A Study of Reasonable Royalty Awards in Japan

I mentioned back in December that Professor Masabumi Suzuki of Nagoya University in Japan had brought to my attention a paper titled Predictability of Monetary Damages under Article 102(3) of the Japanese Patent Law which was recently published (in Japanese) by the Second Subcommittee, the Second Patent Committee, in 64 Intellectual Property Management 219 (2014).  My research assistants Gina Rhee and Takamasa Nakahara have now provided me with a rough translation of the article, which attempts to delineate and, to some degree, quantify the factors that go into awards of reasonable royalties in Japanese patent litigation.

To provide a little background, under article 102(3) of the Japanese Patent Act "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."  As I discuss in my book, however, prior to 1999 the relevant text included the word tsujono ("normally"), meaning that royalties would be measured by the amount the patent owner "normally" would have derived from licensing the invention.  That word was removed out of concern that it influenced "courts to rely heavily on previous licenses granted by the patentee, license rates paid for the use of government inventions, and published royalty rates compiled for particular industries," and that "these awards tended to undercompensate patentees and to encourage infringement" (p.311).  Anyway, the above study involved an examination of 68 cases from January 1, 1999 to March 5, 2013, in which courts awarded reasonable royalties pursuant to article 102(3).  (I believe this is intended to be comprehensive, not just a random sample of such cases.)  The authors show that, as I reported previously, courts awarded a 5% rate in 28% of the cases, 3% in 22% of the cases, and 10% in 16% of the cases.  (It appears, if I am not mistaken, that the rate is applied to the defendant's turnover of infringing products.  No need to be concerned about the entire market value rule in a system without juries!)  Comparing these data to survey evidence from 1992 and 2002, it appears that awards of 3% are less prevalent than in 1992 but more so than in 2002; while 5% and 10% rates are more common than in 1992 and about the same as reported in 2002.  (There may be some overlap, though, between the cases reflected in the 2002 survey and the cases the authors analyzed, some of which go back as far as 1999.)  Altogether, during the period under consideration, there were five cases in which the award exceeded ¥200,000,000 (U.S.$1,660,000 at current exchange rates); the vast majority were under ¥100,000,000.

Based on their analysis of these cases, the authors develop a formula to help predict the rate a court will award in a given case.  In 11 of the cases there were comparable licenses involving the same or another patent, which provided a starting point for the calculation; in most of the remaining cases, courts used as a starting point the standard rate for a given technological field as reported by the Japanese Institute of Inventors and Innovation (Hatsumei Kyokai) in the fifth edition of this book.  (See also the discussion in my book of the use of standard rates, at p.311 n.100.)  The authors uncover various positive factors (e.g., "the technical or economical value and importance of the invention," the plaintiff's own high profit margin, or the substantial contribution of the invention to the defendant's profitability) and negative factors (e.g., the invention does not contribute much to the value of the end product, there are available alternatives, or the end product is a mass-produced, inexpensive one) that affect whether a court will depart upwards or downwards from the starting rate.  The authors then weight each of these factors depending on whether the factor relates to the invention itself, the patentee, the infringer, third parties, or something else, and adjust the starting rate accordingly.  Finally, they take this "imaginary rate" (the starting rate plus or minus its "adjustment value") and multiply it by a "sales coefficient."  The sales coefficient reflects the fact that lower rates are awarded where the turnover of the infringing product is high, and vice versa; there tends to be an inverse relationship between the two.  Overall, in 70% of the 54 cases to which this analysis was applied, the authors were able to predict the rate awarded to within one percentage point.  In addition, on the whole there were "more cases in which the awarded rate is actually higher than the license agreement rate," which probably makes sense given that the cases that result in damages awards all involve patents that have been adjudged valid and infringed.

For another recent article (this one in English) discussing patent damages in Japan, see Nodoka Nakamura's Recent Trends in Court Judgments Concerning Damages in Japanese Patent Infringement Litigations, A.I.P.P.I.--Journal of the Japanese Group of AIPPI 389 (Nov. 2014), which is based on  Ms. Nakamura's  review of court judgments handed down from January 1, 2003 to January 30, 2014, and listed in the appendix to the article.  For my blog post on this paper, see here.