Wednesday, September 18, 2013

Kleinheyer and Hartwig on allocation of defendant's profits in Germany

Adrian Kleinmeyer and Henning Hartwig recently published an article titled Kausalitätsabschlag und Kontrollüberlegung beim Verletzergewinn:  Zugleich Besprechung von BGH, Urt. v. 24.7.2012-X ZR 51/11-Flaschenträger,  in issue 7 of the 2013 volume of GRUR.  The authors discuss the German case law addressing the topic of how to allocate an infringer's profits to the unauthorized use of a patented invention.  (I briefly discuss this topic under German law in my book at p.272.)  To illustrate, suppose the patent covers component B and that the infringer made, used, or sold a device comprising ABCD.  How much of the infringer's profit is attributable to B?  From an economic perspective, the correct way to go about answering this question would be first to determine what the next-best available noninfringing alternative to B was; let's call it X.  Then you would try to figure out what profit the defendant would have earned if it made, used, or sold a device comprising AXCD instead of ABCD.  The difference between the actual profit and this hypothetical profit would be the amount attributable to the unauthorized use of the patented invention.  In reality, this sort of calculation is hard to do, and courts in countries that permit awards of defendant's profits generally try instead to figure out how much of the actual profit earned on sales of ABCD are properly attributable to B.  Often--probably most of the time, in fact--only some portion of the profit is attributable to B, while another portion is attributable to the other features of the device or to other factors.

In the recent Flaschenträger case, which I blogged about in May (here), and which can be found in the original German here and in English translation (but behind a paywall) here, the German Federal Supreme Court reaffirmed that in a case like the one I described above the court should consider various factors that might impact the amount of the infringer's profits, including not only the patented invention's technical advantages but also such things as the design of the infringing product, its manufacturer, the trademark under which the product is sold, its price, and other factors independent of the patent (opinion para. 18).  Kleinheyer and Hartwig, however, take issue with the assumption that the lower price offered by the infringer is a factor that should reduce the amount of profit attributable to the infringement.  

In my opinion, the authors have a point.  As I discuss in my book, in a simple model of infringement, one possibility is that the infringer is more efficient than the patentee (meaning here that the infringer faces a lower marginal cost curve in producing the patented product) and therefore can profitably sell the patented product at a lower price than the patentee.  In such a case, the ideal solution is for the infringer to take a license.  But the fact that it can and does sell at a lower price bears an important relationship to the amount of its profits.  Another possibility is that the infringer is less efficient but nevertheless undercharges the patentee for some period of time.  Again, the infringer's lower price is what leads to whatever profit it earns until such time as the patentee charges an even lower price or obtains an injunction.

But I think there also can be cases in which the lower price probably should be taken into consideration.  Consider, for example, a multicomponent device like a smartphone.  Suppose that Samsung sells a phone at a lower price than Apple; that the phone infringes one of Apple's patents; but the patent relates to a seldom-used feature of the Samsung phone in question.  In determining what portion of Samsung's profit derives from the unauthorized use of the Apple patent and what portion derives from other factors, it seems relevant to me that Samsung sells its phone at a lower price.  The lower price probably attracts many consumers, while the presence of a relatively unimportant patented feature might have little impact.  So perhaps what is needed is a nuanced understanding that recognizes that price may influence the defendant's profits in a manner that is independent from the act of patent infringement, or in a manner that enables the infringer to earn more profits attributable to the infringement.

Interestingly, Kleinheyer and Hartwig also state (at p.686) that it is not necessary to an award of infringer's profits that the infringer have knowledge of the original product, or that there be an original product at all.  As support, they cite three previously published articles expressing this view:  Hans Delahaye, Kernprobleme der Schadensberechnungsarten bei Schutzrechtsverletzungen, GRUR 1986, 217 (219); Rudolf Kraßer, Schadensersatz für Verletzungen von gewerblichen schutzrechten nach Urherberrechten nach deutschem Recht, GRUR Int. 1980, 259 (262); and Albert Preu, Richtlinien für die Bemessung von Schadensersatz bei Verletzung von Patenten, GRUR 1979, 753 (757).  This latter point is contrary, however, to the position taken by Axel Walz in a recent paper published in GRUR Int. that I blogged about here; Walz argues that awards of profits shouldn't be granted to nonpracticing patentees.  Perhaps it would be good for the BGH at some point to determine which side is correct on this issue.  

Kleinheyer and Hartwig also disagree with the BGH's statement in Flaschenträger that (and I'll quote here from the English language translation) "Since the various methods of estimating the damages payable serve to compensate one and the same damage sustained by the patent proprietor owing to the infringements committed, as a rule, based on their underlying principle, these methods should essentially have similar results even where divergences are inevitable owing to the different parameters underlying each individual calculation" (citing Klaus-J. Melullis, Zur Ermittlung und zum Ausgleich des Schadens bei Patentverletzungen, GRUR 2008, 679 (684)).  This is an interesting issue, and seems analogous to the recent discussion between Professor Siebrasse and me regarding the appropriate baseline for awarding infringer's profits, see here.

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