Japan's IP High Court on Defendant's Profits, Royalties

A recent decision of Japan's Intellectual Property High Court, NeoChemir Inc. v. Medion Research Labs. Inc., Case No. 2018 (Ne) 10063, Judgment of June 7, 2019 (IP High Court), clarifies some points regarding awards of infringer's profits and reasonable royalties under Japanese law.  I came across a summary of the case in the September 2019 issue of A.I.P.P.I.--Journal of the Japanese Group of AIPPI, after which I also discovered a translation of the full judgment on the IP High Court's website.  I also just recently came across a German translation of portions of the decision in the December 2019 issue of GRUR-Int. (pp. 1186-91), along with (as I mentioned last week) a commentary by Atsuhiro Furuta.

The facts of the case, in brief, are as follows.  Plaintiff Medion accused NeoChemir and other firms of infringing Medion's patents relating to "carbon dioxide-containing viscous composition" by making and selling certain cosmetic products.  The court affirms on liability, and then proceeds to discuss damages.  Under the text of Japan Patent Act article 102 that remains in force until April 1, damages can be assessed 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.

(4)　The preceding paragraphs shall not prevent any relevant party from claiming compensation for damage in an amount exceeding the amount provided for therein. In such a case, where the infringer committed the infringement of the patent right or exclusive license without intent or gross negligence, the court may take these circumstances into consideration in determining the amount of damages.

The plaintiff here claims damages under article 102(2), though the court also considers what a reasonable royalty would be under article 102(3).  

As for the infringer's profits, the court reaffirms the understanding that Japan Patent Act article 102(2) presumes that the infringer's profit equals the loss sustained by the plaintiff.  As I have discussed previously stated--see, e.g., my book at pp.  323-24, and this paper at p.186--I don't think this presumption is all that sound as a matter of economics.  The court's analysis, however, is sensitive to the possibility that the defendant's profit may be attributable to factors other than the patented feature (though it concludes that the evidence here did not support that theory), and it discusses what types of costs should be deducted to determine the defendant's profit.  The court writes (pp. 29-34):

Further, it is reasonable to understand from the above purpose of Article 102, paragraph (2) of the Patent Act that an amount of profit made by an infringer due to an infringing act as provided in the same paragraph is a total amount of profit made by the infringer in principle, and there should be a presumption under the paragraph   for such a total amount of profit. Of course, the above provision is a provision of presumption. Thus in a case where an infringer establishes the fact that there is no connection between a damage on patentee and a part or all of profit made by the infringer, the above presumption may be rebutted to such extent. . . .

It should be construed that an amount of profit made by an infringer due to an infringing act of Article 102, paragraph (2) of the Patent Act is an amount of marginal profit in which only an additional cost that was necessitated in direct relation to manufacture and sales of infringing products by the infringer is deducted from sales figures of the infringing products by the infringer, and the burden of proof is on the patentee's side. . . .

As aforementioned, expenses to be deducted means expenses additionally required in direct relation to the production and sales of infringing products, which includes, for example, raw material cost, purchase cost, and shipping cost for infringing products. In contrast, for example, an employment cost as well as traveling and communication costs in administrative part do not correspond to additional expenses that were necessitated in direct relation to manufacture and sales of infringing products in usual circumstances. . . .

Regarding the rebuttal to the presumption under the provision of Article 102, paragraph (2) of the Patent Act, it is construed as an infringer who should bear burden of proof, similar to the circumstances of the proviso to the same paragraph, paragraph (1) of the Patent Act, and a fact for the rebuttal to presumption may be construed as including circumstances which could disprove the connection between a profit gained by the infringer and a damage on patentee. For example, the following facts may be considered as a fact for the rebuttal to presumption with respect to Article 102, paragraph (2) of the Patent Act, as similar to the circumstances of the proviso to the same article, paragraph (1) of the Patent Act: [i] a difference in business style (market is not the same) between patentee and infringer; [ii] the presence of competing products in a market; [iii] marketing efforts of infringer (branding, advertisement); and [iv] performance of infringing products (features other than patent invention including function and design). Further, even in a case where a patent invention is implemented for only a part of the infringing products, these facts may be taken into consideration as a fact for the rebuttal to presumption. It cannot be deduced directly from the fact that the patent invention is implemented for only a part of the infringing products that the above rebuttal to presumption is recognized, but it is reasonable to find by comprehensively taking into account the circumstances such as an importance of a part of an infringing product where the patent invention is implemented and the customer attracting force of the patent invention.

On the facts, however, the court concludes that the defendants have not rebutted the presumption.

The decision concludes with a discussion of the plaintiff's alternative claim for reasonable royalties under article 102(3); the court awards the plaintiff this alternative amount with regard to one product for which this leads to an amount higher than the amount calculated under article 102(2) (pp. 42-43, 51-52).  The court summarizes the law of royalties as follows (pp. 39-40):

Therefore, a royalty rate to be paid for the implementation should be determined as a reasonable royalty rate by comprehensively taking into account the following circumstances appeared in a lawsuit: [i] a royalty rate in the actual license agreement of the patent invention or if it is indefinite, a market rate of royalty rate in their business; [ii] the value of the patent invention itself; i.e., the technical content or significance of the patent invention, and the substitutability with alternative products; [iii] contributions to sales figure and profit when the patent invention is used for products and a manner of infringement; and [iv] a competition between patentee and infringer as well as a business policy of patentee.

Applying these factors, the court computes a 10% royalty rate (pp. 41-42):

As in the foregoing, it is reasonable to find that a royalty rate to be paid for the implementation of the present case to be determined post facto for a person who infringed a patent right would not fall below 10% by taking into account the following circumstances appeared in a lawsuit: [i] in this case, the royalty rate of the actual license agreement of the respective patents is not disclosed, whereas an average license fee in recent statistics of a technical field to which the respective inventions pertain is 5.3% in a result of questionnaire for domestic businesses, and 6.1% in the determination by court, and there is a case where a settlement money was found to be 10% of sales figure with regard to patent right infringement of patent in the same field owned by the Appellee; [ii] Invention 1-1 and Invention 2-1 have considerable importance, and no alternative technique is present; [iii] it can be said that the implementation of Invention 1-1 and Invention 2-1 contributes to the sales and profit of the respective Defendants' products; and [iv] the Appellee and the Appellants have a competitive relationship. Further, in view of the contents of Patent right 1 and Patent right 2, the royalty does not differ between one case and a combination of both cases.

The court also awards interest in the amount of 5%, and attorneys' fees.  

For discussion of an earlier case brought by NeoChemir, see here.