Before its recent amendment, Article 85, Paragraph 1(2) of the Patent Act provided that the owner of an infringed patent could opt to calculate damages incurred based on the 'total profits method' – that is, "the profits earned by the infringer from the infringing acts". It also provided an alternative, the 'total sales income method', as follows:
"[If] the infringer fails to provide evidence demonstrating the costs and necessary expenses incurred from the sale and production of the infringing goods, the total income obtained from the sale of the infringing goods shall be regarded as the earned profits."
IP Court decisions gradually established a consensus regarding the application of these provisions. Most IP Court decisions held that it was inappropriate to adopt the industrial profits standards promulgated by the Ministry of Finance (MOF) directly; this was supported by Supreme Court decision 2011-Tai-Shang-1091. The IP Court also held that:
- the infringer should provide evidence of the costs of its actions in order to calculate its gross profits;
- such costs should be limited to manufacturing costs directly incurred by the infringer in relation to the infringing products and should not include other fixed costs for the operation of the business; and
- in case of failure to produce evidence, the total income obtained from the sale of the infringing products should be considered the total amount of damages to be paid.
The amendments to the Patent Act that came into force in 2013 moved the provisions for the payment of damages to Article 97, Paragraph 1(2). While the total profits method was retained in the new provisions, the total sales income method was deleted. The legislative intent of Article 97 states the following:
"The pre-amended provision adopted the Total Sales Income Method… the patent owner might be over-compensated by the damages amount thus calculated. Therefore, the latter part is deleted. Calculation of damages should be conducted on a case-by-case basis."
Since the amendments have affected the calculation of damages and the allocation of the burden of proof, patent owners and lawyers have expressed concern since its implementation.
It has now been a number of years since the amendments came into effect. Several recent IP Court decisions have concerned the application of Article 97, Paragraph 1(2). Some continued to follow the above consensus, while others used the net profits rate of the MOF's industrial profits standards to calculate damages.
Infringer's obligation to provide evidence of costs
In the IP Court decisions 2013-Min-Zhuan-Su-78 (January 2014), 2013-Min-Zhuan-Su-115 (April 2014) and 2013-Min-Zhuan-Su-69 (April 2014), the court used the sales price of the infringing product minus the costs declared by the infringer to calculate the damages. However, these decisions did not closely analyse whether the costs were limited to the manufacturing costs directly incurred by the infringer in relation to the infringing product or whether they could include other fixed costs for the operation of the business.
On the other hand, the IP Court decision 2013-Min-Zhuan-Su-3 (December 2013) described the legislative intent and spirit of the latest amendment to the Patent Act in detail and reaffirmed that "infringement damages are only claimed to reimburse the loss actually suffered by the patent owner but not to further provide the patent owner with other benefit". The decision further clarified that, although the Patent Act previously provided for the reversal of the burden of proof in order to alleviate the difficulty that patent owners have in proving damages (as well as causation between the infringement and the damages), this provision was not intended to enable the patent owner to enjoy over-compensation for its loss. Based on the above principles, the decision clarified that the amended Patent Act kept the total profits method only to reduce the burden of proof imposed on the patent owner and deter infringement, and that damages should be calculated on a case-by-case basis.
Net profits in industrial profits standards
From the principles rendered in the above decision, it seems that the consensus reached by previous IP Court decisions (that the infringer must prove its costs) still applies when calculating damages on a case-by-case basis. However, in this case the plaintiff and defendant agreed to adopt the MOF industrial profits standards to calculate damages – although they could not agree on whether to adopt the gross profit rate or the net profit rate. Because the defendant manufactured and sold only the infringing products, the decision held that "all the revenue of the defendant was his/her income earned by manufacturing and selling the infringing products" and that "all the business costs were directly related to the manufacture and sales of the infringing products". It further held that:
"whether or not the defendant had infringed the patent, such business costs would occur even if the patent owner manufactured and/or sold the infringing products by itself; therefore, such business costs should be deducted from the sales income. The deducted amount was the profits that the patent owner could have earned if there had been no infringing acts. Therefore, it is groundless for the patent owner to assert that the damages should be calculated based on the Gross Profit Rate of the Industrial Profits Standards. The damages should be calculated based on the Net Profit Rate of the Industrial Profits Standard."
This analysis seems to calculate the damages based on the actual loss to the patent owner and adopt the net profit rate to calculate the damages, because business costs would also have been incurred if the patent owner had manufactured and sold the products itself.
IP Court decision 2013-Min-Zhuan-Su-56 (May 2014) adopted the same rationale and used the net profit rate of the industrial profits standards to calculate damages. This decision also clarified that:
"[T]he MOF will annually promulgate the profit rate standards applicable to different industries, and use this rate as the basis for the collection of income taxes. The Industrial Profits Standards are determined based on a random survey in the market and comments from relevant industrial associations. In other words, such standards are determined based on statistics and experience. The IP Court may refer to such standards when calculating damages."
As these decisions demonstrate, since the amendments to the Patent Act came into effect, three decisions have calculated damages based on the costs proven by the infringer and two decisions have analysed the spirit of the amendment in detail and specified that the court may adopt the net profit rate of the industrial profits standards to calculate damages. Since these five decisions were made at the first instance, it is worth monitoring the development of these cases and possible future second-instance decisions, and observing the new consensus reached by the IP Court.
For further information on this topic please contact Katherine Juang at Lee and Li Attorneys at Law by telephone (+886 2 2715 3300) or email (firstname.lastname@example.org). The Lee and Li website can be accessed at www.leeandli.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.