A referential comparison of international practices in calculating damages in patent infringement cases

By Ma Yunpeng, Assistant Judge, IP Division, Beijing Second Intermediate People’s Court,[Patent]

Introduction

Calculating damages in patent infringement cases has always been a difficult problem. There have been three methods widely used in all jurisdictions across the world after their continuous exploration, i.e., “lost profit” for the patentee, which he deserves but did not receive; “unjust enrichment” which is the market gain from the infringing activities; and patent “royalties.” But all of the above factors do not play out the same way in all countries.


I. China’s status quo and analysis

According to the Article 65 of China’s Patent Law, damages of patent infringement may be calculated on the basis of four considerations: actual loss incurred to the patentee due to the infringement, the infringer’s infringement profit, a multiplicity of the royalty fees, and the statutory damages. China’s Supreme People’s Court specifically interpreted the foregoing article in the Several Provisions on Issues Concerning Applicable Laws to the Trial of Patent Disputes, in which Article 20 provides guidelines for calculating actual losses and infringement profit, and Article 21 provides guidelines for determining royalty fees and the scope of statutory damages. In addition, Article 22 delineates the range of “reasonable expenses.” The Supreme People’s Court in its 2009 Interpretations drew on foreign experiences in calculating unjust enrichment to determine reasonable profit “by restricting the infringement gains to those obtained from the patent infringement activities, and deducting what is reasonable profit generated from other rights” in order to make the ultimate compensation more accurate.


II. Relevant foreign practices and latest trends

1. The United States

Section 284 of U.S. Patent Act provides that “upon finding for the claimant, the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.”


In determining the specific amount of compensation, American courts will usually take into account the following two factors:

(1) Lost profits. This standard was established in the Panduit case of 1978 which includes four elements: a. demand for the patented products; b. absence of acceptable non-infringing substitutes; c. patentee’s manufacturing and marketing capability to exploit the demand; and d. the amount of the profit patentee would have made.


However, this standard has been criticized, and some adjustments have been made in specific cases by adding, e.g., market share, depreciation and other considerations.


(2) Reasonable royalties. Specifically speaking, the court would presume a hypothetical negotiation by which a willing patentee and the infringer would reach a licensing agreement before the infringement. The royalty rate under such agreement is the reasonable license. The Georgia- Pacific case illustrates the factors generally needed for consideration.


It should be noted that in the process of the Patent Reform Act, most controversial was the modification of the amount of damages that attracted most attention, for instance, the limitation on royalty recoveries, the role of court rather than jury for the determination, and economic value properly attributable to patent’s specific contributions over the prior art, as opposed to the whole claim, etc. However, the final 2011 Act made no amendment on damage calculation provisions, revealing that no conclusion has been reached in America in this regard.


2. The UK

The UK Patent Act provides two factors for consideration in assessing damages: (1) damages; and (2) an account of profit of the infringement. The UK practice aims at rectification by monetary rewards rather than retribution of the offenders.


The UK has a relative comprehensive method for calculating damages, whereby a proprietor may seek lost profit due to the infringer’s competition in the market, including lost profit from reduced sales, loss of goodwill, and price erosion, with a specific formula: actual sales by the proprietor × (proprietor’s original price - the lowered price) + actual sales amount × (proprietor’s original price ? proprietor’s costs).


The UK has a more checkered history in the calculation of infringer’s unjust enrichment, which was repealed in 1919 and re-introduced in 1949. The purpose of this principle is to make the calculation of damages more equitable, requiring a deduction of the cost in R&D, investment, manufacturing and sales which have incurred to the infringer, and the patentee would have no complaint in case his ineffective patent produces no profit in his bad luck.


3. France

The French Patent Law makes no specific provision on damages, but the Article 53(4) provides that “any assignee of (patent rights) license shall be accepted as a party in the action involving patent forgery brought by the owner of the patent so that the assignee may be compensated for the interests he deserves.” And likewise the court should of course accept the action brought by the obligee for his infringed rights and give compensation he deserves.


The question then is how to measure the so-called “deserves.” According to French judicial practice, there are two principles to follow, namely, (1) the compensation for infringement damages should be equal to, but shall not exceed the actual damages and (2) the compensation is limited to the direct damages resulting from the infringement .


4. Germany

According to Article 139(2) of German Patent Law, “any person who undertakes such action intentionally or negligently shall be liable for compensation to the injured party for the damage suffered therefrom. If the infringer is charged with only slight negligence, the court may fix, in lieu of compensation, an indemnity within the limits of the damage to the injured party and the profit which has accrued to the infringer.”


Specifically, Germany has established a method for patent damages compensation in judicial practice, which requires the defendant (1) pay appropriate royalties to the plaintiff, (2) repay the profits from patent infringement to the plaintiff and (3) pay the profits the plaintiff possibly acquires if there is no infringement. The third method may be applied where the patentee may have higher profits by selling patented products on the condition that the patentee must publicly disclose his profit margins.


5. Japan

Japan made eight amendments of its Patent Law during the period from 1999 to 2008, nearly one every year. The provisions related to compensation are the focus for amendments.


In Japan, there are four methods for calculating the amount of damages.


(1) Lost profit, which equals the profit acquired by the proprietor in its exploiting the patent product per unit × the total number of infringing products. However, there shall be a deduction of those that the patentee cannot make or cannot sell on the market in the absence of the infringing products;


(2) Positive harm, which equals the deduction of the patentee’s tangible property due to patent infringement, and its statutory provisions can be found in the Article 709 of Japanese Civil Code which is a general provision for damages;


(3) Unjust enrichment, which means that the patentee may not be entitled to damages if he has not worked the patent, similar to UK practice;


(4) Royalties, which equals “the amount of money from working the patent.”


There was a further amendment of civil remedies for patent infringement in Japanese Patent Law in 2008, including (1) a lowered standard of proof for lost profit. The lost profit equals the possible profit acquired by the proprietor where there is no infringement. Relevant amount may be deducted according to specific circumstances if the infringer’s evidence is accepted; (2) a requirement that specific circumstances shall be taken into consideration for the identification of technology transfer fee in determining the amount.


II. Reasonable assessment of the amount of damages

There have been three amendments of China’s Patent Law and the Supreme People’s Court has promulgated two judicial interpretations concerning specific issues in judicial practice. It should be admitted that China’s legal system has introduced the major compensation grounds and calculation methods. However, the fact is that there are still many problems for such principal provisions in actual operation.


1. Measure of actual loss

The calculation of profit losses is a very difficult problem in itself. For example, there are closely relevant factors other than infringement between the decrease of patented produce sales and product quality, market as well as target purchasers and etc., which will exert a varying influence on the final correct calculation. Therefore, the actual losses calculation had been seldom used in judicial practice although it is the first method for calculation of profit losses under China’s current Patent Law.


Considering the above situation, China may learn from foreign experience and introduce the system of expert opinion or professional asset evaluation agencies in judicial practice, and make a further refinement of the actual losses as well as the scope of every component of actual losses. Therefore, the court will have more references for trial and improve the accuracy in actual losses calculation.


2. Determination of unjust enrichment

A basic method applied in China, Germany, Japan, Korea and other countries to determine the amount of damages for infringement is to presume that the infringer’s unjust enrichment to be the loss suffered by the proprietor. In reality, most patented products or products obtained by patented process are some kind of improvement over prior art products or components, and seldom is a completely new product; whereas the infringing products made or sold by the infringer are usually composed of many components, some of which may be patented, as in home appliances. Where the infringing product is a high-tech one, it may be comprise of a host of patented technologies, belonging yet to different proprietors each of whom holds patents only to its own portion or portions of the technologies. For this reason, then, it is necessary in principle to distinguish which part of the infringer’s unjust enrichment comes from infringement upon the patent or from other factors; otherwise, there will be an unfair conclusion. To that end, the Supreme People’s Court introduced the rule of “reasonable deduction” in its judicial interpretation in 2009 that “there shall be a reasonable deduction of interest resulting from other rights.” However, some scholars think such interpretation is too narrow to cover all reasonable interest that should be deducted. For example, the infringer may improve his interests by his betterment in advertising campaign, marketing strategies, after-sales service, etc. in implementation of his patented technology. Therefore, it may be more reasonable to change the foregoing interpretation into that “there shall be a reasonable deduction of interest resulting from other factors.”


3. Calculation of royalty rates

In comparison with the above two methods, it is simpler and easier to operate in determining the amount of damages by a multiplicity of reasonable royalties for calculation. It is also applied by the court to require the party to submit evidences in judicial practice.


The application of such a method requires that (1) the proprietor has acquired or concluded an agreement on royalties before the infringement proceedings; (2) there has been a basically similar royalty rate for licenses in the same region; (3) such royalties should be reasonable and evidenced by the facts that a number of licensees has paid such royalties to the proprietor; and (4) that there is comparability between the license to use the patent and infringement in terms of geographical scope and specific rights to use such patent.


Then the question is: what is the reasonable number of royalties? There are two kinds of concepts concerning royalties according to judicial practice in US. The first is the “established royalty,” and the other “reasonable royalty,” which can be found in Section 284 of U.S. Patent Act that “upon finding for the claimant, the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.”


The U.S. Legislature set some concrete standards for the calculation of “reasonable royalty” in the deliberation of U.S. Patent Reform Act in recent years. It includes the entire market value standard, which means that the amount of compensation shall be the entire market value of infringing product or process where the invention patent is featured by the decisive influence of market on the demand of infringing product in comparison with prior technology, the standard of agreed royalties on basis of non-monopoly license and the standard that the infringing product or process can be attributed to the economic value specifically contributed by the patent to prior technology. China’s courts may take the foregoing standards for reference in determining the amount of compensation.


4. Court’s decision on the amount of statutory damages

As mentioned earlier, the amount of statutory damages is the last method to be applied in calculation of damages under China’s Patent Law, which is similar to Japanese awarded compensation and shall be applied when the other three methods fail. It should take three factors into consideration. The first is the subjective condition of the infringer that his intention or negligence should be the precondition for statutory compensation with a reference to Japanese Patent Law. The second is that the application of such method should take the infringer’s request into consideration for the restriction of court’s active application of such method. The third is that, even if the method is applied, the patentee should submit as much useful information as possible, and the infringer may also be required to submit such information in order to help the judge to determine a reasonable amount of compensation.


In judicial practice, some courts also make conclusions regarding the factors which are generally required to take into consideration and make continuous improvement in their future trial of similar cases. These factors include: (1) The type of patent at issue. In general, an invention patent deserves larger amount than a utility model or a design patent; (2) The nature and circumstances of infringement such as the extent of the infringer’s subjective maliciousness, production scale, sales coverage, duration and price of the infringing products, etc.; and (3) The reasonable fees and expenses incurred to the proprietor in litigating and enforcing his patent.


(Translated by Yuan Renhui)


 

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