This article reviews the UK approach to compensation in cases involving patent infringement, interim injunctions and employee inventions.

 

The Intellectual Property (Enforcement, etc.) Regulations 2006 (SI 2006/1028) Assessment of damages 3. (1)   Where in an action for infringement of an intellectual property right the defendant knew, or had reasonable grounds to know, that he engaged in infringing activity, the damages awarded to the claimant shall be appropriate to the actual prejudice he suffered as a result of the infringement. (2)       When awarding such damages— (a)       all appropriate aspects shall be taken into account, including in particular— (i)        the negative economic consequences, including any lost profits, which the claimant has suffered, and any unfair profits made by the defendant; and (ii)       elements other than economic factors, including the moral prejudice caused to the claimant by the infringement; or (b)       where appropriate, they may be awarded on the basis of the royalties or fees which would have been due had the defendant obtained a licence. …

 

Compensation for patent infringement is governed by the EU Directive on the Enforcement of Intellectual Property Rights (2004/48/EC) (Directive), which is implemented by the Intellectual Property  (Enforcement etc.) Regulations 2006 (SI 2006/1028) (Regulations) as well as case law. England and Wales, unlike the People’s Republic of China, is a common law jurisdiction in which the decisions of courts are bound by precedents set in earlier cases with similar facts. Key reported cases therefore provide the most detailed guidance on the award of damages in patent disputes.

 

There are very few reported UK patent cases on compensation however because most disputes are settled before cases reach a formal inquiry into damages. There have been no reported cases following the implementation of the Directive. The current common law is summarised below however first it must be noted that it is questionable whether the leading cases are wholly compatible with the Regulations. The following are some examples of common law principles which may be incompatible with the Regulations:

 

·                    a claimant must choose between damages and an account of the defendant’s profits derived from its infringement of the claimant’s rights (account of profits);

·                    the Court’s assessment of damages may include the infringer’s unfair profits; and

·                    compensation may be calculated based on royalties as an alternative to compensation for loss of profit.

These principles are examined below.

Election between Damages and an Account of Profit

 

In the UK, once liability for patent infringement has been established, a separate hearing to decide the quantum of the damages award is held. The claimant conventionally chooses an inquiry into damages or an account of profits (aided by the defendant’s disclosure of limited financial information[1]). However, paragraph 3(2)(a)(i) of the Regulations requires the Court to take into account, in cases of knowing infringement,  “any loss of profits, which the claimant has suffered, and any unfair profits made by the defendant”. Arguably, under the Regulations, the claimant should no longer be forced to choose between damages and an account of profits[2]or, if a claimant is rightly required to choose, should the Court consider the defendant’s unfair profits as part of the assessment of damages?

 

Following the Directive, Spanish Courts have awarded compensation based on both the claimant’s loss of profit and the profits made by the defendant.[3] However, a consultation document by the Patent Office[4] stated that no action was required to implement Article 13 of the Directive (equivalent to Paragraph 3 of the Regulations) because the UK approach was already in line with the provisions.

Calculation of Damages

The leading case on damages is Gerber Garment Technology Inc. v. Lectra Systems Ltd. and Anr.[5] Mr Justice Kitchin recently summarized the law in Ultraframe (UK) Limited v Eurocell Building Plastics Limited and Eurocell Profiles[6]:

 

1             Damages are compensatory. The general rule is that the measure of damages is to be, as far as possible, that sum of money that will put the claimant in the position he would have been in if he had not sustained the wrong.

2             The claimant can only recover loss which:

(a)         was foreseeable;

(b)         was caused by the wrong; and

(c)          is not excluded from recovery by public or social policy.

The infringement must be, as a matter of common sense, a cause of the loss.

3             The burden of proof rests on the claimant. Damages are to be assessed liberally to compensate the claimant, not punish the defendant.

4             It is irrelevant that the defendant could have competed lawfully. In the past defendants have argued that they could have inflicted the same economic “injury” by lawful competition. The courts have consistently rejected this approach.

5             Where a claimant has exploited his patent by manufacture and sale he can claim:

(a)         lost profit on sales by the defendant that he would have made;

(b)         lost profit on his own sales to the extent that he was forced by the infringement to reduce his price; and

(c)          a reasonable royalty on sales by the defendant which he would not have made.

This principle involves difficult questions of fact or estimation. The situation is more complicated where there  are multiple infringers other than the defendant or where the exploitation of the patent has not been strictly by the patentee but by an agent or subsidiary company (see below).

6             As to lost sales, the court should form a general view as to what proportion of the defendant's sales the claimant would have made. The court must make an estimate as to the chances that particular sales would have been made and reflect those chances, whether they are more or less than even, in the damages which it awards. For example if the court decides there was a 49 percent chance of the claimant making a particular sale made by the defendant, it should award 49 percent of the profits made on that sale rather than discounting it completely from the award.

7             The assessment of damages for lost profits should take into account the fact that the lost sales are of "extra production" and that only certain specific extra costs (marginal costs) would have been incurred in making the additional sales.

8             The reasonable royalty is one which a willing licensor and a willing licensee would have agreed to. Where there are truly comparable licences in the relevant field these are the most useful guide, however it can be difficult to estimate a “reasonable” royalty when it is clear that the patentee would not licence anyone.

9             An alternative approach to determining a royalty rate is to assess the profits that would be available to the licensee and apportion them between the licensor and the licensee (this approach has been used in licence of right cases concerning copyright and designs).[7] 

10           Where damages are difficult to assess the court should make the best estimate it can having regard to all the circumstances of the case and dealing with the matter broadly, with common sense and fairness.

In Ciccone v Associated Newspapers Ltd[8] the Court questioned whether item five above complied with the Regulations (see box): compensation for loss under paragraph 3(2)(a) and compensation on the basis of royalty fees under (3)(2)(b) are expressed to be alternatives. The matter was not determined (being too complex for an interlocutory hearing) but it appears that there is clear scope for a reference to the European Court of Justice.

 

Factors to consider when calculating loss of profits include: displaced sales; price depression; mitigating steps; and the loss of ancillary sales:

 

·                    Displaced sales are assessed in relation to the objective reality of the market. The claimant must show that the defendant’s customers would, but for the infringement, have purchased the claimant’s goods and not those of third parties—whether or not the third-party goods on the market also infringe the claimant’s patent. (In the US, potential sales of infringing third-party products are not relevant,[9] but the Court of Appeal of England and Wales rejected this approach in Coflexip SA v Stolt Offshore Ltd.[10])

·                    Damages may be recovered where the defendant has forced the claimant to reduce its prices in order to compete effectively with the infringing goods and where the claimant cannot realistically increase prices again even after the infringement has ceased. The inability to increase product costs back to their original prices is often used by pharmaceutical patentees to justify interim injunctions against generic products entering the market (e.g. Novartis AG v Dexcel-Pharma Ltd[11]).

·                    The claimant may recover the costs of steps to mitigate damage (such as advertisements to counteract the effect of trade mark infringement)[12] even if the steps were not successful.

·                    A claimant may also be compensated for loss of “convoyed goods”: sales of ancillary items or services which the patentee would normally have made on the back of a sale of the patented item. For example, in the copyright case Retail Systems Technology v Mc Guire & Ors[13], the High Court of Ireland, in awarding damages for infringement of the copyright in software, included the loss of profits from lost ancillary sales of hardware. The judge also awarded damages on a notional royalty basis in relation to software licence fees received by the defendants which the claimant was unlikely to have secured.

For sales made by the defendant which the claimant would never have made, the Court has applied the “user principle” in patent disputes since the early 1900s. The court awards damages on the basis of a reasonable royalty rate on the basis of a willing licensor and licensee. The court does not necessarily set an objectively “fair” rate. For example, the royalty rate is based on the defendant’s actual selling price, which may be lower than the price it would have charged if a licence had been in place.

 

If the “profits available” approach is adopted (in the absence of comparable licences) the court will attempt to determine a fair split of the defendant’s available profits—but the lion’s share is usually allocated to the defendant. In Ultraframe, the judge found that the defendant’s gross profit had been 60% but awarded only an 8% royalty. Damages based on royalties should normally be expected to be smaller than damages based on displaced sales.

 

The Directive introduces, but does not define, the concept of “moral prejudice” as a consideration when calculating compensation. In copyright and design claims, aggravating factors can (if pleaded) be taken into account by the Court in awarding damages. However, at this point damages in patent cases have normally only been awarded based on actual financial losses. It is worth considering raising a claim for moral prejudice in the future to improve damage awards.

Exploitation of Patent by Subsidiaries

In Gerber the patents were held by the American parent company Gerber Garment Technology Inc (GGT). For a proportion of the period in question the patented products were sold in the UK by GGT’s UK subsidiary (GGT UK). GGT paid a sales commission to its Belgian subsidiary (GGT SA) which in turn paid part of this to GGT UK. Later, machines were sold from GGT to GGT SA which then sold them on to GGT UK. GGT UK was responsible for the ultimate sales to UK consumers. The Defendant argued that it was these subsidiaries, not GGT, that had in fact lost profits due to the infringements. The Defendant submitted that because GGT had not suffered a loss of profits and because its subsidiaries did not own the patents that had been infringed no tort had been committed against them and no party was entitled to recover damages for its loss of profits.

The Defendant cited the general rule derived from Salomon v A Salomon & Co Ltd[14] which is that a corporate entity is regarded as a separate and distinct legal person. The heart of the Defendant’s argument was that the court should not lift the corporate veil. Mr Justice Jacob (as he then was) disagreed with the Defendant’s submissions stating:

GGT is not suing for its subsidiaries’ loss. It is suing for its own. The wrong was to it, not to the subsidiaries. The question is what damage has it suffered? The answer seems to me to be clear and direct—the loss in value of its shares in its subsidiaries…Every dollar of which the subsidiary is deprived, deprives the parent of a dollar’s worth of subsidiary. The dollar is in any real and commercial sense the loss of the parent.[15]  

Jacob J subsequently went further and stated:

…the proposition that every dollar lost affects the worth of the company by a dollar would be a self-evident starting point.[16]

When the case was appealed Lord Justice Staughton in a dissenting opinion, agreed with Jacob J’s ruling. However Lords Justice Hobhouse and Hutchison rejected the principle that a dollar lost to the subsidiary was self evidently a dollar lost to the parent. Hobhouse LJ referred to the differing tax regimes of GGT and its UK and Belgian subsidiaries as prima facie evidence for assuming the opposite:

…the profits from the trading activity of a company would be liable to local tax and it does not follow that an increase in the trading profits of a company translates, in the hands of the company, into an identical increase in its after tax results, let alone when it seeks to make an income distribution to shareholders.

The Court of Appeal therefore departed from the first instance decision by finding that each dollar lost to the subsidiary could not be assumed to be worth the same to the parent especially when the subsidiaries operated within different tax regimes. Hobhouse LJ went on to apply George Fischer (Great Britain) v Multi-Construction Ltd[17] to the case before him and stated that Fischer was authority for the following material points of law:

1              There is no rule of law that precludes a shareholder from proving that he has suffered a financial loss as a result of the loss of dividends or a fall in the value of his shares.

2              A plaintiff who alleges that he has suffered a financial loss must prove and quantify that loss and prove that it was caused by the defendant’s actionable wrong.

3              Uncontradicted expert evidence is admissible and capable in law of discharging the burden of proving the loss and its quantification.

The Court of Appeal therefore held that Jacob J was correct in his first instance judgment to permit a parent company to recover damages for a decrease in the value of the shares of a subsidiary where that decrease had been caused by an actionable wrong against the parent i.e. the infringement of its patents. However the Court of Appeal asserted that the law places the burden of proof upon the plaintiff to demonstrate the cause and extent of his loss. As the Fischer case states; expert evidence, if uncontradicted, is capable of discharging such a burden.

Hobhouse LJ went on to state that:

The root principle which must be adhered to is that each company is a separate legal entity. The property of one is not the property of another. The plaintiff must prove its own financial loss in its own pocket and quantify it.

Thus the position is clear, only the loss in value of the shares of the subsidiary that the plaintiff can prove was caused by the infringement is recoverable.

 

Account of Profits

 

Damages based on an account of profits are rarely chosen in patent cases. Celanese International Corp v BP Chemicals Ltd[18] is frequently used to illustrate why. Celanese initially contended that it was entitled to the entire profit BP had derived from its acetic acid producing plants which made use of the patented device: approximately £180 million (including interest). The Court allowed recovery of approximately £568,000.

 

The principles to be applied in respect of an account of profits in a patent case were last considered in Spring Form Inc v Toy Brokers Limited[19] where the judge summarised the authorities:

 

1             The purpose of an account of profits is to:

(a)         deprive the defendant of the profits which he has improperly made by wrongful acts committed in breach of the plaintiff’s rights; and

(b)         to transfer those profits to the plaintiff.

2             Only that part of the profit which is attributable to the infringement is to be accounted for (contrast this with the ability to recover loss of profits on ancillary sales in a damages assessment).

3             The claimant needs to show that the defendant would not have made the profit but for its infringement of the patent.

4             The profit is to be calculated by deducting the particular overheads which relate to the product from the sales income – general overheads incurred in any event are not to be deducted.

5             Where the infringement was unintentional, the defendant is entitled to some allowance for the expense incurred in designing the product and bringing it to market.

6             Where there is more than one claimant only one account will be taken which will be apportioned between the claimants.

7             The account extends to all infringers sued.

Additionally, the taking of an account has the effect of condoning past infringements[20] but not those which may take place in the future.[21] Accordingly the claimant can bring a further claim for damages or an account of profits against purchasers and users in relation to subsequent infringements.[22]

 

Cross-undertakings

 

Infringement disputes are not the only category of patent dispute which may, in the UK, result in significant financial compensation. Patentees securing interim injunctions may take considerable risks in giving cross-undertakings in damages.

In Les Laboratoires Servier & Anor v Apotex Inc & Ors,[23] Mr Justice Norris confirmed that assessment of the amount payable under the cross-undertaking should be approached broadly on a contractual damages basis, despite the remedy being equitable and the basis of calculation being within the discretion of the Court. He applied compensatory, not punitive, principles. Following Hoffmann-La Roche v Secretary of State for Trade[24], the judge determined that damages were to be based on the assumption that the patent holder had breached a hypothetical contract not to seek an injunction or prevent sales of the alleged infringer.

Firstly, could the injuncted party prove on the balance of probabilities that its chance of making a profit was real? Secondly, each separate market hypothesis advanced by the injured party was assessed and the amount of damages adjusted for the chance of that scenario occurring. The judge assessed the figures ‘in the round’ and awarded approximately £17.5 million[25] (which sounds significant until one learns that the patent owner’s profit during the period was approximately £74 million).

Such cases often raise particularly difficult issues of causation, for example whether it was the injunction or the litigation in general that caused the damage. In Lilly Icos Llc & Ors v 8pm Chemists Ltd & Anor,[26] where the injunction was intended to restrain trademark infringement, Mr Justice Arnold took a robust and not a strictly contractual approach. He cited, with approval, the following from Mr Justice Mason in the High Court of Australia in Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd:[27]

 

The object of the undertaking is to protect a party, normally the defendant, in respect of such damage as he may sustain by reason of the grant of the interim injunction in the event that it emerges that the plaintiff is not entitled to relief. It is no part of the purpose of the undertaking to protect the defendant against loss or damage which he would have sustained otherwise, as for example, detriment which flows from the commencement of the litigation itself. That is loss or damage which the defendant must bear himself, as he does when no interim injunction is sought or granted…

 

Employee compensation

 

In 2009, the UK Court issued its first employee compensation awards under sections 40 and 41 of the Patents Act 1977 (as amended). It awarded the claimants Dr. Kelly and Dr. Chiu lump sums of £1 million and £500,000 respectively in Kelly & Anor v GE Healthcare Ltd[28]. The invention was the radioactive heart imaging agent sold very successfully under the name “Myoview.”

Section 40(1) states:

Where … the employee has made an invention belonging to the employer for which a patent has been granted, that the patent is (having regard among other things to the size and nature of the employer's undertaking) of outstanding benefit to the employer and that by reason of those facts it is just that the employee should be awarded compensation…

Section 41 deals with the amount of the compensation to be paid. It states:

An award of compensation to an employee … shall be such as will secure for the employee a fair share (having regard to all the circumstances) of the benefit which the employer has derived, or may reasonably be expected to derive, from the patent or from the assignment, assignation or grant to a person connected with the employer of the property or any right in the invention or the property in, or any right in or under, an application for that patent.

In Shanks v Unilever Plc & Ors[29], Lord Justice Mann considered that:

…the remedy is [therefore] essentially restitutionary in that it is ostensibly based on what the employer actually gets out of it or is apparently going to get out of it. Furthermore the Kelly case specified that when assessing the award to be paid, the following principles are applied:

1             the employee need not prove loss, for example by reference to inadequate remuneration for his employment or by the expenditure of effort and skill beyond the call of duty, but these are nevertheless factors to take into account;

2             the valuation of any benefit is to be performed ex post facto and in the light of all the available evidence as to the benefit derived from the patent; and

3             where the employee shows that the invention has been of outstanding benefit, the amount of compensation is to be determined in the light of all the available evidence in accordance with section 41 to secure a just and fair reward, neither limiting him to compensation for loss or damage nor placing him in as strong a position as an external patentee or licensor.

 

 

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[1] Island Records Ltd v Tring International Plc [1995] EWHC 8 (Ch)

[2] Gregory J. Urbanchuk MSc writing in “The Barrister” available at www.barristermagazine.com

[3]  Madrid’s Commercial Court No 6, 17th October 2007 – See AIPPI Report Q203 - Spain

[4] Now UK Intellectual Property Office

[5] [1997] RPC 44, Court of Appeal

[6] [2006] EWHC 1344 (Pat) Ch D (Patents Ct)

[7] For example Sterling Fluid System Ltd’s Licence of Right (Copyright) Application in the Patent Office, July 29, 30, September 2 and October 27, 1998).

[8] [2009] EWHC 1107 (Ch)

[9] Panduit Corporation v Stahlin Bros Fibre Works Inc 575 F.2d 1152; 197 U.S.P.Q 726.

[10] [2003] F.S.R. 41 [2003] EWCA Civ 296 CA

[11] [2008] EWHC 1266

[12] Spalding v Gamage (1918) 35 RPC 101 CA

[13] [2007] IEHC 13 (02 February 2007)

[14] [1897] AC 22

[15] [1995] RPC 383 at 410

[16] [1995] RPC 383 at 411

[17] [1995] 1 BCLC 260

[18] [1999] RPC 203

[19] [2001] All ER (D) 09

[20] Saccharin Corpn Ltd v Chemicals and Drugs Co [1900] 2 Ch 556 at 558‑559

[21] Codex Corpn v Racal-Milgo Ltd [1984] FSR 87

[22] Codex Corpn v Racal-Milgo Ltd [1984] FSR 87

[23] [2008] EWHC 2347 (Ch) (9 October 2008)

[24] [2005] AC 295 HL

[25] There was an appeal of this award, but not the basis of calculation; rather as the manufacture of the perindopril product which would have been supplied to the UK was found to have been made in infringement of the basic Canadian patent which had yet to expire it was ordered that the award was to be treated as an interim payment pending the final outcome in Canada; [2010] EWCA Civ 279

 

[26] [2009] EWHC 1905 (Ch) (31 July 2009)

[27] (1981) 146 CLR 249

[28] [2009] EWHC 181 (Pat) (11 February 2009)

[29] [2009] EWHC 3164 (Ch) (03 December 2009)