AIPPI Q236: Relief in Proceedings Other than Injunctions or Damages, Part 3: On Reasonable Royalties

In two previous posts (here and here) I've discussed Q236 ("Relief in Proceedings Other than Injunctions or Damages") as posed by AIPPI (the Association Internationale pour la Protection de la Propriété Intellectuelle, or International Association for the Protection of Intellectual Property) to its member groups in 2012.  The first post described what the AIPPI is and listed the specific questions encompassed within Q236, while the second post provided the AIPPI's September 2013 resolution on Q236 and my initial observations.  I mentioned then that I would return with another post or posts addressing some of the specific matters that struck me in reading through the member group reports and the AIPPI's summary report.  This post will focus on the issue of reasonable royalties.  My fourth and final post in this series will discuss some remaining issues.

As noted in my second post, with respect to reasonable royalties the AIPPI's Working Guidelines state that "while actually a measure of damages, a court (or applicable administrative body) may sometimes award monetary relief measured on the basis of a presumed licence fee or reasonable royalty rate as if the IPR holder and infringer had entered into a voluntary licensing arrangement."   Similarly, the Summary Report (which, along with all of the other relevant documents, is accessible here) states (at p.3) that "in a number of jurisdictions, a reasonable royalty is merely a measure of damages, rather than being available as a separate or alternative form of monetary relief," but that nineteen of the forty responding member groups characterized it as a separate or alternative form.  Pages 7-8 then summarizes some of the specifics:  for example, in several countries reasonable royalties are not available for trade secret misappropriation; in China, reasonable royalties are available in patent cases only when lost profits or the defendant's profits cannot be proven (as I discuss at pages 353-54 of my book); in France, they are viewed as "an alternative to damages for patents, but only as a method for calculating damages for" trademark and copyright infringement; in Germany, they "[m]ay be ordered if a damages claim is time-barred" (p.10); and in Japan they are "used as the amount of a claim for unjust enrichment and also as a basis for calculation of damages."  (I also discussed this point under German and Japanese law in this post in September.)

Some of the practical significance of classifying reasonable royalties as "damages" or as something else can be gleaned from above.  First, classifying reasonable royalties as "damages" seems to suggest that they are essentially a claim for "lost royalties."  Where there is no established royalty or the patentee wouldn't have actually licensed the patent, this "lost royalties" theory might seem a  bit of a fiction, though I think it is still reasonable to think of it as a damages claim:  the patentee was entitled to (at least) compensation in the form of a reasonable royalty, and by having failed to pay that royalty before commencing use the defendant has caused the patentee to suffer a loss.  In any event, some jurisdictions (for example, the U.S.) appear to classify reasonable royalties this way by statute.  See 35 U.S.C. section 284 ("Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer").  On this view, however, there are, literally, no "damages," and no reasonable royalty should be awarded, in at least two circumstances:  (1) when it appears that, but for the infringement, the defendant never would have licensed the patented technology because there was a less expensive noninfringing alternative that was just as good as the patented technology; or (2) there is a failure of proof, for example, where the plaintiff introduces no admissible evidence as to the amount of the royalty and the court may not simply guess what an appropriate royalty would have been.  The latter situation occurred in the Apple v. Motorola case over which Judge Posner presided two years ago, the appeal from which we are daily awaiting.  Although this may be correct as a matter of policy, whether this is the correct result under U.S. law is an interesting question.  As noted above, the statute says "but in no event less than a reasonable royalty," and some courts understand that to mean that the prevailing plaintiff is entitled to some royalty even if the evidence is quite thin.  (For an interesting recent discussion, see the district court opinion in Interwoven Inc. v. Vertical Computer Systems, accessible from the Patent Damages Blog here.)  

Relatedly, Colm Ahern has an interesting discussion of Spanish law in his post Is Proof of Damages Required in Spain If Patentee Opts for Equivalent Royalty? over at PatLit.  Mr. Ahern notes that article 13 of the 2004 EC Enforcement Directive appears to equate reasonable royalties with damages, but that this characterization can raise problems in some countries' laws, particularly where the patentee does not exploit the patent in that country.  He states that a recent decision from the Madrid Appeal Court allows the patentee to recover reasonable royalties nonetheless, on the theory that the remedy is grounded in "the illegitimate invasion of [an] exclusive right."

An alternative way of looking at reasonable royalties, as suggested above (and in Mr. Ahern's post as well) is to ground them in the law of unjust enrichment (rather than "damages").  The theory is that the defendant gained a benefit to which it was not entitled--it saved itself the expense of paying a royalty.  (Of course, you could take the analysis further and say that the defendant was unjustly enriched in the amount of the profit it earned or the expenses it saved as a result of the infringement, and this provides a way of thinking about the remedy of an accounting of defendant's profits, which I may take up in a future post.)  Judge Posner made this point too in Apple v. Motorola (which I quote and discuss at pages 25-26 & n.94 of this paper):

The monetary remedy in patent cases is measured as I have already noted either by the patentee’s loss or by the value of the infringement to the infringer.  The premise of the alternative measure—value to the infringer—is that had the infringer negotiated for a license rather than infringing, that value would have been transmuted into a license fee paid to the patentee, and the loss of that fee constitutes damages suffered by the patentee.  “Restitution measured by the market value of an unauthorized use appeared at an early date as a remedy for patent infringement, in cases where the patentee was unable to prove either his own damages or the infringer’s profits.  (Although such an award has always been denominated ‘damages’ in the context of patent infringement, it is more accurately described as a species of restitution for the value of a benefit wrongly obtained.)  Unlike the accounting for the infringer’s profits, restitution measured by use value survives in the current Patent Act.”  Restatement (Third) of Restitution and Unjust Enrichment § 42, comments c and f (2011); see also George E. Palmer, The Law of Restitution § 2.7, pp. 93–94 (1978); Roger D. Blair & Thomas F. Cotter, “An Economic Analysis of Damages Rules in Intellectual Property Law,” 39 William & Mary L. Rev. 1585, 1650 (1998). 

As suggested above, this alternative characterization sometimes allows litigants in Germany and Japan to recover monetary relief even though the statute of limitations for "damages" has run.  

Finally, as I discuss in the paper referenced above, under U.S. law another theoretical consequence of grounding reasonable royalties in the law of unjust enrichment rather than "damages" might be that this would provide a basis for characterizing royalties as "equitable" rather than "legal" relief, and thus eliminating the right to trial by jury.  I'm not entirely convinced by the argument myself, though, and in any event it is, as stated, more theoretical than something that stands a realistic chance of being taken up in legislation.  Not surprisingly, this matter is not taken up in any of the AIPPI member group reports; as a practical matter, to my knowledge no country other than the U.S. tries patent infringement cases by jury.