On March 6, 2024, Japan’s Intellectual Property High Court issued its decision in Hamamatsu Phototoics L.K. v. Tokyo Seimitsu Co., Case No. 2023 (Ne) 10037. An English-language summary, and a translation of the entire decision, are available on the court’s website, here.
The plaintiff, Hamamatsu, owns Patent No. 4509578 for a “Laser machining method and last machining apparatus.” Plaintiff makes and sells stealth dicing (SD) engines; defendant makes and sells SD equipment, of which an SD engine is a component. Plaintiff sued defendant for infringement and prevailed on the merits. On appeal, the IP High Court affirms on liability, and agrees that the plaintiff is not entitled to the disgorgement of the defendant’s profits, but increases the lost profits damages and awards those in lieu of a reasonable royalty. I will focus on the damages issues.
First, a little background. As my coauthors and I have explained elsewhere:
Article 102 of the Japanese Patent Act provides for three special methods for calculating damages: methods using the patentee’s profit margin, the infringer’s profits, or hypothetical royalty. Paragraph 2 of that Article provides: “Where a patentee or an exclusive licensee claims against an infringer compensation for damage sustained as a result of the intentional or negligent infringement of the patent right or exclusive license, and the infringer earned profits from the act of infringement, the amount of profits earned by the infringer shall be presumed to be the amount of damage sustained by the patentee or exclusive licensee.” Though courts initially limited this form of damages to patentees that were practicing the patented invention, the Grand Panel of the Intellectual Property High Court softened this requirement in 2013, holding that disgorgement is available anytime the patentee lost profits as a result of infringement, even if those profits did not result from lost sales of goods or services covered by the patent-in-suit. For example, it is now generally accepted that disgorgement is an available remedy for patentees that sell unpatented products that compete with the infringing products supplied by the infringer. It is still unclear and disputed, however, whether patentees that only license the patent-in-suit to third parties may request disgorgement as a remedy. Moreover, when disgorgement is awarded, at least some courts have apportioned the infringer’s profits to reflect the percentage of infringing sales attributable to the infringing feature.189/
189/ For example, the court in Case No. 2014 (Ne) 10022 (IP High Ct. 2014) (Japan) (Telephone Number Automatic Creation Device) admitted 65 percent “partial reversal of the presumption” based on the infringer’s profits, taking into account the contribution of the patented invention to the profits.
See also this excellent and informative paper by Professor Masabumi Suzuki, which notes that Japanese courts continue to view article 102(2) as providing a way to approximate the plaintiff's lost profits, and not a disgorgement remedy as such. Thus, he writes, "the infringer's side should allege and prove any circumstances supporting that the actual lost profits are smaller in amount than the infringer's profit" (p.13).
In the Hamamatsu case, the plaintiff sought to recover, as its presumptive lost profit, the infringer’s profits, or at least some portion of them. The court of first instance rejected this claim, however, and the IP High Court affirms:
. . . the Plaintiff has sold SD engines but has not manufactured and sold SD equipment that falls under the same type of product as the infringing products. Moreover, there is also no evidence sufficient to find that the Plaintiff is capable of manufacturing SD equipment by itself and had had a specific plan to manufacture and sell SD equipment. The Plaintiff's lost profit is absolutely that caused by the loss of sales of SD engines and is not that caused by the loss of sales of SD equipment. SD equipment and SD engines differ in consumers and market and are not competing in the same market. Therefore, there is no reasonable circumstance based on which the Defendant's entire profit from the sales of SD equipment is presumed to be profit from the sales of SD engines lost by the Plaintiff (damage to the Plaintiff).
D. In this regard, the Plaintiff also alleges that, out of the marginal profit of the Defendant's Old Products, the marginal profit for the part corresponding to the SD engine should be presumed to be the value of damage incurred by the Plaintiff. However, an SD engine is a component constituting part of SD equipment, and the value for the SD engine is merely one of many items that constitute manufacturing costs. In this case, there is no circumstance sufficient to specify the portion of the marginal profit of SD equipment that is derived from each component. There is thus no choice but to say that it is difficult to specify the portion derived from the "SD engine" alone, and the marginal profit for the "part corresponding to the SD engine" cannot be unambiguously specified. Even in the case of calculating such marginal profit, there is no established calculation method, and various conclusions can be drawn depending on the factors considered and the logical manipulation performed. Therefore, it should be said that the "part corresponding to the SD engine" of the marginal profit calculated in such way cannot be used as a reasonable basis for presuming the value of damage incurred by the Plaintiff in this case and converting the burden of argument and proof of a ground for reversal of presumption. . . .
E. For the reasons described above, it can be said that the application of the provisions of Article 102, paragraph (2) of the Patent Act is allowed in this case on the grounds that there is a circumstance suggesting that the Plaintiff could have gained profit if there were no patent infringement by the infringer. However, the marginal profit for the part corresponding to the SD engine cannot be specified. Therefore, the value of damage incurred by the Plaintiff in this case cannot be found pursuant to the provisions on presumption of the same paragraph. In all the aforementioned judgments of the Special Division of the Intellectual Property High Court, the Intellectual Property High Court made determinations on the cases with a circumstance where the patentee, etc. had sold and otherwise handled a product targeting the same market and consumers as the product wherein the patent is worked or the infringing product. Therefore, those judgments do not conflict with the understanding of this case as stated above. The Plaintiff also cites the judgment of the Intellectual Property High Court of August 8, 2022 (Intellectual Property High Court, 2019 (Ne) 10007). However, the same judgment was rendered on a case in which the patentee sells the finished product while the infringer sells a component that indirectly infringes the patent and is not a case like this case in which specification of the portion corresponding to a relevant component in the marginal profit of a finished product becomes an issue. Therefore, said judgment is not sufficient to affect the conclusion regarding the application of the same paragraph as stated above (pp. 22-23).
The Court then goes on to consider the plaintiff’s claim for lost profits under article 102(1). The court concludes that plaintiff would have sold some SD engines to the defendant, but for the infringement, but (if I’m reading this correctly) the defendant’s ability to resort to noninfringing alternatives means that the plaintiff would have satisfied only 30% of the defendant’s needs:
The Inventions are not related to the stealth dicing function itself but are related to processing of the end in the laser machining of a workpiece by using the same function. The ability to attract customers of the Inventions themselves is not found to be high, taking into account the facts that regarding art pertaining to the Inventions, there are alternative technologies using AF low tracking and a method of not performing laser machining at the end of a workpiece (edge off) and that the Defendant is actually selling the Defendant's New Products using AF low tracking with edge off function. SD equipment of the Defendant or Disco with the Plaintiff's engine mounted does not have exactly the same performance and function as the Defendant's Old Products. The Defendant has sold the Defendant's Products by changing the specifications of SD equipment and developing and providing modules according to the manufacturing processes and the shapes of workpieces of individual users. Taking into account these circumstances that appeared in this case together, it is reasonable to find that the quantity corresponding to the "circumstance that renders the patentee unable to sell" as referred to in Article 102, paragraph (1), item (i) of the Patent Act accounts for 70% (p.25).
The plaintiff therefore is entitled to its marginal profit on 30% of the quantity of SD engines the defendant made. The marginal profit per unit of the plaintiff’s SD engines is redacted, and the marginal profit on 100% of the (redacted) units the defendant made is 412,800,000 yen. Thus, the marginal profit on 30% is “123,840,000 yen (= 412,800,000 yen x (1 - 0.7)).” This number is higher than the amount of a reasonable royalty calculated under article 102(3) at a royalty rate of 5%, so the plaintiff gets the 123,840,000 yen.
In addition, the court awards “delay damages” from the day after the tort was committed of judgment to the date of payment in the amount of 5% per annum, which I understand is fairly standard in Japanese practice; and attorneys’ fees in the amount of 13,000,000 yen (about US$92,000) (pp. 27-28).
One
other issue that arose was this: there
was another case between the same parties involving the same products, but a
different patent. The defendant argued
that the plaintiff’s damages should be divided in half between the present case
and the other one. The court rejected
this argument, stating that even if there was some overlap in damages, the
infringement of the other patent was not a matter before this court (which
seems reasonable to me).
On the issue of the infringer's profits, I might have expected the court to try to determine the amount of the defendant’s profit that was attributable to the infringing technology, and order the defendant to give up that. Here, however, if I’m understanding correctly, the plaintiff argued that the defendant should disgorge the amount of its profit attributable to the infringing component, but the evidence did not indicate how much this would be (so does that mean that the burden on this issue was on, or had shifted to, the plaintiff, to show how much of the defendant’s profit should be given up?). The issue calls to mind the question of how courts in the U.S. should determine, in design patent infringement cases, the profit attributable to the article of manufacture that incorporate an infringing design, if that article is not coextensive with the defendant’s entire product (see discussion here). To my knowledge, U.S. courts still haven’t figured that one out, and this Japanese decision may provide further evidence that the question is not very well formulated to begin with.
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