Wednesday, September 25, 2013

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 (6th ed. Frank Peterreins tr. 2013); Benkard, Patentgesetz § 141 ¶ 4, at 1504 (10th 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.”).

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