Troubled waters as uncertainty continues over patent damages

The amended Patent Law
The EU IP Enforcement Directive

A n October 2007 court ruling has highlighted controversy over how to calculate damages for patent infringement in view of an amendment to the Patent Law in 2006. While the court held that damages could be calculated on the basis of both the infringer’s profits and the profits that the rights holder might reasonably have obtained, there is some doubt over whether this interpretation of the amended law chimes with the EU IP Enforcement Directive (2004/48/EC).

The amended Patent Law
Article 66 of the Patent Law was amended in June 2006. The amended version establishes that in order to quantify compensation for damages deriving from the infringement of patent rights, the injured party may opt between two criteria: (i) the negative economic consequences, or (ii) the hypothetical fee that it would have received if the exploitation had been authorised. According to said article:

“1. The damages to be awarded to the patentee shall comprise not only the amount of the loss sustained, but also the profit which the patentee has failed to obtain as a result of the infringement of his right. The amount of such damages may include, where appropriate, the expenses for having investigated to obtain reasonable evidence demonstrating that the infraction, object of the proceeding, was committed.
2. The injured party shall be able to choose from the following to set the damages:
a) The negative economic consequences, including the profits that the proprietor would have foreseeably obtained from exploiting the patented invention if competition from the infringing party had not existed and the profits that the infringing party has obtained from exploiting the patented invention.
Compensation will be awarded in the case of emotional distress even where the existence of economic damage has not been proven.
b) The amount which the infringing party would have had to pay the proprietor of the patent for the grant of a licence that would have allowed him to exploit the patent according to law.
The economic importance of the patented invention, the lifetime of the patent at the time the infringement began and the number and type of licences granted at that time, among other factors, shall be taken into account to establish this amount.”

Prior to this amendment, Article 66 offered three different possible criteria to determine the amount of compensation:

“a) The profits that the proprietor would have foreseeably obtained from exploiting the patented invention if competition from the infringing party had not existed.
b) The profits that this latter has obtained from exploiting the patented invention.
c) The amount which the infringing party would have had to pay the proprietor of the patent for the grant of a licence that would have allowed him to exploit the patent according to law.”

The amended Article 66 consolidates the first two criteria into “negative economic consequences”. However, this has given rise to disagreement over whether this amendment actually implies a wholesale change in the way that damages should be calculated or whether it merely affects the wording of Article 66 without producing any substantial effects.

Some scholars, including Cortés Fernández, have argued that the new wording of Article 66 means that the rights holder is entitled to damages calculated on the basis of both the infringer’s profits and the profits that the rights holder might reasonably have obtained. However, others, including Gimeno-Bayón, consider that damages cannot be calculated by adding these two factors together.

The EU IP Enforcement Directive
This was the situation when Commercial Court No 6 of Madrid issued a ruling on 17th October 2007 in which it took account of both these factors when calculating damages. The ruling stated the following:

“In conclusion, damages will be fixed in enforcement stage according to the following bases calculated in the time period lapsing between 1st June 2006 and 7th July 2007: Total profits that MSD would have foreseeably obtained from the exploitation of Losartan, if the defendants’ activity would have not taken place … Total benefits that 'C, SA' and 'Q, SA' have obtained from the exploitation of Losartan … Damages caused to MSD as a result of the price decrease of its medicinal product starting from 1st March 2007.”

In respect of whether it is possible to accumulate damages under both criteria, it is necessary to examine the EU IP Enforcement Directive. Indeed, the modification of Article 66 was the result of this directive being transposed into the Spanish legal system.

According to Article 13 of the directive:

“1. Member states shall ensure that the competent judicial authorities, on application of the injured party, order the infringer who knowingly, or with reasonable grounds to know, engaged in an infringing activity, to pay the rights holder damages appropriate to the actual prejudice suffered by him/her as a result of the infringement.
When the judicial authorities set the damages:
(a) they shall take into account all appropriate aspects, such as the negative economic consequences, including lost profits which the injured party has suffered, any unfair profits made by the infringer and, in appropriate cases, elements other than economic factors, such as the moral prejudice caused to the rights holder by the infringement;
or
(b) as an alternative to (a), they may, in appropriate cases, set the damages as a lump sum on the basis of elements such as at least the amount of royalties or fees which would have been due if the infringer had requested authorisation to use the intellectual property right in question.
2. Where the infringer did not knowingly, or with reasonable grounds to know, engage in infringing activity, member states may lay down that the judicial authorities may order the recovery of profits or the payment of damages, which may be pre-established.”

Therefore, Article 13.1 takes into consideration profits obtained by the infringer as a criterion to quantify damages.

However, this cannot be interpreted as allowing the accumulation of profits obtained by the infringer as well as the loss of profit suffered by the rights holder for compensation purposes. This is confirmed by Article 13.2, which states that member states are entitled to adopt several measures in the event that an exclusive right is infringed in good faith. Such measures may consist of the possibility that “the judicial authorities may order the recovery of profits or the payment of damages, which may be pre-established”. Therefore, it is clearly established that the recovery of profits obtained by the infringer is an alternative to compensation for damages. Even if this alternative is not expressly related to infringements committed in bad faith, it is assumed in these cases that the infringer’ profits coincide with the patent holder’s losses.

Finally, Article 26 of the directive establishes that:

“with a view to compensating for the prejudice suffered as a result of an infringement committed by an infringer who engaged in an activity in the knowledge, or with reasonable grounds for knowing, that it would give rise to such an infringement, the amount of damages awarded to the rights holder should take account of all appropriate aspects, such as loss of earnings incurred by the rights holder, or unfair profits made by the infringer and, where appropriate, any moral prejudice caused to the rights holder. As an alternative, for example where it would be difficult to determine the amount of the actual prejudice suffered, the amount of the damages might be derived from elements such as the royalties or fees which would have been due if the infringer had requested authorisation to use the intellectual property right in question. The aim is not to introduce an obligation to provide for punitive damages but to allow for compensation based on an objective criterion while taking account of the expenses incurred by the rights holder, such as the costs of identification and research.”