Friday, August 30, 2013

Awards of defendant's profits and nonpracticing entities

As I discuss in my book, most countries allow the prevailing patentee three principal damages options:  the patentee's own lost profit; a reasonable royalty; or an award of the defendant's profit attributable to the infringement.  The U.S. is an outlier (for better or worse) in that, since 1946, we have not made this third remedy available except in cases of design patent infringement.  In countries where the remedy is available, however, the conditions under which it can be awarded differ to some degree.

First, under one theory, awards of defendant's profits are intended to be a proxy for the patentee's own lost profit, which might be difficult for the patentee to prove.  From an economic standpoint, this is not a very good rationale, since the defendant's profit and the plaintiff's own lost profit may be wildly different.  The Japanese case I blogged about the other day, Sangenic v. Aprica, however, seems to understand the award of defendant's profits as merely a presumption of the plaintiff's lost profit, which the defendant can then try to whittle down to something that might more closely approximate the plaintiff's lost profit.  This still strikes me as an approach that invites error, but there it is.  In any event, if a patent system views awards of defendant's profits as a proxy for the plaintiff's lost profit, then it makes sense to render such awards only when there is reason to believe the plaintiff has suffered some lost profit as such, and not merely a loss of royalties.  Under this rationale, then, awards of defendant's profits wouldn't be available to nonpracticing entities.  Under Japanese law, however, it appears that this remedy is available as long as the plaintiff lost a profit, even if for example that profit would have been earned through reliance on an exclusive distributor to do the actual selling, or from sales of products that would have competed against the infringing products.   

Second, one could view awards of defendant's profits as deriving their justification on the basis of an unjust enrichment (or some such) theory, which from an economic perspective might suggest a deterrence rationale.  If the infringer must disgorge the profit earned from the use of the patent, infringement is deterred.  At the same time, we probably don't want to overdeter, that is, to make defendants unreasonably cautious about launching new products or undertaking excessive searches for existing patents prior to launch.  This might suggest that, if awards of defendant's profits are to be available, they should be premised on some level of intent or knowledge on the part of the defendant, and not merely a presumption that the defendant was aware of the patent.  (See my discussion with Professor Siebrasse in the comments section to my recent post on a Canadian case, Varco Canada Ltd. v. Pason Systems Corp.)  Thus, the Canadian standard, under which awards of defendant's profits are discretionary and the defendant's act of deliberate infringement is an important factor, might make more sense than a rule that accords the patentee an entitlement to seek such an award.  Since many cases brought by NPEs do not involve deliberate copying on the part of the defendant, NPEs often would not be entitled to awards of profits.  
However, as Axel Walz points out in his recent article, Patentverletzungen im Lichte des Kartellrechts:  In Sachen Europäische Kommission gegen Orange-Book, GRUR Int. 2013, 718, in Germany the conventional wisdom seems to be that the patentee has a choice among the three options.  Walz, however, cites a 1909 German Supreme Court case for the proposition that the patentee must be using the patent in some commercial sense if it wants to recover an award of defendant’s profits, and he believes that merely using the patent to derive licensing revenue wouldn’t count.  He seems to suggest a rationale similar to that followed in Japan, that awards of profits are allowed because patentees can’t always prove their lost profits, and that this rationale wouldn’t apply in the case of an NPE, whose “lost profits” are really lost licensing revenues and thus relatively easily calculable.  Walz also argues that awards of defendant’s profits are not appropriate, under E.U. competition law, in cases involving standard-essential patents.  He notes the following from the BGH’s 2004 Standard-Spundfaß decision, which discusses the competition-law defense that later came to be the Orange-Book-Standard defense:
compensation for damages to the plaintiff resulting from the use the defendant has made can in any case only be demanded for the amount to which the plaintiff would have been entitled if it had not refused (illegally) to grant the defendant . . . a licence for the disputed patent.
BGH, July 13, 2004, GRUR 2004, 966—Standard-Spundfaß, English translation available at 36 IIC 741, 748-49 (2005). 

Of course, if and when the remedy of defendant's profits is available, there are a host of further issues to take into account, among them how to determine the portion of the profit that is properly attributable to the use of the infringed patent, and whether to deduct only variable or some portion of fixed costs from the defendant's revenue.     
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On issues completely unrelated to the above, Dennis Crouch has an interesting write-up here on a recent Federal Circuit case on declaratory judgments, and Robert Lundie-Smith has one on a recent U.K. matter addressing what qualifies as a threatened infringement proceeding.

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