Thursday, May 1, 2014

Statutory damages for patent infringement in China and Russia, Part 2

This is the second of a two-part series on statutory damages for patent infringement.  (For part 1, see here.)  It begins with a continuation of Nadia Wood’s analysis of the recent Russian legislation.

Wood:  Further research suggests that, under the Russian law, the amount of damages must be determined at the time of filing of the suit, that the court may not award damages higher than the amount requested by the plaintiff, and that the second option, the double penalty, is used as a floor rather than (or perhaps in addition to) the alternative to the first option.  Here’s why:  

1.      It seems that Russia last year launched an Intellectual Property Rights Court  (for discussion, see this article on the Canadian firm Gowlings’ website.)  The IP Court has an FAQ section on its website, (link in Russian). In that FAQ section, the IP Court has the following Q & A:

Q: Можно ли заявить требование о выплате компенсации за нарушение интеллектуальных прав в размере, определенном по усмотрению суда, поскольку суд вправе по своему усмотрению уменьшить размер взыскиваемой компенсации по сравнению с размером, указанным в иске?
A: Согласно п. 43.1 Постановления Пленума Верховного Суда РФ № 5, Пленума Высшего Арбитражного Суда РФ № 29 от 26.03.2009 «О некоторых вопросах, возникших в связи с введением в действие части четвертой Гражданского кодекса Российской Федерации» несмотря на то, что размер подлежащей взысканию компенсации определяется по усмотрению суда (абз 2 ст. 1301, абз. 2 ст. 1311, пп. 1 п. 4 ст. 1515, пп. 1 п. 2 ст. 1537 ГК РФ), в исковом заявлении должна быть указана цена иска в твердой сумме. Если истцом не указана цена иска (размер требуемой компенсации), суд выносит определение об оставлении соответствующего искового заявления без движения (ст. 136 ГПК РФ, ст. 128 АПК РФ).

My translation of that Q&A:

Q: Can I make a claim for compensation for the violation of intellectual property rights in the amount to be determined at the discretion of the court, since the court has the discretion to reduce the amount of the ordered compensation compared to the amount specified in the complaint?
A: According to § 43.1 of the Resolution by the Plenum of the Supreme Court of Russian Federation number 5, Plenum of the Supreme Arbitration Court of the Russian Federation dated 26.03.2009 number 29 “On some issues that have arisen in connection with the introduction of Part IV of the Civil Code of the Russian Federation” despite the fact that the amount to be recovered as compensation shall be determined at the discretion of the court (paragraph 2 of Art. 1301; para. 2 of Art. 1311; para. 1, para. 4 of Art. 1515; para. 1, para. 2 of Art. 1537 Civil Code), the complaint must specify the price of the claim a fixed amount. If the plaintiff does not specify the price of the suit (the amount of the demanded compensation), the court shall enter an order precluding the suit from moving forward (Art. 136 of the CPC RF [Civil Procedure Code], Art. 128 RF APC [Arbitration Procedure Code]).

2.      All of the articles referenced above impose liability for violations of various IP rights: 1301 for violation of exclusive right to production; 1311 for rights adjacent to author’s (for theater production, for example); 1515 for trademark, 1537 for designation of origin (links in Russian). All of these articles impose liability using nearly identical language as the newly-enacted article 1406 for patents. The structure of the relevant part for all of these articles is as follows (this is a generic summation for the purposes of illustration):

The owner at his option may demand from the offender instead of actual damages payment of compensation:
in the amount of ten thousand to five million rubles determined at the discretion of the court based on the nature of the violation;
twice the value of [here where the articles differ, some using twice the value of the produced goods or twice the royalty rate, but they all have this double- penalty option here].

3.      I tracked down the 2009 Resolution that the IP court referenced, which appears to me analogous to Rules of Civil Procedure promulgated by the courts of highest jurisdiction in the US, except that it also seems to interpret the laws. The Resolution is available here in .html: (link in Russian) and here in .pdf format: (link in Russian).

Paragraphs 43 and 43.1 of the Resolution direct the courts in interpreting articles 1299–1301, 1309–1311, 1515 и 1537 of the Civil Code to demand a fixed compensation amount to be listed in the complaint and to preclude the case from moving forward without it, which is the part that IP court cited in its FAQ. The rationale for that seems to be that the government collects a fee based on the listed amount. If I am reading this correctly, a $100,000 lawsuit would cost less to file than a $1,000,000 lawsuit.

The most interesting part comes next. Paragraph 43.4 of the Resolution directs the courts to do the following:

43.3. Рассматривая дела о взыскании компенсации в размере от десяти тысяч до пяти миллионов рублей, суд определяет сумму компенсации в указанных законом пределах по своему усмотрению, но не выше заявленного истцом требования. При этом суд не лишен права взыскать сумму компенсации в меньшем размере по сравнению с заявленным требованием, но не ниже низшего предела, установленного абзацем вторым статьи 1301, абзацем вторым статьи 1311, подпунктом 1 пункта 4 статьи 1515 или подпунктом 1 пункта 2 статьи 1537 ГК РФ.
Размер подлежащей взысканию компенсации должен быть судом обоснован. При определении размера компенсации суд, учитывая, в частности, характер допущенного нарушения, срок незаконного использования результата интеллектуальной деятельности, степень вины нарушителя, наличие ранее совершенных лицом нарушений исключительного права данного правообладателя, вероятные убытки правообладателя, принимает решение, исходя из принципов разумности и справедливости, а также соразмерности компенсации последствиям нарушения.

My translation:

43.3. In deciding the claim for compensation in the amount of ten thousand to five million rubles, the court shall determine the amount of compensation within these legal limits, at its discretion, but not higher than the plaintiff’s claim. The court is not deprived of the right to order compensation in the amount lower than the stated demand, but not less than the lower limit set by the second paragraph of Article 1301, second paragraph of Article 1311, subsection 1, paragraph 4 of Article 1515 or subparagraph 1 of paragraph 2 of Article 1537 of the Civil Code of the Russian Federation.
The court must justify the amount of compensation it orders. In determining the amount of compensation the court takes into account in particular the nature of the violation, the period of illegal use of intellectual activity, degree of guilt, the existence of previously-committed violations of the exclusive right of this right holder by the offender, the probable losses to the right holder, and makes its decision based on the principles of reasonableness and fairness, as well as the proportionality of compensation to the consequences of the violation.

The next paragraph after that, 43.4, directs the court to use non-exclusive licensing agreement in the existence at the time of the infringement as a base rate when a claim for damages is in the amount of double licensing or royalty fee.

4.      Based on the above, I have a few tentative thoughts about the genesis and application of the new law, but I would welcome input from readers who are more knowledgeable about the specifics:

a.       Obviously, article 1406 on patents mirrors the language of the other articles discussed above, but it is not covered by the same Resolution. I would expect that the courts will most likely interpret it the same, however, and that another Resolution would be forthcoming, if necessary.

b.      What the Resolution suggests is that to utilize option 2, you actually need to have a licensing agreement with someone somewhere, even though the text of the law itself describes the base rate as a “rate usually charged under comparable circumstances.” The language of 43.4 is still somewhat vague though. I wonder if the highest court felt the need to make a resolution based on “some issues” in interpreting the statute; perhaps there are some decisions out there that would indicate how the courts have interpreted these similar provisions?

c.       It also appears that the double-penalty option 2 serves as “the floor” for option 1, damages to be determined by the court.

d.      The closest counterpart to these provisions of the Russian law in the U.S. would be 17 U.S.C. § 504, which provides for statutory damages in copyright infringement cases. In the U.S. statute, the owner may make a selection “at any time before final judgment is rendered.” 17 U.S.C. § 504(c)(1). Russian law has no such language, but the Resolution seems to demand that the election is made at the time of filing or the case cannot move forward.

From a practical perspective, I should think it is very difficult for the plaintiff to determine the value of the damages at the time of filing, since the plaintiff rarely knows the scope of the infringement. Even if the plaintiff knows that a certain factory in Russia is producing counterfeit purses, it would not necessarily know how many purses the infringer had made. Without knowing the value of the suit, it would be difficult for the plaintiff to decide whether to ask for actual or statutory damages. I would welcome further insights on whether or to what extent discovery is available in Russian courts, and whether the amount of damages can subsequently be amended.

e.       The U.S. counterpart also has “additional damages” provision allowing for damages for twice the licensing rate in certain cases, but the text of the law makes it clear that these damages are “in addition to any award of damages under this section.” 17 U.S.C. § 504(d). Again, Russian law brings no such clarity.

f.          Whereas in the US the courts have broad discretion in imposing damages within the statutory limits, the discretion of the Russian courts appears to be far more constrained by the enumerated factors in the Resolution. One of the key differences is proportionality: the Resolution directs Russian courts to consider losses to the owner and “proportionality of the ordered compensation to the consequences of the violation.” By contrast, United States Congress has specifically sought to ensure that “the cost of infringement substantially exceeds the costs of compliance, so that persons who use or distribute intellectual property have a strong incentive to abide by the copyright laws.” H.R. Rep. 106-216, at 6 (1999). Consistent with this Congressional intent, the U.S. Supreme Court has repeatedly held that a statutory damages award for copyright infringement requires no proof of or relationship to actual damages. See F.W. Woolworth Co. v. Contemporary Arts, 344 U.S. 228, 231, 233 (1952) (affirming statutory maximum award where proven damages were significantly lower to “vindicate the statutory policy”); Douglas v. Cunningham, 294 U.S. 207, 208 (1935) (reversing where lower court reduced damages award from statutory maximum to statutory minimum on ground that no actual damages were proven); L.A. Westermann Co. v. Dispatch Printing Co., 249 U.S. 100, 106 (1919) (holding plaintiff entitled to statutory damages where no evidence of actual damages was presented).

Thus, even though Russia appears to be strengthening protection for intellectual property, the new law may lack teeth given difficulties in valuing the suit prior to filing and court’s focus on proportionality of compensation to actual damages even though statutory damages are available. Without the powerful “stick” of statutory damages, the deterrent effect on others besides the defendant is low, and creates no strong incentive for Russian citizens to comply with intellectual property laws.

Finally, as Professor Cotter discussed in Part 1 of this series, in determining statutory damages for patent infringements China appears to focus on “the value, function, and materiality of the patent.” Thomas F. Cotter, Comparative Patent Remedies:  A Legal and Economic Analysis 359 (2013). This approach seems to be similar to that of Russia rather than the United States.

Cotter:    In my book, I observe at pages 359-60 (citing Roger D. Blair & Thomas F. Cotter, Intellectual Property: Economic and Legal Dimensions of Rights and Remedies 74–83 (2005)):

statutory damages may be a sensible tool to apply when actual damages are difficult to prove; or when an act of infringement individually causes little harm, but is of a type that is likely to go undetected or is likely to be replicated by many actors, such that the potential harm in the aggregate is substantial. In such cases, a damages multiplier may be necessary to achieve adequate deterrence, and statutory damages are in theory one way to impose such a multiplier. On the other hand, statutory damages that are not tied to some underlying estimate of actual harm, lost royalties, or probability of detection give rise to risks of substantial over- or underdeterrence.

I further speculated that the risk of underdeterrence might be of greater concern in China, given that even the highest amount of statutory damages awardable is relatively low (about $ U.S. 160,000); and I would consider this risk substantial in Russia as well, given that the highest award is comparable (about $ U.S. 140,000).  I’d also question whether it makes sense to award statutory damages that in practice may not reflect the amount of actual harm to the patentee.  But it is interesting to see two countries now experimenting with this procedure, and I’ll be eager to hear how matters work out over the coming years.

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