it on his wall. Paul then called his attorney and asked him to contact SportPet. Paul was hoping that SportPet would agree to stop selling its version of the toy. He was aware that, in some cases, the patent gave him the 3 2014 Douglas G. Kidder legal ability to stop SportPet from selling an infringing product. He was hopeful that a business resolution could be found whereby Paul would get something from SportPet to compensate him for his innovation. In his ideal world, he would simply sell his products to SportPet at the same price at which he was selling to Target: $7.95/unit. But it was not to be. SportPet's owners were not interested in buying product from Paul and were unwilling to negotiate a license to Paul's patent. They claimed to have independently developed the toy and did not believe Paul's patent was valid. After some back and forth between Paul and SportPet, Paul decided to file suit against SportPet. It is now three years after the suit was filed and Paul's attorney has called and asked for your help estimating damages for Paul. Topics to consider: What types of damages are available to Paul? (e.g. Unjust enrichment, Reasonable Royalty, Lost Profits) What is the damages period? How does it affect your damages calculation if there is evidence that SportPet lied and actually copied Paul's design? How does Paul's offer to sell product to SportPet for $7.95 affect your damages calculation? 4 2014 Douglas G. Kidder Income UnderCover Mouse Income Statement 2009 2010 2011 2012 2013 Units Wholesale Direct 27,200 2,745 24,455 97,017 42,394 54,623 126,696 51,010 75,687 115,744 44,705 71,039 75,788 28,220 47,568 Revenues Wholesale Direct Repair Freight $599,809 $32,133 $561,235 $$6,441 $2,091,626 $426,243 $1,654,238 $$11,145 $1,949,065 $412,685 $1,523,564 $$12,816 $1,274,673 $254,311 $1,005,623 $$14,739 COGS Manufacture Freight Labor $294,192 $50,047 $112,187 $131,958 $1,610,950 $356,025 $1,245,234 $$9,691 Err:522 $811,790 $178,511 $278,870 $354,409 $1,073,656 $233,121 $380,377 $460,158 $996,310 $212,969 $354,546 $428,794 $655,945 $139,449 $236,067 $280,428 Gross Margin $305,616 $799,160 $1,017,970 $952,755 $618,728 SG&A Advertising Bank Dues Equipment Rental Freight - Other Insurance Office Supplies Outside Svcs Postage Rent Repair R&D Ship Materials Shop Supplies Small Tools Property Tax Telephone Travel Entertainment Utilities Vehicles Owner's Salary $375,326 $251,235 $192 $160 $$455 $16,036 $1,871 $4,537 $1,304 $14,584 $676 $254 $1,410 $4,782 $804 $415 $3,000 $1,637 $208 $5,122 $1,250 $65,394 $443,296 $158,782 $212 $160 $227 $242 $27,491 $1,230 $3,434 $1,287 $14,584 $451 $1,045 $3,601 $4,973 $1,690 $393 $3,017 $5,809 $833 $5,277 $2,568 $205,991 $668,004 $351,254 $212 $160 $227 $300 $28,041 $3,023 $4,537 $1,670 $14,584 $585 $3,055 $4,675 $6,457 $2,194 $393 $3,917 $12,874 $1,081 $6,852 $5,621 $216,291 $759,977 $412,584 $212 $160 $227 $300 $28,602 $1,488 $4,537 $1,557 $14,584 $546 $2,843 $4,356 $6,017 $2,044 $393 $3,650 $34,921 $1,007 $6,385 $6,458 $227,105 $540,385 $178,542 $212 $160 $227 $300 $29,174 $973 $4,537 $1,018 $14,584 $357 $3,820 $2,849 $3,935 $1,337 $393 $2,387 $45,129 $659 $4,176 $7,156 $238,460 EBITDA $(69,709) $355,864 $349,966 $192,779 $78,343 Interest Rate Term Depreciation Taxes1 $(18,750) 6.25% 10 ($2,905) $- $(17,344) $(15,850) $(14,263) $(12,577) $(4,271) $(113,644) $(6,419) $(111,417) $(6,419) $(58,513) $(6,193) $(20,255) Net Income $(91,364) $220,604 $216,280 $113,584 $39,318 2009 Net Income Discount Rate Present Value UnderCover Mouse Revenues SportPet Revenues Total Revenues Market Share for Undercover Mouse Market Share for SportPet Incremental Sales Undercover Mouse COGS Lost Profits Royalty Rates 2010 2011 2012 2013 $(91,364) 1 $(91,364) $220,604 0.9411764706 $207,627 $216,280 0.8858131488 $191,583 $113,584 $39,318 0.833706493 0.7846649346 $94,695 $30,851 2009 $599,809 $694,211 $1,294,020 2010 $1,610,950 $906,439 $2,517,389 2011 $2,091,626 $1,964,738 $4,056,363 2012 $1,949,065 $2,324,447 $4,273,512 2013 $1,274,673 $1,907,690 $3,182,362 46% 54% 64% 36% 52% 48% 46% 54% 40% 60% 972,237 294,192 $678,044 1,937,332 811,790 $1,125,542 3,043,265 1,073,656 $1,969,609 3,213,378 996,310 $2,217,068 2,418,251 655,945 $1,762,306 UnderCover Mouse Geographic Breakdown of Revenues Pacific Mountain Central East 2009 $389,876 $149,952 $59,981 $- Pacific Mountain Central East 2008 65% 25% 10% 0% 2010 2011 $905,496 $1,012,678 $288,481 $357,215 $252,336 $356,026 $164,637 $365,707 2009 56% 18% 16% 10% 2010 48% 17% 17% 17% 2012 $768,056 $324,314 $450,489 $406,207 2013 $428,284 $185,790 $378,187 $282,411 2011 39% 17% 23% 21% 2012 34% 15% 30% 22% Balance UnderCover Mouse Balance Sheet 2009 2010 2011 2012 2013 $499,781 $715,587 $960,949 $1,021,445 $1,018,277 $145,475 $382,993 $624,547 $761,645 $796,556 Cash & Short Term Checking Petty Cash Schwab $58,891 $36,812 $687 $21,392 $241,487 $27,669 $314 $213,504 $470,364 $31,233 $300 $438,831 $561,457 $34,267 $300 $526,890 $610,013 $22,143 $300 $587,570 A/R $39,192 $70,666 $83,342 $108,210 $100,834 Other Current Finished Goods Raw Materials WIP Undeposited Funds $47,392 $8,731 $33,194 $3,967 $1,500 $70,841 $8,652 $51,727 $10,462 $0 $70,841 $8,652 $51,727 $10,462 $0 $91,978 $11,234 $67,161 $13,583 $0 $85,709 $10,468 $62,583 $12,657 $0 $354,306 $332,594 $336,402 $259,800 $221,721 ASSETS Current Assets Fixed Assets Vehicle Cost Accum. Depr. Personal Portion $10,780 $24,351 ($1,306) ($12,266) $12,241 $24,351 ($4,804) ($7,306) $16,049 $24,351 ($8,302) $0 $12,551 $24,351 ($11,800) $0 $9,053 $24,351 ($15,298) $0 Warehouse Cost Accum. Depr. $28,526 $30,125 ($1,599) $27,753 $30,125 ($2,372) $27,753 $30,125 ($5,293) $25,605 $33,819 ($8,215) $26,604 $37,514 ($10,910) Equipment Cost Accum. Depr. $315,000 $350,000 ($35,000) $292,600 $364,000 ($71,400) $292,600 $365,274 ($107,927) $221,645 $366,191 ($144,547) $186,064 $367,345 ($181,281) $0 $0 $0 $0 $0 $499,781 $715,587 $960,949 $1,021,445 $1,018,277 $318,509 $15,951 $420 $322,307 $38,204 $111 $302,693 $42,156 $111 $285,899 $49,604 $144 $255,443 $46,223 $134 $1,927 $483 $331 $331 ($6) $787 $212 $300,000 $3,354 $990 $544 $544 ($6) $1,281 $3,132 $277,505 $3,689 $1,089 $599 $599 ($6) $1,409 $3,132 $253,605 $3,874 $1,143 $628 $628 ($6) $1,480 $4,067 $228,211 $4,067 $1,201 $660 $660 ($7) $1,553 $3,790 $201,229 $181,271 $393,281 $658,256 $735,547 $762,834 Goodwill LIABILITIES & EQUITY Liabilities A/P Credit Cards Payroll Liabilities Fed. Withholding SS -- Employee SS - Employer ETT Other Sales Tax Payable Bank Debt Equity