Landmark German Case on Patent Damages, Part 2

Continuing my discussion from Wednesday of the Judgment of the Munich Regional Court of Apr. 16, 2026, 7 O8367/25, the second portion of the decision centers on issues relating to awards of the infringer’s profits.  The court states that calculating the award involves three steps:  determining the infringer’s revenue, deducting the appropriately deductible costs, and determining the appropriate proportionality factor (Anteilsfaktor) (para. 61).  As for the first of these, the patentee can rely on the amount the infringer discloses pursuant to its disclosure obligation (Auskunftsverpflichtung) (para. 63).  In addition, the court says it is fundamentally irrelevant whether the claim is for direct or (as here) indirect infringement; in such a case, the revenues from all of the machines sold by the defendant and assumed to have been used for the purpose of practicing the patented technology are to be taken into account (para. 64).  (More on this issue below.)  Further, for sales made up to three months following expiration of the patent (sometimes referred to in English as “springboard” profits), the court believes that there should be a rebuttable presumption that these sales were the product of infringing offers made during the patent term (para. 65).  Extrapolating from the BGH’s decision in Polsterumarbeitungsmaschine (Judgment of Nov. 14, 2023, I ZR 30/21, discussed on this blog here), moreover, the patentee also is entitled to recover profits earned from additional business (Zusatzgeschäften, a term that in the context of patent law I would normally translate as “convoyed goods,” but I hesitate to use that term here because this is a case involving indirect rather than direct infringement), including goods that were sold after patent expiration but which are traceable to infringing conduct during the patent term (paras. 66-72).  These effects presumably dissipate over time, however, and so the court concludes that it is appropriate to presumes that the portion of such sales decreases in a linear fashion over a ten-year period—to wit, in the first year following patent expiration, the monetary recovery can be assessed at 100%, in the second year 90%, and so on (para. 72).  The court next turns its attention to deductible costs, which in general are the variable costs of production only and not the fixed costs, in accordance with the BGH’s Gemeinkostenanteil decision as I noted the other day (see paras. 73-88, going into some detail about which costs typically should be classified as variable and which fixed).  The court then turns its attention to causality and the proportionality factor, stating that this inquiry involves two steps:  determining the appropriate base (Bezugsgröße) and then the appropriate percentage of the profit to allocate to that base (para. 89).  Again it references the brake pad example noted on Wednesday, stating that

To answer the question of the extent to which the infringer’s profit is attributable to the infringement, the specific Bezugsgröße of the infringing product must first be determined. For example, if the infringed patent concerns a specific design of a brake pad for a motor vehicle, the proportion factor will vary depending on whether the vehicle, the brake system, or the brake pad is taken as the reference. The larger the Bezugsgröße chosen, the lower the proportion factor to be applied. Another factor in determining the Bezugsgröße is whether the patent protects a minor improvement or a completely novel invention. It is also relevant whether alternatives exist on the market and whether the product is emotionally charged (e.g., a brand-name product), which is generally unlikely to be the case (para. 91).

 Tying together the proportionality factor and the presumption of springboard profits, the court states that

. . . when determining the causality factor, it must be noted that subsequent transactions concluded after the expiration of the patent’s term are likely to be based less and less on the infringement of the intellectual property right over the years (the “blurry factor”—derived from the English term “blurry”: blurred).  In its Polsterumarbeitungsmaschine decision, the BGH does not postulate a right of the patent holder to perpetual participation in the profits generated by the patent infringer through subsequent transactions. Rather, the intention is to achieve a fair balance of interests. Therefore, the Chamber assumes that follow-on transactions are generally included for a period of 10 years after patent expiration, and that the proportion of the infringer’s profits attributable to the patent infringement decreases by 10% of the baseline value each year. This means that, in the first step, the causation factor must be determined as the base value, for example, 50%. This value is to be applied for the first year. In the second year, only 45% is to be applied, in the third year 40%, and so on (para. 92).

The decision concludes with the application of this methodology to the facts of the case.  The defendant sold 28 machines (25 during the patent term, 3 within one month of expiration), which generated revenue of €1,994.312, from which the court deducts €986,365.40 in variable costs; the court then determines that the appropriate causality factor is 50%, reasoning that, although “the machine is solely suited to carrying out the patent-infringing process,” “particularly with such expensive machines, other factors also play a role in the purchase decision, such as the defendant’s reputation or the quality of the services it offers in connection with the machines” (para. 118).   The resulting sum is, according to the court, €503,972.80 (I get €503,973.30; not sure what accounts for the missing 50 cents).  The revenue from the sales of 26 canisters of solvent sold during the patent term amounts to €531,611.32, from which €245,486.08 is deductible, leaving €286,125.24, to which the court applies a causality factor of 70%, resulting in €200,287.67.  The court then turns to solvents sold post-expiration but before the court hearing (36 months), and comes up with a figure of €397.26 in profit per machine per month (I’m not quite following the math here), to which the “blurry factor” analysis leads to a reduction of 10%, resulting in €360,394.27.  So overall, the award is €1,064.654.74, plus interest.  

So, to summarize, in a case in which the defendant was found to have engaged in indirect infringement by selling machines and solvent used by third parties to perform the patented process, the patentee is entitled to recover an allocable share of the profits earned on the sale of those machines and solvent, including a portion of the profits earned on sales made post-expiration.  (Although the name of the solvent is redacted, my sense is that it is a staple article of commerce.  I should also mention, perhaps, that the defendant is appealing the underlying liability determination.)  Overall, I think this is pretty remarkable.

In and of themselves, awards of damages (or, in countries where the law so permits, profits) for Zugeschäften are not so remarkable, assuming that there is sufficient proof of a causal connection between the infringement and those sales—although with respect to convoyed goods as such, the law in the U.S., unlike in the U.K., France, and Germany, imposes an additional limitation that the damages must “function together with the patented component in some manner so as to produce a desired end product or result.”   See Rite-Hite Co. v. Kelley Corp., 56 F.3d 1538 (Fed. Cir. 1995) (en banc) (stating further that “[a]ll the components together must be analogous to components of a single assembly or be parts of a complete machine, or they must constitute a functional unit,” and that “precedent has not extended liability to include items that have essentially no functional relationship to the patented invention and that may have been sold with an infringing device only as a matter of convenience or business advantage”).  Recovery of springboard damages or profits also are not so remarkable either, again assuming proof of a sufficient connection between the infringing conduct and sales made post-expiration.  German law, however, as evidenced by the Posterumarbeitungsmaschine decision, already had gone one step further, in permitting the recovery of profits on springboard convoyed sales.  And now this decision applies that logic to the induced infringement of a process patent. 

Even if we put aside for the moment the question of whether the court’s presumptions pertaining to post-expiration profits are sound, something about awarding the profits earned by an indirect infringer on its sales to the direct infringer of machines and solvent used for carrying out the patented process seems odd to me.  Suppose, for example, that a direct infringer benefits from the use of a patented process because the process reduces its costs of production by €150; but that to carry out the process, it must first buy equipment that costs it €50, so its net benefit from using the process is €100.  Suppose further that the seller of the equipment (who, let’s assume, will be liable under applicable law for some form of indirect infringement) incurs costs of €25 to produce that equipment, and thus earns a €25 profit on sales of the equipment to the third party.  Alternatively, suppose that the equipment costs the direct infringer €100 but still only costs €25 for the indirect infringer to manufacture.  The direct infringer’s net benefit is now €50 and the equipment manufacturer’s profit is €75.  In either case, the optimal outcome ex ante would have been for the direct infringer to agree to pay a royalty for the use of the use of the process, in some amount up to €150 minus the cost of the equipment used to carry out the process.  If the price of the equipment was €50, the direct infringer should have paid a royalty of up to €100, but on these facts the patentee who sues the indirect infringer can recover only €25 (assuming that profits are an available measure of monetary recovery).  Conversely, if the price of the equipment was €100, the direct infringer should have paid a royalty of up to €50, but the patentee who sues the indirect infringer can recover €75.  In neither case is the award of profits really tethered to the value of the use to the direct infringer, which would seem to me to be the more appropriate measure.  Of course, this is just a stylized example, and I suppose one could argue that a rule allowing for the recovery of either the direct or indirect infringer’s profit encourages the parties to negotiate ex ante rather than to infringe.  Even so, it seems like an odd result to me, though I need to give the matter some more thought.   (On the topic of damages for indirect infringement, see this article by the late Professor Dmitri Karshtedt, which I noted here.)

Another thing that is striking about the decision is the court’s summoning out of thin air its three-month, ten-year, and “blurry factor” presumptions.  Oddly enough, in a talk earlier this week to a group in the Netherlands, I mentioned at one point how the conventional view is that common-law judges have some measure of discretion to make law in response to changing circumstances, whereas civil-law judges are constrained to follow the code; but in fact, it’s not very difficult to come up with examples in which civil law judges have sometimes crafted judge-made standards dehors the text.  The example I actually had in mind when I made the comment was the development by French and German courts, over a hundred years ago, of moral rights in copyright law, though later I thought about the Huawei v. ZTE “dance” as articulated by the CJEU and further refined by the UPC and domestic courts; and the above decision would seem to be yet another example.  Meanwhile in the U.S., our (in my view, sometimes excessively) textualist-minded courts seem to be moving in precisely the opposite direction, as witness, e.g., cases like Romag Fasteners (discarding both precedent and common sense in adopting a literal reading of the Lanham Act's provision on disgorgement of profits, see discussion here), AMG Capital Management (in contrast, holding that the FTC cannot seek disgorgement of profits, see discussion here), or in a related vein Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999) (holding that the Judiciary Act of 1789 precludes U.S. district courts from entering injunctions of a type that were unknown in 1789).  Freaky Friday, anyone?

Landmark German Case on Patent Damages, Part 1

Earlier this week, ip fray published a post discussing and excerpting a recent decision of the Seventh Chamber of the Munich I Regional Court, specifically the Judgment of Apr. 16, 2026, 7 O 8367/25.  The patent at issue is the German portion of EP 1 501 669 B1, for a “smoothing method for layered deposition modeling,” used in layered manufacturing techniques.  (I was interested to see that the inventors are from Eden Prairie, Minnesota, not much more than a stone’s throw from my house.)  The patent has expired, but the defendants were found to have engaged in indirect infringement during the patent term by selling machines and solvents used to carry out the process.  The present decision therefore focuses on damages, ultimately awarding €1,064,654.70 for the sale of 28 devices and 266 16-liter units of solvent (paras. 39-40), both used for carrying out the process.  But because “there are therefore few decisions regarding the amount of damages,” the court perceives “a need for judicial clarification on exactly how damages should be calculated. This is particularly necessary because, as a result of the European Court of Justice’s ‘BSH-Hausgeräte’ decision (GRUR 2025, 568), national courts are likely to have to deal with an increasing number of centralized claims for damages” (para. 42; I’ll be using machine translations throughout, subject to some adjustments of my own from the original German).  So beginning with paragraph 43 of the decision, the court sets out what it views as the relevant principles for calculating damages.  (These are summarized in the decision’s headnotes at the beginning of the decision, and these headnotes are the focus of the ip fray article.)  Overall, this appears to be quite an important decision, so I am dividing up my discussion and analysis into at least a couple of parts, with today’s post centering on the court's general statements regarding lost profits, royalties, and infringer's profits.

First, the court compares the three methods of determining damages (the aforementioned lost profits, royalties, and infringer’s profits), stating that the first of these is the hardest to prove but also tends to be result in a higher amount.  Reasonable royalties are comparatively easy to prove, and infringer’s profits something of a compromise between the two (para. 49), though the latter are not dependent on the amount of the patentee’s loss (para. 47).  This all seems largely correct to me, from an economic standpoint, although I would also point out that the infringer’s profit could be higher than the patentee’s own lost profit, if for example the infringer reaches markets the patentee doesn’t or is a more efficient producer of the patented article.  Overall, though, this discussion is in my view a welcome change from something I recall haven previously seen (see my discussion here) suggesting that in principle all three methods should converge on the same amount.

Second, the court notes that patentees’ reluctance to disclose their own financial information means that there are few decisions in which lost profits are awarded.  The court appears (to me) to want to change this, stating that all the patentee really needs to do is to prove its unit price and to offer the expert opinion of an auditor of what costs should be deducted (para. 51).  Moreover, the need to prove causation need not be insurmountable; all the patentee must do is prove a decline in sales following the infringement, and a rebuttable presumption then arises that these are caused by the infringement (para. 52).  The court suggests that the infringer can try to rebut the presumption through, perhaps, market reports--though the ip fray article suggests that in practice the presumption may be hard to overcome, because of the limited discovery available to defendants.

Third, the court says that patent owners can combine a lost profits award with a reasonable royalty or an award of profits, in cases in which the decrease in sales is at least partly attributable to other factors, or the infringer reaches additional markets that the patent owner didn’t serve.  But reasonable royalties can’t be combined with infringer’s profits (para. 53), all of which seems economically correct to me.

Fourth, in line with the BGH’s 2001 Gemeinkostenanteil decision, as a general rule when calculating an award of infringer’s profits, only the infringer’s direct costs should be deducted from its revenue (para. 54).  (The non-deductibility of allocable overhead, of course, leads to higher awards.)  In addition, however, the court stresses the importance of determining the extent to which the infringer’s profit is attributable to the infringement.  In this regard, it is essential to determine the appropriate base (Bezugsgröße).  Here, the court uses as an example an infringing brake pad.  In comparison with the entire vehicle the brake pad portion (Anteil) is vanishingly small; in comparison with the brake assembly, it is small; and in comparison with the brake pad itself it is, of course, 100% (para. 55).  In this regard, especially for a very small component of an entire product, the portion may be determined not be means of a percent but rather as a multiple of the standard license rate (para. 56).  In contrast, for machines which make use of a method or device claim, typically the percentage can be presumed to be 50% (para. 57).      

Fifth, a reasonable royalty can be viewed as a “safe harbor,” and the requirements for calculating it are minimal (niedrig).  The revenue from infringing products should be evident from the disclosure the defendant is required to make (in German, the Auskunft), after which it is necessary to determine the base (entire machine or component) and the typical license rate.  According to the court, the standard rate varies from 1% in the automobile industry to 10% for high-quality mechanical engineering (para. 58).  (The ip fray article suggest that these rates could really add up, since in Germany a separate action is required for each patent that is asserted by the plaintiff.  Or would the court take this procedural matter into account in calculating royalties, to avoid overcompensation?)

Sixth, the court states that because of differences between a negotiated license and license rate that is determined followed a finding of infringement, the latter can be higher, citing the Munich court’s 2010 Gülleausbringung decision (which I blogged about here).  This makes economic sense, since the infringer avoids certain risks that the voluntary licensee undertakes, and also because prior to final judgment there often will be some uncertainty as to infringement (though in Germany, there still may be substantial uncertainty as to validity, since the invalidation proceedings are separate from infringement proceedings).  As to the amount of the enhancement, the court says it can be up to three times higher (para. 59).  This actually seems pretty high to me, in view of the latter point about validity still potentially being in dispute.  

There is a lot more to the decision—some of it potentially quite path-breaking—including discussion of apportionment of profits, damages for convoyed goods, and springboard damages.  I will continue with my next installment on this decision in a few days.

Damages for Industrial Property Infringement in France

Grégoire Desrousseaux, Mayeul Ottaviani, and Louis Jabert have published an article titled L’évaluation du prejudice de la contrefaçon devant les juridictions françaises, Propriété Industrielle (“Quantifying infringement harm before the French courts”), Sept. 2025, pp. 15-26.  I highly recommend the article to anyone who wants to understand how the French courts calculate damages for the infringement of patents, trademarks, and designs.  The abstract reads as follows (my translation):

 

The transposition into French law of the damages calculation rules of Directive 2004/48/CE has caused a lot of ink to flow.  The authors have attempted an empirical, cross-sectional approach for the amount and calculation of damages, in compiling the accessible decisions rendered between 2016 and 2025 concerning patents, trademarks, and design and models.  An objective was to analyze, concretely, how the parties and the courts make use of the economic factors (often incomplete) to which they have access, to justify their demands and to guide their decisions.  Another objective was to try to identify—if they exist—the most common methods of calculation.

The article is enlightening.  The authors identified 52 decisions from the relevant time period, decided by courts of first or second instance (juridictions du fond), consisting of 26 patent decisions, 19 trademark decisions, and 7 involving designs and models.  They divide these into two basic categories, paragraph 1 and paragraph 2, reflecting the division set forth in the relevant statutory provisions for patents, trademarks, and designs, which for all three reads the same, to wit (again, my translation):

            For assessing damages and interest, the court takes into account distinctly:  (1) the negative economic consequences of the infringement, including lost profits and the loss sustained by the injured party; (2) the moral prejudice incurred by the latter; and (3) the profits realized by the infringer, including the intellectual, material, and promotional investments which the latter has derived from the infringement.

    

            However, the court may, alternatively and upon request by the injured party, award damages as a lump sum.  This amount is higher than the royalties or fees that would have been due if the infringer had requested authorization for the use of the right infringed.  This sum does not exclude compensation for moral prejudice inflicted upon the injured party.

According to the authors, 45 of the 52 cases (87%) made use of the first paragraph, and only 7 (13%) the second.  Of those falling into the first class, they found 4 that (wrongly, in their view) cumulated (that is, added together, if I understand correctly) lost profits with infringer’s profits.  15 were based on lost profits, 24 on infringers’ profits, and 2 used a mixed methodology (meaning that the amount awarded fell in between lost profits and infringers’ profits).  They describe the formula for lost profits as follows:  (1) the number of infringing products sold by the infringer, (2) multiplied by the price at which the plaintiff would have sold those products, (3) multiplied by the plaintiff’s profit margin, (4) multiplied by the taux de report—a term I find difficult to translate into idiomatic English, but which they define as the percent of the infringing products the plaintiff would have sold but for the infringement—(5) multiplied by the taux de pondération (the percent by which the infringed right contributed to the infringer’s sales).  The formula for calculating the infringer’s profits is:  (1) the number of infringing products sold by the infringer, (2) multiplied by the price at which the infringer sold them, (3) multiplied by the infringer’s profit margin, (4) multiplied by the taux de pondération.   They also find that plaintiffs frequently request and frequently are granted some amount for moral prejudice.  Finally, they remark that courts have a fair amount of discretion in applying the rules; they do not have to follow a strictly mathematical rule, and sometimes the relevant evidence (e.g., of consumer  behavior) have to be estimated qualitatively rather than quantitatively.

2024 US-China Patent Valuation and Damages Workshop

A workshop report titled The 2024 Patent Valuation and Damages Workshop: A US-China Comparative Law Perspective is available on ssrn, and should be of interest to anyone following U.S. and Chinese patent and/or SEP litigation.  I remotely delivered a presentation on compensatory patent damages in the U.S. at the workshop, which was held in May 2024 and included presentations by several other U.S. and Chinese participants.  Here is a link to the report, and here is the abstract:

This report summarizes the proceedings of the 2024 Patent Valuation and Damages Workshop: A U.S.–China Comparative Law Perspective, jointly organized by the Berkeley Asia IP & Competition Law Center (BAIC), Berkeley Center for Law and Technology (BCLT), KoGuan School of Law at Shanghai Jiao Tong University, and the Institute of Intellectual Property and Competition Law. Held in Shanghai on May 28, 2024, the workshop convened leading judges, scholars, practitioners, in-house counsel, and economists from both countries to examine the evolving frameworks for patent damages and valuation. As the inaugural workshop on patent law and practice from a U.S.–China comparative perspective, pioneered by BAIC and BCLT, it explored compensatory damages (lost profits, reasonable royalties, price erosion, apportionment), punitive damages and their deterrence effects, the challenges of valuing and licensing standard-essential patents (SEPs), and the “important but limited” role of judicial rate setting in shaping technology markets. With attention to both theoretical underpinnings and practical case studies, the report highlights key similarities and divergences in practice, as well as the implications for global patent litigation and licensing. By capturing this pioneering comparative dialogue, the report provides valuable insight into the jurisprudential evolution of patent remedies and their broader policy context in the world’s two largest innovation economies.

Korea Patent Court Approves Award of Extraterritorial Damages

Professor Chaho Jung has shared with me an interesting decision, the Judgment of Jan. 18, 2024, 2021Na1787 (Korea Pat. Ct.).  The decision has at least two holdings of particular interest to the subject matter of this blog.  First, to estimate the profits derived from the sale of the defendant’s product, in the absence of evidence provided by the defendant, the court calculated a contribution margin using (I'm quoting Professor Jung here and below) “the variable cost-to-sales ratio for the ‘medical substances and pharmaceutical products’ sector, as analyzed in the Bank of Korea’s Corporate Management Analysis, which is based on corporate income tax return data provided by the National Tax Service.”  Second, the court holds that “[a]s long as there is an act of patent infringement within the country, the patent holder is entitled to compensation for damages that have a sufficient causal relationship with the infringement, and such damages are not necessarily limited to those that occurred domestically.”  This second holding, if affirmed on appeal (I understand the case is pending before the Korean Supreme Court), would seem to align Korean practice with last year's decision of the German BGH, Judgment of May 7, 2024, X ZR 104/22—Verdampfungstrockneranlage (see previous discussion on this blog here).  The overall award is for over 12 billion won (about $9 million), plus interest.   

Choice of Law and the UPC

Back in March, in a post titled UPC Choice of Law Principles for Damages, I noted a decision of the Mannheim Local Division of the UPC, Hurom Co. v. NUC Electronics Europe GmbH, setting out the following choice of law principles for patent infringement actions filed in the UPC:  "with regard to the determination whether substantive law as laid down in the UPCA or substantive national laws of the UPCA member states applies to acts allegedly infringing traditional European bundle patents, the following applies:

"a) to acts committed after the entry into force of the UPCA, the substantive law as laid down in the UPCA applies;

 

"b) to acts committed before the entry into force of the UPCA, the substantive national laws apply;

 

"c) to ongoing acts started before the entry into force of the UPCA and continued after the entry into force on 1 June 2023, the substantive law as laid down in the UPCA applies."

Furthermore, the court appears to consider damages rules as “substantive,” meaning that national law would apply to damages calculations for acts committed exclusively before the entry into force of the UPCA.

My post neglected to mention, however, a January decision of the UPC Court of Appeal, Fives ECL, SAS v. REEL GmbH, UPC_COA_30/2024 (Jan. 16, 2025), which decided the preliminary issue of whether the UPC has jurisdiction to hear isolated claims for damages, and if so whether this rule applies where the damages were suffered prior to the entry into force of the UPC on June 1, 2023.  The specific setting of this case was that the patent owner had obtained from a German national court a judgment of infringement, prior to June 1, 2023, and a declaration that the defendant would be liable for damages; but it thereafter pursued its damages claim before the UPC.  The UPC Court of Appeal held that the UPC was competent to hear the damages claim (but left open the question of whether national or UPC law would apply to that claim).  The principle established in the Mannheim decision, if correct, would hold that national law applies where the infringing activity occurred prior to June 1, 2023.  

The issues presented in these cases, including an analysis of Fives v. REEL itself, are discussed in a series of article published by Dr. Thomas J. Adam in the journal European Patent Litigation in Practice: “Reach-Back Damages” in the UPC:  Does the UPC have or, indeed, need a long arm to adjudicate on damages caused by patent uses that took place prior to the coming into force of the UPCA?, 3 EPLP 109 (2024); Which Substantive Law Does the UPC Apply as to “Reach-Back Damages”? Some General Thoughts and a Pragmatic Proposal, 3 EPLP 197 (2024); and “We’ll Take It from Here” – Calculation of Damages in the UPC Based on a National Infringement Decision and “Reach-Back” Damages:  Case note to UPC-CoA, 16 January 2025 – UPC_CoA_30/2024.  Dr. Adam’s analysis is consistent with the results reached in the two above-cited cases, if not every aspect of their reasoning.  The second article also discusses the question of what the relevant statute of limitations should be for claims that accrued prior to the entry into force of the UPC.  The UPC itself establishes a five-year statute of limitations (article 72), but Dr. Adam reasons that in these types of cases national law, if different, should apply in order to comport with the parties’ legitimate expectations.  That would mean, for example, that where the claim accrued under German law, the normal statute of limitations would be shorter (three years), except in cases in which the patent owner seeks residual damages under BGB article 252, in which case the statute of limitations is ten years (see, e.g., my previous post on the BGH’s Spannungsversorgungsvorrichtung decision here).     

Update (6-3-2025):  As noted on ip fray, just yesterday a different panel of the UPC Court of Appeal concluded, consistent with the court's January decision in Fives v. REEL, that the UPC has jurisdiction over a case alleging the infringement before and after June 1, 2023 of a non-opted out European Patent.  The new decision is XSYS Germany GmbH v. Esko-Graphics Imaging GmbH, UPC_CoA_156/2025,APL_8790/2025

Another Japanese IP High Court Decision on Infringers' Profits

Last fall I mentioned Hamamatsu Photonics K.K. v. Tokyo Seimitsu Co., Case No. 2023 (Ne) 10037 (IP High Court Mar. 6, 2024), a case in which the Second Division of Japan’s IP High Court held that article 102(2) of Japan’s Patent Act did not apply but article 102(1) did.  By way of background, article 102(1), which addresses lost profits, reads (in translation) as follows:  “If a patentee or an exclusive licensee claims compensation for damages that the patentee or licensee personally incurs due to infringement, against a person that, intentionally or due to negligence, infringes the patent right or violates the exclusive license, and the infringer has transferred infringing articles, the amount calculated by multiplying the number of articles so transferred (hereinafter referred to in this paragraph as the ‘number transferred’) by amount of profit per unit from the products that the patentee or exclusive license could have sold if there had been no infringement, may be fixed as the value of the damage that the patentee or exclusive licensee has incurred, within the limits of an amount proportionate to the ability of the patentee or exclusive licensee to work the patented invention; provided, however, that if there are circumstances due to which the patentee or the exclusive licensee would have been unable to sell a number of products equivalent to all or part of number transferred, an amount proportionate to the number of products that could not have been sold due to such circumstances are to be deducted from the value of damage thus calculated.”  Article 102(2) then states that “If a patentee or exclusive licensee claims compensation for damages that the patentee or licensee personally incurs due to infringement, against a person that, intentionally or due to negligence, infringes the patent or violates the exclusive license, and the infringer has made a profit from the infringement, the amount of that profit is presumed to be the value of damages incurred by the patentee or exclusive licensee.”  Thus, while article 102(2) addresses infringers' profits, it is not considered to be a disgorgement remedy as such, but rather a means for estimating the plaintiff’s lost profit with reference to the profit the infringer made, subject to appropriate adjustments.  In the Hamamatsu case noted above, the plaintiff owned a patent reading on a component (a “stealth dicing” or “SD” engine) that is incorporated into an end product (“stealth dicing” or “SD” equipment).  The plaintiff claimed it was entitled to the defendant’s profit on sales of the end products, adjusted to reflect that the patent in suit contributed some but not all of the value of that product.  The Second Division of the IP High Court rejected that argument, though it concluded that under article 102(1) the plaintiff could recover lost profits on lost sales of SD engines it would have sold to the defendant, plus delay damages, totaling about 136,000,000 yen.

Professor Masabumi Suzuki recently alerted me, however, to an  April 2024 decision of the Fourth Division of the IP High Court, Hamamatsu Phototonics K.K. v. Tokyo Seimitsu Co., Case No. 2023 (Ne) 10037 (IP High Court Apr 24, 2024).  (An English-language summary, but not the full opinion, is now available on the IP High Court’s website.  The Japanese original is here, and a press release by Hamamatsu here.)  As the title indicates, the parties are the same; and while two other patents are in suit, if I understand correctly the products sold by the plaintiff and the products alleged to be infringed by the defendant are the same products.  Nevertheless, in this case, which was pending when the other case was decided, the court holds that article 102(2) entitles the plaintiff to recover an allocable portion of the infringer’s profits—specifically, the ratio of the price of the SD engine to the SD dicer (the end product), multiplied by the marginal profit on the sale of the engine—noting inter alia that the plaintiff’s product is the “core of the technology for the SD dicer.”  The amount awarded under this formula is approximately 832 million yen, which is higher than the plaintiff’s quantifiable lost profits under article 102(1) or a reasonable royalty under 102(3).

Although the two decisions reached different conclusions on the applicability of article 102(2), I’m not sure that they are irreconcilable on the law. The different outcomes may be attributable to the two divisions’ perception of the strength of the evidence submitted to them concerning the defendant’s marginal profit attributable to the SD engine.  In any event, I understand that both judgments are now final and that there is no further appeal pending.  I don't know, but I would guess that there might have been some accommodation made between the parties to avoid a duplicative recovery, though nothing to that effect is indicated in either decision as far as I can see.  Indeed, te first decision noted the pendency of the second decision, but stated that it would not presume to award only half-damages, since the infringement of the patents at issue in the second suit was still to be determined.  The second decision says that the first decision has not yet been “finalized” (according to my machine translation of the Japanese original, which is kind of rough).  Anyway, based on the latter decision, it appears that Japanese courts will now allow an allocable award of the infringer's profits in a case in which the patented invention reads on a component of the defendant's end product.   

Amicus Briefs in Support of EcoFactor; Two Cert. Petitions in Cases Involving Questions of Extraterritorial Damages

As previously noted, the Federal Circuit will be rehearing en banc EcoFactor, Inc. v. Google LLC, on the question of “the district court’s adherence to Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), in its allowance of testimony from EcoFactor’s damages expert assigning a per-unit royalty rate to the three licenses in evidence in this case.”  An earlier post linked to Google’s brief and the amicus briefs filed in support of Google (one of which I joined).  EcoFactor’s corrected brief and three amicus briefs in support of EcoFactor are now available on Pacer as well.  Here they are, below.  If any more come in, or if any of the below are replaced with corrected copies, I will add them to the list:

PLAINTIFF-APPELLEE ECOFACTOR, INC.’S CORRECTED NON-CONFIDENTIAL EN BANC RESPONSE BRIEF

EN BANC REHEARING BRIEF OF AMICUS CURIAE ALLIANCE OF U.S. STARTUPS & INVENTORS FOR JOBS (“USIJ”) IN SUPPORT OF APPELLEE, ECOFACTOR

BRIEF OF THE NEW CIVIL LIBERTIES ALLIANCE AS AMICUS CURIAE IN SUPPORT OF PLAINTIFF-APPELLEE

BRIEF FOR PROFESSOR MICHAEL RISCH AND THE GROUP OF INTERESTED PRACTITIONERS AS AMICUS CURIAE IN SUPPORT OF ECOFACTOR

The New Civil Liberties Alliance brief is limited to arguing that Judge Pauline Newman should be part of the en banc panel.

While on the topic of briefs, I should note as well that the plaintiff in Brumfield v. IBG has filed a cert. petition with the U.S. Supreme Court.  Brumfield is a case in which the Federal Circuit concluded that U.S. courts may award damages for losses suffered abroad by reason of conduct occurring within the United States in violation of 35 U.S.C. § 271(a)—but on the facts of the case, concluded that the plaintiff hadn’t proven any such damages (see discussion here).  The cert. petition mostly focuses on other issues, however, though it does argue that “after ruling in [original plaintiff] TT’s favor that TT could obtain damages based on foreign conduct for infringement under 35 U.S.C. § 271(a), the Federal Circuit raised and decided the issue of causation (i.e., whether there was a 'casual connection' between infringement under § 271(a) and the 'foreign conduct for which proposal seeks royalty damages.' (Pet. App. 52a). This issue was never argued by the parties or decided by the district court below. (CAFC App. 18-20). By deciding it for the first time on appeal, the Federal Circuit denied TT’s due process rights to be heard” (p.39).  The responsive brief is due on March 20.  And while on the topic of extraterritorial damages and cert. petitions, Hytera has filed a cert. petition in a case in which the Seventh Circuit held that the federal Defend Trade Secrets Act (DTSA) extends civil liability for extraterritorial trade secret misappropriation, where "an act in furtherance of the offense was committed in the United States."  Hytera disagrees with the lower court’s interpretation of the quoted language, arguing that the statutory term “offense” means “criminal offense,” not “civil offense,” such that extraterritorial liability extends only to criminal trade secret misappropriation in violation of the Economic Espionage Act.  The question presented is “Does the private right of action for trade secret misappropriation created by the Defend Trade Secrets Act of 2016 rebut the presumption against extraterritorial application of U.S. law?"  A response is due February 10. 

I will be discussing both Brumfield and Hytera in my lecture at Ludwig Maximillians University in Munich next week.  More information forthcoming tomorrow.

Japanese IP High Court Decision in Fuji Medical Instruments Mfg. Co. v. Family Inada Co.

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.