Nakamura on Patent Damages in Japan

Nodoka Nakamura has published a paper in the November 2014 issue of A.I.P.P.I.--Journal of the Japanese Group of AIPPI titled Recent Trends in Court Judgments Concerning Damages in Japanese Patent Infringement Litigations (pp.  389-410).  Ms. Nakamura ‘s study is based on her review of court judgments handed down from January 1, 2003 to January 30, 2014, and listed in the appendix to the article.  As such it provides a very useful  description of current Japanese case law relating to lost profits, infringers’ profits, and reasonable royalties.

As Ms. Nakamura explains, article 709 of the Japanese Civil Code article 709 provides a general right to recover compensatory damages for the violation of one’s rights, but in practice it is very difficult for patent owners successfully to invoke this provision.  (See also my book, pp.307-08, 310).  In response to this problem, the Patent Act itself includes article 102, paragraphs 1-3 of which in relevant part read as follows:

    (1) Where a patentee or an exclusive licensee claims against an infringer compensation for damage sustained as a result of the intentional or negligent infringement of the patent right or exclusive license, and the infringer assigned articles that composed the act of infringement, the amount of damage sustained by the patentee or the exclusive licensee may be presumed to be the amount of profit per unit of articles which would have been sold by the patentee or the exclusive licensee if there had been no such act of infringement, multiplied by the quantity (hereinafter referred to in this paragraph as the “assigned quantity”) of articles assigned by the infringer, the maximum of which shall be the amount attainable by the patentee or the exclusive licensee in light of the capability of the patentee or the exclusive licensee to work such articles; provided, however, that if any circumstances exist under which the patentee or the exclusive licensee would have been unable to sell the assigned quantity in whole or in part, the amount calculated as the number of articles not able to be sold due to such circumstances shall be deducted.

    (2) Where a patentee or an exclusive licensee claims against an infringer compensation for damage sustained as a result of the intentional or negligent infringement of the patent right or exclusive license, and the infringer earned profits from the act of infringement, the amount of profits earned by the infringer shall be presumed to be the amount of damage sustained by the patentee or exclusive licensee.

    (3) A patentee or an exclusive licensee may claim against an infringer compensation for damage sustained as a result of the intentional or negligent infringement of the patent right or exclusive license, by regarding the amount the patentee or exclusive licensee would have been entitled to receive for the working of the patented invention as the amount of damage sustained.

Thus, the first paragraph provides for the recovery of lost profits; the second for an award of the infringer’s profits (seen, however, as an alternative way of calculating the plaintiff’s actual loss); and the third for a reasonable royalty.

I recommend that readers interested in Japanese law take a look at the entire paper, but here are few highlights drawn from Ms. Nakamura’s discussion of the recent cases:

1.  In calculating lost profits under article 102(1), it is no longer the case that the patent owner must be selling products incorporating the patented technology.  Rather, it is sufficient if the patentee sells products that compete with the infringing products (see p.393; see also my book pp. 318, 324).  The paper also provides an overview of the case law on what costs should be deducted to determine the patentee’s profit margin (pp. 394-95).  In addition, as Ms. Nakamura discusses courts make may further deductions by taking into account whether there are circumstances suggesting that the patentee would not have made as many sales as the defendant, and the extent to which the patent contributes to the patentee’s profit margin (including “the technical significance of the invention” and “alternative technology”) (p.396).  In the majority of cases, these deductions amount to almost all (95-100%) or very little (1-20%), with “almost no court judgments where an intermediate value was used” (p.397).

2.  Courts consider similar factors in determining the defendant’s profit margin and the contribution of the invention to the defendant’s profits (pp. 398-401).  In addition, the recent case law holds that, as under article 102(1), damages under article 102(2) are available even if the patentee does not sell products embodying the patented technology, as long as the patentee sells products that compete with the infringing products (p.398; see also my previous discussion of this issue on this blog, here).

3.  In cases in which the patentee would not have made as many sales as the defendant made, Japanese courts have not awarded a reasonable royalty on the infringing sales that did not deprive the patentee of sales (pp.397, 401).  My own view is that this is not a sound economic result (see my book pp. 317-18); I still intend to do further research on how other countries handle this issue.  (in the U.S., the patentee could get a royalty on the infringing sales that did not displace its own sales.)

4.  Ms. Nakamura gives a good overview of the factors Japanese courts take into account in determining reasonable royalties (p.403), including some which appear to be of the “ex post” variety.  Interestingly, she concludes (p.404) that “there has not been a trend for the court to decide a higher royalty rate than those decided prior to” a 1999 statutory amendment that removed the word tsujono (“normally”) from what is now article 102(3).  For discussion in my book, see pp. 311, 321-22.