Monday, February 10, 2014

Annonay v. Albiges: Lyons Court of Appeals Applies Questionable Methodology in Awarding Lost Profits

A recent lost profits case from France is Annonay Productions France Sas v. Albiges SaS, Cour d’appel de Lyon, Sept. 12, 2013, PIBD 993, III, 1503.  The plaintiff is a coowner of a patent on a portable device for rolling up a swimming pool protective cover (dispositif mobile d'enroulement de couverture de securité pour piscine).   A contract between the two coowners allowed either of them to sue for infringement without notifying or accounting to the other.  One of the issues in the case was whether the defendant could raise the defense of invalidity where only one of the coowners filed suit, and the court concluded that the answer was no.  (By way of contrast, in the U.S., both coowners would have to be parties to an action for infringement.  For no clearly good reason, one coowner cannot compel an unwilling coowner to be a party.  See Roger D. Blair & Thomas F. Cotter, The Elusive Logic of Standing Doctrine in Intellectual Property Law, 74 Tulane L. Rev. 1323, 1351 n.124 (2000).)  The court affirmed a judgment that the defendant’s “Easy Pro 3” and “Easy Pro 4” models infringed.  On the question of damages, the court of first instance estimated the masse contrefaisante (here the defendant’s turnover, or chiffre d'affaires) as  €924,588.  However, because the Easy Pro devices incorporated improvements over the patented invention, that court concluded that the plaintiff would not necessarily have realized all these sales, and awarded €150,000 in damages. 

The Court of Appeals modified the damages award, stating that "Even assuming the improvement is real, it is an infringement, and we may not exclude a portion of the sales from the assessment of the masse contrefaisante."  ("Mais ce perfectionnement, à le supposer réel, est une contrefaçon et ne permet pas d’écarter une partie des ventes de l’appréciation de la masse contrefaisante.”)  The court of Appeals noted that the plaintiff’s accounting expert testified that the plaintiff’s average gross margin was 49.54%, and the court approved the method by which this rate was calculated.  The court then multiplied this rate by the defendant’s turnover and awarded the plaintiff the resulting figure, €458,040, stating that “Under these conditions, the ‘prejudice actually incurred and proved’ . . . is indeed €458,040 . . . ."  (“Dans ces conditions, le ‘préjudice réelement subi et prouvé’ . . . est bien de 458 040 euros . . . .")

In my book, I discuss the French case law on lost profits, stating (at pp. 265-66):
To calculate lost profits . . . the court estimates the number of sales the plaintiff would have made but for the infringement, taking into account such factors as the plaintiff’s capacity, customer preferences, possible noninfringing substitutes, and so on. It then multiplies this number by (a) the price at which the plaintiff would have sold the products and (b) the plaintiff’s profit margin.  From an economic perspective, this approach, including the consideration of noninfringing substitutes, seems correct in all particulars—subject only to the caveat that courts should use the plaintiff ’s profit margin on the forgone sales only, which as we have seen is likely to be higher than the plaintiff’s overall profit margin on sales of the patented product. French courts sometimes use the plaintiff ’s gross profit margin (marge brute) in recognition of this latter point.
Unless I'm missing something, the Annonay decision seems to depart from this framework by applying a approach that seems rather dubious from an economic perspective.  If the defendant's product was an improvement, it may well be reasonable to assume that the plaintiff wouldn't have earned the same number of sales as the defendant did but for the infringement.  In addition, to measure the plaintiff's loss accurately, you'd also want to take into account such factors as the comparative prices at which the parties sold or would have sold their products (which obviously affects the quantity demanded) and whether there were any noninfringing alternatives to which the defendant might have turned in the absence of infringement.  In any event, there's no good economic reason to presume that the plaintiff's turnover would have been the same as the defendant's; and if the plaintiff lost only some of the sales the defendant made, the plaintiff should recover lost profits on those sales and a reasonable royalty on the remainder.  For further discussion, see Roger D. Blair & Thomas F. Cotter, Intellectual Property:  Economic and Legal Dimensions of Rights and Remedies 209 (Cambridge Univ. Press 2005). 

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