Thursday, December 7, 2017

AIPPI Resolution on Quantification of Monetary Relief

In early October I mentioned that the AIPPI World Congress would be meeting in Sydney to discuss, among other matters, the quantification of monetary relief for the infringement of IP rights.  My post also included  a link to the AIPPI webpage on this topic, which in turn included links to forty individual country reports.  Anyway, if you go to that link now you will also find a link to the resolution AIPPI adopted on October 17.  I won't quote it in full, but here are some of the more interesting parts of the AIPPI resolution.

First, point (1) of the resolution sets out the general principle that "Damages should compensate the right holder: a) for its lost profits in respect of sales of products or services that the right holder would have made but for the infringement; and/or b) for its lost profits in respect of price erosion; and/or c) by a reasonable royalty in respect of infringing sales that are not proved to have been lost sales of the right holder, save that the right holder cannot recover twice for the same loss."  Proceeding from these premises, point (2) notes that "the task is by its nature one of estimation," and point (3) then lists various factors that may be relevant to the calculation of lost profits, including "the availability of other substitutable products or services in the market."  This last point would, if adopted in the U.K., require the overruling of the old United Horse-Shoe case, which stands for the proposition that noninfringing alternatives are not relevant to the calculation of lost profits--and would therefore be a welcome change in the law.  (For my critique of United Horse-Shoe, see, e.g., here.)  Interestingly, I don't see any discussion of this specific issue in the U.K country report.  In addition, point (6) states that "Damages should also be recoverable where sales of goods or services of the right holder that compete with the infringement but do not embody the IP right have been lost because of the infringement, as long as the right holder proves a causal nexus between the infringement and the lost sales. The court may take the degree or strength of causation into consideration when considering the appropriate quantum of damages."  This is the rule followed in the U.S. under the Rite-Hite case, and although it remains controversial among some scholars it has always seemed correct to me if the overarching goal is to ensure that the patent owner is no worse off as a result of the infringement. 

Second, point (9) lists various factors that may be relevant to determining a reasonable royalty:
a) other licence agreements of the same IP right as the IP right in suit (but taking due account of the circumstances in which any such other licence agreement was negotiated and, in particular, but not limited to, whether infringement and/or validity of the IP right in suit had been determined);
b) other licence agreements of similar IP rights to the IP right in suit;
c) the cost of non-infringing alternatives;
d) advantages of the IP right in suit when compared with alternatives (including any applicable licence fees for alternatives);
e) profitability of the products or services encompassing the IP right in suit;
f) development costs of the IP right in suit; and
g) the absence and/or circumstances of prior licensing discussions between the
Up to a point, this is a reasonable distillation of two of what in my view should be the three most relevant factors:  comparables (a and b), and the advantage of the IP over alternatives (c and d).  The other major consideration, in my view, is apportionment (to what extent does the invention contribute to the profitability of the end product), and I don't see subpoint "e" fully addressing this issue.  (Neither does point (13), which states "Where the IP right in suit relates to a part of a multi-component product or service sold by the infringer, the value to be attributed to the IP right in suit (and the compensation available by way of lost profits or reasonable royalty) should be assessed having regard to the extent to which the infringing component provides the basis for customer demand for that multi-component product or service.")  I think it would have good to make that issue clearer.  I also don't agree with subpoint (f), since patents and other IP rights (again, in my view) are a reward for success, not effort, though I realize there is a robust debate (see, e.g, Ted Sichelman's work) on the question of whether damages should be based more on the cost of development. 

In addition, point (10) states that "In assessing a reasonable royalty, the parties should be considered as if they were willing licensor and licensee respectively, with the attributes of the actual right holder and infringer, but disregarding the fact that one or both parties would not in practice have agreed to license the IP right in suit," and point (11) correctly observes that "A reasonable royalty should be assessed on the basis that the IP right in suit is valid and infringed where validity and infringement have been determined in the same proceeding or, otherwise, if warranted in the circumstances." That corrective is necessary to avoid a double discounting problem, as I have observed many times elsewhere (and the observation is hardly original to me).  And point (16) notes the possibility of ongoing royalties when no injunction is granted (though it doesn't address whether injunctions should always or almost always be granted--that's not the topic of the resolution), stating that "In assessing a reasonable royalty where no injunction is granted, the royalty should include a royalty in respect of future infringements, if any."  It might have been good to add that, contrary to current U.S. practice, the rate should be the same rate used for pre-judgment royalties (a point I've made before, see, e.g., here), but so it goes.  Overall, though, I'd say this is a reasonably good resolution.

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