Damages inquiries in patent cases in Europe are rare. One reason for this is that the injunction is normally the key remedy sought with the result that parties generally seek a settlement once liability has been determined. This article compares the approaches adopted in Germany, the United Kingdom and the Netherlands to the assessment of damages and accounts of profits in patent infringement cases.
Both the patentee and an exclusive licensee can claim damages in respect of patent infringement. There are three possible options for determining the quantum of the damages:
- "Lost profits" – the patentee (or exclusive licensee) can recover the sums he would actually have earned but for the patent infringement;
- "Fair licence" - the patentee can recover an amount equivalent to the licence fee that the infringer would have had to pay if the infringer had negotiated a fair and reasonable licence with the patentee; or
- "Extraction of the infringer's profits" – the patentee can claim a share of up to 100 per cent of the profits that the infringer has made based on the infringing acts: the categories of costs that may be deducted to compute the 'profits' are very limited.
The patentee (or exclusive licensee) is not entitled to make a claim for lost profits if he does not offer his own competing products. Equally, if the patentee is prevented from distributing his own products by a further patent (perhaps owned by the infringer), then he cannot claim lost profits. In assessing lost profits, a determination is made of what additional profits the patentee would have earned if the patent infringement had not been committed.
Lost profits should be considered, in particular, in cases in which the patent infringement has caused a massive price drop (for instance, infringing generic pharmaceuticals). In these cases, the lost profits method is the only method which is likely to result in a full compensation of the loss suffered. In most cases however, patentees rarely choose the method of lost profits for a number of reasons.
The fair licence fee is determined by asking the question what licence fee the patentee and the infringer would have negotiated in out of court licence negotiations, in which both parties would have acted fairly and reasonably. In this assessment all factors are considered that are relevant in normal licence negotiations between licensing partners acting reasonably. In the court practice, the starting point typically is an assessment as to what royalty rate is common in similar licensing situations (similar in terms of the relevant industry sector, the importance of the product, the strategic impact of the licensed patent, etc). This method is mainly attractive in smaller cases as the determination of the amount of damages requires less effort than with the other methods. The licence fee can be determined without data on the profit situation and based on comparatively few assessment steps. An advantage over lost profits is that the patentee does not need to reveal any data concerning his own profit situation.
Extraction of infringer's profits (or an account of profits)
In most cases, it is the method of extraction of the infringer's profits which gives the patentee the greatest damages. Using this method, the amount of damages is determined in two steps: first, the "profit" is determined, second, a patentee's share (which can be up to 100 per cent of the profits) is determined.
Under the case law developed by the Federal Court of Justice over the last 10 years, the "profit" determined in the first step of the method is significantly higher than what accountants would regard as profit. In the decision Gemeinkostenanteil, the court said that, in the profit determination, overhead costs can only be considered if they clearly and unambiguously belong to the infringing products. In this regard the burden of proof is on the infringer. According to the present court practice, costs of employees, equipment, buildings and/or financing that are used for both infringing and non-infringing products are not regarded as clearly belonging to the infringing products and cannot therefore be considered. In particular it is not admissible to consider a percentage of these cost factors on the basis of an assessment of what share of the respective factor was used for the infringing products. The costs in respect of these factors (work force, equipment etc.) can be considered in the profit calculation only if the respective factor was exclusively used for the infringing products.
The more recent decision Steckverbindergehäuse adds a further restriction on costs that can be considered in the profit calculation. Even costs that are clearly belonging to the infringing products cannot be considered if these costs would not have been incurred if the patentee, instead of the infringer, had made and supplied the products. An example would be the R&D costs for the infringing product; these costs clearly belong to the infringement, however, they cannot be considered, as it is assumed that the plaintiff has a developed product and would therefore not spend the cost for R&D of another product. Other types of costs not considered following this decision include the cost for the waste due to production testing or the legal costs incurred defending against patent infringement allegations. These restrictions on cost deductions often result in profits in the range of 20 to 60 per cent of the turnover.
To determine the share of profits to be extracted in the second step, the question asked is whether factors other than the patented technology were driving factors in the customers' decision to purchase the infringer's product. In cases where a product without the patented technology would not have any chance in the marketplace, 100 per cent of the profits have to be extracted. This would, for example, be the case if the patent protects a pharmaceutical compound that is critical for fighting a disease. In other cases where a design around is available or the patent protects a minor aspect of the product (e.g. a specific mirror support in a car), the defendant can submit that other factors like a famous brand, other technology protected by other patents, or other non-protected technology, also contributed to the customers' decisions to purchase the product. The court then has to estimate what impact in percent terms the patented technology had on the customers' decisions. In recent court cases, the courts have adopted percentages between 15 and 80 per cent.
It becomes obvious from the above that extraction of infringer's profits is the most promising method in most cases and currently, in the vast majority of the cases the patentee will elect for this method.
Effect of subsequent revocation of the patent
Where a patent is revoked by the Federal Patent Court or the EPO, the patent is deemed not to have had its effects, from the outset (Art. 68 EPC, § 21 (3) German Patent Act). Thus, the patentee cannot claim any damages. Where the infringement court has already granted damages and this decision has become "final", this judgment can also be nullified in specific proceedings (Restitutionsklage). Typically, the parties will resolve this kind of situation by way of settlement.
The United Kingdom
In the UK, the patentee has a choice between either his lost profits or an account of the infringer's profits. In the first case the damages are intended to be compensatory; the second, restitutionary. In calculating the patentee's lost profits, the general rule is that the measure of damages is to be, as far as possible, that sum of money that will put the patentee in the position as he would have been in had there been no infringement. In calculating the infringer's profits, the purpose of the remedy is to deprive the infringer of the profits which he has wrongly made by his infringements and to transfer those profits to the patentee.
The patentee can recover loss which was (i) foreseeable, (ii) caused by the infringement, and (iii) not excluded from recovery by public or social policy. Where the patentee has exploited his patent by manufacture and sale he can claim (a) lost profit on sales by the infringer that he would have made otherwise; (b) lost profit on his own sales to the extent that he was forced by the infringement to reduce his own price; and (c) a reasonable royalty on sales by the infringer which he would not have made.
Where the patentee licenses his patents, then a reasonable royalty will be assessed. This assessment proceeds on the assumption of a willing licensor and a willing licensee. Where truly comparable licenses exist in the relevant field, the court will normally use these as guidance in setting the royalty rate.
One fairly recent case exemplifies the UK approach, Ultraframe v Eurocell. Ultraframe manufacture conservatories, Eurocell were distributors of the Ultralite 500 system (made according to the patent). Eurocell started to make and sell their own version, called Pinnacle 500. The Pinnacle 500 was found to infringe Ultraframe's patent. At the damages inquiry, Ultraframe were found to be entitled to damages for the lost profit on lost sales of Ultralite 500, a royalty of 8% on sales of Pinnacle 500 that did not represent lost sales, damages for price depression, damages for losses, post-infringement caused by price depression and disruption of the market, and interest.
Account of profits
The purpose of this remedy is to deprive the infringer of the profits which he has improperly made by wrongful acts committed in breach of the patentee's rights and to transfer those profits to the patentee. The remedy is rarely used however because, unlike in Germany, the infringer may set off against gross revenue both direct costs and apportioned indirect costs (i.e. overheads).
An interesting aspect of this remedy is how it works where there are multiple parties in the supply chain. Can the patentee seek lost profits damages from some in the chain and then claim an account of profits from others? How does that affect parties in the supply chain who have provided indemnities to others in the chain? Does an exclusive licensee have to seek an account of profits if the patentee has done so?
The UK courts have addressed these potential problems by requiring that the patentee (and the exclusive licensee) must choose to receive either an account of profits or damages in relation to each infringing product or process. In addition, although the patentee may seek accounts of profits from multiple infringers in the supply chain, the accounts must be taken together.
Effect of subsequent revocation of the patent
Another issue which the UK courts have considered fairly recently is what happens where a patentee is successful in national proceedings and is awarded damages (or an inquiry is ordered) and then the national court or the EPO revokes the patent. Are the damages still payable or, if already paid, should they be paid back?
The Court of Appeal has answered the question in the negative. As between the parties, the issue is res judicata with the consequence that at any subsequent damages inquiry, the paying party cannot seek to overturn the judgment (it is estopped from raising the issue afresh). A situation where a later national decision revoked the patent arose in Coflexip, a third party (Rock water) successfully revoked the patent which Stolt had been found to infringe, after the decision in Stolt's proceedings but before the Stolt damages inquiry took place. The position where an EPO opposition results in the patent being revoked was considered in Unilin, and the result was found to be no different. Jacob LJ concluded: "So I think the Judge was wrong to hold that there was no estoppel. I am not sorry to reach that conclusion. It means that businessmen in this country know that they can use the rather speedy court system here to get a conclusion one way or the other. If the patent is revoked, the way is cleared; if it is upheld and held infringed then compensation will be payable for past acts. And an injunction will run unless there is a later revocation by the EPO. Subject to that last point, the effect of all this is that one does not have to wait to find out who has won until the slowest horse in the race gets there."
The patentee can either claim his damages resulting from the infringement of the patent or an account of the infringer's profits. Literally, Article 70(5) Dutch Patent Act (DPA) provides that the patentee can claim damages and an account of profits. The Dutch Supreme Court however has decided that damages and an account of profits cannot cumulate indeterminately. The patentee can ask the infringer to provide information on the basis of which the patentee can determine which option will lead to the largest amount and he can then elect for such option.
Damages typically can consist of lost profits of the patentee or a reasonable royalty. In addition, damages can consist of loss of value of the exclusive right and extra judicial costs of enforcement, to the extent that they were not included in any cost order by the court. If the patentee wishes to claim a reasonable royalty, he may set the royalty rate at the highest end of what can be considered as a reasonable rate, in the circumstances of the case. In most cases damages are determined as a sum of money, but it is possible to claim non-monetary damages. An example of this is the so called moratorium, i.e. an injunction to be effective for a certain period after expiry of the patent, to compensate for damages suffered by a too early entry into the market by the infringer.
In order to determine his damages and/or the infringer's profits, the patentee can claim information from the infringer such as copies of invoices, lists of purchasers, possibly with a specification of amounts and supply dates. The patentee can claim that an independent accountant certifies that this information by the infringer is accurate and complete.
Damages in relation to a patent which is later revoked
Article 50 (2) DPA provides for the situation where a patent is revoked after a judgment ordering payment of damages because of infringement. Once the judgment is final and not open to appeal and furthermore this judgment has been executed, these damages need not be paid back. So far, there has been no judicial interpretation of this provision.
The Dutch, English and German approaches to the assessment of damages and taking of accounts of profits are broadly similar. However significant differences still remain, for example the very generous approach of the German courts to accounts of profits in contrast to that of the UK courts.