Awards of Infringer's Profits: A Summary of the Issues

Several of my recent posts have been about awards of defendant's profits.  This is a common remedy for patent infringement in some systems--Canada especially--but in the U.S., since 1946, it has been available only for design patent infringement (and in copyright, trademark, and trade secret cases).  Maybe this is a good time to summarize some of the issues.  Perhaps all of this will lead at some point to a law review article--or make its way into a second edition of my book someday--but that's in the distant future for now.

First, there's the question of the rationale for awarding the infringer's profits.  Although some patent systems view, or have viewed, this remedy as a proxy for the plaintiff's own lost profits, that's not a very sound economic rationale.  A better rationale is that awarding the infringer's profit deters infringement by ensuring that the infringer is no better off for having infringed.

Second, though, is the question of whether such awards threaten to overdeter; see this post for discussion.  Perhaps not, if the infringement is deliberate, but that raises some interesting issues of its own, among them what "deliberate" should mean in this context, and whether (as a consequence) awards of infringers' profits should only be available for deliberate infringement.  (In U.S. trademark law, awards of infringers' profits traditionally were available only for willful infringement, though some courts no longer follow this rule.)

Third--and perhaps related to the preceding point--should infringers' profits be available if the patent owner is a nonpracticing entity (NPE)?  If awards of infringer's profits are available only for deliberate infringement, this would exclude many, though perhaps not all, cases in which the patent owner is an NPE, because as an empirical matter the majority of such cases probably involve inadvertent infringement.  (Patent systems that view awards of infringers' profits as a proxy for lost profits, such as Japan, also limit such awards to cases in which the patent owner is working the patent, though questions may remain as to what "working" means.  See here and here for recent discussion on this blog.)

Fourth, should awards of infringers' profits ever be available for the infringement of a standard-essential patent?  I would think not; Axel Walz appears to agree, see here.  See also this post at Foss Patents, discussing Samsung's recent decision not pursue this type of relief in one of its German cases.

Fifth is the issue of how to calculate the infringer's profits.  These should only be the profits attributable to the infringement (but see my discussion of the perverse U.S. practice as it relates to design patents, here, and my discussion of Chinese law on this point, which appears to have been rectified, at my book pages 355-57).  But how do you calculate that?  One issue is what costs to deduct from the revenue the infringer derived from the sale of infringing goods:  variable costs only, or some portion of allocable overhead?  This is an interesting issue, which I discuss in my book at pages 207-08, and which is the subject to the German BGH's famous decision Gemeinkostenanteil (see my book pages 270-73).  Another issue is what factors should be taken into account to accurately capture the amount of the profit that is attributable to the infringing feature.  As an economic matter, the most important factor should be whether there are noninfringing alternatives (see my book page 68), though as I discuss in my book in Germany and the U.K. this factor is not given sufficient emphasis in the case law (see pages 197-203, 273-74).  (Canada gets it right, see pages 203-05.)  Other factors may be relevant as well.  One of my recent posts discusses the extent to which the defendant's ability to sell at a lower price than the patent owner should be relevant, see here.

Sixth, should awards of infringer's profits be available if the defendant delays filing suit more than x number of years? See discussion, here.

Seventh, should awards of "profits" be given if the defendant earned no profit, but did save costs by using the patented feature?  (In other words, the defendant lost less money that it would have, if it had used an alternative.)  In my view, if a patent system is going to award a disgorgement type of remedy, the answer should be yes:  the defendant should disgorge the benefit it received, which is the amount of its cost saving.  But as I discuss in my book (pages 201, 205, 273, 324-25) some patent systems say no, because the relevant statute literally allows only awards of profits, not cost savings. 

Jarosz and Chapman on Reasonable Royalties

John Jarosz and Michael Chapman have published an article titled The Hypothetical Negotiation and Reasonable Royalty Damages in 16 Stanford Technology Law Review 769 (2013), available here.  I read and commented on an earlier version in draft.  Here is the abstract:

Reasonable royalty damages are the predominant form of relief awarded in patent infringement cases and, of late, have been a lightning rod for assertions that the patent protection system is out of control. The primary tool used to assess reasonable royalty damages is the hypothetical negotiation construct arising from the seminal Georgia-Pacific Corp. v. United States Plywood Corp. decision in 1970. The construct provides that a reasonable royalty should be determined by hypothesizing an imaginary negotiation between a patent holder and an infringer over use of a patented invention at the time of first infringement. This Article examines the wisdom of the historically heavy reliance upon the construct. We question whether this construct is likely to achieve the ultimate goal of reasonable royalty damages–namely, to provide the patent holder with fair and adequate compensation for the unauthorized use of a patented invention. We find that the foundation for the construct is tenuous and that the use of the hypothetical negotiation construct introduces unnecessary and unproductive questions and conflict into the determination of reasonable royalty damages. We propose that the determination of reasonable royalty damages be based on a direct and objective assessment of a patent’s (1) incremental benefits, (2) licensing comparables, and (3) design-around costs. We propose a balancing and weighing of the results of these different approaches without the introduction of artificial bargaining drama, guided by the objective of ensuring fair patent holder compensation in light of the infringement at issue.

Personally, I agree with portions of the authors' analysis, disagree with other portions.  I still favor use of the hypothetical ex ante negotiation construct, for example, and would tend to disagree with what I interpret as the authors' preference for using ex post data (see e.g., article pp. 812 et seq,, 814-15 n.212).  But it's a very stimulating article, with a good deal of interesting history and analysis, and I certainly recommend taking a look at it.

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.”).

The European Observatory on Infringements of Intellectual Property Rights

Readers in Europe may already be quite familiar with this, but I'm guessing that many readers elsewhere are not.  

In 2009, the European Commission (EC) launched something called the European Observatory on Counterfeiting and Piracy, which (according to the EU Single Market:  Enforcement of Intellectual Property Rights webpage) was  intended to "bring[ ] together representatives from Member States administrations, private industry and consumer or­ga­ni­sa­tions to improve efforts to com­bat a rising problem that threat­ens consumer health and safety, business, jobs and national and local economies." The Observatory's own webpage is here.  The Observatory's Legal Sub-Group compiled several reports on matters such as "Damages in Intellectual Property Rights", "Injunctions in Intellectual Property Rights", and "Cross border measures in EU," all of which are downloadable from the preceding webpage.  (Subgroup member Ann-Charlotte Söderlund also published a paper titled Damages in IPRED and in Sweden in the 2/2012 issue of the Italian journal Il Diritto Industriale, pages 147-53.  IPRED is the acronym the subgroup used, for “Intellectual Property Rights Enforcement Directive,” for what I usually refer to as the 2004 E.C. Enforcement Directive, text of which can be found here.)  Much of the Observatory's work appears to have focused on counterfeiting issues, as its name suggests, but (having taken a very quick look at the Legal Sub-Group's reports on damages and injunctions), the reports also provide concise but useful information on practices in each of the E.U. member states relating to damages and injunctions in patent as well as in copyright and trademark cases.

In 2012, the Observatory was renamed the Observatory on Infringements of Intellectual Property Rights and its work was entrusted to OHIM (the Office for Harmonization in the Internal Market), which has its own website devoted to the renamed Observatory, here.  I don't know why the EU continues to maintain the earlier website, instead of having OHIM merge the two into one, but there it is.

Hoppe-Jänisch on the Düsseldorf Court's Decision to Refer "LTE Standard" to the CJEU

Daniel Hoppe-Jänisch has just published Der Vorlagebeschluss des LG Düsseldorf „LTE-Standard‟in the September issue of Mitteilungen der deutschen Patentanwälte (pages 384-90).  Mr. Hoppe-Jänisch's English-language translation of his article, titled The Landgericht Düsseldorf's (Düsseldorf District Court) decision to refer "LTE-standard," is available on White & Case's website, here.  (Mr. Hoppe-Jänisch had previously published a short commentary about the case in GRUR-RR, and I have cited his earlier commentary here and here.)  For those of you who aren't familiar with the matter, in  March 2013 the Düsseldorf District Court referred to the Court of Justice for the European Union (CJEU) the question of whether it is an abuse of dominant position for the owner of a FRAND-encumbered standard-essential patent (SEP) to seek an injunction, where the infringer has expressed its willingness to negotiate a FRAND license.

Mr. Hoppe-Jänisch's English-language version provides a nice translation of the five questions the court has referred to the CJEU:

1.  Does the owner of a standard-essential patent who declares themselves willing, vis-à-vis a standard-setting organisation, to grant a licence to any third party on fair, reasonable and nondiscriminatory terms, abuse their dominant market position if they seek injunctive relief before a court against a patent infringer despite the infringer having declared themselves willing to negotiate such a licence,

or

Can an abuse of the dominant market position only be presumed if the patent infringer has made an unconditional and binding offer to the owner of the standard-essential patent to conclude a licence agreement that the patent owner cannot refuse without unduly restraining the patent infringer or violating the non-discrimination rule, and the patent infringer, in anticipation of the licence to be issued, already complies with their contractual obligations with respect to already committed acts of use?

2.  If the abuse of a dominant market position can already be presumed from the patent infringer’s willingness to negotiate:

Does Article 102 TFEU pose specific qualitative and/or  chronological requirements to the willingness to negotiate? Can such a willingness to negotiate already be presumed when the patent infringer merely generally declares (orally) their willingness to enter into negotiations or does the patent infringer already have to have entered into negotiations by, for example, communicating terms and conditions under which they are prepared to conclude a licence agreement?

3.  If the submission of an unconditional binding offer to conclude a licence agreement is a requirement for an abuse of a dominant market position:

Does Article 102 TFEU pose specific qualitative and/or chronological requirements to the offer? Does the offer have to include all terms and conditions, which are usually set forth in licence agreements in the technology field in question? Can the offer be made particularly under the condition that the standard-essential patent is actually used and proves to be legally valid?

4.  If the patent infringer’s fulfilment of obligations arising from the requested licence is a requirement for an abuse of a dominant market position:

Does Article 102 TFEU pose particular requirements with respect to such acts of fulfilment? Is the patent infringer required, in particular, to make disclosures relating to past acts of infringement and/or to pay licence fees? Can an obligation to pay licence fees also be fulfilled by giving security?

5.  Do the requirements for the presumption of abuse of a dominant market position by the owner of a standard-essential patent also apply to other claims through legal action arising from patent infringement (disclosures, recall, damages)?

The article provides a good, concise overview both of the LTE-Standard case and of other relevant SEP/FRAND matters, including the EU's proceedings against Samsung and Motorola; the Dutch court's decision in Samsung v. Apple; and the UK decision involving IPCom and Nokia.  In Mr. Hoppe-Jänisch's view, the Düsseldorf court's accompanying opinion suggests an interest in balancing the conflicting interests of the SEP owner and the would-be licensee, and (despite its distancing itself somewhat from the BGH's Orange-Book-Standard framework) evidences concern over the risk of abuse both on the part of both the SEP owner and the alleged infringer.  He writes that a mere willingness to negotiate on the part of the alleged infringer isn't, or shouldn't, necessarily be enough to invoke the competition-law exception to the SEP owner's right to obtain an injunction, though it may suffice when "a purely tactical, delaying and dishonest behaviour can be ruled out."  He also notes the Düsseldorf court's willingness to bow to criticism and do away with the requirement that the infringer concede validity and infringement.  Finally, he notes that the CJEU is unlikely to to "take a position on all details of the objection's application," and discusses some possible future controversies over the meaning of "standard-essentiality" and the conditions relevant to demonstrating a willingness to negotiate.

Overall, a good read for those of you who are interested in the SEP/FRAND landscape in Europe.