Eiichi Fukushima October 7 2013 IP High Court allows assumed damages under Article 102(2) of Patent Law Nishimura & Asahi | Intellectual Property - Japan Eiichi Fukushima Intellectual Property SummaryBackgroundFactsTokyo District Court decisionIP High Court decisionCommentSummaryOn February 1 2013 the IP High Court, in a Grand Panel judgment, upheld a Tokyo District Court decision that admitted a claim for an injunction filed by Sangenic International Limited against Aprica Children's Products KK, which imports and sells garbage storage cassettes for disposable paper nappies, under Article 100(1) of the Patent Law (121/1959, as amended). However, the court overturned the lower court's decision that denied the application of Article 102(2) of the Patent Law, admitting the application of Article 102(2) under certain conditions.BackgroundArticle 2(3) of the Patent Law provides that 'working' an invention refers to the following acts:for a product invention (including a program), the manufacture, use or assignment (ie, assignment and lease; this includes, where the product is a program, its provision through electric telecommunication lines) of the product, or the import, export or offer of assignment (including display for the purpose of assignment) of the product;for a process invention, the use of the process; andfor an invention of a manufacturing process, the use, assignment, import, export or offer of assignment of the product manufactured by the process, in addition to the use of the process.Article 100 of the Patent Law provides as follows:A patentee or an exclusive licensee may require a party that is infringing or likely to infringe its patent right or exclusive licence to cease or refrain from such infringement.A patentee or an exclusive licensee that requires the infringing party to discontinue infringement may demand:the destruction of infringing items (including infringing items in the case of a patented invention of a manufacturing process, as in Article 102(1));the removal of the facilities used in the act of infringement; orany other measures necessary to prevent the infringement.Article 102 of the Patent Law provides as follows:Where a patentee or exclusive licensee makes a claim for compensation of damages against a party that intentionally or negligently infringes the patent right or exclusive licence, the profits gained by the infringer through the infringement will be presumed to be the amount of damages suffered by the patentee or exclusive licensee.A patentee or exclusive licensee may make a claim against the infringing party for the monetary amount to which it would have been entitled for working the patented invention, which will be considered the amount of damages.Article 37 of the Design Law provides as follows:The owner of a design right or an exclusive licensee may require a party that is infringing the design right or exclusive licence, or likely to do so, to cease or refrain from such infringement.The owner of a design right or an exclusive licensee that requires the infringing party to cease infringement may demand:the destruction of the infringing items (including programs, as provided for in Article 2(4) of the Patent Law and in Article 38 of this law);the removal of the facilities used in the act of infringement; orany other measures necessary to prevent the infringement.Article 39 of the Design Law provides as follows:Where the owner of a design right or an exclusive licensee makes a claim for compensation for damages against a party that intentionally or negligently infringed its design right or exclusive licence, the profits gained by the infringer through the infringement will be presumed to be the amount of damages suffered by the design owner or exclusive licensee.The owner of a design right or an exclusive licensee may make a claim against the infringer for the monetary amount to which it would have been entitled for working the registered design or similar designs, which will be considered the amount of damages.Article 2(1)(14) of the Unfair Competition Prevention Law provides that 'unfair competition' constitutes the provision or circulation of false facts that are injurious to the business reputation of a competitor.Article 4 of the Unfair Competition Prevention Law provides that a party that intentionally or negligently injures the business interests of another party through unfair competition will be liable for compensation for damages caused by such injury. However, this does not apply to damages arising from the use of a trade secret after the right provided for in Article 15 has been extinguished under the same provision.Article 709 of the Civil Code provides that a party that intentionally or negligently infringes a right or legally protected interest of another party will be liable for compensation for any resulting damages.FactsSangenic, a UK corporation that owns the patent for a waste storage cassette for disposable paper nappies and the design on a waste storage cassette in Japan, filed suit before the Tokyo District Court requesting an injunction to stop Aprica's import and sale of garbage storage cassettes. Sangenic asserted that the cassettes infringed its patent and design and claimed for damages.Aprica denied Sangenic's arguments and alleged in a counterclaim that Sangenic made a false statement to Aprica's customers (to the effect that Aprica's products infringed Sangenic's intellectual property), which adversely affected Aprica's business reputation.Tokyo District Court decisionOn December 26 2012 the Tokyo District Court admitted Sangenic's claims under the Patent Law, but rejected the claims under the Design Law. The court also dismissed Aprica's counterclaim under Article 2(1)(14) of the Unfair Competition Prevention Law.As to the main claim, the court held that Aprica's products satisfied all of the requirements of Sangenic's patent and fell under its technical scope in view of:the patent claims;the patent specification;the technical level at the time of the patent application; andthe history of the patent application.Regarding the possible co-existence of the validity of the patent, the patented invention was considered not to have been easily conceived from either a combination of the Exhibit B-14 invention and the known prior art or a combination of the Exhibit B-14 invention and the Exhibit B-18 invention. Thus, the court held that the patent could not be invalidated due to lack of inventiveness.As to Sangenic's assertion of design right infringement, the main composite feature of the registered design was its half-size ring shape, whereas Aprica's design was a full-size ring shape. The total aesthetic impression given by both designs thus differed and, as such, Aprica's design was not similar to Sangenic's registered design.The court therefore denied the infringement claim for Sangenic's design right and admitted the injunction and destruction of Aprica's products sought under Sangenic's patent right.Regarding compensation for damages, the court did not admit the application of Article 102(2) of the Patent Law, as Sangenic was not recognised as practising or working the patent right in Japan, although negligence was admitted in respect of Aprica. In accordance with Article 102(3) of the Patent Law and in view of the circumstances under which the royalty ratio should be higher, given its market situation in the patent's particular technical field, as well as considering that the licence royalty would be higher in the case of Sangenic's extension of a licence to Aprica, the licensing royalty in this case was determined to be 10%. The court thus admitted total damages amounting to Y18,139,152 in lost profits under Article 102(3) of the Patent Law and Y3 million in actual damages (including attorneys' fees).Finally, in connection with the counterclaim, Sangenic's notice to Aprica's customers did not specifically refer to the industrial property held by Sangenic, the infringing party or the allegedly infringing products. Rather, the court held that the notice merely expressed Sangenic's viewpoint. Therefore, it was not recognised as a notification of a "false fact injurious to the business reputation" of another party and Aprica's counterclaim was dismissed.IP High Court decisionBoth Sangenic and Aprica appealed to the IP High Court.On February 1 2012 the court affirmed the Tokyo District Court decision and dismissed Aprica's appeal. The court rejected the lower court's denial of the application of Article 102(2) of the Patent Law, admitting the application of Article 102(2) under certain conditions.The IP High Court concluded that Sangenic's main claim should be admitted with amendment, under which the application of Article 102(2) was allowed and Aprica's counterclaim was dismissed as groundless.As Aprica had infringed Sangenic's patent right by importing and selling Aprica's products, Aprica had an obligation to compensate for the damages suffered by Sangenic.Article 102(2) provides that:"Where a patentee… claims, from a person who has intentionally or negligently infringed the patent right… compensation for damage caused to him by the infringement, the profits gained by the infringer through the infringement shall be presumed to be the amount of damage suffered by the patentee."Article 102(2) is intended to alleviate the difficulty of substantiating the amount of damages by assuming that the amount of profit gained by the infringer through the infringement constitutes the amount of damage suffered by the patent owner. This contrasts with civil law practice, in which the patent owner must first substantiate the amount of damage caused and the causal link between the damage and the infringing act when seeking compensation. However, it is usually difficult to prove these claims, thus preventing a proper amount of damages from being awarded. In view of the purpose of Article 102(2), the damages are based only on an assumption and there are no reasonable grounds to impose more stringent requirements.Therefore, where the patent owner would have received higher profits had there been no act of infringement, the court held that the application of Article 102(2) should be permitted, and that where differences exist in the business methods of the patent owner and the infringer, such factors should be considered circumstances mitigating the amount of assumed damages. Thus, as to the application of Article 102(2), the patent owner need not practise or work the patented invention in question.The court made the following findings:Sangenic had entered into a sales agreement with Combi.Sangenic exported and sold its UK-produced cassettes to Combi by appointing Combi as its sales agent in Japan.Combi sold Sangenic's cassettes to general customers in Japan.Sangenic thus sold its cassettes in Japan through Combi. Aprica, which imported and sold its products in Japan, was therefore in competition with Combi and Sangenic in the Japanese market for waste storage cassettes and, as a result, it was recognised that the Japanese sales of Sangenic's cassettes decreased due to Aprica's infringement (ie, through the sale of Aprica's products).In view of these facts, the court found that Sangenic would have received higher profits had Aprica not infringed the patent; therefore, there was no reason not to apply Article 102(2) in calculating the amount of damages suffered by Sangenic.Aprica, taking the view that Article 102(2) does not provide for the assumption of the damages themselves and also considering the territorial principle, argued as follows:The working of a patented invention under Article 2(3) of the Patent Law by the patent owner is required in Japan in order to admit the application of Article 102(2).As Sangenic did not sell its cassettes under the patented invention in Japan, Article 102(2) should not be applied in the calculation of damages.However, the court rejected Aprica's arguments on the following grounds:There is no provision in Article 102(2) stating that the practice or working of the patented invention by the patent owner is required.As Article 102(2) is meant to alleviate the difficulty of substantiating the amount of damages and is used for the assumption of facts only, it is improper to impose more restrictive requirements for its application.Thus, the working or practice of the patented invention by the patent owner is unnecessary for the application of Article 102(2). Therefore, it should be construed as meaning that where the patent owner would have received higher profits had there been no infringement, the application of Article 102(2) should be permitted.In view of the above, the court concluded that in this case it could apply Article 102(2) regardless of whether Sangenic's activities constituted the 'working' or 'practice' of the patent under Article 2(3) of the Patent Law. This conclusion did not apply to the patent's validity outside Japan and thus did not go against the territorial principle.Based on Article 202(2) of the Patent Law, the court calculated Sangenic's damages as amounting to Y134,617,022.Aprica further asserted that Combi – not Sangenic – gained the profits by selling Sangenic's products in Japan and, as such, Sangenic accrued no damages, since Sangenic and Combi had concluded both an agreement on a compulsory minimum purchase amount and an economic compensation agreement in case of failure to meet the minimum purchase amount. Therefore, it was inappropriate for Sangenic to claim compensation, because it had accrued no damages.The court rejected this argument on the following grounds:Sangenic had entered into a sales agreement with Combi and appointed Combi as its sales agent for Sangenic products in Japan. Sangenic sold (ie, exported) its UK-produced cassettes to Combi under the sales agreement and Combi sold the cassettes to general customers in Japan; thus, Sangenic was understood to be selling its cassettes in Japan through Combi. As such, Combi was not the only party profiting from the sales of Sangenic's products in Japan. Further, there was no evidence to prove the existence of the compulsory minimum purchase amount agreement or the economic compensation agreement in case of failure to achieve the minimum purchase amount.Aprica provided no concrete evidence of the amount of profits gained by Combi through the sale of Sangenic's cassettes; therefore, Sangenic's damages could not be mitigated by the mere fact that Combi sold Sangenic's cassettes.Both Aprica's and Sangenic's products were used for the same purpose and the price difference between the two was small (Y500 for three packages, which equates to Y167 for one case). The brand power of Combi (as Sangenic's appointed sales agent in Japan) was comparable to that of Aprica, and it was thus proper to consider that the sales of Sangenic's cassettes were reduced by the amount of Aprica's sales. According to the court, it was improper to mitigate Sangenic's damages based merely on Aprica's brand power, the existence of other products that competed with Sangenic's cassettes or the inferiority of Sangenic's products.The court also concluded that Aprica's counterclaim was groundless, as there was no evidence to the effect that Sangenic had made a false statement or disseminated untrue information affecting Aprica's business reputation (Article 2(1)(14) of the Unfair Competition Prevention Law).CommentThere has long been disagreement among IP scholars and the courts as to whether Article 102(2) of the Patent Law is applicable where the patent owner does not practise or work the patented invention in question. This is why the court issued its decision through a Grand Panel judgment.The decision clarifies that in cases where the patent owner would have received higher profits had no infringement occurred, the assumption under Article 102(2) of the Patent Law will apply. According to this reasoning, it is assumed that this does not include cases in which the patent owner receives only a royalty under Article 102(3) of the Patent Law. This leads to the question of what other criteria are necessary in order for Article 102(2) to apply. To answer this question, all future cases in which Article 102(2) is applied will need to be examined carefully.In this particular case, the court clarified that various differences between the patent owner and the infringer (eg, different business methods) should be considered as factors mitigating the amount of damages assumed. Aprica responded by making various assertions of circumstances to support such mitigation under Article 102(2), but all were rejected as inappropriate or lacking sufficient evidence. On this particular point, another question arises as to other circumstances in which the assumed damages could be mitigated under Article 102(2).Further, a third question that arises in this case is whether Combi could have claimed compensation for damages against Aprica (even though Combi made no such claim).Although the court widened the scope of application of Article 102(2) in this case, it also raised many unresolved questions. Further developments in this regard are therefore likely as future cases are decided under Article 102(2).For further information on this topic please contact Eiichi Fukushima at Nishimura & Asahi by telephone (+81 3 5562 8500), fax (+81 3 5561 9711) or email ([email protected]).