I am rather late in reporting on this decision—the Judgment of Oct. 20, 2022, 2020 (Ne) 10024 (IP High Ct. Grand Panel)—but better late than never. An English-language translation is available on the IP High Court’s website, here. The plaintiff asserted three patents, referred to in the decision as Patents A, B, and C, relating to massage chair apparatuses or machines. The plaintiff claimed that twelve products made by the defendant infringed. The district court concluded that none of the defendant’s products infringed, but on appeal the court finds that the export or sale of Defendant’s Products 1 and 2 infringe Patent C. The judgment of the court begins at p.75 of the translation, with the damages portion beginning at p.148. The damages questions center on articles 102(2) and (3) of the Japanese Patent Act, which in translation read as follows:
If a patentee or exclusive licensee files a claim for compensation for damage that the patentee or licensee personally incurs due to infringement, against a person that, intentionally or due to negligence, infringes the patent or exclusive license, and the infringer has profited from the infringement, the amount of that profit is presumed to be the value of damage incurred by the patentee or exclusive licensee.
The patentee or exclusive licensee may fix the value of the damages that the patentee or licensee has personally incurred as being equivalent to the amount of money the patentee or exclusive licensee would have been entitled to receive for the working of the patented invention, and may claim compensation for this against a person that, intentionally or due to negligence, infringes the patent or violates the exclusive license.
Applying the first of these provisions to the present case, the court observes:
Given that it is generally difficult for the patentee to prove the value of damages, and that this could result in causing an inconvenience that reasonable damage compensation would not be achieved, the purport of this provision is to reduce the patentee's difficulty of proof by presuming the amount of profit gained by the infringer from the infringement to be the value of the damage, if the infringer has gained such profit. Thus, if there are any circumstances suggesting that the patentee could have gained profits if no patent infringement had been made by the infringer, it should be construed that the application of Article 102, paragraph (2) of the Patent Act would be allowed by deeming that the patentee has incurred damage due to that infringement (see the judgment of the Special Division of the Intellectual Property High Court rendered on February 1, 2013 and the judgment of the Special Division of the Intellectual Property High Court rendered on June 7, 2019). In light of the purport of that paragraph, if the patentee was exporting or selling a product which is of the same type as the infringing product, targeting the same consumers, and which is in such a competitive relationship (a competing product) in the market that it could have been exported or sold if no patent infringement had been made by the infringer, it can be evaluated that the sales of the patentee's competing product decreased due to the infringement; therefore, it is reasonable to construe that there are circumstances suggesting that the patentee could have gained profits if no patent infringement had been made by the infringer. Moreover, it should be construed that the patentee's product does not necessarily need to be a product working the patented invention or need to demonstrate the same function and effect as the patented invention in order to say that such circumstances exist (pp. 149-50).
Reviewing the evidence, the court concludes that
In light of the commonality in the function of being capable of massaging a massage recipient's forearms, Appellant's Product 1 is found to be a product in such a competitive relationship (a competing product) in the respective markets in the common destination countries mentioned above that it could have been exported if Defendant's Product 1 had not been exported. Therefore, it is found that, regarding Appellant's Product 1, there are circumstances suggesting that the Appellant could have gained profits if no infringement of Patent Right C had been made by the Appellee. Accordingly, Article 102, paragraph (2) of the Patent Act is applied to the calculation of the amount of the damages incurred by the Appellant in relation to the export of Defendant's Product 1 (p.150).
And similarly for Defendant’s Product 2 (pp. 150-51).
On, then, to calculation. There follows a lengthy discussion of what expenses should be deducted from the defendant’s turnover to calculate its profits (pp. 152-57). The amounts are redacted, but we are told that once the appropriate expenses are deducted, the marginal profit the defendant earned from sales of Product 2 are “nil.” So only the marginal profit from the sales of Defendant’s Product 1 count for purposes of article 102(2), but that doesn’t mean the plaintiff recovers all of that amount, either. As indicated above, there is a presumption that the defendant’s profit from sales and export of infringing goods equals the plaintiff’s lost profit, if the evidence shows that the plaintiff could have earned additional profits but for the infringement. But that presumption can be rebutted, at least in part:
The Appellee alleged that the following matters fall under grounds for rebuttal of the Presumption: [i] the fact that the patented inventions are worked only in a part of Defendant's Product 1; [ii] the existence of competing products in the markets; [iii] the non-identicality of the markets; [iv] the Appellee's marketing efforts (the brand power and advertising); and [v] the performances of Defendant's Product 1 (functions, designs, and other characteristics other than Inventions C) (p.157).
Reviewing the evidence, the court states:
. . . the technical meaning of Inventions C is not high, and the contribution of Inventions C to forming the motivation to purchase Defendant's Product 1 is limited. Therefore, it is found that the marginal profit amount that the Appellee gained from the export of Defendant's Product 1 . . . includes parts to which Inventions C do not contribute. Therefore, the fact that Inventions C are worked only in a part of Defendant's Product 1 is found to fall under grounds for rebuttal of the presumption (p.159).
Similarly, “Defendant's Product 1 and Appellant's Product 1 did not have the same markets to the extent that the destination countries are different” (p.161), so this too partially rebuts the presumption that plaintiff would have earned the defendant’s marginal profit from sales of Product 1. (“The portion of the exports to destination countries to which Appellant's Product 1 was not exported . . . is equivalent to 7% of the export volume of Defendant's Product 1” (p.163).) On the other hand, the evidence does not substantiate the defendant’s allegation that “even if Defendant's Product 1 were not sold, the demands of consumers and traders (including overseas agencies) in overseas markets will shift to competing products of other companies, but not to Appellant’s Products 1” (p.160); that “Appellee's brand power and advertisement of Defendant's Product 1 contributed to the extent of forming the motivation to purchase Defendant's Product 1” (p.162); or that “the design of Defendant's Product 1 contributed to the extent of forming the motivation to purchase Defendant's Product 1” (p.162). So these allegations do not succeed in rebutting the presumption. Putting it all together, the court concludes that “[t]he amount of damages to the Appellant based on Article 102, paragraph (2) of the Patent Act is found to be ●●●●●●●●●●● yen in total, which is equivalent to 10% of the marginal profit amount of Defendant's Product 1” (p.163).
But wait—there’s more. At this point, the court goes on to consider what a reasonable royalty would be under article 102(3); that is, “even where the presumption under Article 102, paragraph (2) of the Patent Act is partially rebutted, if the patentee is found to have been able to grant a license for the rebutted portion of the presumption, it should be construed that application of paragraph (3) of said Article would be allowed” (p.164). However, “[i]t cannot be found that the Appellant could have granted a license for such part to which Inventions C have not contributed.” Therefore, “in this case, it is reasonable to allow application of Article 102, paragraph (3) of the Patent Act only for the rebutted portion of the presumption relating to grounds for rebuttal due to the non-identicality of the markets” (p.165). Similarly, for Defendant’s Product 2 (some of which, if I understand correctly, was sold domestically, and some exported), the patentee is entitled to a 1% royalty. The 1% rate is based on, inter alia, industry and judicial averages for the type of product at issue, and the fact Patent C covers an incidental feature of the product and does not have a high “technical meaning” (pp. 168-69).
The end result is that:
(1) For sales of the Defendant's Products 1, the patentee is entitled to 10% of the defendant's marginal profit under article 102(2).
(2) For sales of Defendant's Products 1 that did not compete against products the patentee would have made, because they were produced for export to countries to which the patentee did not export its own products—amounting, as noted above, to 7% of the export volume of Defendant’s Product 1—the patentee is entitled to a 1% royalty (that is, 1% of the defendant’s turnover on these products) under article 102(3).
(3) The court adds these two numbers together to arrive at the damages for Defendant’s Product 1.
(4) For sales of Defendant’s Products 2, for which there was no marginal profit, the patentee recovers a 1% royalty on turnover.
Although
all of the above amounts are redacted, the total damages awarded, including
attorneys’ fees, is given as ¥391,549,273 (about $2.5 million using today’s
exchange rate).
A few things to note, assuming I have understood all of the above correctly. First, this appears to be yet another case in which a court has awarded damages reflecting gains or losses in relation to transactions that occurred or would have occurred abroad, but which were caused by an initial act or acts of domestic infringement: here, manufacture, export (which is an infringing act under article 101(iii)), and perhaps sales (I don’t know if any of the sales of exported products were consummated in Japan or if they were all consummated abroad). As I have previously noted, there are a couple of other Japanese cases to similar effect, as well as cases in the U.S., Canada, the U.K., and Germany. Second, the court reaffirms the principle that the plaintiff can recover under article 102(2) even if the product it sells does not work the patent invention; it’s enough that the plaintiff would have made additional sales of the product but for the infringement. This is consistent with the Federal Circuit’s opinion in Rite-Hite v. Kelley, and with a 2020 Japanese decision noted here.
Third, if I am understanding correctly, the court awarded the patentee 10% of the defendant’s marginal profit on exports of Defendant’s Product 1 (because Patent C did not contribute much to sales, and because 7% of the exports were to countries the plaintiff doesn’t serve), plus 1% of the defendant’s turnover on that 7% as a reasonable royalty for the portion of defendant’s sales that did not compete against the patentee’s products. The court does not perceive this to be double counting, for reasons discussed at pp. 167-68:
. . . if it is found that the patentee could have granted a license for the portion of rebuttal of presumption regarding the presumption pursuant to said paragraph, it can be considered that the patentee has incurred damages of an amount equivalent to the royalties due to the loss of a licensing opportunity in addition to the lost profits due to decreases in sales. Therefore, it does not result in counting damages to the patentee twice. In addition, the Amended Patent Act 2019, for which paragraph (1), item (ii) of said Article was newly established, did not amend the provisions of paragraph (2) of said Article in the same way as paragraph (1), item (ii) of said Article; however, it does not immediately become a reason to deny the application of paragraph (3) of said Article for the portion of rebuttal of presumption regarding the presumption pursuant to paragraph (2) of said Article.
Article 102(1), alluded to above, states:
If a patentee or exclusive licensee files a claim against an infringer for compensation for damage sustained as a result of the intentional or negligent infringement of their patent right or exclusive license, and the infringer has transferred articles that constitute the act of infringement, the amount of damage sustained by the patentee or exclusive licensee may be established to be the total of the amounts set forth in each of the following items.
(i) the amount arrived at when the amount of profit per unit for the articles that the patentee or exclusive licensee would have been able to sell if the infringement had not taken place is multiplied by that part of the quantity of articles that the person infringing the patent right or exclusive license has transferred (referred to as the "quantity transferred" in the following item) which does not exceed the quantity covered by the patentee's or exclusive licensee's ability to work the patented invention (referred to as the "workable quantity" in the following item) (if there are circumstances that render the patentee or the exclusive licensee unable to sell a quantity of products equivalent to all or part of the workable quantity, the workable quantity less the quantity not sellable due to those circumstances (referred to as the "specified quantity" in the following item));
(ii) if applicable, an amount equivalent to the amount of money that is to be received in exchange for the working of the patented invention under the patent right or exclusive license, for any quantity exceeding the workable quantity which is part of the quantity transferred, or for any specified quantity which is part of the quantity transferred (unless it is not found that the patentee would have been able to establish an exclusive license or grant a non-exclusive license under the patentee's patent rights, or that exclusive licensee would have been able to grant a non-exclusive license under the exclusive licensee's exclusive license).
I thank Professor Masabumi Suzuki for helpful discussion of this case.
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