Using the hypothetical royalty fee to assess patent infringement damages

Under Article 66 of the Patents Law of 1986, a party whose patent rights have been infringed by a third party may claim compensation for damages sustained as a result of the unauthorised exploitation of an invention.

The damages to be awarded to the patentee shall include not only the amount of the loss sustained, but also the profit that the patentee has failed to obtain as a result of the infringement.

Law 19/2006, which implemented the EU IP Rights Enforcement Directive (2004/48/EC), amended the wording of Article 66(2) of the Patents Act to state that when setting compensation for damages, the courts shall take into account, at the request of the aggrieved party, the following criteria: 

  • the negative economic consequences (eg, the lost profits which the injured party would foreseeably have obtained from the exploitation of the patented invention had the infringement not occurred, and the profits that the infringer may have obtained from the exploitation of the patented invention); 
  • the moral prejudice caused to the rights holder by the infringement; and 
  • the amount of royalties or fees which would have been due to the rights holder had it granted the infringer a licence to exploit the invention lawfully.

Article 66(2) of the Patents Act adds that, with a view to setting the “hypothetical royalty fee” (known in other jurisdictions as the “reasonable royalty award”), the court shall take into account: 

  • the economic importance of the patented invention; 
  • the duration of the patent at the time the infringement began; and 
  • the number and type of licences granted at that time.

These parameters for the assessment of damages in patent infringement disputesare not new under Spanish law. In practice, the role of Law 19/2006 implementing the directive has been modest in this respect, as the earlier wording of the Patents Act was very similar and set the same criteria for the calculation of damages (with the exception of moral prejudice).

Over the last 10 years various appeal courts have held that plaintiffs seeking compensation for damages for patent infringement could use the hypothetical royalty fee criterion for the assessment and award of damages only if the plaintiff could: 

  • prove that the granting of patent licences was part of its ordinary industrial and commercial policy; 
  • provide evidence of the rate which the claimant would have charged the infringer for a licence on the patented invention; and 
  • provide evidence of causation (ie, a causal relationship between the damage caused by the infringer and the compensation requested).

Judgments which followed this doctrine include: 

  • a judgment of the Malaga Court of Appeals of 3rd June 1997; 
  • a judgment of the Murica Court of Appeals of 30th November 2005; and 
  • a Supreme Court judgment of 31st May 2002.

In practice, this doctrine made it near impossible for plaintiffs to use the hypothetical royalty fee criterion as an effective means of obtaining damages for patent infringement.

However, some other courts, led by the Barcelona Court of Appeals, held a different view. They stressed that the reasonable royalty criterion should be interpreted as a fictitious compensatory mechanism designed by the legislature to provide the plaintiff with an effective tool to request from the infringer the award of damages on an objective basis, and should not be subject to the requirements set out above. The courts supporting this flexible approach insisted that it was unnecessary for the plaintiff to prove that its ordinary policy was to grant licences to third parties or to submit evidence of causation, provided that “the hypothetical royalty fee seeks to compensate the patent holder for the essence of the infringement” because the legislature believe that the rights holder would have been compensated if it had allowed the exploitation of the patented invention, and thus that the patentee was deprived of a sum of money that it would have obtained under other circumstances.

Some examples of this patentee-friendly perspective include the judgments of the Barcelona Court of Appeal of 19th December 2001, 3rd February 2006 and 31st May 2007.

However, this divided approach was recently resolved by the Supreme Court in favour of the patentee-friendly view of the law in Imperial Chemical Industries, PLC v IZI Lack, SL (Case 20/2008, 5th February 2008), which revoked a decision of the Valencia Court of Appeals in a trademark infringement and unfair competition case. The lower court had granted the plaintiffs a permanent injunction but dismissed their claim for damages under the hypothetical royalty fee criteria, finding that they had failed to prove the reality of the damages. The Supreme Court overruled the lower court decision on the same grounds as followed by the Barcelona Court of Appeals some years earlier.

The fact that the Supreme Court decision was rendered in a trademark case rather than a patent infringement case should not prevent the application of the doctrine to patent cases, as the relevant article of the Trademarks Act 1988 which was interpreted by the Supreme Court is identical to that regarding the hypothetical royalty fee criterion in the Patents Act. Accordingly, the interpretation of the Trademarks Act by the Supreme Court may equally be applied to Article 66(2) of the Patents Act.

One reason that led the Supreme Court to support the patentee-friendly approach was the mandate contained in Article 26 of the EU IP Rights Enforcement Directive, which states 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.

The most recent judgments rendered by Spanish appeal courts have followed the same approach and have thus consolidated the view of the reasonable royalty fee as an objective criterion for the assessment of damages. Among the most recent decisions rendered in this respect are the judgments of the Madrid Court of Appeals of 25th October 2008 and the Barcelona Court of Appeals of 23rd October 2008.

Of course, this favourable approach of the courts in support of a more reasonable interpretation of the requirements for the award of damages in accordance with the hypothetical royalty fee criterion does not mean that the patentee need not submit evidence in support of the damages action. Such evidence is still essential to help the judge to assess the damages to be awarded. Thus, a rights holder bringing a patent infringement action against a third party must prove the rate to be fixed in each particular case for the assessment of damages and must convince the judge why that particular rate is appropriate to the circumstances of the case.

This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight

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