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The price erosion theory of damages as used in patent law is the difference between actual costs of goods and potential price. The potential price is the price an item could have realized had there been no competition from the infringers.
In order to recover price erosion damages, the patentee must show that, “but for" the infringement, it would have been able to charge and receive a higher price. To show ‘but for' causation and entitlement to lost profits, a patentee must reconstruct the market to show, hypothetically, likely outcomes with infringement factored out of the economic picture. Although hypothetical, this market reconstruction requires "sound economic proof of the nature of the market." In addition, the patentee's theory of price erosion "must account for the nature, or definition, of the market, similarities between any benchmark market and the market in which price erosion is alleged, and the effect of the hypothetically increased price on the likely number of sales at that price in that market." [Tel-Lock, Inc. v. Thomson Consumer Elecs., 2005 U.S. Dist. LEXIS 7224, 31-32 (N.D. Ill. Mar. 30, 2005)]