Basic Principles, Assessment and Enforcement

IIC 2004

Heft 2 113

**

be expected in the normal course of affairs or under special circumstances, and in

particular in accordance with the arrangements and provisions made. The judge is therefore

called upon to decide the likely outcome of the situation if the infringement had not occurred.

There are no hard and fast rules for assessing this question. The less competition the patentinfringing

product faces on the market concerned, the greater the probability that the patentee

would have benefited from the sales by the infringer but for infringement. A few years ago the

Düsseldorf District Court ruled on a number of patent infringement actions which involved the

infringement of patents on the first inertia reel car seat belts. Once these seat belts had been

launched on the market the old, non-automatic safety belts no longer represented an equivalent

alternative. Consequently,

in this case the court assumed that the entire volume of sales by the infringer would have been

attained by the patentee (or his licensees), if the infringement had not taken place.

Even when this obstacle has been overcome and the probable course of affairs determined, the

patentee is still a long way from achieving the compensation that he is seeking. A decision then

has to be made about the extent of damage caused as a result of the lost sales. As defined by Sec.

of the Civil Code, this damage consists in particular of the lost profits. It is therefore

necessary to determine the profits that the patentee would have achieved but for patent

infringement. According to Sec.

of the German Code of Civil Procedure, the court is allowed

to estimate the extent of damage incurred. But a basis must first be provided for this estimate.

This is a painful situation for the patentee inasmuch as he is obliged to reveal details about his

profits. And he is obliged to reveal these details not only to the court, but at the same time to the

defendant, his competitor. But that is not all. It is usual for the defendant to dispute the alleged

profit, and therefore evidence must be provided by the patentee. This usually requires the

submission of a report prepared by a suitable expert. This expert, normally a certified accountant,

must conduct a precise examination of the cost structure of the patentee´s company and of the

additional costs he would incur in achieving additional sales. Such an investigation is timeconsuming

and expensive. The expert notifies the court of the results of his investigations in

writing. Like all the documents pertaining to the hearing, this is also made available to the

defendant.

The lost profits not only include the profit that would have been obtained if the patentee himself

had achieved the sales of which he has been deprived by the actions of the infringer. Rather, the

lost profits can also involve a reduction in profits suffered by the patentee as a result of reducing

his own prices. This he may be compelled to do to match the infringer´s prices in order to

maintain his market position.

So you can see, enforcing claims for damages resulting from the infringement of a patent based

on lost profits is a relatively complicated and difficult matter. That is why this method of

assessment of damages is relatively rarely used. Fortunately, German law offers two other

alternatives as a means of putting a figure on the actual damage.

One of these is for the patentee to demand a suitable licence fee in place of the actual damages.

This is not defined in the codified law, but it was already recognised at the start of the 20th

century by the

, the Supreme Court of the German Reich, and has been regularly

supported since then by the adjudications of the

, the German Federal

Supreme Court.

6

8

. the infringer, has

to pay the licence fee that would have been agreed on for such a licence by reasonable

contractual partners.

9

That is why it is immaterial whether the party committing the

infringement has done so wilfully or only by negligence.

Because the licence analogy, at least until recently, represented the most common method of

calculating the extent of the damage, this has also meant that the infringement of a patent

represented only a minimal risk for the party committing the infringement. He had three options.

First, the patent infringement could remain unnoticed or might not be prosecuted for whatever

reason by the patentee. Second, the court could deny the claim that an infringement had taken

place and consequently dismiss the action. Third, the Federal Patent Court could invalidate the

patent. A less fortunate infringer who is adjudged guilty of infringing a patent would then pay

the licence fee that he would have had to pay anyway if he had initially sought to obtain the

approval of the patentee for the use of the invention.

However, it should be pointed out that, to a certain extent, when making their ruling, the courts

have sought to help the prejudiced party a bit and

take the special characteristics of this imaginary „licence agreement“ into account.

Although, as stated above, a „penalty surcharge“ is not permissible, it is nevertheless necessary

to consider what distinguishes the imaginary licence agreement from an ordinary one. I would

like to offer two examples to illustrate what I mean:

1. Under German law, past licence fees are not repaid to the contractual licensee if the licensed

patent is invalidated. The licensee is simply not required to pay any further licence fees in the

future. However, in such cases the infringer is not required to make any payments for past use

either. As a result, the licence fee in his imaginary „licence agreement“ is increased. A

comparison is made between him and a licensee whose licence agreement states that all licence

fees are to be repaid if the licensed patent should be revoked or invalidated any time. The law

assumes that a bonus in the form of a higher licence fee would be negotiated to „underwrite

the risk“ in such cases.

11

12

. reclaiming the profit made by the infringer. The infringer is treated

as if he had conducted his business and made profits on behalf of the patentee. This method has

been accepted for many decades but was not very popular in Germany until recently, for the

following reason.

As I have already mentioned, the patentee may demand that the infringer provide him with

details about the scope of the activities constituting infringement. To this end he may insist on

being given information about sales, including every single delivery, profits and individual cost

factors. However, in Germany the patentee usually has few or no possibilities for checking the

information supplied by the infringer about the scope and individual details of the infringing

acts. The patentee is not entitled to examine the infringer´s accounts or to instruct an expert to

examine them, nor is there anything in the nature of discovery proceedings that would compel

the infringer to submit his operational documents for inspection.

As a consequence, it is frequently the case that the information obtained states that no profit, or

only an insignificant amount, was obtained from the patent infringement. My experience with the

information supplied by those who have been adjudged to have committed patent infringements

would seem to indicate that as a rule, patent infringement does not pay!

However, in this same context a recent ruling by the German Federal Supreme Court suggests a

fundamental change. This decision,

Share of Overheads

(

), concerns the following situation.

The parties concerned were companies in the jewellery business. The plaintiff was the owner of a

registered design for a so-called clamping ring (a platinum finger ring in which the stone is

tension-set between the smooth ends of the cut-through ring so that it appears to float between

the ends). In a preceding litigation involving these parties, the ruling by the court stated that the

defendant was obliged to reimburse the plaintiff for the damage she had incurred as a result of

the marketing of a copy of the protected ring. The parties then disputed the amount of damages

to be paid.

The defendant had admitted to total profits of some EUR6,000. This amounted to more than 4%

of sales. It was also revealed that the defendant had not only deducted production-related

manufacturing costs of approximately EUR74,000 from his sales of some EUR135,000, but also

prorated overheads of his business operations amounting to about EUR55,000.

The Federal Supreme Court held that, in accordance with the purpose of the claim for recovering

profits, it was basically correct, in determining the infringing party´s profit, not to deduct all the

costs from the proceeds actually obtained. Only the variable costs of the manufacture and

marketing of the copies should be deducted. However, fixed costs such as rents and depreciation

should not be deducted. If the infringer were allowed unrestrictedly to deduct from his proceeds

a sum for such fixed costs, the profit from the infringement would not be completely absorbed.

Instead, the in fringer would retain a contribution margin to his fixed costs. In particular this

would conflict with the notion that, through the recovering of profits, the prejudiced party would

be placed in a position in which, if there had been no infringement, the prejudiced party´s profit

would have been the same as that of the infringing party. Accordingly, we should assume that the

fixed costs would have been incurred anyway.

By the same token, according to the German Federal Supreme Court, objections should be raised

to the fact that the appeals court has only awarded the plaintiff 70% of the assumed profit made

by the defendant. The appeals court did so because it held that 30% of the defendant´s profit was

derived through his own efforts (

the exploitation of his business relationships, the application

of his marketing knowledge and the marketing support provided by undercutting the plaintiff´s

sales prices). As the

says, these efforts cannot be invoked by the defendant

either. Insofar, there is no apportionment of profits.

It therefore followed that the profit to be recovered could amount to EUR61,000 instead of

EUR6,000. That is a more than tenfold increase and constitutes more than 40% of the sales. The

Federal Supreme Court did not make this a final ruling, but remitted the case to the appeals

court. The appeals court was commissioned to clarify the extent to which part of the costs listed

as overhead could be directly allocated as costs incurred in manufacturing the imitations.

Although this was no final conclusion, the enormous impact of the ruling is evident. Surrender of

40% of the sales figure can certainly spell financial ruin for the infringer.

The ruling did not come from the Tenth Senate for Civil Matters of the German Federal Supreme

Court, which is responsible for dealing with patent infringements, but from the First Senate for

Civil Matters, responsible for handling copyright infringements. However, everything supports

the idea that patent law should in this respect be subject to the same principles as those

applicable in copyright law. Consequently, the district courts are already applying the

aforementioned ruling in cases involving patent law and are awarding substantially higher

amounts than before. But the recovery of profits is not a camouflaged method of making the

infringer pay punitive compensation.

In each individual case, two aspects must be carefully

examined:

- Firstly, the extent has to be determined to which, in the concrete case, the assumption can be

disproved that costs would have been incurred in full even if the infringement had not occurred.

- Secondly, it may be considered to what extent it has to be assumed that, in the absence of the

patent-infringing production, a contribution margin to the overheads would have been achieved

through the production and sale of another product.

One would, after all, assume that any entrepreneur would try to avoid an ongoing situation in

which his overheads were not covered by the proceeds from his sales. Consequently, it remains

to be seen whether the ruling really will have a lasting and revolutionary impact on the German

practice of awarding damages.

VI. In this connection it is worth mentioning that on 1 January 2003 the European Commission

proposed a draft „Directive of the European Parliament and of the Council on measures and

procedures to ensure the enforcement of intellectual property rights“.

Article 17 of this draft comprises the following provisions:

1. Member States shall lay down that the judicial authorities shall order an infringer to pay the

right holder adequate damages in reparation of the damage incurred by the latter as a result of his

intellectual property right being infringed through the infringer having engaged in an activity in

the knowledge, or with reasonable grounds for knowing, that it would give rise to such an

infringement.

To this end, the competent authorities shall award, at the request of the prejudiced party:

(a

)

either damages set at double the royalties or fees which would have been due if the infringer

had requested authorisation to use the intellectual property right in question;

(b

)

or compensatory damages corresponding to the actual prejudice (including lost profits)

suffered by the right holder as a result of the infringement.

In appropriate cases, Member States shall lay down that the prejudice suffered can also be

deemed to include elements other than economic factors, such as the moral prejudice caused to

the right holder by the infringement.

2. In the case provided for in paragraph 1, point (b), Member States may provide for the

recovery, for the benefit of the right holder, of all the profits made by the infringer which are

attributable to that infringement and which are not taken into account when calculating the

compensatory damages.

For calculating the amount of the profits made by the infringer, the right holder is bound to

provide evidence only with regard to the amount of the gross income achieved by the infringer,

with the latter being bound to provide evidence of his deductible expenses and profits

attributable to factors other than the protected object.

If the directive containing these details is adopted, then under German law in future a suitable

licence fee would be required by way of damages. However, such a licence fee would then

amount to twice the usual fee and thereby introduce a - moderate - „punishment“ into German

law.

It seems likely that the infringer will continue to be required to surrender his profits, although,

according to the draft, this is not compulsory. However, the member states may make this

provision and it is unlikely that Germany will depart from existing practise and not make use of

this possibility. To this extent the draft directive is in conformity with the ruling on

Share of

Overheads

), and in fact goes even further, since it imposes on the infringer

the burden of proof for all costs that he wishes to deduct from the proceeds that he has obtained.

The patentee is therefore only required to submit the sales proceeds. The infringer must provide

evidence of everything that he wishes to deduct from these proceeds.

One question that is, of course, not addressed is whether, and under what conditions, prorated

overheads may be deducted. This could therefore be one of the questions on which the European

Court of Justice will have to rule.

VII. Now that it has, I hope, become clear what constitutes damages for patent infringement in

Germany, I should like to briefly examine the normal course of procedure when an action for

damages is heard by the courts.

At the start I mentioned that it takes about one year to obtain an injunction, which is granted by

the district court against the infringer and which can be enforced by the patentee, even if the

infringer has lodged an appeal. What is the situation regarding damages?

Unfortunately, as far as damages are concerned, the matter is not so simple. Usually the

judgement by the district court only requires the infringer to desist from further infringements

and to provide details about the scope of the activities constituting the infringement. As far as

compensation is concerned, it simply establishes that the infringer is obliged to pay damages to

the patentee. This means that no amount of damages is determined. This aspect has to be

clarified either through negotiations between the patentee and the infringer or by means of a

ruling arrived at in subsequent proceedings.

This is an unsatisfactory procedure for the patentee, and the reason for it is as follows. Because,

as I have already mentioned, there is no discovery procedure or anything similar in German law,

until the court makes its ruling the patentee does not have any accurate details about the scope of

the infringing actions to determine damages. That is why the ruling requires the infringer not

only to refrain from any further infringements but also to furnish information and render

accounts of the proceeds and profits achieved through the sale of the contested embodiment. At

the same time this also means that at this time it is impossible to put a figure on the amount of

the damages, because neither the sales figures needed to calculate a suitable licence fee are

known, nor the profit obtained by the infringer, which the patentee may wish to demand.

Consequently, the amount of damages can only be determined at a later stage.

The German Code of Civil Procedure does provide for special proceedings in such cases, the socalled

action by stages (

). In these proceedings, a ruling on the claim for release of

information is made in the first stage. Once the information has been provided, more or less on a

voluntary basis or by means of a coercive penalty imposed by the court, the proceedings move

on to the second stage. There a ruling is made on the amount of damages to be paid. If necessary

there may be an intermediate stage, if the patentee has reasonable doubt as to the correctness of

the information provided. In such cases he may insist that a judgement be passed on the infringer

in order to ensure the accuracy of the information under oath. At each of these stages the

proceedings may be conducted by at least two instances, and possibly by the German Federal

Supreme Court. This action by stages can thus be very time-consuming and difficult. That is why

it is virtually never used in cases involving patent infringements.

Of course, it is also very time-consuming if entirely new proceedings are necessary to determine

the amount of damages to be paid, but nevertheless this does have certain advantages. The first

of these is that the infringement proceedings are „slimmed down“. As already mentioned, the

fault that must exist in order for there to be an obligation to pay damages is assumed in practical

terms. Because the court dealing with the infringement does not have to rule on whether the

patent forming the basis for the action is valid, it can concentrate almost entirely on the question

of whether, in an objective sense, an infringement of the patent has occurred. This is one

important reason why a decision can be reached quickly. Provided he is successful, this rapid

decision-making process also has the advantage for the patentee that the ruling furthermore

requires the infringer to meet the costs of the proceedings, including the costs of the plaintiff´s

attorneys and patent attorneys. In the action by stages a decision regarding the costs of the

litigation is only made at the end of the third stage. After all, in the vast majority of cases, an

agreement on the amount of compensation can be reached by way of settlement once a nonappealable

ruling has been made that a patent infringement has taken place and that the

infringing party is obliged to pay damages. In those cases where this is not achieved, the

necessary second proceedings can concentrate solely on the problems involving the amount of

compensation to be paid. Based on what I have described above, this provides sufficient material

for second proceedings.

VIII. Unlike the enforcement of injunctive relief, in Germany the implementation of claims for

damages is a relatively complex and time-consuming process. Nevertheless, a differentiated

request and indemnification system is provided that, in my opinion, provides an essentially

appropriate means of compensation for the damage incurred by the patentee as a result of the

infringement. Although some patentees may dream of wielding a more potent weapon against the

infringing party, on the other hand it should be borne in mind that very few requirements are

imposed in order to find fault, with the result that even a well-intentioned competitor can never

rule out the possibility of being adjudged an infringer of patents. This can happen to the patentee

too. In different circumstances he may find himself the „villain of the story“. If German law

provides for a certain restraint with regard to any damage calculation that would extend beyond

the compensation for actual material prejudice, I do not think that anything needs to be rectified

in this respect.

Essentially unamended text of a talk given by the author in Seoul on October 9, 2003. The speech format is

retained

.

**

), Lecturer at the Heinrich Heine

University, Düsseldorf, Germany.

Sec. 143 of the German Patent Act.

ZPO).

Hepatitis C Virus (Hepatitis-C-Virus).

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Radio Clock (Funkuhr).

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Cross base valve sacks

III (Kreuzbodenventilsäcke III

Process

Control Computer

).

.

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