Wednesday, July 24, 2019

The U.K. Supreme Court's Damages Decision in Morris-Garner

I mentioned a few months back (here) an analysis by Michael Burdon, published by Rose Hughes on the IPKat Blog, discussing the problems inherent to having courts in one country determine the terms of a global FRAND license (as in Unwired Planet, which is now on appeal to the U.K. Supreme Court).  My post noted, among other matters, Mr. Burdon's citation to a 2018 U.K. Supreme Court decision, Morris-Garner v One Step Ltd [2018] UKSC 20, which had previously escaped my attention.  Morris-Garner was a breach of contract decision, but the opinions discuss at great length, and with citation to several U.K. patent cases, the availability in some instances of "notional" or "user" damages, which are similar to the concept of a reasonable royalty under U.S. law.  I'd recommend that anyone interested in a serious analysis of this concept take a look at the decision, which includes a majority opinion authored by Lord Reed and separate opinions by Lords Sumption and Carnwath.  Lord Reed's opinion summarizes his conclusions as follows:
95. The foregoing discussion leads to the following conclusions:
(1) Damages assessed by reference to the value of the use wrongfully made of property (sometimes termed “user damages”) are readily awarded at common law for the invasion of rights to tangible moveable or immoveable property (by detinue, conversion or trespass). The rationale of such awards is that the person who makes wrongful use of property, where its use is commercially valuable, prevents the owner from exercising a valuable right to control its use, and should therefore compensate him for the loss of the value of the exercise of that right. He takes something for nothing, for which the owner was entitled to require payment.
(2) Damages are also available on a similar basis for patent infringement and breaches of other intellectual property rights.
(3) Damages can be awarded under Lord Cairns’ Act in substitution for specific performance or an injunction, where the court had jurisdiction to entertain an application for such relief at the time when the proceedings were commenced. Such damages are a monetary substitute for what is lost by the withholding of such relief.
(4) One possible method of quantifying damages under this head is on the basis of the economic value of the right which the court has declined to enforce, and which it has consequently rendered worthless. Such a valuation can be arrived at by reference to the amount which the claimant might reasonably have demanded as a quid pro quo for the relaxation of the obligation in question. The rationale is that, since the withholding of specific relief has the same practical effect as requiring the claimant to permit the infringement of his rights, his loss can be measured by reference to the economic value of such permission.
(5) That is not, however, the only approach to assessing damages under Lord Cairns’ Act. It is for the court to judge what method of quantification, in the circumstances of the case before it, will give a fair equivalent for what is lost by the refusal of the injunction.
(6) Common law damages for breach of contract are intended to compensate the claimant for loss or damage resulting from the non-performance of the obligation in question. They are therefore normally based on the difference between the effect of performance and non-performance upon the claimant’s situation.
(7) Where damages are sought at common law for breach of contract, it is for the claimant to establish that a loss has been incurred, in the sense that he is in a less favourable situation, either economically or in some other respect, than he would have been in if the contract had been performed.
(8) Where the breach of a contractual obligation has caused the claimant to suffer economic loss, that loss should be measured or estimated as accurately and reliably as the nature of the case permits. The law is tolerant of imprecision where the loss is incapable of precise measurement, and there are also a variety of legal principles which can assist the claimant in cases where there is a paucity of evidence.
(9) Where the claimant’s interest in the performance of a contract is purely economic, and he cannot establish that any economic loss has resulted from its breach, the normal inference is that he has not suffered any loss. In that event, he cannot be awarded more than nominal damages.
(10) Negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset. That may be the position where the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed. The rationale is that the claimant has in substance been deprived of a valuable asset, and his loss can therefore be measured by determining the economic value of the right in question, considered as an asset. The defendant has taken something for nothing, for which the claimant was entitled to require payment.
(11) Common law damages for breach of contract cannot be awarded merely for the purpose of depriving the defendant of profits made as a result of the breach, other than in exceptional circumstances, following Attorney General v Blake.
(12) Common law damages for breach of contract are not a matter of discretion. They are claimed as of right, and they are awarded or refused on the basis of legal principle.
Lord Sumption, by contrast, sees the user principle as having applicability in
a very disparate group of cases governed by different principles and not always consistent among themselves. The case law can be conveniently be categorised under three heads: (i) cases in which damages are not limited to pecuniary loss, because the claimant has an interest in the observance of his rights which extends beyond financial reparation; (ii) cases in which the claimant would be entitled to the specific enforcement of his right, and the notional release fee is the price of non-enforcement; and (iii) cases in which the claimant has suffered (or may be assumed to have suffered) pecuniary loss, and the notional release fee is treated as evidence of that loss. Clear analysis requires a distinction to be made between these cases. But it does not require principles to be formulated for one category without regard to those which apply to another. The law should develop coherently across different categories. It should not be allowed to fragment into self-contained sectors governed by arbitrary rules which have little relationship to the task in hand or to the principles applied in cognate areas (para. 109).
Thus, he would regard user damages as, in some instances, serving "as an evidential tool for assessing a party's true loss in appropriate cases" (para. 123).  

Lord Carnwath summarizes the differences between Lord Reed's and Lord Sumption's opinions, and states why he joins in the former.  Toward the very end of his opinion, he also expresses some views about the use of post-breach evidence:
153. Finally, I would add a comment on an issue mentioned by Lord Reed (para 56), but not treated by him as needing to be resolved in this appeal. Lord Sumption touches on the same issue, noting that the hypothetical release fee is “normally to be assessed at the time of the breach” (para 108). He cites the statement by Neuberger LJ in Lunn Poly Ltd v Liverpool and Lancashire Properties Ltd [2006] 2 EGLR 29, para 29:
“Given that negotiating damages under the Act are meant to be compensatory, and are normally to be assessed or valued at the date of breach, principle and consistency indicate that post-valuation events are normally irrelevant. However, given the quasi-equitable nature of such damages, the judge may, where there are good reasons, direct a departure from the norm, either by selecting a different valuation date or by directing that a specific post-valuation-date event be taken into account.” . . .
156. Neuberger LJ referred in particular to AMEC Development v Jury’s Hotel Management (UK) Ltd (2001) 82 P & CR 22. The judge (Anthony Mann QC, sitting as a Deputy High Court judge) noted that Brightman J in Wrotham Park (p 815H) had taken as his starting point for the hypothetical negotiation the profit which the developer “with the benefit of foresight” would have assumed. As the deputy judge commented, Brightman J seems to have imagined a negotiation before the infringement, but using actual profits as evidence of what the parties would have contemplated “before they actually accrued”. He took this as showing that the negotiation analysis need not be pursued “rigorously to its logical end”, and that he was not required to “guess at something which events have in fact made certain” (para 13).
157. While declining to lay down any “firm general guidance”, Neuberger LJ did not accept the deputy judge’s approach as generally applicable. Once the court had decided on a particular date of valuation, “consistency, fairness and principle” pointed against ignoring factors existing at that date or taking account of factors which occurred afterwards (para 29). He then set out what he regarded as “the proper analysis” in the passage cited above. As can be seen, he saw the “quasi-equitable” nature of the jurisdiction as permitting a relatively flexible approach, guided only (it seems) by whether the judge sees “good reasons” to direct a departure from the norm.
158. In my view, the more detailed examination by this court of the subject of “negotiating damages” allows for more precise and principled guidance. Here again there are useful statutory parallels. The Bwllfa case (Bwllfa and Merthyr Dare Steam Collieries Ltd (1891) v Pontypridd Waterworks Co [1903] AC 426) established that, in assessing compensation for loss caused by limits to mine-working imposed under a statutory notice, the arbitrator was entitled to take account of evidence of increase of prices since the date of the notice; he was “not required to conjecture on a matter which has become an accomplished fact” (p 431 per Lord Macnaghten). That was in a case where, as Lord Robertson observed (p 432) the statutory compensation was not for an assumed sale of the coal at the date of the notice, but for “a continuing embargo on working”.
159. In the same way, in the present context account must be taken of the nature of the claim. Under the user principle, whether as applied to the taking of a horse or infringement of a patent, the inquiry is as to the price or fee that the defendant would have been expected to pay at the time of the taking or the infringement. Logically the assumed knowledge should be limited to that which was available to the parties at the time. The position is different where the award is by way of compensation for the refusal of an injunction. This is a reflection not simply of the more flexible (“quasi-equitable”) nature of the jurisdiction, but (as Lord Reed explains: para 47) the different bases of the awards: “past, on the one hand, and future or continuing, on the other”. Where the causes of the claimant’s loss are not limited to past breaches, but include the judge’s refusal of an injunction to restrain future breaches, there is no reason in principle to exclude information available to the parties up to the time of the judge's decision.
Lord Carnwath's views seem consistent with the current approach of the Federal Circuit in the U.S., but different from the views Norman Siebrasse and I have expressed elsewhere (see here); see also pp. 53-57 of Patent Remedies for Complex Products.

There also have been a couple of articles published recently in EIPR discussing this case, which I may have more to say about in due time.

Not particularly relevant to damages, but having little knowledge of the Welsh language, I would greatly appreciate guidance from readers on how to pronounce the names in paragraph 158 of Lord Carnwath's opinion, particularly Bwllfa ("bool-fa"?).  

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