October 5, 2020

Patent News

The Grand Panel of the Intellectual Property High Court provides guidance on how to calculate damages based on "lost profits" (Article102(1) of the Patent Act).

In Japan, Article 102 (1) of the Patent Act presumes the lost profits of a patent owner as the amounts of damages. However, the interpretation and application of the article are still somewhat unclear and need further clarification. The Grand Panel already provided the 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) ("Previous IP High Court Judgement") (please see our newsletter of November 29, 2019). In the judgement ("Judgement"), the Grand Panel comprehensively shows the guidance for Article 102 (1) of the Patent Act.
(IP High Court Case No. 2019 (Ne) 10003, Judgement issued on February 28, 2020)

Background

The plaintiff in the first instance ("Plaintiff") is a patent holder who holds two patents ("Patent 1", "Patent 2", collectively referred as "Patents") related to beauty devices ("Plaintiff's Products") and sells the Plaintiff's Products. The defendant in the first instance ("Defendant") is a company that sells, imports and exports beauty products including nine types of beauty roller devices (photo below) ("Defendant's Products"). The Plaintiff claimed that the Defendant's Products infringed the Patents, and sought an injunction and compensation for damages.


The Tokyo District Court, which is the first instance court of the case, judged that the sale of the Defendant's Products infringed Patent 2, and granted an injunction and a part of claimed damages. Both the Plaintiff and the Defendant appealed and challenged the decision.

Judgement

The IP High Court judged that the Defendant's Products infringed Patent 2, as did the Tokyo District Court, but increased the amount of damages.

In the case, the characteristic part of the invention of Patent 2 ("Invention 2") related to a part of the products manufactured and sold by the Plaintiff and the Defendant (i.e., bearing of the roller of the beauty device). Furthermore, while the price of the Plaintiff's Products was high, the price of the Defendant's Products was reasonable, and while the Plaintiff's Products were sold at major mail-order companies, department stores, major electronics retailers and so on, the Defendant's Products were sold at large discount stores and general stores.

In deciding the amount of damages, the Tokyo District Court judged that the contribution rate of Patent 2 is 10% and reduced 90% from the amount obtained by multiplying the amount of profit per unit of the Plaintiff's Products by the sales quantity of the Defendant's Products. Furthermore, the Tokyo District Court deducted 50% from the damage amount, saying that 50% of the sales volume of the Defendant's Products could not be sold by the Plaintiff, because the price of the Defendant's Products was cheaper than that of the Plaintiff's Products and customer segments were different.

On the other hand, the IP High Court considered the fact that the characteristic part of Invention 2 remained only a part of the Plaintiff's Product in calculating the "amount of profit per unit of products" and judged that "profit amount per unit of products" is the amount obtained by multiplying the profit amount of the Plaintiff's Products by 40%. In addition, the IP High Court deducted 50% from the damage amount of the sales quantity of the Defendant's Products because such quantity of the products could not be sold by the Plaintiff, as same as the Tokyo District Court judged.

In order to decide the amount of damage, the IP High Court indicated guidance regarding the following 4 points of Article 102 (1) of the Patent Act.

Article 102 (1) of the Patent Act provides that the amount of damage is calculated as follows.

"(ii) The amount of profit per unit of (i) products which would have been sold by the patentee if there had been no act of infringement; multiplied by the quantity of products assigned by the infringer ("assigned quantity"), the maximum of which shall be the amount attainable by the patentee in light of (iii) the capability of the patentee to work such products. However, if any (iv) circumstances exist under which the patentee would have been unable to sell the assigned quantity in whole or in part, the amount calculated as the number of products not able to be sold due to such circumstances shall be deducted."

• (i) "products which would have been sold by the patentee if there had been no act of infringement"
  
  The IP High Court has ruled that "products which would have been sold by the patentee if there had been no act of infringement" means products of a patentee which has a competitive relationship with the infringing products in the market.
  The Plaintiff's Products were implemented products of Invention 2, and thus the IP High Court judged that the Plaintiff's Products clearly fall into "products which would have been sold by the patentee if there had been no act of infringement".



• (ii) "the amount of profit per unit of products which would have been sold by the patentee"
  
  The IP High Court has ruled that the "amount of profit per unit of products" means the amount of marginal profit obtained by deducting only the additional costs required directly related to the manufacture and sales of the products by the patentee from the sales of the patentee's products, and the burden of proof is on the patentee's side.
  However, the IP High Court judged that Invention 2 could not be said to contribute to all the profits from the sale of the Plaintiff's Products, since (a) Invention 2 is characterized by bearing members that are part of the beauty device, (b) the part of the Plaintiff's Products that pays a large customer attraction is the structure of the rolling part of the beauty device, and (c) the Plaintiff's Products include solar panels and generate a weak electric current, which is recognized as increasing customer attraction, but the Defendant's Products do not have such function. Therefore, the IP High Court judged that it was not reasonable to consider the entire marginal profit gained from the sale of the Plaintiff's Products as the Plaintiff's lost profit and the amount of profit per unit of the Plaintiff's Products shall be the amount obtained by multiplying the Plaintiff's profit by 40%.



• (iii) "the capability of the patentee to work such products"
  
  The IP High Court has ruled that "the capability of the patentee to work such products" is sufficient with potential ability and even if it is possible to supply a quantity of products corresponding to the sales volume of the infringing product by a method such as production consignment, there is a "capability of the patentee to work such products", and the burden of proof is on the patentee's side.
  The IP High Court judged that the Plaintiff has "the capability of the patentee to work such products", since the Plaintiff had the ability to supply more than the sales volume of the Defendant's Products.


• (iv) "circumstances exist under which the patentee would have been unable to sell the assigned quantity in whole or in part"
  
  The IP High Court has ruled that "circumstances under which the patentee would have been unable to sell the assigned quantity in whole or in part" means circumstances hindering a legally sufficient cause between the infringement and the decrease in sales of the patentee's products. The IP High Court held that the circumstances may include, for example, (a) a difference in the business market and price between the patentee and the infringer (non-identity of the market), (b) the presence of competing products in the market, and (c) the infringer's marketing efforts (branding and advertising), and (d) a difference in the performance (features other than the patented invention such as function and design) of the infringing product, and the burden of proof is on the infringer's side.
  Regarding the difference in price and store of the Plaintiff's Products and the Defendant's Products, the IP High Court acknowledged that (a) given the nature of beauty products, some consumers would buy expensive products if there was no cheaper product and (b) since the Plaintiff's Products have a platinum coat on the roller surface and include a solar panel to generate a weak electric current, its quality is higher than that of the Defendant's Product without these functions, so it would be possible for the Plaintiff to capture a certain number of consumers of the Defendant's Products. Then, in consideration of such circumstances, the IP High Court judged that it is appropriate to admit that the quantity corresponding to the circumstances that the patentee would have been unable to sell is about 50% of the total.

From the above, the IP High Court decided that the Plaintiff's damage amount is,

• Defendant's Products sales quantity (351,724 products) x Circumstances that the Plaintiff could not have sold (50%) x Profit margin per unit (2,218 JPY) (marginal profit 5,546 JPY * 0.4 = 2,218 JPY) = 390 million JPY

In addition to the above, the lawyer's fee of 50 million JPY was added, and therefore a total of 440 million JPY was granted as the Plaintiff's damage amount.

Comments

In the Judgement, it is significant that the Grand Panel comprehensively showed the criteria for Article 102 (1) of the Patent Act, and in particular, showed the interpretation and the criteria for the amount of damage when the characteristic part of the patented invention is only a part of the plaintiff's product and the defendant's product.

Article 102 of the Patent Act was revised in 2019 (enforced on April 1, 2020), but the Judgement is also of reference for the interpretation of revised Article 102 of the Patent Act.

(i) "products which would have been sold by the patentee if there had been no act of infringement"

There has been a conventional debate as to whether the "products which would have been sold by the patentee" must be an implemented product of the patented invention or it is sufficient that the product sold by the patentee is a competing product.
The IP High Court ruled that a competing product is sufficient, as shown in many court cases in recent years.

(ii) "the amount of profit per unit of products which would have been sold by the patentee

The IP High Court clarified that the conventional marginal profit theory should be adopted as the amount of profit per unit of products.
There have been the following several views on how to deal with the situation that the characteristic part of the patented invention is only a part of the plaintiff's product and the defendant's product:
(a) treating the above situation as a problem of "amount of profit per unit of products";
(b) treating the above situation as a problem of "circumstances exist under which the patentee would have been unable to sell the assigned quantity in whole or in part"; and,
(c) treating the above situation as reasons for reduction other than above (a) and (b), etc.

The Tokyo District Court's ruling was not based on (b) above because the Tokyo District Court judged the contribution rate separately from the "circumstances exist under which the patentee would have been unable to sell the assigned quantity in whole or in part", but its theoretical structure was not clear.

In the Judgement, the IP High Court clarified that the above issue shall be solved as a problem of "amount of profit per unit of products" ((a) above).

In the case, since the Plaintiff's Products were implemented products of Invention 2, it was possible to consider "the ratio of the characteristic part contributing to the profit from the sale of the Plaintiff's Products". However, if the patented product is only a competing product and there was no implemented product of the patented invention, it is not clear from the Judgement how to judge the ratio of the contributing part, and we will need to wait for a future judgment.

(iii) "the capability of the patentee to work such products"

As for the capability to implement, it has generally been understood that the potential capability is sufficient. In the Judgement, the IP High Court clarified to comply with such criteria.

(iv) "circumstances exist under which the patentee would have been unable to sell the assigned quantity in whole or in part"

"Circumstances exist under which the patentee would have been unable to sell the assigned quantity in whole or in part" have traditionally been understood to be a situation that hinders a legally sufficient cause between the infringement and the decrease in sales of the patentee's products. The IP High Court clarified to adopt such a way of interpretation.

The circumstances, such as non-identity of the market mentioned in the Judgement, are interpreted in the same manner as the circumstances stipulated in Article 102 (2) of the Patent Act, which were shown in the Previous IP High Court Judgement.

Written by: Ms. Kiyoko Nakaoka (Attorney at Law and Patent Attorney)