Monday, May 20, 2013

Recent U.K. and German decisions on awards of infringer’s profits

In most countries other than the United States, the prevailing patentee often has the option of recovering the defendant’s profit attributable to the infringement, as an alternative to the patentee’s own lost profit or a reasonable royalty.    (In the U.S., this remedy exists in design patent law and in other bodies of intellectual property law, but Congress eliminated it with respect to utility patents in 1946.)  Indeed, this remedy has enjoyed something of a renaissance in recent years, particularly in Canada, but also in the U.K. and Germany. 

As discussed in my book, one of the difficult issues that courts must confront in awarding the defendant’s profits is to calculate the amount of that profit that is properly attributable to the unauthorized use of the patent.  From an economic standpoint, the appropriate methodology--though one that often might be practically difficult--would be to compare the profit the defendant actually made with the profit it would have made, had it used the next-best available noninfringing alternative.  In a case in which the noninfringing alterantive is just as good as the patented invention, application of this principle would mean that the defendant earned no profit attributable to the use of the patented invention; an appropriate award would be zero.  The Canadian Supreme Court adopted this approach in Monsanto v. Schmeiser (see my book pp. 203-04), but courts in the U.K. and Germany generally have rejected it.   Nevertheless, courts in the U.K. and Germany do make an effort to apportion the profit earned with the use of the patented invention so that the plaintiff does not receive the entire profit earned by the defendant, but rather only the portion the court believes is attributable to the use of the infringing feature.  And at least in Germany, courts sometimes have considered the existence of noninfringing alternatives as relevant to this inquiry.  For discussion of the relevant case law and commentary, see my book pp. 197-209, 270-74.  (Oddly, in the one area of patent law in which the U.S. retains awards of defendant’s profits—design patents—the U.S. patent statute appears to instruct the court to award the defendant’s entire profit, i.e., not to apportion.  Both Mark Lemley and I have argued that this rule, which was applied in the Apple v. Samsung litigation last summer,  is nonsensical.)    

Two cases addressing awards of defendant’s profits that came to my attention too late to be included in my book are the German Federal Supreme Court’s July 2012 decision in Flaschenträger and the October 2012 decision of the England and Wales Court of Appeal in Hollister Inc. v. Medik Ostomy Supplies Ltd.  Hollister is actually a trademark decision, but its reasoning would appear to be relevant in the patent context as well.  As explained in my book (p.274), E.U. law requires, as a condition to the lawful resale of trademarked pharmaceuticals, that the reseller provide advance notice to the trademark owner.  Where the reseller fails to provide the notice and the trademark owner sues, what damages is the trademark owner entitled to recover?  In my view, in the but-for world in which the violation did not occur (that is, in a world in which the reseller provided the requisite notice) the reseller would have earned exactly the same profit, and thus the profit attributable to the infringement is zero.  Courts in Germany nevertheless have awarded the entirety of the defendant’s profits from the sale of the goods (see id. p.274 n.204).  In the U.K., the Patents County Court in Hollister had awarded only half the defendant’s profits, on the view that this result was more proportionate to the harm (see id.), but the appellate court reversed and (finding the German precedent persuasive) ordered an award of all the profits.  In addition--and perhaps of more importance for patent infringement cases--for purposes of calculating the profit, the court held that the defendant is not entitled to deduct a portion of its general overhead,  but rather must show that the deducted costs are properly attributable to the production of the infringing merchandise (para. 85).   (Although the court does not cite the German Federal Supreme Court's 2000 decision in Gemeinkostenanteil, see my book pp. 271-72, the court appears to be adopting an approach similar to the one applied there to the deduction of overhead.)  The combination of these two holdings in Hollister could lead to substantially higher awards of profits in the U.K., as others have noted.

The German Flaschenträger case, though similarly (and in my view, incorrectly) rejecting the argument that the existence of noninfringing alternatives can result in an award of zero profits, nevertheless provides some interesting points of analysis.  First, although the trial court had awarded the patentee the defendant’s entire profit from the sale of infringing merchandise, the appellate court cut this in half.  The BGH, citing the equitable (“billig”) nature of such awards, affirmed the appellate court’s modification on the ground that in this case (and typically in other cases as well) the defendant’s profit is likely attributable to many factors.  The court also noted that the extent to which the defendant’s profit can be attributed to the infringement is typically not a matter that can be, at acceptable expense, precisely calculated, but rather only estimated (see para. 20).  Second, the appellate court had taken into account the fact that an award of 50% of the defendant’s profits would approximate the likely award the plaintiff would have received under a reasonable royalty theory at an 8% royalty rate, which accorded with the typical rate in machine construction (Maschinenbau) and the instrument industry (Werkzeugindustrie).  The BGH affirmed, stating that under German law awards of defendant’s profits are viewed as an alternative form of compensation (which is contrary to the view expressed by the English court in para. 69 Hollister, interestingly), and (citing Klaus-Peter Melullis, Zur Ermittlung und zum Ausgleich des Schadens bei Patentverletzungen, GRUR Int. 2008, 679, 684) that this sort of comparison can be appropriate where the royalty parameters are not in dispute.

For further commentary on Flaschenträger, see Mitt. Heft 11/2012, p.510.  For commentary in English, see this post on the Kluwer Patent Blog.

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