Compensatory damages and 'damage to competition'
Loss of profits and differential logic
Other factors - effect on goodwill
Disgorgement of profits and Article 125
Equitable evaluation


Dissatisfaction with recovery of damages is a perennial issue for IP stakeholders - and one which is not confined to Italy. However, significant improvementsmade over the past decade have made it easier for rights holders to obtain appropriate damages in clear cases of counterfeiting.

Contrary to popular belief, the legislative instruments available to counteract infringement in Italy are relatively efficient. The Industrial Property Code 2005 consolidated the main legislation on IP matters, expressly including unregistered trademarks, trade secrets and appellations of origin within the definition of 'intellectual property'. In 2006 the code and the Copyright Law were amended to implement the EU IP Rights Enforcement Directive (2004/48/EC), with a view to strengthening procedural instruments for the protection of IP rights. The code was further improved in 2010, when several practical recommendations, proposed by a commission of experts, were incorporated.

As a result, trademark or design infringement can be halted within a few weeks or even a few days; patent infringement can be addressed within a few months. The key to these relatively short timeframes is an efficient system of injunctive relief, applied by specialist IP tribunals with exclusive jurisdiction over IP matters. The judicial framework for IP disputes is arguably one of the most effective in Europe - and is unquestionably an example for Italy to follow in other areas of law.

In the field of intellectual property, bringing a lawsuit on the merits is necessary only if the rights holder wants the infringer to be ordered to pay compensatory damages and disgorgement of profits, provisions on the latter having been expressly included in the code in 2006. The other corrective measures that can be ordered under the code are:

  • the "destruction of the articles constituting infringement" (which can also include advertising materials and catalogues);
  • the "transfer of property" to the rights holder; and
  • the transfer of "the specific means solely aimed at manufacturing [the infringing product] or at exploiting a protected method or process".

This last measure, for which Article 124(4) provides, must be the subject of a specific court order, notwithstanding the right to seek compensatory damages. As a result, this measure (which has been available since 1939 under the terms of the former Patent Act) goes beyond the principle of mere compensation for losses, as does the penalty prescribed for the violation of an order in a court decision.

In reality, the compensatory principle does not represent - and has never represented - a limit in the field of either intellectual property or competition in Italy, as the principle of deterrence has always been recognised and accorded due importance. Put simply, it is the principle that a counterfeiter may not derive commercial benefit from its activities.

However, in recent years the difficulty in obtaining significant compensation has become more acute. The court processes for recovering compensatory damages last longer the European average, as it typically takes approximately three years to obtain judgment. Moreover, Italian judges have only slowly overcome their reluctance to grant significant compensation. Nonetheless, the situation is changing for the better, especially in light of the introduction of the code in 2006.

Compensatory damages and 'damage to competition'

Article 125(1) of the Industrial Property Code sets out the basic rule on infringement damages, stating that:

"Damages due to the injured party shall be liquidated according to Articles 1223, 1226 and 1227 of the Italian Civil Code, taking into account all the relevant aspects, such as the negative... economical consequences, including the loss of profits, of the rights holder, the benefits realised by the author of the infringement and, in the appropriate case, different elements from the economical ones, such as the moral damages caused to the rights holder."

This rule clearly takes the general liability rule in Article 2043 of the Civil Code as its starting point, but its rationale is not purely compensatory. If compensation were the sole objective, Article 125(1) could simply refer to the "negative economic consequences" for the rights holder, including its lost profits. However, the rule requires the court to take into account "all the relevant aspects", included the benefits accruing to the infringer. This is a significant shift away from the underlying logic of Article 2043 of the Civil Code. It introduces an element which, in itself, is concerned with reparation rather than compensation in the strict sense. Its purpose is to annul (or counterbalance) the negative effects of the infringement and to correct the activity of the market which has been harmed by the infringement.

This interpretation is supported not only by the wording of the rule, but also by the logic of the system. It is no coincidence that the original text of the former Patent Act provided for the assignment in property of counterfeit products to the injured party, transferring to the rights holder not merely the counterfeiter's profits, but its entire related income and even part of its investment. This could not be justified purely on compensatory grounds. Similarly, the publication of a judgment according to Article 120 of the Code of Civil Procedure is intended specifically to compensate the victim, but from an IP perspective such a measure has a wider function - that of making public the restoration of an infringed right. This reasoning is borne out by the fact that the publication requirement also applies in the case of a judgment on preliminary measures.

Therefore, the emphasis on the "benefits realised by the author of the infringement" in assessing the quantification of damages is entirely consistent with the systemic aim of preventing free riding on IP rights. The disgorgement of a counterfeiter's profits under Article 125(3) of the Industrial Property Code has an important systemic function in discouraging counterfeiting and mitigating its negative effects. From this perspective, the disgorgement of profits is a necessary complement to the system. In the field of copyright (which was also part of the 2006 reforms), a corresponding rule was omitted not because it was seen to contradict the principle of strict compensation, but because disgorgement of profits was already accepted in case law as a form of minimum standard of protection. This view is also supported by the preparatory works of the Copyright Law 1941. At that time, a rule similar to that now included in the code was suggested. It was ultimately not included because it was considered to be already implicit in the system.(1)

Loss of profits and differential logic

In an infringement suit, Article 125 allows the rights holder to seek:

  • compensatory damages and due compensation for the negative effect on market conditions as a result of the infringement; and
  • disgorgement of the infringer's profits, which may represent an amount corresponding to the competitive advantage derived from the infringement which would not otherwise have accrued to the infringer.

Traditionally, the starting point for such an assessment has been the loss of profits - ie, the profit (or increase in profit) that would have accrued to the rights holder if the infringement had never occurred. This requires a form of counterfactual evaluation, which should take account of, and be based on, rules of presumptive and common knowledge. The claimant need only provide appropriate information to determine the loss of profits by taking into account the positive or negative trends in the market at the time before the infringement took place and, as appropriate, demonstrating further elements which might positively affect such trends (and therefore its gains). In contrast, the infringer bears the burden of demonstrating any circumstances which might negatively affect such trends. Thus, it makes no sense to force the rights holder to identify and demonstrate all variables with a potential effect on the marketing of the counterfeit products or services. It is more appropriate simply to require a snapshot of the commercial situation that existed before the infringement, thereby allowing the court to infer, on a presumptive basis, the likely evolution of the situation if the infringing activity had not taken place.

A calculation of lost profits should first take account of the gains that would have accrued to the rights holder with respect to actual revenue in the relevant years if it had been marketing its goods or services without the infringement, deducting from this only the additional sums that the rights holder would have spent, over and above the actual cost borne in the relevant period, to market these further products or services. The amount calculated by this analysis is sometimes termed 'marginal profit'. The main profits realised by the infringer are assessed in consideration of the main revenue in relation to the ability to market counterfeit goods or services, deducting from this the expenses which would not have been borne if these goods or services had never be marketed.

Beyond the technical accounting considerations, there is a legal logic to the need to calculate the rights holder's lost profits and the infringer's profits from this counterfactual perspective. Otherwise, all that is left is statistical data, rather than a measure of damages for the rights holder and the advantage to the infringer as a consequence of the infringement.

In order to arrive at the rights holder's marginal profit, it would be impractical to take as a reference the infringer's revenue in the relevant years, multiplied by the rights holder's average profit, since this does not accurately represent the rights holder's lost profits. The true figure may be much higher where, in the specific circumstances of the case, it is reasonable to assume that the goods or services could have been sold by the rights holder in the same quantities and at the same price as before the violation. However, it is similarly possible that in the specific circumstances of the case, the infringer may have sold more products than the rights holder would have done had the infringement not occurred - perhaps because the infringer was able to target a market that was not targeted by the rights holder. Trademark infringement offers many good examples of this, as counterfeits are often sold at well below the price of the original product. In such cases due weight should be given to both the infringer's profits and the various features of damages other than loss of profits.

Where the issue of marketing goods to different consumers comes into play, the starting point for determining lost profits is the revenue gained before the infringement from customers who were 'diverted' as a result of the infringement. This analysis should take into account the factor of rising or falling revenues, with the burden of proof being distributed between the parties as before. With regard to the marginal revenue, there will usually be a consequent fall in expenses, which normally corresponds to the variable element relating to the cost of the lost goods or services, so that the corresponding marginal profit will be equal to the difference between the presumed revenue and the unincurred variable expenses (if any), without taking account of fixed costs.

Other factors - effect on goodwill

The differential approach should also be applied when assessing the further consequences of the damage. These are often wrongly neglected, but are increasingly significant - not least because IP rights have not only a use value, but also an exchange value. In analysing this wider impact, it is necessary to consider both the negative impact on the rights holder's goodwill and the positive elements for the infringer, particularly with respect to advertising costs and the general benefit of free riding.

The forms of damage are numerous and vary from case to case. The rights holder bears the burden of proof in asserting that damage has been done, and must prove the existence of such damage using circumstantial elements, based on common experience. As far as the quantification of damage is concerned, it is often necessary to apply an equitable evaluation. Expert witnesses, if used, can give the court at least an order of magnitude to guide the assessment. In general, the elements to consider will include:

  • damage to the undertaking's image or reputation;
  • loss of value of goodwill;
  • loss of value of IP rights;
  • loss of advertising investment over the period in question; and
  • damage to the desirability of the IP right for licensing, merchandising or co-branding activities.

Naturally, these forms of damage - particularly the first - cannot be directly inferred by examining basic balance-sheet profit and loss, but such damage may nonetheless be quantifiable on the basis of data that can be obtained in the course of a lawsuit. This is particularly the case for the quantification of reputational damage. Italian experts emphasise this aspect from a legal and economic perspective, as an assessment can be made by reference to a proportion of the cost of restoring a company's damaged corporate image, or to a proportion of the advertising costs borne by the rights holder.(2) Such an assessment is not confined to the advertising and promotional activity actually undertaken by the rights holder to restore its image - not least because the infringement, by reducing the rights holder's revenue and profits, may force a reduction in promotional investment, rather than an increase. This is consistent with the differential analysis: what matters is that the act of counterfeiting has given rise to a need to make good some damage, not that the damage has been made good.

From this perspective, it may be relevant to consider institutional advertising among the actual advertising costs incurred by the rights holder if, as often happens, the infringement was deleterious to corporate goodwill in general. This is particularly relevant where the distinguishing sign, patent right or design has played a central role in the body of the communications. However, such assessments are always guided by a presumptive logic. There is precedent for compensation amounting to 10% of such costs being awarded on this basis.(3) Any generalisation would be arbitrary; rather, it seems logical to consider the volume of counterfeits in proportion to the marketing of original products or services in assessing this aspect of damages.

In quantifying loss of value of goodwill as a consequence of counterfeiting, it is useful to consider a rule on business assignments. DPR 460/96 has been formally repealed, but its wording remains part of tax practice, as the Tax Agency has deemed it as a general reference term. Article 2(4) states that:

"For businesses and for rights therein the goodwill value is determined on the basis of the elements within the Sector Studies [ie, standard incomes determined by the Tax Agency for each field of business] or, in the absence of these, on the basis of the percentage of profitability applied to the average revenues established or, in the absence of this, [that] declared for taxes on income in the last three tax periods before [the period] in which the assignment took place, multiplied by three. The percentage of profitability cannot be inferior to the ratio of the undertaking's income to the revenues ascertained (or failing this, declared for the purposes of the same taxes and in the same period). The multiplier is reduced to two... [if] a) the activity is started within the three tax periods previous to [that] in which the assignment took place; b) the activity was not carried out, in the period before that in which the assignment took place, for at least half of the normal period of conducting business; c) the time remaining on the lease of the property in which the activity is carried out is less than 12 months."

Having thus established the value of total goodwill in the rights at the date when the infringer's activity diverted the relevant consumers, it is possible to calculate what estimated percentage of that value (determined according to the percentage profit and the average ascertained revenue) is represented by the quantitative effect of the infringement.

The illegal use of IP rights (and in the case of trade secrets, their illegal acquisition) also implies a loss of value in such rights as assets in themselves. For example, such rights can help to guarantee the availability of credit and often have significant economic value to the company's corporate operations. In these cases the infringement may dramatically reduce the value and attractiveness of IP rights. Trade secrets provide the clearest example: a partial loss of secrecy necessarily affects their economic value. Article 98 of the code emphasises the economic value of technical and commercial know-how and its secrecy as a requirement for its protection. In more general terms, the value of IP rights stems from the competitive advantage that they bestow, on which an infringement almost invariably impinges.

Quantifying this aspect of damage is far from easy, even by reference to the evaluation methods for corporate assets (eg, in the case of assignment and warranty operations).(4) In the case of the most famous trademarks, an evaluation may be available from an independent source, such as the UK-based company Interbrand, which uses a method that is regarded as particularly comprehensive and accurate. This method combines a financial evaluation based on differential flows produced from the trademark and a qualitative evaluation based on the strength of the brand.

The damage arising from the loss of advertising investment can also be calculated on a presumptive basis, starting from a proportional comparison of the scale of investment and the incidence of infringing activity.

The loss of value and attractiveness of an IP right for licensing, merchandising or co-branding activities, for which compensation is generally payable, assumes particular importance in the context of non-confusing trademark infringement. However, it may also be significant for other IP rights, especially if their use or ownership - which the public will assume to be legitimate - is linked to a technologically advanced, innovative or successful reputation.

Disgorgement of profits and Article 125

The specific framework for the disgorgement of profits was adopted as part of Italy's implementation of EU Directive 2004/48/EC and was added to the last paragraph of Article 125 of the Industrial Property Code by Legislative Decree 140/2006.

There is no corresponding rule on disgorgement in Article 158 of the Copyright Law, although this was already established as a legitimate measure in case law when the legislation was introduced.

The latter provision includes a form of special rule on "enrichment without just cause", whereby the remedy of disgorgement, presented as an alternative to compensation for lost profits, makes it easier for the rights holder to discharge the burden of proof. As such, it confirms the trend in recent Italian case law towards more substantial compensation for IP infringement. In combination with the ability to obtain pre-trial protective measures in respect of a suspected infringer's accounting books (and, under the new wording of Article 121 of the code, certain banking documentation), this approach makes it increasingly difficult for an infringer to mount a robust defence. As such, it provides an incentive to seek settlement at a preliminary stage. This is already becoming more common, with litigation on the merits following the opposite trend.

This tactic is particularly appropriate in cases in which the violation has taken place in connection with a type of business that the rights holder would not have established. For example, the infringer may be using a distinctive sign for goods which the rights holder would not have produced (or authorised its licensees to produce) because the type of product or the level of quality is inconsistent with its existing range. Similarly, rights holders may find this approach useful where a product that infringes a patent or design right is much less efficient or attractive than the original. Such an infringement would hardly justify a claim for compensation for lost profits, but it is nonetheless a parasitic use of a reserved right - one which it would be iniquitous to leave unpunished.

Both a consideration of the system's rationale and the fact that the relevant provisions refer to the refunding of profits point to the same conclusion: the profits to be returned are not only those directly attributable to the use of the intangible asset, but also all other profits relating to the infringement. This is the only way to ensure that the infringer does not make a commercial gain, thereby stressing the deterrent aim which is explicit in the directive.(5)

A minority opinion(6) suggests that the Italian implementing legislation has distorted and overstated the aim of the directive. On this argument, the requirement to return profits would also apply to innocent infringers (which would prevent the injured party from using this remedy to recover an amount that might be higher than the loss of profit). Many other commentators have observed that the directive was not intended to be binding in this regard - the disgorgement of profits from innocent infringers was a purely optional rule. The essential point(7) is that EU law admits the possibility of going beyond a strict compensatory approach, this being the only possible meaning of the prescription (contained in the directive and included in the first version of Article 125 of the code) which requires that the infringer's profits be taken into account in calculating compensation. Thus, in cases of culpable infringement, the Italian legislature sees nothing wrong in allocating the counterfeiter's profits to the rights holder.(8)

On this basis, the provisions on disgorgement in Article 125 are consistent with the new approach underlying the revisions to the code between 2006 and 2010, confirming the systemic value of the modifications and, thus, their impact on the unmodified parts of the code.

Equitable evaluation

Under Italian IP law, a court may decide to quantify damages arising from infringement by equitable evaluation. In addition, the rights holder may specifically request this calculation method. This approach is particularly suitable where the interests at stake would not justify an expert witness on this issue.

Article 125(2) adds to this general rule a provision on reasonable royalties - that is, the licence fee that the infringer would have had to pay in order to make contractually valid use of the infringed right. This represents a type of minimum standard of protection when seeking compensation for lost profits on the basis of damages (insofar as these are identifiable). This method is favourable to an infringer, effectively transforming it into a kind of mandatory licensee. For this reason the code follows the directive in identifying such reasonable royalties as a minimum standard for compensation determined on an equitable basis and in the absence of other findings of proof. It is implicitly accepted that equitable evaluations can be increased on the basis of additional assessments of damage - primarily infringement of the rights holder's exclusive right of use.

This remedy has significant practical implications. A party that has suffered damage as a result of counterfeiting activities need not spend time and money searching for evidence to quantify its own lost earnings. Rather, it can provide adequate evidence of infringement by referring to the infringer's balance sheets (or accounts). Such information can be obtained at the start of the lawsuit by means of a preliminary measure for description or seizure. In practice, an infringer which is subject to such a measure knows immediately that, at a minimum, it will have to pay the other party an amount equal to its profits as they appear in its accounts (if the claimant is seeking disgorgement of profits) or a licence fee (if an equitable evaluation is sought). This often results in an out-of-court settlement, before the judgment on the merits.

For further information on this topic please contact Cesare Galli at IP Law Galli by telephone (+39 02 5412 3094), fax (+39 02 5412 4344) or email ([email protected]).


(1) See Court of Cassation Decision 6251, October 24 1983.

(2) See Frassi, "I danni patrimoniali. Dal lucro cessante al danno emergente", in AIDA, 2000, 93 ff, and Renoldi, "L'incidenza economica della contraffazione e la misurazione del danno", at Il dir ind, 1999, 238 ff.

(3) Decision of the Court of Prato, February 21 1994, reported in Giur Ann Dir Ind, 1994, 656 ff.

(4) See Dallocchio and others in Guida alle garanzie sui diritti di proprietà intellettuale (Galli Ed), Bologna, 2011.

(5) See Barbuto, "La retroversione degli utili come sanzione per la contraffazione di marchi e brevetti", in Riv Dir Ind, 2007.

(6) That of Vanzetti.

(7) As noted in Barbuto, op cit.

(8) See Franzosi, "Il risarcimento del danno da lesione di diritti di proprietà industriale", in IDI, 2006, 205; and, in more general terms, Sirena, "La restituzione del profitto ingiustificato (nel diritto industriale italiano)" in Riv Dir Civ, 2006, 305; and Galli, "La protezione contro il parassitismo nel 'nuovo' Codice della Proprietà Industriale", in AAVV, La revisione del CPI, Milan 2007.