The Japanese Patent Office is trying to strengthen its patent litigation system, with 2019 revisions to the Japanese Patent Act recently approved by the Japanese Diet. With this reform now written into law, Japan could be on its way to becoming a more patentee-friendly jurisdiction.
To date, the Japanese patent litigation system has generally been patentee friendly, principally because of its “automatic injunction” rule: Unlike the eBay rule in the United States, Japanese courts typically allow an injunction almost automatically if patent infringement is found. However, it is also true that, prior to the Japanese Patent Act’s 2019 revisions, the Japanese system had weaknesses in relation to evidence collection and damages calculations. The 2019 revisions aim to strengthen such weaknesses and make the Japanese system even more patentee friendly.
Strengthening the Evidence Collection System
In order to prevail in patent litigation, plaintiffs must collect evidence to prove infringement and damages amounts. Before the 2019 revisions, the Japanese system permitted evidence collection through a “document production system.” However, this system purportedly has not worked well. In addition to this conventional system, the 2019 revisions add an onsite inspection system as an additional evidence collection method. Now, under new Article 105-2, upon the motion of a party in patent infringement litigation, the court may order an inspector to conduct an onsite inspection. In order to mitigate any risk of trade secret misappropriation, in general, a neutral third party is appointed as an inspector. The procedure requires the inspector to submit a report to the court after the inspection. The petitioner generally cannot attend the inspection, and if the court determines that the inspection report contains a trade secret, portions may be redacted before the report is submitted to the petitioner.
Increasing the Lost Profit Component in Damages Calculations
Another principal feature of the 2019 revisions focuses on increasing potential damages amounts. Similar to other major jurisdictions, in Japan a plaintiff patentee is able to seek as damages lost profits or a reasonable royalty. The 2019 revisions aim to increase lost profit amounts as damages in patent litigation. Under Article 102(1), the basic calculation methodology for lost profits is to multiply the amount of profit per unit of product that the patentee would have earned had there been no infringement by the quantity of products sold by the infringer, subject to limitations of the patentee’s capability. For example, if a defendant infringer sold 100 units of infringing products and the profit per unit was $10 but the plaintiff patentee only has the capability to sell 70 units, the lost profit amount would be $700: 70 units multiplied by $10. But this invited the question of whether the plaintiff patentee could seek damages for the remaining 30 units. Before the 2019 revisions, the Intellectual Property High Court ruled that patentees cannot seek additional amounts for such remaining units. However, this ruling had been criticized as excessively favoring defendant infringers. In this regard, the 2019 revisions have changed this ruling, and under the new provision, a plaintiff patentee may seek a reasonable royalty for the remaining 30 units.
Increasing Reasonable Royalties in Damages Calculations
The 2019 revisions also aim to increase reasonable royalty calculation. Current Article 102(3) provides that plaintiff patentees can seek as damages the amount the patentee would have been entitled to receive for the working of the patented invention (reasonable royalty).
Under the 2019 revisions, new Article 102(4) provides that, in determining such reasonable royalty, a court may consider the amount the patentee would be entitled to receive if the patentee and the infringer would enter into an agreement on the assumption that the patent has been infringed. The change is aimed at increasing reasonable royalty calculations in patent litigation settings: In a real-world negotiation, royalties are determined based on an ex-ante calculation, meaning that the royalty amount is agreed by taking into consideration the uncertainty of validity and infringement. In a patent litigation setting, on the other hand, the determination of the royalty amount as damages is an ex-post calculation in a situation where the court has already concluded that there has been an infringement of the plaintiff’s patent. Such ex-post calculation in a patent litigation setting must be higher than an ex-ante calculation in a real-world negotiation. The 2019 revisions clarify this point, and thus aim to increase the amounts of reasonable royalty in patent litigation.
The 2019 revisions have placed Japan on the road to becoming a more patentee-friendly jurisdiction. The revised Japanese Patent Act is expected to come into effect next year, and it will be interesting to observe what effect the revisions will have on the landscape of patent litigation in Japan.