November 29, 2019

Patent News

The Grand Panel of the Intellectual Property High Court provides guidance on how to calculate damages based on "Infringer's Profits" (Article102(2) of the Patent Act) and "Reasonable Royalty" (Article102 (3) of the Patent Act).

In Japan, Article 102 (2) of the Patent Act presumes the profits gained by an infringer through the act of patent infringement (namely, "Infringer's Profits") are the amounts of damages and Article 102 (3) deems an amount equivalent to the amount that the patentee would have been entitled to receive for the working of the patented invention ("Reasonable Royalty") to be the damages.

However, the interpretation and application of these articles are still somewhat unclear and need further clarification. Examples of such issues include the following: Since Article 102 (2) is merely a presumptive clause, the presumption can be overturned in some circumstances. While Article 102 (3) states that an amount equivalent to a license fee can be claimed, it is not clear how to calculate a reasonable royalty rate.

In this case, the interpretation of these articles was argued between the parties, and the Grand Panel provided guidance on how to calculate damages based on these articles.

(IP High Court Case No. 2018 (Ne) 10063, Judgement issued on June 7,2019)

This is a case in which the Plaintiff who owns two patent rights (the "Patents") concerning an invention entitled "Carbon Dioxide-Containing Viscous Composition" sought compensation for damages and the interest thereon on the basis of a tort of patent infringement against the Defendants, alleging that the carbonate pack cosmetics (the "Defendant's Products") produced and/or sold by Defendants fall within the technical scope of the invention.

Since the Osaka District Court, which is the first instance court of this case, ruled that the Defendant's Products infringe the Patents and the Patents are valid and acknowledged a part of the claim for compensation for damages against Defendants, Defendants appealed and challenged the decision. The Grand Panel dismissed the appeal by the Defendants and states as follows.

- "Infringer's Profits"
In the judgement, the court has ruled that Infringer's Profits of Article 102(2) shall be an amount of marginal profit in which only an additional cost that was necessary and directly related to manufacture and sales of infringing products by an infringer can be deducted from sales figures of the infringing products, and the burden of proof is on the patentee's side.

Further, with regards to the rebuttal to the presumption under the provision of Article 102(2) of the Patent Act, the court has stated that it is the infringer who should bear the burden of proof regarding circumstances hindering a legally sufficient cause between the infringer's profit and the patentee's damages.

The court also held that circumstances rebutting the presumption of Article 102(2) may include, for example, [i] difference between patentee's business and infringer's business (non-identity of the market); [ii] the presence of competing products in the market; [iii] marketing efforts of infringer (branding, advertisement); and [iv] performance of infringing products (features other than patent invention including function and design). This judgment is the first court decision which refers to the detail of the circumstances rebutting the presumption of Article 102(2).

- "Reasonable Royalty"
The court has ruled (i) that "Reasonable Royalty" under Article 102(3) of the Patent Act is considered to be minimum damages, which should be on a sales figure basis of infringing products by multiplying the sales figure by a royalty rate to be paid for the implementation and (ii) that the royalty rate should be higher than the normal royalty rate where a license agreement is made through negotiation and thus it should be determined as a reasonable royalty rate by comprehensively taking into account the following circumstances appearing in a lawsuit: [i] royalty rate set in the actual license agreement for the patent (if available), or the average royalty rate in the industry; [ii] the value of the patent such as the technical content or significance of the patent invention, and the substitutability with alternative technology; [iii] contributions of the patent to sales and profits and the manner of infringement; and [iv] the competitive relationship between patentee and infringer as well as a business policy of the patentee. This judgment is the first court decision which refers to the detail of the circumstances which should be taken into account of the calculation of a reasonable royalty rate of Article 102(2).

As mentioned above, this judgement made clear the rules regarding the calculation of damages and can practically be of reference for calculating damages. For example, it clearly states that the royalty rate based on Article 102 (3) should be higher than the normal royalty rate where a license agreement is made through negotiation.

As for the calculation of damages, recently, amendments to the Patent Act were enacted. Before the amendments, it was not possible for a patentee to receive a separate Reasonable Royalty for the portion where the presumption of Articles 102 (1) and (2) were overturned (because it exceeds the production capacity of the patentee). However, the amendments enable a patentee to receive the Reasonable Royalty separately for said portion of Article 102(1), while the amendments do not state whether a patentee can receive the Reasonable Royalty separately for said portion of Article 102(2).

We think that due to this decision as well as the amendments to the Patent Act, presumed damages according to the Patent Act will be calculated higher, which will contribute to protection of patent rights in Japan.

Written by: Mr. Yuichiro Suzuki (Attorney at Law and Patent Attorney)