U.K. Supreme Court Holds that Infringement Defendant Is Not Required to Pay Damages Where Patent Claims in Suit Are Revoked by the EPO

As reported yesterday on the IPKat blog and on PatLit, the U.K. Supreme Court yesterday in Virgin Atlantic Airways Ltd. v. Zodiac Seats UK Ltd. held that, where a patent infringement defendant has been found liable and ordered to pay damages, the principle of res judicata does not require the judgment to be paid if the patent is revoked in another proceeding.  In so holding, the Court reversed English precedent to the contrary; and it may be that English law will, like German law, also require the restitution of damages already paid by an infringement defendant in a case in which the patent is subsequently revoked. 

The question whether a person who has paid damages for infringement should receive restitution if the patent suit is subsequently nullified in another, separate proceeding is one that I blogged about a couple of times in May.  I noted on May 27 that (at that time) "U.K. law (like U.S. law) would let the damages judgment stand, under principles of res judicata.  As a general matter, so would France, as the Cour de Cassation’s 2012 decision of February 17, 2012 holds.  (French text and an English translation both available here.)  On the other hand, Germany and Japan would both permit retrial and restitution.  (Indeed, in 2012 the German Federal Supreme Court held in Tintenpatrone III that restitution is available even where the patent is restricted in such a way that the infringement defendant’s conduct no longer falls within the scope of the claims.  For a translation of the decision into English, see 43 IIC 855 (2012).)"

On May 30 I offered some preliminary views on which rule--restitution or no restitution--makes more sense, by way of an example in which the value of a reasonable royalty premised on a 100% probability of infringement and validity was $1 million, but the actual ex ante probability of infringement was 80% and of validity 70%.  (In such a case, rational parties would agree to a $560,000 royalty ex ante, but in the event of litigation the court should award $1 million in order to avoid a double discounting problem.)  In particular, I suggested that the correct answer may depend on whether a patent infringement trial would decide both infringement and validity (as is the case in many countries, including the United States), or only infringement (as in some other countries including Germany, where validity is decided in a separate proceeding that typically is completed after the infringement case is over).  I stated that the infringement defendant should receive restitution in the latter system, because otherwise the patentee would receive a windfall "because her expected payoff from going to trial is $800,000 (that is, $1 million x 0.8), whereas she would have agreed to only $560,000 ex ante."  (This is a simplification, of course.  A rational licensee would also take into account the probability that it might not succeed in getting the patent invalidated before being held liable for infringement, and would not get back any royalties it already paid before invalidation.  Plus, of course, the probabilities themselves cannot be precisely quantified in the real world.  I guess what I mean to say is that the ex ante actuarial value of the patent in the hypothetical is $560,000, and that a right to restitution in the event the patent is invalidated preserves that value.)  Similarly, if infringement and validity are decided in the same forum, [the defendant] should not be entitled to restitution, because otherwise [the patentee’s] (ultimate) expected payoff would be less than $560,000."

I now think that my analysis was a bit hasty.  I still believe that the case for restitution is stronger in a system like Germany's in which validity and infringement are decided separately, because otherwise (in the example above, where there was an ex ante 80% probability of infringement and a 70% probability of validity) the plaintiff is overcompensated in the sense that its ex ante expectation going to trial for infringement is an award the actuarial value of which is $800,000.   But I may have been too quick to conclude that the no-restitution rule is preferable in a system in which validity and infringement are determined together.  Suppose that the probability of the patent having been found valid in the infringement proceeding also being found valid in a subsequent nullification proceeding is 90% (the numbers are for illustrative purposes only).  Absent the defendant's right to restitution in the event the patent is invalidated, the patentee's ex ante expectation going to trial is a damages award of $560,000, whereas the actuarial value of the patent is $497,000 $504,000, if I'm doing the math correctly.

In principle, then, if I've got the analysis right this time, the no-restitution rule is superior only if the value of finality of judgments outweighs the risk of overcompensating the patentee.  But I probably should think about these issues some more and eventually attempt to put the analysis into a more formal model.