New German case on reasonable royalties

Actually, not all that new--it was decided in 2010--but only recently reported, with headnotes by Judge Dr. Peter Guntz, in Mitteilungen der deutschen Patentanwälten 6/2013, at pp. 275-81.  The case is LG München, 7 O 17718/09, Mar. 25, 2010—Gülleausbringung (“Liquid Manure Spreading").  (Ah yes, the glamorous world of patent law.)  The plaintiff, a licensee of the patent in suit (DE 196 40.037) filed suit for infringement and prevailed, and a trial on damages followed.  I wouldn’t say the decision breaks a lot of new ground (see my book pp. 266-70 for an overview of the law of reasonable royalties in Germany), but it provides an interesting application of German damages law.  The court notes the general principle that an award of reasonable royalties is supposed to render the infringer neither better off nor worse off than a licensee, and that the appropriate license rate is that which reasonable licensing partners would have agreed to, if they had foreseen at the conclusion of the licensing contract the future development, duration, and extent of the licensee’s usage of the patent.  In addition, however, a court should take into account the special features which distinguish the infringement situation from the customary licensing contract.  For example, when the parties agree to a license, they often don’t know for sure if the patent is valid and would be infringed by the licensee’s product, so they may include a discount.  On the other hand, the licensor also may demand an upfront payment or a higher rate to compensate for various risks. Moreover, a higher rate serves to impede the infringer from calculating that it might escape detection or will not be prosecuted.  Thus, a court should not necessarily simply use the same license rate that willing partners would have agreed to.  The court then cites to recitals 3 and 26 and article 13 of the 2004 EC Enforcement Directive:

(3) However, without effective means of enforcing intellectual property rights, innovation and creativity are discouraged and investment diminished. It is therefore necessary to ensure that the substantive law on intellectual property, which is nowadays largely part of the acquis communautaire, is applied effectively in the Community. In this respect, the means of enforcing intellectual property rights are of paramount importance for the success of the Internal Market.

(26) With a view to compensating for the prejudice suffered as a result of an infringement committed by an infringer who engaged in an activity in the knowledge, or with reasonable grounds for knowing, that it would give rise to such an infringement, the amount of damages awarded to the rightholder should take account of all appropriate aspects, such as loss of earnings incurred by the rightholder, or unfair profits made by the infringer and, where appropriate, any moral prejudice caused to the rightholder. As an alternative, for example where it would be difficult to determine the amount of the actual prejudice suffered, the amount of the damages might be derived from elements such as the royalties or fees which would have been due if the infringer had requested authorisation to use the intellectual property right in question. The aim is not to introduce an obligation to provide for punitive damages but to allow for compensation based on an objective criterion while taking account of the expenses incurred by the rightholder, such as the costs of identification and research.

Article 13

Damages

1.Member States shall ensure that the competent judicial authorities, on application of the injured party, order the infringer who knowingly, or with reasonable grounds to know, engaged in an infringing activity, to pay the rightholder damages appropriate to the actual prejudice suffered by him/her as a result of the infringement.

When the judicial authorities set the damages:

(a) they shall take into account all appropriate aspects, such as the negative economic consequences, including lost profits, which the injured party has suffered, any unfair profits made by the infringer and, in appropriate cases, elements other than economic factors, such as the moral prejudice caused to the rightholder by the infringement;

or

(b) as an alternative to (a), they may, in appropriate cases, set the damages as a lump sum on the basis of elements such as at least the amount of royalties or fees which would have been due if the infringer had requested authorisation to use the intellectual property right in question.

   

Interpreting German Patent Act art. 139 in accordance with the Directive, the license rate is not necessarily capped at the maximum amount the parties would have agreed to on the free market.  Rather, reasonable parties would have agreed to a decidedly higher rate if they had foreseen an infringement proceeding.

The court next turned to the appropriate rate and base in the case before it.  The court concluded that for infringing sales of liquid manure spreading vehicles, it would be appropriate to use the revenue from the sales of those vehicles multiplied by a rate of 2%.  For infringing sales of the liquid manure spreading feature (Gülleausbringungvorrichtung) sold as a separate component, the appropriate rate was 5%.  (The patentee had requested 3% and 6%.  I take it that the patent must have claimed both the feature and the combination of feature coupled with vehicle.)  The court noted that in the machine industry the typical license rate ranges from 3-5%.  In determining the appropriate rate here, the court then considered both license-increasing and license-decreasing factors.  Among the former were that the invention was not a pioneering one, that there are other patents for liquid manure spreading devices, and that the patentee did not possess monopoly power in the relevant market segment.  Among the latter were that the patent had been in existence for ten years, that the infringement judgment had been affirmed in the meantime (though a patent nullification proceeding instituted by the defendant was pending), and the additional risks faced by the patentee.  As for the base, the court noted that appropriate considerations are whether the product is usually distributed and reckoned as an entire device and whether the protected feature is responsible for an increase in value or the device’s distinctive stamp (kennzeichnendes Gepräge).  The court also noted that there is an interaction between the royalty base and the royalty rate (Wechselwirkung zwischen der Bezugsgröße und der Höhe des Lizenzsatzes), so where the base is large it may be appropriate to use a lower rate.