Infringer's Profits as "Residual Damages" Under German Law

On a couple of occasions I have blogged about Restschadensersatz, or residual damages, under German law (see here and here).  More precisely, in 2013 I wrote:

In Germany, the statute of limitations for filing an action for patent infringement is governed by article 141 of the Patent Act.  WIPO’s translation of this provision reads:

As regards the period of limitation for claims due to infringement of a patent right, the provisions of Part 5 of Book 1 of the Civil Code shall apply mutatis mutandis. If the infringer has gained something through the infringement at the expense of the entitled party, Section 852 of the Civil Code shall be applicable mutatis mutandis.

Focusing on sentence 1, the general statute of limitations for filing a patent infringement claim is three years.  See Thomas Kühnen, Patent Litigation Proceedings in Germany:  A Handbook for Practitioners ¶ 1554,at 389 (6^th ed. Frank Peterreins tr. 2013); Benkard, Patentgesetz § 141 ¶ 4, at 1504 (10^th ed. 2006).  But the second sentence provides a second opportunity to file a claim for damages, after the three-year period has lapsed.  Here is the text of the referenced section of the Civil Code (BGB § 852) (English translation can be found here, German original here):

If by a tort the person liable to pay compensation obtains something at the cost of the injured person, then even after the claim to compensation for the damage arising from a tort is statute-barred he is obliged to make restitution under the provisions on the return of unjust enrichment. This claim is statute-barred ten years after it arises, or, notwithstanding the date on which it arises, thirty years after the date on which the act causing the injury was committed or after the other event that triggered the loss.

So even after the three-year period, the patent owner may get to file a claim, but for what?  The term used for the damages the patent owner may recover under these circumstances is Restschadensersatz, or residual damages.  Prevailing opinion is that these damages consist of a reasonable royalty only.  See Benkard Patentgesetz, § 141 ¶ 6, at 1505-06.  The argument appears to be that the only benefit the infringer derived at the expense of the entitled party is the royalty it didn’t pay.  For a contrary opinion, however, see Matthias Hülsewig, Der Restschadensersatzanspruch im Patentrecht—beschränkt auf die angemessene Lizenzgebühr?, GRUR 2011, 673, arguing that the patentee should have the option of recovering the infringer’s profit or a reasonable royalty.

Then in 2016 I wrote:

A few weeks back Dr.  Hülsewig kindly emailed me a copy of a 2015 opinion of the German Federal Supreme Court in a copyright matter, in which the court states that the question of whether BGB § 852 permits the recovery of the infringer's profit remains an open question.  See paragraph 34 of Judgment of Jan. 15, 2015, I ZR 148/13 (BGH)--Motorradteile, available here.  In addition, as Dr. Hülsewig pointed out, the new 11th edition of the Benkard treatise on German Patent Law now also takes the position that claims for residual damages are not limited to reasonable royalties but also may include the disgorgement of other pecuniary benefits the infringer has derived ("Daher kann der Rest-Schadensersatzanspruch nicht in jedem Fall auf die (stets geschuldete) angemessene Lizenz beschränkt werden; vielmehr können auch weitere Vermögensvorteile herausverlangt werden" (section 141, p. 1907).  So perhaps we are witnessing a change in the majority view of what claims for residual damages may include under German law.

Well, it looks like the change in the majority view is now complete.  Two weeks ago Dr.  Hülsewig emailed me the BGH's Judgment of March 26, 2019, X ZR 109/16--Spannungsversorgungsvorrichtung ("Power Supply Device"), in which the court definitively holds that the patentee can demand the disgorgement of the infringer's profit as residual damages.  As my previous blog posts on the subject suggest, I'm not convinced this is a great idea as a matter of policy, but the doctrine now appears to be settled.

From Around the Blogs Part 1: Damages in Canada, Spain, Taiwan, and the U.S.

1.  On the Sufficient Description blog, Norman Siebrasse has posted a four-part series (here, here, here, and here) on a recent decision of Canada's Court of Appeal, Apotex Inc. v. Eli Lilly & Co.  The decision holds, among other things, that (1) in assessing patent damages a court must consider whether an alleged noninfringing alternative (the existence of which would reduce the amount of damages) was objectively economically viable (thus rendering irrelevant Apotex's assertion that, but-for the infringement, it would have turned to an alternative that was unprofitable); (2) where, as here, use of the asserted noninfringing alternative would have infringed another of the plaintiff's patents, it would not have been an available alternative; and (3) compound interest is available as a "head of damages," but that there is no presumption in favor of its use.  Professor Siebrasse has some insightful observations about the first two of these holdings in particular.

2.  On the Kluwer Patent Blog, Miguel Montañá published a post titled Damages may be considered proven when the facts speak for themselves.  The post discusses a July 2018 decision of the Barcelona Court of Appeal holding that in some instances the "facts speak for themselves," that is, "the existence of damages if intrinsic to the nature of the infringement and does not require special proof."  If I understand correctly, however, the patent owner would still bear the burden of coming forward with evidence as to the amount of its injury, even if the fact of injury is presumed.  Apparently the facts of this particular case showed that the plaintiff was in negotiations with a customer when the defendant supplied that customer with an infringing product.

On a personal note, I will be speaking at one or two forums in Barcelona in late March 2019.  I'm looking forward to returning to one of my favorite cities.

3.  On the IAM Blog, Yulan Kuo published a post titled Taiwan Supreme Court Issues Decision on Unfair Enrichment in Patent Infringement Case.  According to the author, in Koninklijke Philips NV v. Gigastorage Corp. the court reversed the Taiwan IP Court's award of NT$1 billion for unjust enrichment and remanded for further consideration in light of various factors.  If I understand correctly, the court also wants the lower court to consider whether delay in enforcing one's rights might reduce the award, even if the statute of limitations has expired (compare with the U.S. Supreme Court's view in SCA Hygiene).  On a personal note here, I may be visiting Taiwan in the fall of 2019, so perhaps I will have an opportunity to discuss this case then. 

4.  On IP Watchdog, Mark Pedigo published a post titled Use of the Book of Wisdom in Reasonable Royalties, recapping the relevant Federal Circuit and lower court decisions permitting (or not) the use of information post-dating the date of the first infringement, for purposes of calculating reasonable royalties.  Mr. Pedigo concludes that "[u]se and acceptance of the book of wisdom can be relevant and useful, but it is not always allowed by the courts."

For some papers I have coauthored arguing that courts should be more open to the admissibility of such evidence, see here and here.

U.S. Supreme Court Holds That Delay in Filing Suit Is Not a Defense to a Claim for Patent Damages

This morning the U.S. Supreme Court handed down its opinion in SCA Hygiene Products Aktieblog v. First Quality Baby Products.  The Court holds that, under § 286 of the Patent Act (“Except as otherwise provided bylaw, no recovery shall be had for any infringement committed more than six years prior to the filing of the complaint or counterclaim for infringement in the action”), the equitable defense of laches (defined as "unreasonable, prejudicial delay in filing suit") cannot bar a claim for patent damages suffered within the six years prior to the filing of complaint.  The opinion, authored by Justice Alito and joined by seven other justices, therefore aligns patent law with the rule the Court announced for copyright cases in its 2014 decision Petrella v. Metro-Goldwyn-Mayer, Inc. (see discussion here), and overrules Federal Circuit precedent holding that (Petrella notwithstanding) the laches defense could bar a claim for patent damages brought within the six-year statutory window (see discussion here).  According to the majority, "[l]aches is a gap-filling doctrine, and where there is a statute of limitations, there is no gap to fill" (p.5).  The Court rejects the argument that § 282 of the Patent Act, which states among other things that "unenforceability" is a defense in patent infringement actions, codifies a laches defense that would "bar a claim for damages incurred within the period set out in § 286," concluding that there was no such well-established practice prior to the enactment of the 1952 Patent Act.  

Justice Breyer, who also dissented in Petrella, is the sole dissenter here.  He argues that the pre-1952 case law does establish that courts viewed laches as a viable defense even as against claims brought within the statute of limitation, and expresses concern that absent a laches defense some patent owners will be motivated to delay suit until after the defendant has incurred substantial costs.  (He also is less sanguine than the majority that the doctrine defense of "equitable estoppel" will pick up the slack.  This doctrine, which the Supreme Court in Petrella  characterized as involving "intentionally misleading representations concerning [one's] abstention from suit" whereby "the alleged infringer detrimentally relies on the . . . owner’s deception," survives § 286, since delay "is not an element of the defense.")  Basically, Justice Breyer's concern about delay and "lock-in" is a variation on the "patent holdup" theme, which is often brought to bear as an argument against mandatory injunctive relief against a defendant who has incurred substantial sunk costs and who may face disproportionately high ex post design-around costs.  I'm sympathetic to this concern as it relates to injunctions, and it may be that the concern is equally valid here, though I would note that (1) the damages that would be due for harms accruing to the utility patent owner over the six years preceding the filing of the complaint would take the form of lost profits or a reasonable royalty which (in theory) should not reflect any holdup costs, and (2) post-eBay it's hardly a foregone conclusion that the prevailing plaintiff will obtain an injunction against future infringement--though if not, and the court awards an ongoing royalty, there is a risk under U.S. practice that the ongoing royalty will reflect some degree of holdup value (see, e.g., discussion here).   

In this regard, and since this is a blog about damages law, I would call attention to Justice Breyer's discussion of a possible distinction between damages awards in patent and copyright cases at pp. 9-10 of his dissent:

For another thing, the Copyright Act, unlike the Patent Act, has express provisions that mitigate the unfairness of a copyright holder waiting for decades to bring his lawsuit. A copyright holder who tries to lie in wait to see if a defendant’s investment will prove successful will discover that the Copyright Act allows that defendant to “prove and offset against . . . profits ‘deductible expenses’ incurred in generating those profits.” Id., at ___ (slip op., at 12) (quoting 17 U. S. C. §504(b)). Thus, if the defendant invests say $50 million in a film, a copyright holder who waits until year 15 (when the film begins to earn a profit) to bring a lawsuit may be limited to recovering the defendant’s profits less an apportioned amount of the defendant’s initial $50 million investment. But the Patent Act has no such deduction provision.

With all due respect, this doesn't seem to make much sense.   For one thing, awards of infringer's profits are available in patent cases only for design patent infringement; and in those cases  the defendant presumably is allowed to deduct its costs, as it would in copyright.  Of course, as we know from Samsung v. Apple it may have to disgorge profits that go beyond the profits attributable to the infringed design, so this might have been a valid distinction to draw (albeit one of limited applicability), but it doesn't appear to be the point Justice Breyer was trying to make.  Justice Breyer also ignores the availability in copyright but not patent cases of statutory damages, which might seem to cut against his point that copyright has more damages-limiting doctrines than does patent.

One other thing I would note, relevant more to damages law than to laches as such, is the majority's characterization of the remedy of an accounting of profits (that is, disgorgement), which the majority mentions in its discussion of the pre-1952 case law.  The majority specifically refers to this remedy as "equitable"  and "not the same as damages" (p.11).  I repeat, then, a query I've made before with regard to design patent litigation, where the disgorgement remedy persists:  are we sure there's a right to a trial by jury on the amount of the disgorgement in such cases--and if not, why hasn't anybody (yet, to my knowledge) raised this point in their discussions of Samsung v. Apple and of Nordock?

Update:  One further thought:  does the Court's alignment of the copyright and patent law rules in this case herald a similar treatment of the issue of exhaustion, which was argued this morning in Impression Products, Inc. v. Lexmark International, Inc.?  Here's a link to the transcript, which I hope to read this afternoon.  For what it's worth, my own views of the exhaustion matter are in line with those expressed in an op-ed in this morning's Wall Street Journal by Professors Daniel Hemel and Lisa Larrimore Ouellette, here.

Delay in Filing Suit and the Statute of Limitations: The U.S. Supreme Court Decision in Petrella

This morning the U.S. Supreme Court issued its opinion in Petrella v. Metro-Goldwyn-Mayer, Inc. (available here).  Justice Ginsburg wrote the 6-3 majority opinion; Justice Breyer, joined by the Chief Justice and Justice Kennedy, dissented.  It's a copyright case, but as I discussed here and here it may have some implications for patent practice as well.  Although the underlying facts of the case (involving a claim of copyright infringement in a screenplay on which the movie Raging Bull allegedly is in part based) is complicated, the first two paragraphs of Justice Ginsburg's opinion concisely state the holding of the case:

The Copyright Act provides that “[n]o civil action shall be maintained under the [Act] unless it is commenced within three years after the claim accrued.” 17 U.S.C. §507(b). This case presents the question whether the equitable defense of laches (unreasonable, prejudicial delay in commencing suit) may bar relief on a copyright infringement claim brought within § 507(b)’s three-year limitations period. Section 507(b), it is undisputed, bars relief of any kind for conduct occurring prior to the three year limitations period. To the extent that an infringement suit seeks relief solely for conduct occurring within the limitations period, however, courts are not at liberty to jettison Congress’ judgment on the timeliness of suit. Laches, we hold, cannot be invoked to preclude adjudication of a claim for damages brought within the three-year window. As to equitable relief, in extraordinary circumstances, laches may bar at the very threshold the particular relief requested by the plaintiff. And a plaintiff ’s delay can always be brought to bear at the remedial stage, in determining appropriate injunctive relief, and in assessing the “profits of the infringer . . . attributable to the infringement.” §504(b).

Petitioner Paula Petrella, in her suit for copyright infringement, sought no relief for conduct occurring outside § 507(b)’s three-year limitations period. Nevertheless, the courts below held that laches barred her suit in its entirety, without regard to the currency of the conduct of which Petrella complains. That position, we hold, is contrary to § 507(b) and this Court’s precedent on the province of laches.

The Court left open the possibility, however, that under appropriate circumstances the doctrine of estoppel could bar a claim from proceeding, stating (at p.19):

. . . when a copyright owner engages in intentionally misleading representations concerning his abstention from suit, and the alleged infringer detrimentally relies on the copyright owner’s deception, the doctrine of estoppel may bar the copyright owner’s claims completely, eliminating all potential remedies. See 6 Patry § 20:58, at 20– 110 to 20–112.21. The test for estoppel is more exacting than the test for laches, and the two defenses are differently oriented. The gravamen of estoppel, a defense long recognized as available in actions at law, see Wehrman v. Conklin, 155 U. S. 314, 327 (1894), is misleading and consequent loss, see 6 Patry § 20:58, at 20–110 to 20–112. Delay may be involved, but is not an element of the defense. For laches, timeliness is the essential element. In contrast to laches, urged by MGM entirely to override the statute of limitations Congress prescribed, estoppel does not undermine Congress’ prescription, for it rests on misleading, whether engaged in early on, or later in time.

The Court also noted that, "[s]hould Petrella ultimately prevail on the merits, the District Court, in determining appropriate injunctive relief and assessing profits, may take account of her delay in commencing suit" (p.22).

As for the implications of Petrella to patent practice, as I stated in my September 25, 2013 post (which also discusses some related matters arising under German and Japanese law):

In the U.S., the Patent Act states that “[e]xcept as otherwise provided by law, no recovery shall be had for any infringement committed more than six years prior to the filing of the complaint or counterclaim for infringement in the action.”  35 U.S.C. § 286.  In addition, the equitable doctrine of laches may bar a claim for pre-filing damages incurred within the past six years, and the doctrine of equitable estoppel may bar even a claim for an injunction, if the patentee delays too long in filing suit and the infringer is prejudiced as a result.  See A.C. Aukerman Co. v. R.L. Chaides Constr. Co., 960 F.2d 1020 (Fed. Cir. 1992) (en banc).  (I would think as well that undue delay would make it more difficult for the patentee to prove the irreparable harm that is a necessary part of the eBay framework for obtaining a permanent injunction.)

The Supreme Court was careful, however, not to prejudge the applicability of Petrella to patent cases.  In this regard, footnote 15 of Justice Ginsburg's opinion states:

The Patent Act states: “[N]o recovery shall be had for any infringement committed more than six years prior to the filing of the complaint.” 35 U. S. C. § 286. The Act also provides that “[n]oninfringement, absence of liability for infringement or unenforceability” may be raised “in any action involving the validity or infringement of a patent.” § 282(b) (2012 ed.). Based in part on § 282 and commentary thereon, legislative history, and historical practice, the Federal Circuit has held that laches can bar damages incurred prior to the commencement of suit, but not injunctive relief. A. C. Aukerman Co. v. R. L. Chaides Constr. Co., 960 F. 2d 1020, 1029–1031, 1039–1041 (1992) (en banc). We have not had occasion to review the Federal Circuit’s position.

For reference, here's what the Federal Circuit said about the interplay of laches and the statute of limitations in Aukerman (foonotes and citations omitted):

Extended to suits at law as well, laches became “part of the general body of rules governing relief in the federal court system.” Id. at 478. As a defense to a claim of patent infringement, laches was well established at the time of recodification of the patent laws in 1952 [footnote omitted]. The commentary of one of the drafters of the revised patent statute confirms the intention to retain the defense of laches, specifically by 35 U.S.C. § 282:

The defenses which may be raised in an action involving the validity or infringement of a patent are[:] .... ‘Noninfringement, absence of liability for infringement, or unenforceability’ [35 U.S.C. § 282][;] ... this would include ... equitable defenses such as laches, estoppel and unclean hands.

P.J. Federico, Commentary on the New Patent Law, 35 U.S.C.A. 1, 55 (West 1954). . . .

Aukerman argues, nevertheless, that the defense of laches is inapplicable, as a matter of law, against a claim for damages in patent infringement suits. For this proposition, Aukerman first argues that recognition of laches as a defense conflicts with 35 U.S.C. § 286 (1988), which provides:

Except as otherwise provided by law, no recovery shall be had for any infringement committed more than six years prior to the filing of the complaint or counterclaim for infringement in the action.

Per Aukerman, this provision is comparable to a statute of limitations which effectively preempts the laches defense.

Aukerman's argument is . . . flawed.

. . . with respect to section 286 specifically, a six-year limitation on damages, virtually identical to section 286, has been in the patent statute since 1897. . . .

We are unpersuaded that section 286 should be interpreted to preclude the defense of laches and provide, in effect, a guarantee of six years damages regardless of equitable considerations arising from delay in assertion of one's rights. Without exception, all circuits recognized laches as a defense to a charge of patent infringement despite the reenactment of the damages limitation in the 1952 statute. . . . 

Perhaps significantly, copyright has had a specific statute of limitations for a much shorter period of time, only since 1957.  See Petrella, p.3.  In any event, regardless of whether Aukerman  remains good law or not, estoppel could continue to bar even equitable relief under appropriate circumstances; and (as I noted in my earlier post) under eBay undue delay in filing suit probably would weigh against a finding of irreparable harm (and might also tilt the balance of conveniences in favor of the defendant).

Awards of infringer's profits and the passage of time

In the U.S., the Patent Act states that “[e]xcept as otherwise provided by law, no recovery shall be had for any infringement committed more than six years prior to the filing of the complaint or counterclaim for infringement in the action.”  35 U.S.C. § 286.  In addition, the equitable doctrine of laches may bar a claim for pre-filing damages incurred within the past six years, and the doctrine of equitable estoppel may bar even a claim for an injunction, if the patentee delays too long in filing suit and the infringer is prejudiced as a result.  See A.C. Aukerman Co. v. R.L. Chaides Constr. Co., 960 F.2d 1020 (Fed. Cir. 1992) (en banc).  (I would think as well that undue delay would make it more difficult for the patentee to prove the irreparable harm that is a necessary part of the eBay framework for obtaining a permanent injunction.)

In Germany, the statute of limitations for filing an action for patent infringement is governed by article 141 of the Patent Act.  WIPO’s translation of this provision reads:

As regards the period of limitation for claims due to infringement of a patent right, the provisions of Part 5 of Book 1 of the Civil Code shall apply mutatis mutandis. If the infringer has gained something through the infringement at the expense of the entitled party, Section 852 of the Civil Code shall be applicable mutatis mutandis.

Focusing on sentence 1, the general statute of limitations for filing a patent infringement claim is three years.  See Thomas Kühnen, Patent Litigation Proceedings in Germany:  A Handbook for Practitioners ¶ 1554,at 389 (6^th ed. Frank Peterreins tr. 2013); Benkard, Patentgesetz § 141 ¶ 4, at 1504 (10^th ed. 2006).  But the second sentence provides a second opportunity to file a claim for damages, after the three-year period has lapsed.  Here is the text of the referenced section of the Civil Code (BGB § 852) (English translation can be found here, German original here):

If by a tort the person liable to pay compensation obtains something at the cost of the injured person, then even after the claim to compensation for the damage arising from a tort is statute-barred he is obliged to make restitution under the provisions on the return of unjust enrichment. This claim is statute-barred ten years after it arises, or, notwithstanding the date on which it arises, thirty years after the date on which the act causing the injury was committed or after the other event that triggered the loss.

So even after the three-year period, the patent owner may get to file a claim, but for what?  The term used for the damages the patent owner may recover under these circumstances is Restschadensersatz, or residual damages.  Prevailing opinion is that these damages consist of a reasonable royalty only.  See Benkard Patentgesetz, § 141 ¶ 6, at 1505-06.  The argument appears to be that the only benefit the infringer derived at the expense of the entitled party is the royalty it didn’t pay.  For a contrary opinion, however, see Matthias Hülsewig, Der Restschadensersatzanspruch im Patentrecht—beschränkt auf die angemessene Lizenzgebühr?, GRUR 2011, 673, arguing that the patentee should have the option of recovering the infringer’s profit or a reasonable royalty.

I’m not an expert on the German Civil Code, so to the extent the arguments for and against awarding the infringer’s profits during the second time period rest primarily on the proper interpretation of that source, I don’t have an informed opinion.  I am inclined to think, however, that as a matter of policy it might make more sense to limit the patentee to a reasonable royalty in such cases.  Assuming, for the sake of argument, that Professor Siebreasse is correct in arguing that awards of defendant’s profits, properly calculated, are a desirable remedy in cases in which the infringement is deliberate, because such damages deter but do not overdeter, I think that argument begins to lose some of its force with the passage of time.  I'm not sure this is an economic argument exactly, but if the patentee waits (say) eight or nine year to sue, it seems a bit unfair to me to require the defendant to disgorge the entire profit it earned from the sale of the infringing goods over that period of time—unless, as the German BGH suggested in the recent Flaschenträger case (see discussion here), at the end of the day the profits actually awarded tend to approximate a reasonable royalty anyway.  

And maybe there is an economic argument against awarding defendant's profits after a long period of time has passed.  To my knowledge, there isn’t a lot of law-and-economic analysis of statutes of limitation, and I can’t claim to be deeply familiar with what little is out there.  An article by Ehud Guttel and Michael Novick, however, titled A New Approach for Old Cases:  Reconsidering Statutes of Limitations, 54 U. Toronto L.J. 129 (2004), looks like it could be relevant to the above issues.  The authors argue that that statutes of limitation should be designed to address (1) the loss of evidence over time, and (2) the errors that are likely to result from evidentiary loss.  They propose a rule that would “never entirely bar the claim.  Instead, it extracts a price that compensates the defendant for his evidentiary loss.  This price consists of the total damages claimed by the plaintiff, discounted by the probabilistic value of the lost evidence.  Thus, for example, if decay in the exculpatory evidence doubles the plaintiff’s chance of winning the case, from a baseline of 30 per cent to 60 per cent, the proposed model halves his potential damages.”  Perhaps the dominant view in Germany (criticized by Dr. Hülsewig) is roughly consistent with this proposal, by limiting the plaintiff’s recovery to a reasonable royalty if the plaintiff waits more than three years to file suit.  (On the other hand, maybe in patent law delay doesn't result in evidence decaying quite as much as in other cases, where eyewitness testimony is more important.  If anything, a patent that has survived a validity challenge or challenges over a period of years is much more clearly valid that one that hasn't been challenged yet.  And evidence of profits is mostly a matter of financial records, though perhaps evidence relevant to some of the factors that assist in allocating the profit to the patentable feature suffer a risk of decay.)  This is all pretty tentative on my part, however; I need to think through these issues some more.      

Note that in Japan as well, where the three-year statute of limitations for patent infringement has lapsed, a plaintiff may still file a claim for unjust enrichment (for which the statute of limitations is ten years) and recover a reasonable royalty.  See my book p.322 n.135; Katsuhiro Hoshi, Research and Study on the Way of Damages Compensation and Penal Regulations in Cases of Intellectual Properties Infringement, 7 IIP Bull. 1, 11-12 (1998) (“After the expiration of three years . . . a claim is often made for a usually applicable royalty as undue profit, since the right to claim the return of undue profit does not lapse for as long as ten years.  It is rare practice to claim the infringer’s profit as undue profit, though it may be theoretically possible to do so.”).